INTRODUCTION TO COST ENGINEERING

BY

Engr. Dr. CHARLES MBELEDE

FNSE, FACostE, FIEE, FCIBSE, FCCM, FIET, MASME, MAPM
Chartered Engineer / Project Manager
CHARTERED
AccreditedENGINEERS AND PROJECT
Senior Valuer NANAGERS
/ Cost Engineer
mbelede@yahoo.com

THE NIGERIAN SOCIETY OF ENGINEERS

COMPULSORY REFRESHER COURSE
FOR PROSPECTIVE CORPORATE MEMBERS
31, Ogunlana
2 OLAYEMI STREETDrive
(2ND FLOOR)
P. O BoxOFF
6455 Surulere,
NNOBI Lagos
STREET
Tel: 01-4700032, 08055237344
P.O. BOX 6455
E-mail: melcon_m_nigeria@yahoo.com
SURULERE
LAGOS, NIGERIA
TEL. 234-1-4700032 234-1-5456054 234-1-830695, 08042180464
E-mail Charlie@infoweb.abs.net
OCTOBER 2010
INTRODUCTION TO COST ENGINEERING

BY

Engr. Dr. CHARLES MBELEDE

PhD, CEng, FIEE, FNSE, FCIBSE, FACostE, FCCM MASME, MAPM
Chartered Engineer / Project Manager
Accredited Senior Valuer / Cost Engineer
mbelede@yahoo.com

1.00 INTRODUCTION

1.01 WHAT IS ENGINEERING?

Engineering is the discipline, art, science and profession of acquiring and
applying technical, scientific and mathematical knowledge to design and
implement materials, structures, machines devices, systems and processes that
can safely realize a desired objective or invention for the benefits of mankind.

Engineering is a wealth creating profession. It is the art and science of

harnessing scientific knowledge for the benefit of mankind.

The 21st century engineering is at the cutting edge of modern technology,

therefore for cost effectiveness cost competitiveness, the engineer must
practice and optimise the science and art of comparing and contrasting for full
realization of the best option(s) at all times.

2.00 WHAT IS COST ENGINEERING?

Cost engineering is an area of engineering practice concerned with the
"application of scientific principles and techniques to problems of cost
estimating, cost control, business planning, management science, profitability
analysis, project management, planning and scheduling.
2.01 A COST ENGINEER
A cost Engineer is by education, training and professional experience, competent to
develop and make practical use of the principles of engineering cost management
which embraces activities such as cost estimating, cost control, value engineering,
planning scheduling, construction management, investment appraisal, risk analysis,
conceptual studies, profitability analysis of engineering projects and processes. The
cost engineer is a qualified professional dedicated to total cost management over the
life cycle of a project, facility or manufacturing operation.

The purpose of cost engineering is to determine standard cost for execution of works,
quotations, cost control, cost assessment and cost management. Cost must be
calculated based on the engineering facts by account. Allocation and distribution in
most cases are not valid.

Sound mathematics and correct procedures are necessary for developing cost
estimating systems, however it is more important for cost engineers and users of cost
information to understand how costs are developed.
2.02 THE FUNDERMENTAL TASKS
These are fundamental tasks which may be undertaken by different groups in different
organizations, but the term cost engineering implies that they are undertaken
throughout the project life-cycle by trained professionals utilizing appropriate
techniques, cost models, tools and databases in a rigorous way, and applying expert
judgment with due regard to the specific circumstances of the activity and the
information available. In most instances, the output of a cost engineering exercise is
not an end in itself but rather an input to a decision making process.

3.00 WHAT IS FINANCIAL MANAGEMENT?

Financial Management can be defined as:
The management of the finances of a business /organization in order to achieve
financial objectives

Simply put:
Financial management is the art and science of money management.
Financial management is important at all levels of human existence because every
entity needs to look after its finances.

3.01 WHY COST ENGINEERING IS IMPORTANT

Engineering and Construction Industry may be classified in economic terms as a
capital goods industry because the benefits of its products cut across all spheres of
human endeavours.
 No one who has responsibility for managing major, complex, high-tech programmes
with a high development content will dispute the importance of the cost and financial
aspects of the work, or the particular difficulty of assessing and controlling costs.
Cost remains a constant source of concern in virtually all engineering or construction
projects as shown thus:
When considering different technical options.

§ In establishing budgets

§ In conducting cost/technical trade-offs

§ In the submission and evaluation of price proposals

§ In preparing for contract negotiations and

§ In assessing the cost impact of introducing changes to

existing designs.

