Engineering Encyclopedia

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Cost Engineering

Note: The source of the technical material in this volume is the Professional
Engineering Development Program (PEDP) of Engineering Services.
Warning: The material contained in this document was developed for Saudi
Aramco and is intended for the exclusive use of Saudi Aramco’s employees.
Any material contained in this document which is not already in the public
domain may not be copied, reproduced, sold, given, or disclosed to third
parties, or otherwise used in whole, or in part, without the written permission
of the Vice President, Engineering Services, Saudi Aramco.

Chapter : Project Management For additional information on this subject, contact

File Reference: PMT10301 J. McKissack
Engineering Encyclopedia Project Management
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Contents Pages

INTRODUCTION................................................................................................................ 1

BACKGROUND REQUIRED OF A SAUDI ARAMCO COST ENGINEER....................... 2

Educational Background ........................................................................................... 2
Engineers .................................................................................................................. 2
Accountants .............................................................................................................. 2
Other Educational Backgrounds ................................................................................ 2
Experience in Lieu of Formal Education .................................................................... 2
Cost Accountants and Cost Clerks............................................................................. 3
Project Management.................................................................................................. 3
Material Control and Supply...................................................................................... 3
Project Estimating and Design ................................................................................... 3
CAREER PATH OF A SAUDI ARAMCO COST ENGINEER............................................ 4
Entry Level ............................................................................................................... 4
Cost Engineer III, II, and I ........................................................................................ 4
Business Administrator.............................................................................................. 4
Business Manager...................................................................................................... 5
Department Positions ................................................................................................ 5
Other Positions.......................................................................................................... 5
DUTIES OF A SAUDI ARAMCO COST ENGINEER ........................................................ 6

REFERENCES FOR COST ENGINEERS ........................................................................... 8

SAUDI ARAMCO PROJECT MANAGEMENT TEAM...................................................... 9

ORGANIZATION THAT SUPPORT SAUDI ARAMCO PROJECT MANAGEMENT

TEAMS...............................................................................................................................10
Project Support & Controls Department...................................................................10
Facilities Planning Department..................................................................................10
Material Supply Organization ...................................................................................10
Contracts Department ..............................................................................................11

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Finance Organization................................................................................................11
SAUDI ARAMCO COST CONTROL PROGRAM.............................................................13
Capital Funding History............................................................................................13
ER Level Responsibilities .........................................................................................13
SAUDI ARAMCO COST CONTROL PROGRAM.............................................................14

GLOSSARY........................................................................................................................17

Table of Figures Pages

Figure 1 Project Cost Engineer Responsibilities ......................................................... 7

Figure 2 Organizations that Support Saudi Aramco Project Management Teams.......12
Figure 3A Saudi Aramco Cost Control Program Flow Chart.....................................15
Figure 3B Saudi Aramco Cost Control Program Flow Chart.....................................16

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INTRODUCTION

This module introduces the Participant to cost engineering, which is used at Saudi Aramco to
account for capital project costs, forecast future expenditures, and report on the status of the
project. To accomplish this objective, we will discuss the Company methods, procedures and
guidelines for cost planning and control.

A Cost Engineer is an individual, who is experienced in the techniques of cost structure

development, cost forecasting and cost control, which are necessary to ensure the completion of a
given project within budget and time constraints.

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BACKGROUND REQUIRED OF A SAUDI ARAMCO COST ENGINEER

Educational Background

Usually, a cost engineer has completed a four-year program that led to a college degree. A
prospective cost engineer can pursue any of several majors to qualify for an entry level position in
cost engineering. Most universities lack a formal program that is defined as cost engineering.
Consequently, cost engineers come from a variety of backgrounds. Despite this fact, most cost
engineers are able to operate competently in their job assignments.

Engineers

Many of the various engineering disciplines may provide a sound basis for an entry level position
in cost engineering. Most engineers who become cost engineers have majored in mechanical, civil,
or electrical engineering. Each of the pure engineering majors demands an ability to reason
soundly, work with mathematics, and produce reports for management. These abilities are
required for effective cost engineering.

Accountants

Accounting graduates have studied cost accounting as part of their major. Their training in
working with numbers and producing reasoned reports qualifies many of these accounting
graduates for positions in cost engineering. These accounting graduates are familiar with data
processing and the journal system of accounting, both of which can assist the cost engineer.

