Project Cost Engineering

CB 712 – E

By
Dr. Emad Fayez Gaid
 Course Objectives

• The aim of the course

to get student familiar with the skills, techniques, processes, and
knowledge areas relevant to the professional practice of cost
engineering.

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 Course Topics

• Introduction to Cost Engineering/Estimating Profession and types of Cost

• Detailed Cost Estimating Risk & Contingencies

• Bid preparation & bidding strategies
• Computerized cost engineering
• Earned Value Management
• Project cash flow analysis
• Time Value of Money & Engineering Economics
Cost estimating methods in PMBOK
Cost accounting and cost control
Asset Management
Value Analysis/Engineering

• Measures of worth for project feasibility

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 Course References
• AACE Intl. and Amos, S. J. (2011) Skills & Knowledge of Cost Engineering: A Product
of the Education Board of AACE International., CreateSpace Independent Publishing
Platform Detailed.
• Pratt, D. (2010) Fundamentals of Construction Estimating. 3rd ed., Delmar Cengage
Learning.
• Peurifoy, R. and Oberlender, G. (2013) Estimating Construction Costs, 6th ed., McGraw-
Hill Education
• Holm, L., Schaufelberger, J. E., Griffin, D, and Cole, T. (2004) Construction Cost
Estimating: Process and Practice. 1st ed., Prentice Hall.
• Peterson, S. J. (2011) Construction Estimating using Excel, 2nd Ed., Prentice Hall
• Del Pico, W. J. (2013) Project Control: Integrating Cost and Schedule in Construction. 1st
ed., RSMeans.
• Peterson, S. J and Dagostino, F. (2014) Estimating in Building Construction, 8th ed.,
Prentice Hall
• Peterson, S. (2012) Construction Accounting & Financial Management, 3rd ed., Prentice
Hall.
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 Lecture 1

Introduction to
Cost Engineering/Estimating Profession
and Types of Cost

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 Introduction
 Project management in the construction industry is the professional practice of
planning, scheduling, monitoring, and controlling a finite amount of resources:
materials, labor, equipment, and subcontractors to achieve a set of goals.

 Cost is the value of an activity or asset. Generally, this value is determined by the
cost of the resources that are expended to complete the activity or produce the
asset. Resources used are categorized as equipment, labor, material, and others.
Although money and time are sometimes thought of as resources, they only
implement and/or constrain the use of the physical resources previously listed.
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 Introduction

 The Project Triangle or Iron Triangle expresses the Triple Constraint of time,
cost and quality or scope that must be managed in project delivery. Each
constraint is connected and moving one point of the triangle will impact the other
two points.

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 What is Cost Engineering/ who are we call cost engineers?
 Total Cost Management (TCM) is the effective application of professional and
technical expertise to plan and control resources, costs, profitability and risk.
Simply stated, it is a systematic approach to managing cost throughout the life
cycle of any enterprise, project, product or service. This is accomplished through
the application of cost engineering and cost management principles, proven
methodologies and the latest technology in support of the management process.

 TCM is that area of engineering practice where engineering judgment and

experience are used in the application of scientific principles and techniques to
problems of business and program planning.
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 Project Cost Management
Source: PMBOK – Sixth Edition

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 Project Cost Management

 Cost engineers often specialize in one functional aspect of the project

process. They may have titles such as cost estimator, parametric
analyst, cost/schedule engineer, project control manager, or project
control leader. No matter what their job title or business
environment, a general knowledge of, and skills in, all areas of cost
engineering are required to perform their job effectively.

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 Project Cost Management

 The cost dimension requires calculation, analysis, planning, and control.

No project has ever been built without dealing with both the physical and
cost dimensions. However, the engineering skills and knowledge required
to deal with costs are quite different from those required to deal with the
physical design. From that difference, the field of cost engineering was
born. AACE Constitution definition stated, the skills and knowledge
needed by the cost dimension are: business and program planning; cost
estimating; economic and financial analysis; cost engineering; project
management; planning and scheduling; and cost and schedule performance
measurement and change control.
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 Cost Structuring

 It is important to further structure the cost elements within the

equipment, labor, material, and other resource categories, to understand
how they influence the total cost of the activity or asset and to get a
better understanding of how they can be controlled. This structuring
sorts the cost elements into direct costs, indirect costs, fixed costs,
and variable costs. In practice, some costs may fall in more than one of
these groupings.

