Professional Documents
Culture Documents
ESTIMATE (OCE)
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GOODS/SERVICES
NON-
PROJECT- PROJECT-
BASED BASED
• CONSTRUCTION • PRODUCTION
• EPC • MAINTENANCE
• DRILLING • PERSONNEL OFFICE
• OTHERS • CAR RENTALS
• CONSULTANCY
• OTHERS 2
PROJECT-BASED
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PMBOK
Project life cycle:
1. Starting the project
2. Organizing and preparing
3. Carrying out the project work, and
4. Closing the project
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PMBOK
Project management process (process groups):
1. Initiating process group
2. Planning process group
3. Executing process group
4. Monitoring and controlling process group
5. Closing process group
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The 10 Knowledge Areas – PMBOK:
1. Project Integration Management
2. Project Scope Management
3. Project Time Management
4. Project Cost Management
5. Project Quality Management
6. Project Human Resource Management
7. Project Communication Management
8. Project Risk Management
9. Project Procurement Management
10. Project Stakeholder Management
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PROJECT COST MANAGEMENT
Scope of knowledge area:
• Estimate costs
• Determine budget
• Control costs
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ESTIMATING
General:
Estimation Theory is a procedure of “guessing” properties of the
population from which data are collected.
The objective of estimating is to determine the approximate value of
a population parameter on the basis of a sample statistic.
Approximate value can be Point Estimate or Interval Estimation.
Related to work:
It is the technique of calculating or computing the various quantities
and the expected expenditure to be incurred on a particular work or
project.
TYPES OF COST
• Fixed Cost • Relevant and irrelevant costs
• Variable Cost • Historical cost
• Direct Cost • Replacement cost
• Indirect Cost • Explicit cost
• Overhead Cost • Implicit cost
• Sunk Cost • Economic cost
• Opportunity Cost • Incremental cost
• Total Fixed Cost • Average cost
• Total Variable Cost • Short-run and long-run costs
• Total Cost • Learning curve cost
• Marginal Cost • Tooling cost
THEORY OF COST
What is Cost?
• The real physical resources consumed.
• The money equivalent of the real physical resources used.
• The value of benefits foregone in the alternative use of resources.
• A measure of the consequences of a decision.
• The value of money that has been used up to produce something.
• The expenses faced by the business in the process of supplying goods and
services to consumer.
• Associated with performing an activity or the acquisition of an asset.
• The value (resources) of an activity or asset.
Cost Engineering
The application of scientific principles and techniques to problems
of estimation, cost control, business planning, profitability analysis,
and project management.
The engineering practice devoted to the management of project
cost, involving such activities as estimating, cost control, cost
forecasting, investment appraisal and risk analysis.
It seeks the optimum balance between cost, quality and time
requirements.
Engineering economics is a core skill and knowledge area of cost
engineering.
Cost Accounting
The internal reporting system, the process of recording, classifying,
analyzing, summarizing, allocating various alternative courses of
action for the control of costs.
TC = TOTAL COST
TVC = TOTAL VARIABLE COST
TFC = TOTAL FIXED COST
Q
Cost Management
Cost management focus on recording of how inputs are employed in
the creation of goods and services (outputs) at the production level.
1. Collect requirements
2. Define scope
3. Create WBS
4. Verify/validate scope
5. Control scope
WBS
2. ANALYZING RATES
In order to determine the rate of a particular item, the factors affecting the rate of
that item are studied carefully and then finally a rate is decided for that item. This
process of determining the rates of an item is termed as analysis of rates or rate
analysis.
For construction, the rates of particular item of work depends on the following:
Specifications of works and material (quality, proportion and constructional)
Operation method
Quantity of materials and their costs
Cost of labors and their wages
Location of site of work and the distances from source and conveyance
Charges
Overhead and establishment charges
Profit
Elements to understand
Wages
Transportation (incoterms; risks, costs, liabilities)
Importation (taxes, other costs)
Insurances
Levies
Bonds
Provisional sum
Contingencies
Insurances
Workman's Compensation Asset
Automobile Third Party Liability
Cargo Marine General Liability
Car (Construction All Risks) Professional indemnity
EAR (Erection All Risks) BPJS
Levies
Taxes Toll
Fees Excise
Duty
Fines
Tariff
Bonds
Performance bond: ensure the seller will complete the work as
specified and for the agreed price.