Other Educational Backgrounds

Other majors from which cost engineers are drawn include statistics, finance and mathematics.
These studies also require of their students deductive reasoning and a facility for working with
numbers, both of which are essential to effective cost engineering.

Experience in Lieu of Formal Education

Experience in lieu of a full four-year college program may be used to qualify for an entry-level
position in cost engineering. Two-year associate degree programs may provide an overview of the
majors that were discussed above. The attainment of this level of education, together with
experience, may qualify an individual to become a cost engineer. All cost engineers, however, at
least must possess good oral and written communication skills.

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Cost Accountants and Cost Clerks

Cost accountants and cost clerks who have been trained in Saudi Aramco methods of cost control
and reporting may qualify as entry level cost engineers. Many of these cost accountants and cost
clerks have worked closely with cost engineers for five or more years, and, as a result, they may
have become sufficiently familiar with the job requirements of cost engineering to quality for a
position in that discipline.

Project Management

People who work in the field of project management may also provide a source for recruitment
into the field of cost engineering. These people have been exposed to construction techniques and
project reporting. Many of them have worked for contractors or owners during major project
construction. As a result, these project management personnel would have come into contact with
contractors' or owners' cost engineers, and they would have used information provided by these
cost engineers.

Material Control and Supply

Material control and supply require familiarity with cost accounting and, in many cases, contact
with project management.

Project Estimating and Design

The final area of experience that relates to cost engineering is project estimating and design. Many
people from these fields have educational qualifications, but they may have pursued upon
graduation a career path other than cost engineering.

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CAREER PATH OF A SAUDI ARAMCO COST ENGINEER

Entry Level

The entry position for a cost engineer may be either as a cost clerk or cost engineer IV. The cost
clerk usually does not have a degree, whereas a cost engineer IV usually has a four-year degree.
A cost engineer IV is a grade code 11 position, according to the approved job description.
Usually, the first three years in this position are spent in the Professional Development Program
(PDP). After a few months of general orientation, each entry level person is expected to work
under close supervision. This time is spent in the performance of well-defined specific tasks. Also,
during this time, several rotational assignments will enable the entry-level cost engineer to
increase his abilities through practical learning experience. In addition, he will attend formal
training courses for further personal development.

Cost Engineer III, II, and I

Promotion to cost engineer III indicates that the cost engineer has mastered the skills associated
with his previous position. At this level, he will begin to specialize in a particular area of expertise,
and his development plans will become more related to the requirements of that job. Under the
direction and guidance of a senior cost engineer, a cost engineer III may be assigned responsibility
for the cost control of one or more job orders within a budget item.

The cost engineer II will work toward a thorough knowledge of cost engineering. He will have
the ability to recognize and solve many of the cost engineering problems experienced at Saudi
Aramco. He works with minimal supervision.

A cost engineer I is technically competent and able to recognize and solve any cost engineering
problem. He can serve as a mentor for the less experienced engineers and assist in the
development of new cost engineers. He is able to work alone without supervision since his
knowledge and past experience provide a foundation for self-sufficiency. This senior cost engineer
has total responsibility for a budget item and takes direction from the business administrator. He
should have the ability to act in a supervisory capacity.

Business Administrator

Promotion to business administrator is possible for the cost engineer who has obtained experience
beyond cost engineer. This position requires a working knowledge of project scheduling,
materials procurement and handling, and contracting. Rotational assignments will provide the
work experience to gain this position.

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Business Manager

The business manager supervises several business administrators as well as personnel from other
disciplines. He is the lead member of project management in all non-engineering functions. The
business manager will have responsibility for operating budgets, plans, and manpower
development. He will ensure that the project management team has suitable and functional office
space.

Department Positions

Various department positions represent the next promotional opportunity. These positions include
business management at the general manager level, staff assignments to the Vice President of
Engineering Services or Executive Director of Project Management, or a supervisory position in
one of the various support organizations.

Other Positions

A cost engineer may be returned to project management as a project engineer or project manager.
Such transfers, however, occur infrequently.

