Project Cost System Components

1
Project Cost System
Chapter 4 - Project Cost System

Cost Control 2
Main Objectives of cost control are:

1. To see that the company’s policy with regard to
production is carried out, which in turn will
ensure that planned profit margins as are
maintained.
2. To arrive at the cost of each stage, operation, or
unit, and to carry out a continuous comparison with
the target to ascertain the gain or loss on each.
This information must be available early enough for
corrective action to be taken wherever possible.
3. To provide information on cost for use in future
estimating.

Project Cost System 3
1. Fixed Capital
- Indirect Cost
- Direct Cost
2. Working Capital
Figure 4.1 Total Project Cost

Fixed Capital 4
It refers to any kind of real or physical capital (fixed

asset) that is not used up in the production of a product and
is contrasted with circulating capital such as raw materials,
operating expenses and the like. Fixed capital is that
portion of the total capital which is invested in fixed
assets (such as land, buildings, vehicles and equipment)
which stay in the business almost permanently.
Circulating capital is a term used by classical economists

such as Adam Smith, David Ricardo and Karl Marx. It refers to
physical capital and operating expenses, i.e., short-lived
items that are used in production and used up in the process
of creating other goods or services. This is roughly equal to
Intermediate consumption. It includes raw materials,
intermediate goods, inventories, ancillary operating expenses
and (working capital). It is contrasted with fixed capital.

Fixed Capital 5
:costs which can be immediately associated in the

Direct Costs
field with work directly contributing to the physical
completion of permanent facility contracted for by the
owner.
Finishing labor for a concrete floor slab

Materials for a structural steel frame
Equipment for a foundation excavation
Subcontractor’s charges for installing the air
conditioning system
Land reclamation

Fixed Capital 6
Indirect Costs : costs which necessarily contribute to the support of

a project as a whole, but cannot be identified directly with
specific work items in the permanent facility.
Job and office personnel salaries

Materials, supplies and utilities for the temporary
warehouse, fields office building and change facilities
Staff vehicles
Safety and first-aid expenses
The portion of home office support required for the project
Contingencies
Overhead : operational cost
Tax, insurance, permit

Working Capital 7
It represents the amount of cost to cover things up in early

stage of a project, or
It represents the amount of day-by-day operating liquidity
available to a business
Cost of raw material in early stage of project.

Salaries for early stage of project.
Cost of spare parts for early stage (i.e. less than one
year).

Components of Project Cost 8
Material
allowances Subcontract
Fee/profit Components of project cost Plant

& contingencies And equipment
labour Overhead
Figure 4.2 Components of Project Cost

Material Cost
Including electrical and mechanical component, e.g.

escalator, transformer, etc.
Price list can be obtained from distributor or supplier
Material cost which include in project cost estimating:
Material cost up to project site
Not included tax
Including in the cost are transportation, storage, and
checking or controlling cost.

Equipment and plant cost
A big part of total project cost, especially in big

projects.
Small equipments, such as concrete vibrators, power tools
usually classified as labor cost or project overhead cost.
Mobilization and demobilization of equipment is estimated
in project overhead cost.
Factors which are considered in project equipment and plant
cost estimating:
Types of equipment and plant
Size and capacity
Useful life

Equipment and plant cost can be estimated based on:

Cost per time unit
Such as: shovel, tractor, scraper, formwork,
generator, etc.
Production per time unit
Such as: asphalt mixing plant, aggregate plant, etc.
Equipment and plant cost is divided into:
Rental/Owning cost
Depreciation cost
Insurance
Tax
Operational cost.
Fuel, spare part, tire cost
Maintenance and small repairing cost
Operator cost

Labour cost
Subcontractor cost
General contractor pay the subcontractor to do a package
of work in the project.
Fee/profit and contingencies
The amount of profit and contingencies depend on:
Project size
Site condition
Project complexity
Information from owner which can been seen in tender
document
Allowances
Cost for unplanned works
Overhead, consists of:

Fixed Overhead
Those regularly recurring expenses which are constant and
do not normally fluctuate with the business volume or the
number of production employees employed.
Office rental
Water, electricity, telephone, office stationary
Material testing, loading test, etc.
Document filing, etc.