Bid bond: provides an assurance that the bidder will not withdraw
his bid within the specified period for acceptance and will execute a
written contract and furnish the required bonds if the bid is
accepted.
Advance Payment bond: payable against advance payment given to
seller.
Payment bond: protect sub-contractors, sub-vendors, and laborers
against nonpayment by the prime contractor.
Provisional sum
A certain amount included in the contract but it is optional.
Only to cover any works or required goods which are not predictable
or uncertain whether needed or not during the work performance.
It may be used by instructing contractor to perform certain work or
activities.
Different than contingencies.
Contingencies sometime are kept by owner in the budget, not in the
contract, or incorporated into the owner cost estimate as a control during
selection process.
If the winner is less cost, then keep the excess into the budget.
Contingencies
AACE: an amount added to an estimate to allow for items,
conditions, or events for which the state, occurrence, or effect is
uncertain and that experience shows will likely result, in aggregate,
in additional costs.
They are used to cover unknowns, unforeseen uncertainties, and/or
unanticipated conditions that are not possible to adequately
evaluate from the data on hand at the time the cost estimate is
prepared, but must be represented by a sufficient cost to cover the
identified risks.
Contingencies
To develop appropriate contingency allowances, the estimator must
identify the uncertainty associated with an item of work or task,
forecast the risk/cost relationship, and assign a value to this task that
will limit the cost risk to an acceptable degree of confidence.
It is calculated by using risk management framework. Value may be
different from phase to phase.
Contingency is included in budget as a control account.
Contingencies
Contingency usually excludes:
Major scope changes (product specification, capacities, building
sizes, and location of the asset or project).
Extraordinary events such as major strikes and natural disasters.
Management reserves.
Escalation and currency effects.
Contingencies
Methods:
1. Expert judgment
2. Predetermined guidelines (with varying degrees of judgment and
empiricism used)
3. Simulation analysis (primarily risk analysis judgment incorporated
in a simulation such as Monte-Carlo)
4. Parametric Modeling (empirically-based algorithm, usually derived
through regression analysis, with varying degrees of judgment
used)
Contingencies
Contingency Percentages (The American Association of State
Highway and Transportation Officials – AASHTO 2009):
1. Planning 25-40%
2. Preliminary Design 20-35%
3. Design Phase I (30%) 15-30%
4. Design Phase II (60%) 10-20%
5. Design Phase III (90%) 05-10%
6. Final Design (100%) 00-05%
Cost Estimating Techniques (A)
Methods:
1. Top-down (Analogous)
2. Bottom-up
Cost Estimating Techniques
Top-down (Analogous):
Uses historical data from similar engineering projects to
estimate costs, revenues.
Uses those data to modify for changes in inflation or
deflation, activity level, weight, energy consumption, size,
and other factors.
Best used in early stage when alternatives are being
developed and refined.
Cost Estimating Techniques
Bottom-up: It can Use WBS
Also called as segmenting model.
More detailed method of cost estimating.
Breaks down the project into small, manageable units and
estimates their economic consequences. Individual cost of activity
is then rolled up to higher level.
Best used in the final stage or when the desired output has been
defined and clarified.
Cost Estimating Techniques
NO CONDITION TOP-DOWN BOTTOM-UP
Lang factor
• Solid process plants: 3.10
• Solid-fluid process plants: 3.63
• Fluid process plants: 4.74
Analytical
• By having detailed work items (WBS, BOQ), supply and installation
cost, including project management, contingency, overhead and
profit.
• Multiply the quantities with the unit costs.
Example: analytical
Given the data below, use the segmenting model to estimate a manufacturer's total
annual cost. Estimated annual production volume = 400,000 units
Estimated direct labor cost per unit = $3.75 and estimated indirect labor cost per unit =
$0.92 Estimated raw material and purchased part cost per unit = $32.50
All other costs are independent of production volume and are estimated at $800,000
per year.
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Cost Estimating Techniques – PMI
Basis of Estimates:
Documentation of the basis of the estimate (such as how it was
developed).
Documentation of all assumptions made.
Documentation of any known constraints.
Indication of the range of possible estimates to indicate that the
item is expected to cost between a range of values.
Indication of the confidence level of the final estimate.
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Cost Estimating Techniques – PMI
Requirements:
Understand the scope statement.
Scoping in detail, for example, using the work breakdown structure
method.
Understand the project schedule.
Understand the required resources.
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Cost Estimating Techniques – PMI
Expert Judgment:
Developed by expert(s)
Guided by historical information from similar projects.