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DUTIES OF A SAUDI ARAMCO COST ENGINEER

The cost engineer is able to develop the estimated costs by project elements from the finalized
estimate into a cost structure. This cost structure will permit the cost engineer to accurately track
and forecast expenditures. When adjustment of schedule or manpower is necessary, he makes
recommendations to the Project Management.

Using mainframe and personal computer applications, the cost engineer prepares project control
reporting documents and estimates cost to complete the project.

The cost engineer is able to anticipate problem areas and recommend action before a crisis
develops.

The cost engineer is aware of the value of time and of the need to consistently meet reporting
deadlines. He must be able to evaluate and understand techniques and formats that the contractor
utilizes to communicate with project participants.

The cost engineer must be able to locate and correct errors in reports that are generated by the
Finance Organization to ensure that only the proper costs are charged to the project.

Refer to Figure 1, which is a table that summarizes the responsibilities of a Saudi Aramco cost
engineer.

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PROJECT COST ENGINEER'S RESPONSIBILITIES

ACTIVITY
Capital Budgeting Participates in the budgeting process for capital projects.
Project Preliminary Initiates funding for project proposal development and monitors
Engineering proposal activities.
Funding/Estimate Assists in the preparation of expenditure requests (ERs) to ensure
Development adequacy from an SAPMT point of view.
Authorization For Prepares the initial authorization for approval (AFE), which gives
Expenditure authority to commit and expend funds, and AFE revisions, if
required.
Financial Master Initiates action for making appropriate data entries into the
financial master.
Contracting Process Participates in generating engineering and construction contracts
and internal company work authorizations.
Cost Collection and Checks the validity of invoices, codes each invoice with the
Accounting appropriate account, secures various required approvals and
forwards related documents to Accounting for final processing.
Also monitors other project related costs booked through the
Saudi Aramco cost ledger.
Commitments Determines commitments with respect to outside
contractors/vendors and within Saudi Aramco.
Expenditure Analyzes expenditure reports as generated within Saudi Aramco
Reporting and external organizations.
Forecasting Prepares expenditure forecasts including estimates of cost of any
remaining work and costs to date.
Project Change Prepares and processes project change requests (PCRs) for
Requests project scope and schedule changes.
Project Reporting Prepares project status update reports.
Quarterly Review Assists in the preparation for quarterly reviews by executive
management.
Project Close-out Participates in project close-out efforts.
Final Cost Report Contributes to the final cost report.

Figure 1 Project Cost Engineer Responsibilities

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REFERENCES FOR COST ENGINEERS

The Saudi Aramco Cost Manual provides a working reference tool that defines and describes all
aspects of the Cost Engineer's responsibilities and duties. The manual is updated semi-annually.
This manual was prepared by the Cost Engineering Unit of the Project Controls Division, Project
Support & Controls Department. The Project Support & Controls Department reports to the
Executive Director of Project Management.

Another source of cost engineering information is contained in the General Instructions, which are
updated periodically by various business lines. The primary General Instructions (G.I.'s) that are
used by the cost engineer are issued by Capital Programs of the Finance Organization. Other
G.I.'s are issued by the Material Supply Organization, which cover the issuance and accounting
for project materials.

Finally, the cost engineer obtains information from Saudi Aramco Engineering Procedures, which
are issued by the Engineering and Operations Services Business Line. These procedures provide
an in-depth analysis of specific issues. This analysis is necessary for the proper performance of
Project Management.

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SAUDI ARAMCO PROJECT MANAGEMENT TEAM

Depending upon the size of the project, the Project Management Team is headed by a Senior
Project Manager or a Project Manager. This manager has full responsibility for project
development, from initial conception to completion and financial closeout.

The following managers report to the Project Manager:

. The Engineering Manager
. The Construction Manager
. The Business Manager
Process engineers, project engineers and engineering specialists report to the Engineering
Manager. The Engineering Manager and his staff are responsible for the design of the project. In
some instances, the project engineer will oversee the construction of the facility.

The construction engineers and material personnel report to The Construction Manager. The
Construction Manager and his staff are responsible for the materials procurement and
construction of the project.

Cost engineers, planning and scheduling engineers, job accountants and contract administrators
report to the Business Manager. The Business Manager and his staff are responsible for the
administrative and support areas of construction.