Variable Overhead
It should represent all operating expense generated by
the field personnel. These are costs that would not occur
if no field personnel were employed. Variable cost will
fluctuate directly with the amount of people a company
employees as part of it production labor force
Site engineer, project manager, project supervisor
Water, electricity, telephone, office stationary
Furniture
Marketing cost, official trip cost
Permanent workers’ salary, etc.

Project Cost Estimating 15
Conceptual - Cost indices

And Preliminary
- Component ratios
estimates
- Cost-capacity factors
- parameter costs
Fair-cost
Detailed estimates
estimates
Contractor’s
Bid estimates
Definite
estimates
Figure 4.3 Project Cost Estimating

Conceptual and preliminary estimates

General made in the early phases of a project
Conceptual and preliminary estimating methods:
Time-referenced cost indices
Cost-capacity factors More
accurate
Component ratios
Parameter costs
Detailed estimates
These normally require a careful tabulation of all the
quantities for a project or portion of a project, this is
called a quantity takeoff
These quantities are then multiplied by selected or
developed unit costs, and the resulting sum represents the
estimated direct cost of the facility

The addition of indirect costs, plant and equipment, home-

office overhead, profit, escalation, and contingency will
develop the total estimated project cost
Proper evaluation of labour productivity, effects of local
practices, market competitiveness, weather conditions, and
completeness of plans and specifications are extremely
important in the preparation of detailed estimates
Types of detailed estimates:
The fair-cost estimate
Best prepared from the actual bid documents provided
to the bidders (before award) and used by the owner’s
representative to evaluate changes (after award)

The major difference between estimates prepared by

construction managers, engineers or other owner’s
representative and a contractor’s bid estimate are:
The absence of lump-sum subcontract quotations
A somewhat simplified number of line items
The contractor’s bid estimate
The contractor must bid low enough to obtain the
work, yet high enough to make profit
Definitive estimates
As the overall project evolves from the owner’s

standpoint, initial approximate estimates become more
refined and more accurate as additional information is
developed.
Cost Indices 19
Cost indices show changes in cost over time

Generally they are applied to the construction phase of
projects
Many of these indices are published periodically in the
technical press:
The Quarterly Cost Roundup, published by the Engineering News
Record, lists over a dozen of these, including its own
well-known Construction Cost Index and Building Cost Index
Cost Estimating using Cost Indices Method
Cost in Year A = Cost in Year B x Cost Index in Year A

Cost Index in Year B

Cost Indices 20
Table 4.1 Example of Cost Index List from Various Technical Press
Year Engineering News Record Marshall & Swift Installed Equipment

1975 207 444
1976 224 472
1977 241 505
1978 259 545
1979 281 599
1980 303 660
1981 330 721
1982 357 746
1983 380 761
1984 387 780
1985 392 790
1986 401 798
1987 412 814
1988 422 852
1989 429 895
1990 435 904

Cost Indices 21
Example 4.1
A school building construction project has cost the

government for about RM 3,000,000 in 1985. Estimate the cost
of similar building in 1990 (See Table 4.1 as reference for
cost index).

Cost Indices 22
solution 4.1
Cost index for building construction in 1985 = 392(Table 4.1)

Cost index for building construction in 1990 = 435(Table 4.1)
Cost of school building construction in 1985 = RM 3,000,000
Cost of similar school building construction in 1990
= RM 3,000,000 x 435
392
= RM 3,329,082

Cost-Capacity Factor 23
Whereas cost indices focus on cost changes over time, cost-

capacity factors apply to changes in size, scope, or
capacity of projects of similar types.
Cost Estimating using Cost Indices Method
Q2 x
C2 = C1
Q1
Where C2 = estimated cost of new facility of capacity Q2

C1 = known cost of facility of capacity Q1
x = the cost-capacity factor for this type of work
(usually x = 0.6)
Example 4.2
An acid factory with capacity of 50,000 ton per year worth

about RM 4,000,000. Estimate the cost to build the similar
factory with capacity of 75,000 ton per year.