Can also be used to determine whether to combine
methods of estimating and how to reconcile differences
between them.
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Cost Estimating Techniques – PMI
Analogous (top-down) Estimating:
Uses historical information on similar projects/works and expert judgment.
Uses the values of parameters, such as scope, cost, budget, and duration or
measures of scale such as size, weight, and complexity, from a previous,
similar project as the basis for estimating the same parameter or measure for
a current project.
Relies on previous actual cost of similar projects, may be with adjustment.
Used because of limited detailed information about the project.
Can be applied to total project or segments of a project, in conjunction with
other methods.
Less costly, less time consuming, and less accurate. 69
Cost Estimating Techniques – PMI
Parametric Estimating:
Uses mathematical model, a statistical LINEAR:
relationship (regression analysis) between COST=A+BX1+CX2+ ...........
historical data and other variables (such as
square footage in construction) to calculate
an estimate for activity parameters, such as
EXPONENTIAL:
cost, budget, and duration. COST=A+ BX1C+DX2E +..........
May result higher accuracy, but depending
upon the sophistication and underlying
data built into the model.
Can be applied to total project or segments
of a project, in conjunction with other 70
methods.
Example of Parametric Construction of highway:
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Example of Parametric Construction of buildings:
Cost elements:
1. Contract Duration
2. Amount of Liquidated Damages
3. Height of Building
4. number of Floors
5. Typical Floor Area
6. Gross Floor Area
Reserve Analysis:
Adding contingency to each activity cost estimates as zero duration
item (slow, overstates cost).
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Cost Estimating Techniques (F)
(Ben-arieh and Qian) for production /
manufacture:
1. Intuitive
2. Analogical
3. Parametric
4. Analytical
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Cost Estimating Techniques
Intuitive:
Using past experience.
Types:
• Case-Based Methodology
• Decision Support Systems (DSS)
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Cost Estimating Techniques
Analogical:
Based on historical cost data for products with known cost.
Types:
• Regression Analysis Models
• Back-Propagation Neural-Network (BPNN) Models
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Cost Estimating Techniques
Parametric:
Derived by applying the statistical methodologies and by
expressing cost as a function of its constituent variables.
These techniques could be effective in those situations where the
parameters, sometimes known as cost drivers, could be easily
identified.
Generally used to quantify the unit cost of a given product.
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Cost Estimating Techniques
Analytical:
Requires decomposing a product into elementary units, operations,
and activities that represent different resources consumed during
the production cycle and expressing the cost as a summation of all
these components.
• Operation-Based Approach
• Breakdown Approach
• Tolerance-Based Cost Models
• Feature-Based Cost Estimation
• Activity-Based Costing (ABC) System 80
Cost Estimating Techniques (G and H)
(Zhang, et al.) for (Cavalieri, et al.) for
production / manufacture: production / manufacture:
1. Traditional detailed- 1. Analogy-based
breakdown 2. Parametric
2. Simplified-breakdown 3. Engineering
3. Group-technology-based
4. Regression-based
5. Activity-based cost
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Using Cost Estimate Techniques
Similar Projects:
New Projects: 1. Analogous Estimation
1. Bottom Up Estimation 2. Parametric Estimation
2. Parametric Estimation 3. Group Decision Making
3. Group Decision Making 4. Expert Judgment
4. Expert Judgment
Cost Estimate Accuracy
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Cost Estimate Accuracy
COST ESTIMATE ACCURACY BASED ON AACE CLASSIFICATION
NAME
Order of
Magnitude
Intermediate
Preliminary
Substantive
Definitive
Maturity Level or Project
Class 5 Class 4 Class 3 Class 2 Class 1
Definition Deliverables /
(0-2%) (1-15%) (10-40%) (30-75%0 (65-100%)
PD
Plant production/facility
Assumed Prelim Defined Defined Defined
capacity
Plant location General Approx. Specific Specific Specific
Soils and hydrology None Prelim Defined Defined Defined
Integrated project plan None Prelim Defined Defined Defined
Objective:
Establish Development Philosophy
Establish FS of project development for long range plan
Objective:
Optimize several development options to determine best development philosophy
Objective:
Produce AFE/AFC quality estimate for funding and budgeting based on Value
Engineering, Scope of Work for Design and Construction phase of the projects
Objective:
This estimate acts as a bid control estimate to evaluate recommended bids.