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ORGANIZATION THAT SUPPORT SAUDI ARAMCO PROJECT MANAGEMENT

TEAMS

Various other organizations support the project management team. These organizations provide
the additional assistance that is necessary to fulfill the objectives of the project. The cost for using
personnel from other organizations is not charged directly to the cost of the project.

Project Support & Controls Department

The Estimating Services Division of the Project Support & Controls Department provides
estimating support for the project, from the conceptual stage, through bidding by the construction
contractors, to the development of any change order estimate this is required.

The Project Controls Division of the Project Support and Controls Department provides cost
engineering, scheduling support and project data management. The cost engineering support
through the life of the project by offering training, procedure updating, assistance in problem
solving, and the distribution of the various cost reports. The scheduling support in preparing
project schedules, offering training, procedure updating, claim analysis and development of
recovery schedules. The project data management group maintains the capital program CPS &
MSS database and generates monthly schedule, expenditure and appropriation reports.

The Project Support Services Division of the Project Support & Controls Department provides
assistance in contract award and administration, blasting services, and pre-commissioning of the
completed project.

Facilities Planning Department

The Facilities Planning Department contains several planning units that work with the facility
proponent and the construction agency to develop a budget brief, a preliminary estimate, and to
prepare the final package that is presented to the Board of Directors for approval. The Budget
Director is also a member of this department. The Budget Director provides the preliminary
engineering funds. In addition, he schedules the project for approval.

Material Supply Organization

The Materials Supply Organization provides for the purchase of standard and specially purchased
material acquisitions. This organization provides for the reservation of standard materials (Saudi
Aramco Materials System -- SAMS) and for the sourcing and procurement of those materials that
must be purchased for the project (Direct Charge Materials -- DC). The Materials Supply
Organization arranges for the purchase, transportation, expediting, and delivery of the materials to
the job site. Finally, this organization provides to Accounting the invoicing information for charge
to the project.

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Contracts Department

The Contracts Department assists in the development of a slate of qualified bidders for work to be
performed. This department participates in the contracting plan and in the development,
explanation, and evaluation of the received bids. With the assistance of the Law Department, the
Contracts Department prepares the final contract documents. If there is any dispute, the Contracts
Department assists in the resolution.

Finance Organization

The Capital Programs, Forecasts and Budgets organization, within Finance, provides the financial
control over the use of company funds. This organization approves project change requests and
analyzes the project status reports for compliance with accounting procedures.

The Materials Accounting Department records the issuance of materials and the respective costs
of each item that is purchased, transferred, acquired from surplus or excess inventory, or returned
to the Materials Supply Organization.

The Fixed Assets and Work-in-progress Accounting Department is responsible for recording and
reporting the project costs. Through the assigned job accountant, the project team is able to
investigate charges that appear to be erroneous. The reports of this department are issued monthly
on microfiche. Using a computer terminal that is located in the project office, project team
members also may obtain some of the accounting information through the mainframe computer.
The cost engineer uses this information in the compilation of his monthly project reports and in his
forecasting of costs through project completion.

Refer to Figure 2, which is a table on the next page that shows the support organizations.

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BUSINESS
DEPARTMENT DIVISION FUNCTION
LINE
ENGINEERING PROJECT ESTIMATING Estimating support.
AND SUPPORT & SERVICES
OPERATIONS CONTROLS
SERVICES
PROJECT Project scheduling, recovery scheduling, claims
CONTROLS analysis.
Cost engineering support.
PROJECT Contract award and administration, blasting
SUPPORT services and pre-commissioning services.
SERVICES
FACILITIES BUDGET Preliminary engineering funding, budget brief
PLANNING DIRECTOR coordination and presentation for approval.

PLANNING Budget brief development, facility proponent

DIVISIONS coordination, estimate liaison with Project Support
& Controls Department.
MATERIAL CONSTRUCT. Assists projects with material reservations,
SUPPLY MATERIALS procurement and expediting.

ADMIN. AND CONTRACTING ENGINEERING Bid slate development, qualification of bidders, bid
GENERAL AND PROJECT explanation and review meetings, bid evaluation
MANAGEMEN and award, contract preparation.
T PROCURE-
MENT
FINANCE CAPITAL Financial control of company funds, approval of
PROGRAMS, project change requests, analysis of project status
FORECASTS reports.
AND
BUDGETS
OPERATIONS MATERIALS Records issuance and costing of materials.
ACCOUNTING ACCOUNTING

FIXED ASSETS Records and reports project costs.