It is vital to understand that the huge investment on engineering and construction

industry demand comfort, reliability economy and Total Cost Engineering
Management (TCM) from initial conception to final completion. This is to ensure that
as far as reasonably practicable that the project is realized with Quality, Time and Cost
targets.

4.00 THE INTERNATIONAL COST ENGINEERING COUNCIL (ICEC)

The International Cost Engineering Council (ICEC) is an nonpolitical and nonprofit
worldwide organization which was founded in 1976 with the object of promoting
cooperation between national and multinational cost engineering, quantity surveying
and project management organizations worldwide for their mutual wellbeing and that
of their individual members.

ICEC member societies are located in more than 40 countries and have chapters or
sections in many additional countries.

4.01 THE INSTITUTE OF APPRASIAL AND COST ENGINEERS (IA&CE) NIGERIA

The Institute of Appraisers and Cost Engineers (IA&CE) a division of the Nigerian
Society of Engineers is member institute of the International Cost Engineering Council
(ICEC). The IA&CE is dedicated to 21st Century Total Cost Engineering Management.
4.02 MAJOR OBJECTIVES OF ICEC
To encourage promote and advance the sciences and arts of the cost engineering,
quantity surveying and project management for the public good, worldwide.

4.03 INTERNATIONAL NETWORK

ICEC is a worldwide confederation of cost engineering, quantity surveying and project
management societies which acts to promote worldwide exchange of cost engineering
and project management information and experiences.

4.04 THE KEY FUNCTIONS OF COST ENGINEERS

The Key functions of Cost Engineering (CE) as defined by the International Cost
Engineering Council (ICEC) are as shown thus:

To provide independent, objective, accurate and reliable capital and

operating cost assessments usable for investment funding and
project control; and

• To analyze investment and development for the guidance of owners, financiers and
contractors.
• Estimates of capital or assets costs including development costs
• Estimates of operating and manufacturing costs through an asset’s life cycle
• Risk assessment and analysis
• Trending of scope and cost changes
• Decision analysis
• Financial analysis (e.g net present value, rate of rate of return etc)
• Project cost Control
• Appraisals of existing assets
• Project analyses, databases, and benchmarking
• Planning and Scheduling
• Sitting studies etc.
• Productive and investment needs assessment
• Facility management needs assessment
• Project feasibility and budget assessment
• Cost management
• Procurement management
• Contract administration
• Whole-life appraisals;
• Quality audits
• Value management and
• Dispute resolution
5.00 SCOPE
In its broadest sense cost engineering is that area of engineering principles where
engineering judgment and experience are utilized in the application of scientific
principles and techniques to problems of cost estimating cost control profitability
analysis, project management, and planning and scheduling. In addition, cost
engineering embraces the principles of several disciplines and branches into business
planning, management science, optimization, operations research, accounting, and
economics, among others. Cost engineering covers a wide range of topics as listed in
component topics in cost engineering.

5.01 PART I SUPPORTING SKILLS AND KNOWLEDGE

Computer operations Time value of money
Operations research Forecasting theory
Statistics and probability Behavioural science
Basic business and finance Motivational management
Oral and written Metric-English units
Communication Conversion
5.02 PART II COST ESTIMATING AND COST CONTROL
Manufacturing Capital cost
Engineering Maintenance
Construction Revamp
Operations Decommissioning

5.03 PART III PLANNING AND SCHEDULING AND PROJECT MANAGEMENT

Organizational structures Quality management

Integrated project contract Resource management
Time management Personnel
Scheduling Materials
Schedule control Equipment and tools
Forecasting Contract administration
Cost Management Societal/legal influence
Budgeting
Forecasting

5.04 PART IV ECONOMIC ANALYSIS AND BUSINESS PLANNING

Value engineering Profitability
Depreciation Appraisal
Comparative studies Life cycle costing
Constructability Risk analysis
5.05 THE DIVERSE WORKS OF COST ENGINEERS INCLUDE:
• Cost Estimating
• Cost Control
• Cost Planning
• Conceptual Studies
• Value Engineering
• Constructability Studies
• Project Cash Flow Projection
• Independent Check Estimates
• Liquidated Damages Assessment
• Project Cost Variation
• Project Cost Fluctuation
• Negotiation Support
• Review of Contract time extension request
• Claims Management/Avoidance
• Construction Management
• Project Management
• Customs Destination Inspection
• Insurance Assessors/Loss Adjusters
• Project Scheduling
• Risk Analysis/Management
• Life Cycle Cost Analysis
• Value Analysis/Management
• Planning/Budget Estimates
• Profitability Analysis of Engineering Project and Process

5.06 THE CE PROVIDES INFORMATION BY:

• Estimating costs and analysis risk
• Trending and controling costs and assessing design; and
• Documenting costs

5.07 COST PLAN

A cost plan (detail cost of each engineering system) provides the means of controlling
the design so that the complete scheme may be built within the approved budget.

