UNIVERSITY OF KERBALA

COLLEGE OF ENGINEERING
PETROLEUM ENGINEERING DEPARTMENT
SUBJECT: ENGINEERING ECONOMICS
Prof. Dr. Sabah Rasoul Al-Jabiri
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COST ENGINEERING

Cost engineering is "the engineering practice devoted to

the management of ENGINEERING projects' cost,
involving such activities as cost estimation, cost control,
cost forecasting, and risk analysis.
One key objective of cost engineering is to arrive at an
accurate cost estimates and schedules. Cost engineering
goes beyond preparing cost estimates and schedules by
helping in resources management and supporting
assessment and decision making.
The most obvious perception is that engineering
addresses technical issues such as the physical design of
a structure or system. However, there are other
dimensions to consider such as money, time, and other
resources that were invested in the creation of an
engineering project. Cost engineering recognizes and
focuses on the relationships between the physical and
cost dimensions of whatever is being "engineered".

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 Types of Costs
All projects incur costs. Project costing is a key factor in
making project decisions. As a project manager, you
need to be aware of the type of costs that impact your
project.
There are five types of costs in a typical project:
 Fixed
 Variable

 Direct

 Indirect

 Sunk

 Fixed Costs
Fixed costs (such as setup costs) are those that do not
change throughout the life-cycle of a project.

Variable Costs
Variable costs,(such as fuel costs and labor rates), are
costs that change during the project life-cycle.

Direct Costs
Direct costs are expenses that come out of the project
budget directly. Examples of direct costs are team travel
expenses, team wages, cost of material used in a project,
etc....

Indirect Costs
Indirect costs are those that are shared across multiple
projects. Indirect costs are sometimes also referred to as
oversight costs. For example, in software development
projects, it is common for a project manager or an
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 architect to be partially allocated across several projects.
Hence, the cost of the project manager or architect will
be shared among the projects they are allocated to.
Project managers are usually an indirect cost to the
project. This is because their work is to supervise. They
don’t actually do the work! The people who do the
work, like developers and designers, are Direct Costs
to the project.

 Sunk Costs
Sunk costs are those that have been incurred in a project,
but have not produced value towards the project’s
objectives. For example suppose you have hired a
software engineer A to develop a website in .NET. After
a month, you decide that A isn’t doing a good job and
reach out to another software engineer B, who convinces
you that .NET is not the way to go. The cost associated
with the .NET software engineers would be treated as
Sunk Costs.