AND WORK-
IN-PROGRESS

Figure 2 Organizations that Support Saudi Aramco Project Management Teams

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SAUDI ARAMCO COST CONTROL PROGRAM

Capital Funding History

The need for a project is conceived by an operations proponent, who then works with the
Facilities Planning Department and the probable project department to prepare a budget brief. The
budget brief defines the scope, justification and conceptual estimate of the project. At this time, a
Budget Item (BI) number is assigned.

When the capital budget and budget brief are approved, the project department assigns a Saudi
Aramco Project Management Team (SAPMT). Preliminary funding for development of a project
proposal is obtained. Next a contractor is selected, the proposal is developed and a project
execution plan is prepared by the SAPMT.

Once the project proposal and project execution plan are reviewed and approved by Saudi
Aramco management, an expenditure request (ER) estimate for the expected total costs of the
project is completed. While the proposal effort is underway and funds for preliminary engineering
are being spent, the SAPMT prepares and submits project proposal update reports to
management.

ER Level Responsibilities

After the ER is approved by the Executive Committee (EXCOM), the detailed ER estimate
becomes the budget for each job order (JO) in the BI. Funds are released through the
Authorization for Expenditure (AFE) system to give the SAPMT authority to commit and expend
funds on their BI/JOs. Once the BI number, JO number and phases are established in the financial
master data base, Saudi Aramco's computerized cost accounting system accepts expenditures
against that JO and produces associated cost reports. When ER and AFE/financial master
activities are complete, detail engineering design and construction contracts can be awarded and
internal company authorizations for work to be done can be generated.

Various Saudi Aramco reports, including cost and contractor status reports, flow into the
SAPMT as work progresses on the project. Following a proper review and its resultant evaluation
and decisions, several key project status reports are generated by the SAPMT for executive
management. Under certain circumstances, information is extracted from those reports for the
board of directors/EXCOM. The proper determination of commitments and the development of
an expenditure forecast, both of which are primary responsibilities of the SAPMT cost engineer,
are essential parts of that reporting process.

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SAUDI ARAMCO COST CONTROL PROGRAM

Commitments, which are generally defined as obligations by the project to expend funds, can be
made either with outside contractors or within Saudi Aramco. Outside commitments include
purchase orders for materials and equipment and contracts for engineering, procurement services
and construction. In-house commitments include items such as Saudi Aramco labor, materials,
company equipment, and prorates.

Expenditure forecasting is the process of predetermining when costs are expected to be formally
recorded within the accounting system and reflected in the financial documents. The cost engineer
considers in this determination the necessary delay for processing vendor and contractor invoices.
An expenditure forecast by calendar quarter is required for monthly reports.

The Monthly Project Update (MPU) report shows budgeted, committed, expended and forecasted
amounts. In this connection, the cost engineer establishes and monitors detailed commitments and
expenditures as shown in the various specialized cost reports. The cost engineer also establishes a
system to track costs to provide early visibility on variances from the budget, warn of adverse
trends and allow prompt corrective action. Other project status reports include statistical reports
on engineering design and procurement.

As required, exhibits and other documentation are prepared for quarterly review meetings, which
are held as a forum to discuss project and project-related concerns. Saudi Aramco executive
management, the SAPMT and contractors' representatives attend those meetings to discuss the
project's current status.

When the facilities are mechanically complete, the SAPMT/cost engineer and operations
departments work jointly to commission the facility and otherwise meet performance acceptance
certificate requirements. As appropriate, the cost engineer assists in the financial closeout process
and in the preparation of a final cost report.

Refer to Figure 3, which is a flowchart on the next page that shows the cost control program.