Solution 4.2
Q2 x
C2 = C1
Q1
75,000 0.6
= 4,000,000
50,000
= 5,101,698

Component Factor 26
Plant cost ratios, examples of which are given in Table 4.2,

use equipment-vendor-price-quotation as a basis for
determining the cost of the whole constructed facility
For example :
If the f.o.b cost for all the equipment for a fluid process
plant adds to RM 4,000,000 and a good historically valid
plant cost ratio for this type of project is 4.5, then the
estimated total cost will be
RM 4,000,000 x 4.5 = RM 18,000,000
The degree to which shop fabrication is used on the equipment

items, the cost and productivity of field labor, and numerous
other factors can seriously affect the accuracy of such
estimates if the estimator lacks the judgment and experience
to take them into account

Component Factor 27
A variation on the plant cost ratio takes the cost of each

major item of equipment separately, multiplies each by its
own ratio, then takes the sum of the factored components.
This approach allows the estimator to apply at a more
detailed level judgment regarding such things as the degree
of shop fabrication, and it can thus produce greater
accuracy.
This assumes, of course, that good historical data are
available for developing the individual factors for each item
of equipment

Component Factor 28
Table 4.2 Process-Plant Cost Ratio from Individual Equipment
Equipment Factor
Blender 2.0
Blowers and fans (including motor) 2.5
Centrifuges (process) 2.0
Compressors
Centrifugals, motor-driven (less motor) 2.0
Steam turbine (including turbine) 2.0
Reciprocating, steam and gas 2.3
Motor-driven (less motor) 2.3
Ejectors (vacuum units) 2.5
Furnaces (package units) 2.0
Heat exchangers 4.8
Instruments 4.1
Motor, electric 8.5

Component Factor 29
Table 4.2 Process-Plant Cost Ratio from Individual Equipment (cont.)
Equipment Factor
Pumps
Centrifugal, motor-driven (less motor) 7.0
Steam turbine (including turbine) 6.5
Positive displacement (less motor) 5.0
Refrigeration (package unit) 2.5
Tanks
Process 4.1
Storage 3.5
Fabricated and field erected (50,000+gal) 2.0
Towers (columns) 4.0

Component Factor 30
Table 4.3 Example of Plant Cost Estimating
Item Cost Factor Plant cost
Blowers and fans 10,000 X 2.5 25,000

Compressors 50,000 X 2.3 115,000
Furnaces 100,000 X 2.0 200,000
Heat exchangers 80,000 X 4.8 384,000
Instruments 50,000 X 4.1 205,000
Motors, electric 60,000 X 8.5 510,000
Pumps 20,000 X 7.0 140,000
Tanks 125,000 X 2.4 260,000
Towers 200,000 X 4.0 800,000
Total 685,000 2,639,000

Parameter Costs 31
Engineering News Record occasionally publishes examples in

some of its Quarterly Cost Roundup issues
R.S.Means publishes Means Square Foot Costs annually which includes
unit cost for a number of building types as well as for
individual construction tasks.
The parameter cost approach relates all cost of a project to
just a few physical measures, or parameter that reflect the
size or scope of that project
For example, the gross enclosed floor are would be a typical
overall parameter for a structure such as a warehouse as
illustrated in Table 4.4 reported by R.S.Means

Parameter Costs 32
Table 4.4 Example of Parameter Cost in Table 4.4 Example of Parameter Cost in
Medical Office – R. S. Means Warehouse – R. S. Means

Quantity Take-Off and Unit Costs 33
Estimate the project cost by measuring the quantity of

project components from plan, specification and design.
Steps to be done in this method of estimating:
Divide the work component
Detail explanation for each component
Size of each component and its activities
Distribute the labor (man-hour) for each activities
Distribute the cost loading
Unit cost method is used if:
The quantity of total work cannot be determined
Unit cost (per m2 or m3) has been determined

Example 4.4
The detail of pipe installation work can be seen in Table

4.5. Estimate the installation cost if pipe which will be
used is 5,500 m.
Table 4.5 Detail of Pipe Installation Work
Pipe Installation Work

No Component Estimated Quantity Unit Cost (RM) Total Cost (RM)
1 Excavation 25,000 m3 250 12,500,000

2 Pipe allocation, 5,000 m 750 3,750,000
adjustment and isolation
3 Fill 20,000 m3 300 6,000,000
Total 22,250,000

Solution 4.4
From Table 4.5 above, it can be seen that:

- Estimation of pipe installation work : 5,000 m
- Total cost of 5,000 pipe installation :RM 22,250,000
So that, the unit cost per length (m)

