INTRODUCTION TO COST ENGINEERING

BY

Engr. Dr. CHARLES MBELEDE

PhD FNSE FACostE FIET FCIBSE FEngVal FNIEEE MASME MAPE IntPE (UK) Eur Ing
Chartered Engineer (UK)
Accredited Engineering Valuer / Accredited Cost Engineer
mbelede@yahoo.com

THE NIGERIAN SOCIETY OF ENGINEERS

COMPULSORY REFESHER COURSE FOR
PROSPECTIVE CORPORATE MEMBERS

JUNE 2020
 INTRODUCTION TO COST ENGINEERING
 
 
 
 
BY
 
 
Engr. Dr. CHARLES MBELEDE
PhD, CEng, FIEE, FNSE, FCIBSE, FACostE, FCCM MASME, MAPM
Chartered Engineer / Project Manager
Accredited Valuer / Cost Engineer
mbelede@yahoo.com

1.00 INTRODUCTION
 
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.

5.01PART 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

5.02PART II COST ESTIMATING AND COST

CONTROL
Manufacturing Capital cost
Engineering Maintenance
Construction Revamp
Operations Decommissioning

5.03PART 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
5.04PART 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)

  800 320
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:
 Assuming standard grade devices, when
specification grade is required.
 Errors in multiplication or addition
 Failing to include outside or underground work
 Failure to determine job site conditions,
especially for retrofit jobs
 Failure to comply with the specifications or
blueprint notes.
 Forgetting a major item, such as a switchgear
quote.
 Forgetting to include special equipment
 Forgetting to include changes to the original
specifications or blueprints.
 Leaving a page out of the total
 Not double checking all figures
  Not transferring totals to the summary worksheet
properly.
 Omitting a section of the estimate
 Thinking that typical floors 6-12 is six floors
when it’s seven floors
 Using improper estimating forms
 Using supplier take-off quantities for quotes
 Relying on verbal supplier quotes
 Wrong extensions or totals
 Wrong scale on reduced blueprints
 Wrong unit for labor –unit
 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 Salvage value
Installation cost Distribution expense
Direct costs General and administrative
Indirect costs Expense
Maintenance Conformity with trends
Inventory for materials Safety and ecological
Inventory for parts Considerations
Periodic overhauls Governmental rules and
Supervision Regulations
Service reliability Uncertainty and Risk
 
 COST ESTIMATE

DIRECT COST INDIRECT COST

LABOR MATERIAL EQUIPMENT EQUIPMENT 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