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BUDGET
BUDGET SAPMT
EXECUTION
BRIEF ESTIMATE
PLAN

EXCOM TC-68 PROJECT PPU

APPROVAL FUNDING PROPOSAL REPORTS

COST
STRUCTURE

EXCOM ER
ERA ESTIMATE

AFE FINANCIAL
APPROVAL MASTER

INTERNAL CO. CONTRACTING

AUTHORIZATIONS PROCESS

ENGINEERING ED&P
DESIGN AND
PROCUREMENT

CONSTRUCTION C&AO
AND OTHER
ACTIVITIES

Figure 3A Saudi Aramco Cost Control Program Flow Chart

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Figure 3B Saudi Aramco Cost Control Program Flow Chart

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GLOSSARY

Authorization for Expenditure Provides approval to an SAPMT to commit and

expend funds against funded projects.
Budget A written plan for expenditures or other units of
measure over a fixed period.
BI Budget Item. Applicable to projects prior to
approved funding.
Budget Brief A document, which is prepared for submission to
the executive committee or board of directors that
indicates the scope, justification and cost of a
capital project.
Budget Estimate Order-of-magnitude type estimate, which is
prepared during the early stages of project
development to indicate the approximate cost of a
completed facility.
Business Line A major organization segment of the Company. It
is headed by a senior vice president.
Capital Budget A written plan for one year's capital expenditures.
In November, the Capital Budget Book is
submitted to the board of directors for approval. It
contains budget briefs of all ERs that require
approval for the next fiscal year.
Capital Expenditures The expenditures to acquire or build assets that
will provide benefits for more than one year.
Commitment Generally defined as financial obligations. These
obligations include purchase orders for services
and materials and contracts for engineering,
procurement services and construction.

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Design Basis Scoping Paper A key document in the budget brief development
process. A Design Basis Scoping Paper provides a
definition of the design basis of an individual BI
prior to the initiation of project proposal
development. It defines the major design aspects of
each BI scope. It details the impact of a BI on
existing or future facilities outside the scope of the
BI. It also serves as a documented agreement
between the Facilities Planning Department, the
proponent, the SAPMT, and senior management
on the major design basis and schedule for the
capital project under construction.
Direct Charge A type of material purchased solely for a specific
use and not held in inventory.
ER Expenditure Request. Describes the BI and the
cost elements and identifies all expenditures that
result from ER approval.
ER Estimate Definitive estimate based on an approved project
proposal. Describes the BI and cost elements, and
it identifies all expenditures that will result from
ER approval.
EXCOM The Executive Committee that is empowered to
act on behalf of the Board of Directors when the
Board of Directors is not scheduled to meet.
Final Cost Report Prepared by the SAPMT for a project that has an
ER value that exceeds $20 million before
performance acceptance and turnover of the
facility to the proponent. The Final Cost Report
provides an historical contracting and other project
planning and control data.
Financial Master A computer data file used by Saudi Aramco's
computerized cost accounting system.
Forecast A cost or quantity estimate of some future event.
JO Job Order. A specific part of a budget item.
Mechanical Completion Certificate A form that certifies that a project is ready for
start-up and commissioning. It is used by FAWIP
to commence depreciation.

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Performance Acceptance
Certificate
Planning Brief
Preliminary Engineering
Project Execution Plan (PEP)
Project Management
Project Proposal
Proponent
Quarterly Review
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A document that is submitted to Fixed Assets &
Work-in-Progress Accounting. The Performance
Acceptance Certificate acknowledges that the
project meets the performance requirements
contained in the approved Budget Brief.
Preceding the budget brief, this document
identifies scope, cost, and justification for a
facility.
The amount of engineering performed prior to ER
approval. Normally, it amounts to approximately
30% of the total engineering effort.
Prepared by the SAPMT, the Project Execution
Plan is an overall plan that establishes how specific
work or project is to be carried out. It Includes the
applicable contracting plan, an examination of
alter-native business and technical approaches to
the work, a cost estimate, a schedule that shows
milestone achievements, and a listing of involved
personnel.
Refers to either the personnel or the activity
involved in the management and control of design
and construction contractors.
Establishes the design basis and scope of a
proposed facility, including size, general layout,
types of material, estimated funds required and
completion schedule. It provides the final design
basis from which an ER is developed and from
which all approved scope changes are measured.
An organization that has requested something to
be done. For example, Northern Area
Manufacturing would be the proponent for a
GOSP to be located in a northern area producing
field.
A presentation that is conducted by a SAPMT and
contractor for the benefit of management. The
purpose of this review is to describe and evaluate
major project status, with emphasis on problem
areas and deviations from schedule or forecast.
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