Monitoring of the cost plan enables the Cost Engineer to detect at any time during the
project if the budget is exceeded or to take immediate remedial action before
planning and design process proceeds further.
 At each phase of the project, the cost plan is updated and the design managed so that
the budget is not exceeded. Cost plan also provides basis for comparison of alternative
designs/options.
A properly prepared/monitored cost plan gives the project Stakeholders confidence
that it is “on the right track” in respect of costs.
5.08 SCHEDULING
Scheduling is an essential part of successful cost engineering management from start
to completion of projects. Attention to details is important in scheduling to ensure
that as far as reasonably practicable that careful consideration is given to constraints
as site, climate and manpower.

A properly prepared schedule must reflect the project parameters.

5.09 RISK ASSESSMENT

An assessment of the likely cost and risk is made taking account of past experience
with similar activities and the assessment of associated trends, and of any changes in
working practices and productivity gains.

6.00 TIME VALUE OF MONEY

This concept assigns progressive future time value for money invested in assets,
stocks, etc Money available now has more value (What goods and services it can buy)
than the same amount a year later. So, time alters the worth or value of money,
propelled by economic factors. An amount of money spent today ha an equivalent
worth a year or more after. A car bought at N100,000 five years ago may cost higher
today. The new cost could be said to be the subjective present worth of the N100,000.
But objective present worth is subject to a stipulated interest rate.

6.01 EQUIVALENCE
Different sums of money that have equal value over an interest period are said to
equivalent. That is, a principal and principal-plus-interest are equivalent.

7.00 COST INDEXES

A cost index is a dimensionless number used to adjust the cost of an item from one
time period to another. The adjustment is necessary because of the changing value of
money with time.
To convert costs from one time period to another, we use the following relationship.

C2 = C1 Index 2
Index 1 ………………………… (1)
 Where C1 = Initial Cost in first year
C2 = Future Cost in future year
Index1 = Index in first year
Index2 = Index in further year

Example 1 A project built in 1986 at a cost of N800m. the index for this project in
1986 was 238. What would the project cost in 1989 if the index in 1989 is
320?

Solution: From equation (1)

320
800 x
xx
238 = N1,076m or N1.076b

8.00 ESTIMATING VERSUS BIDDING

Determining the selling price for a job is actually two separate components. The first
component is called the estimate, which determines the cost of the job. The second
component is the bid, which determines the job’s selling price. It is critical that you
understand the difference between an estimated cost and a bid price. Estimating is
determining your cost and bidding is determining the selling price.

8.01 ESTIMATING
The purpose of estimating is to determine the cost of a project before you actually do
the work. Estimating must take into consideration variable job conditions, the cost of
materials, labor cost, direct job expenses, and management costs (overhead).

8.02 BID PROCESS

Once you know the estimated cost of a project, you can determine the selling price of
the job. Determining the selling price of a job is called bidding.

8.03 COMPETITATIVENESS
Control overhead expenses to keep them to a minimum. Factors that affect a
contractor’s competitiveness include:

1. Competition
2. Cost of material (buying power)
3. Experience
4. Labor cost and productivity
5. Management skills
6. Overhead
7. Selling the job at your price
9.00 DUTIES AND RESPONSIBILITIES OF THE ESTIMATOR
While the duties of estimators may vary from contractor or contractor, the basic
principles remain the same. Generally, the duties of the estimator include but are not
limited to:

1. Determining the cost of the job (estimate)

2. Purchasing material
3. Insuring bid accuracy
4. Project management/tracking

The estimator must develop a system to insure that the bid is accurate, and verify that
errors in the estimate have not been made.

10.00 ESTIMATING AND BID PROCESS

1. Understanding the scope of work
2. The Take-off
3. Determining the bill of material
4. Pricing and laboring material
5. Extending and totaling
6. The estimate summary
7. Applying profit and other costs.
8. Bid accuracy and bid analysis

11.00 DIRECT JOB EXPENSES

Direct job expenses are expenses often not shown the blueprints, but probably
indicated in the specifications. The failure to consider direct job expenses result in
these costs being absorbed out of profits. Onsider the following expenses and be sure
you have included their cost in the estimate.