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 Direct Costs

 Direct costs are those resources that are expended solely to complete the
activity or asset. In other words, “Any cost that is precisely identified with
a final cost objective, but not necessarily limited to items that are
incorporated in the end product as material, equipment or labor. Thus, the
direct cost of a foundation for a house includes trenching for the footings,
the wooden forms (depreciation), the concrete, and the labor to place and
finish the concrete. Direct costs for making a metal work include the scrap
from the stamping process, less any salvage value.

 In plastering and painting work, what about the scaffolding cost.

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 Indirect Costs

 Indirect costs are those resources that need to be expended to support the
activity or asset but are also associated with other activities and assets. In
other words, “Any cost not directly identified with a single final cost
objective but identified with two or more final cost objectives.

 Indirect costs also may be referred to as site overhead costs. Indirect costs
include general administrative activities associated with operating the
business, costs for providing and maintaining field equipment or a
manufacturing facility, and expenses for utilities, mobilization and
demobilization, site installations.

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 Fixed Costs

 Fixed costs are those cost elements that must be provided independent of
the volume of work activity or asset production that they support. These
can be either direct or indirect costs. Fixed costs often include rent,
buildings, machinery, etc. The tools are an indirect fixed cost only if they
are owned. If they are leased or provided as part of the labor charge, they
would fall into a different classification.

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 Variable Costs

 Variable costs are those cost elements that must be provided and are
dependent on the volume of work activity or asset production that they
support. Variable costs are costs that vary with output. Generally variable
costs increase at a constant rate relative to labor and capital. Variable costs
may include wages, utilities, materials used in production, etc. Again, these
can be either direct or indirect costs.

 Cost of rent one equipment may be classified or divided to direct cost,

indirect, fixed and variables cost???

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 Cost Estimating

 Cost Estimating predicts the quantity and cost of resources needed to

accomplish an activity or create an asset.

 Estimating activity / project work item costs “involves developing an

approximation of the costs of the resources needed to complete each
schedule activity. In approximating costs, the estimator considers the
possible causes of variation of the cost estimates, including risks.

 In small scope projects cost estimating and budgeting are very closely
linked and considered as a single process that can be performed by a single
person.
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 Cost Estimating

 The building blocks of a cost estimate are

 Well-defined scope (what we are trying to estimate),

 Cost element structure (how we organize the information), and

 Historical cost data (data from cost accounting records/Cost Control

Reports and/or “experience” of knowledgeable people).

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 Cost Estimating

In detailed estimating. Each work element in the WBS is broken down

into its resource requirements, costs of each resource estimated and

summed to estimate the cost of the WBS work element. Costs are then

usually rolled up to estimate the total project cost in a manner like bottom-

up estimating. Enough resource information is required for costs to be

estimated and rolled up, thus this method provides higher accuracy as

resource estimates are better known in the planning phase.

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 Cost Estimating

Pre-tendering Stage

Estimates in the pre-tendering stage are usually conducted for the owner

by owner’s staff and/or the consultant. With the initial stages of the

project, the owner needs to conduct a feasibility study and set a budget for

the project, even before any schematic designs are prepared. Conceptual

estimating methods are used, such as Rough-Order-of-Magnitude (ROM)

or Cost Indices methods.

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 Cost Estimating

Tendering Stage

Estimates in the tendering stage are usually conducted by the contractor to

complete and submit a bid for the project, where a Detailed estimate

prepared.

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 Cost Estimating

Construction Stage

Once the contract is awarded the contract a contractor’s budget is prepared

for reasons of cost control, and in case of a lump sum contract, a

breakdown of the lump sum should be submitted in a schedule of values.

Finally, change order and claim estimates are prepared during

construction.

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