1. As-built plans
2. Business and occupational fees (B&O)
3. Engineering/working drawings
4. Equipment rental
5. Field office
6. Fire seals
7. Guarantee
8. Insurance
9. Miscellaneous material items
10. Mobilization
11 HSE compliance
 12. Out of town expenses
13. Parking fees
14. Permits and inspection fees
15. Public safety
16. Recycling fees
17. Storage/storage handling
18. Sub-contract expenses
19. Supervision cost
20. Temporary wiring
21. Testing and certification fees
22. Trash disposal
23. Unity charges and fees

12.00 BID ACCURACY

To assure that your bid is accuracy you must verify that you have not made any of the
following errors in the estimate:

o Assuming standard grade devices, when specification grade is required.

o Errors in multiplication or addition
o Failing to include outside or underground work
o Failure to determine job site conditions, especially for retrofit jobs
o Failure to comply with the specifications or blueprint notes.
o Forgetting a major item, such as a switchgear quote.
o Forgetting to include special equipment
o Forgetting to include changes to the original specifications or blueprints.
o Leaving a page out of the total
o Not double checking all figures
o Not transferring totals to the summary worksheet properly.
o Omitting a section of the estimate
o Thinking that typical floors 6-12 is six flows when it’s seven floors
o Using improper estimating forms
o Using supplier take-off quantities for quotes
o Relying on verbal supplier quotes
o Wrong extensions or totals
o Wrong scale on reduced blueprints
o Wrong unit for labor –unit
o Wrong unit for material cost
13.00 COST CONTROL

1. Explain each of the following terms and given data relating to an example
project calculate them:
a. Budgeted cost of work scheduled (BCWS)
b Budgeted cost of work performed (BCWP)
c. Actual cost of work performed (ACWP)
d. Budget at completion (BAC)
e. Estimate at completion (EAC)
f. Schedule variance (SV)
g. Cost variance (CV)

14.00 LIFE CYCLE COSTING

The 21st century engineering design concept is now based on the economic life cycle
cost, in preference to the cheapest possible constructional design, hence Cost
Engineers must give careful consideration to the underlisted three “Rs”:

• Running Cost
• Repairs Cost
• Replacement Cost.

14.01 CHECKLIST FOR LIFE CYCLE COSTING

Purchase or manufacturing cost Benefits and penalties for quality
Transportation cost
Installation cost
Direct costs
Indirect costs
Maintenance
Inventory for materials
Inventory for parts
Periodic overhauls
Supervision
Service reliability
Salvage value
Distribution expense
General and administrative
Expense
Conformity with trends
Safety and ecological
Considerations
Governmental rules and
Regulations
Uncertainty and Risk
 15.00 DIRECT AND INDIRECT COSTS

COST ESTIMATE

DIRECT COST INDIRECT COST

LABOR MATERIAL EQUIPMENT SUBCONTRACT TAXES GEN. COND. RISK

OVERHEAD

PROFIT CONTINGENCY

15.01 DIRECT COSTS are the costs of all permanent equipment, materials, labor and other
resources involved in the fabrication, erection, and installation of the permanent
facilities.

15.02 INDIRECT COSTS are all costs other than direct costs which do not become a
permanent part of the facilities but are required for the orderly completion of the
project. These may include, but are not limited to, construction management, start-up
costs, fees, insurance, and taxes.

THANK YOU AND GOD BLESS

YOU ALL
REFERENCE

1. ACostE (1994) Cost Management for the 21st Century – 13th

International Cost Engineering Congress

2. Michael Holt (1997) Electrical Estimating

3. Mbelede C (2003) Cost Engineering Practice: Nigeria as a Case

Study Presented/published at the Nigeria Society of
Engineers Annual General Meeting (LAGELU 2003)
Ibadan

4. Mbelede C (2005) Basic Engineering Economics. Compulsory Refresher

Course for Prospective Corporate Members of the
Nigerian Society of Engineers.

5. Mbelede C (2010) Cost Engineering Practice in 21st Century Nigeria – The

Appraise and Cost Engineer Journal of the Institute of
Appraises and Cost Engineers (IACE)

6. ICEC - The International Cost Engineering Council www.coste.org

7. Jelen’s Cost and Optimization Engineering Third Edition by Keneth K.

Humphreys, PE CEE (ED) American Association of Cost Engineers