= RM 22,250,000 x 1 = RM 4,450/m
5000
It can be estimated that the cost of 5,500 pipe

installation:
= 5,500 x RM 4,450 = RM 24,475,000

Benefit-Cost Ratio Analysis 36
The investment is considered to be worthwhile if:
Benefit
1
Cost
Classes of Benefits and Costs

Primary : benefits and costs that are a direct result
of particular project
Secondary : the marginal benefits and costs that accrue
when an imperfect market mechanism is at work
External : those that arise when a project produces a
spillover effect on someone other than the intended group
Intangible : those that are difficult to measure on a
monetary scale

For general condition
B ratio  all benefits

C all costs
For government sector

General
B ratio  all benefits

C all costs
Public costs as disbenefits
B ratio  public benefits- public costs

C government costs

Conventional B/C
B ratio  PW of benefits to user PW[B]

C 
PW of total costs to supplier PW[CR (O  M)]
Modified B/C
B ratio  PW[B -(O  M)]

C PW[CR]
B : benefits to user
CR : capital recovery cost
= initial investment – salvage value
O & M : operation and maintenance cost
PW : Present Worth
Single payment formula
i% F
0 1 2 3 4 5 n
COMPOUND AMOUNT PRESENT WORTH
F = P (1+i)n, P = F (1+i)-n,
F = P (F/P,i,n) P = F (P/F,i,n)

uniform series formula (F Vs A)
i% F
0 1 2 3 4 5 n
A / year
SERIES COMPOUND AMOUNT FACTOR SINKING FUND FACTOR
 1  i n  1   i 
F A   A F  
 1  i  1 
n
 i 
F  A (F/A,i,n) A  F (A/F,i,n)

uniform series formula (P Vs A)
P i%
0 1 2 3 4 5 n
A / year
CAPITAL RECOVERY FACTOR SERIES PRESENT WORTH FACTOR
 i 1  i n    1  i n  1 
A P   P A  n 
  1  i n
 1   i  1  i 
A  P (A/P,i, n) P  A (P/A,i,n)

Example 6.1
On a proposed government project, the following consequences

have been identified:
Initial cost of project to be paid by government is $100K
Present worth of future maintenance to be paid by
government is $40K
Present worth of benefits to the public is $300K
Present worth of additional public users cost is $60K
Show the various ways of computing the B/C ratio

Solution 6.1
General
B ratio  all benefits  300


300
 1.5
C all costs 100  40  60 200
Public costs as disbenefits
B ratio  public benefits- public costs

C government costs

300-60 240

100  40 140
 1.7  acceptable

Example 6.2
An individual investment opportunity is deemed to be
worthwhile if its B/C ratio is greater than or equal to 1.
Consider the project of installing a new inventory control
system with the following data:
Initial cost RM 20,000

Project life 5 years
Salvage value RM 4,000
Annual savings RM 10,000
O & M disbursements RM 4,400
MARR (interest) 15%
By interpreting annual savings as benefits, determine B/C

ratio using conventional and modified method

Solution 6.2
Conventional method
B ratio  PW[B]
C PW[CR (O  M)]
10000

20000(A/P,15%,5) 4000(A/F,15%,5) 4400
10000

20000(0.2983) 4000(0.1483) 4400
 1.02  1,acceptable

Conventional method
CAPITAL RECOVERY FACTOR SINKING FUND FACTOR
 i 1  i n   i 
A P   A F  
   1  i  1 
n n
 1  i  1 
A  P (A/P,i, n) A  F (A/F,i,n)

Solution 6.2
Modified method
B ratio  PW[B -(O  M)]

C PW[CR]
10000-4400

20000(A/P,15%,5) 4000(A/F,15%,5)
10000-4400

20000(0.2983) 4000(0.1483)
 1.04  1,acceptable

Example 6.3
Even a company investment opportunity is deemed to be
worthwhile if its B/C ratio is greater than or equal to 1.
Consider the project of constructing a new houses with the
following data:
Initial cost RM 80,000

Project life 4 years
Final Payment RM 50,000
Annual payment RM 15,000
O & M disbursements RM 200
Year 2 Operation RM 80,000
Interest 6%
By interpreting payment as benefits, determine B/C ratio

using conventional and modified method
Example 6.3
80,000
a)
80,000 200
-
i = 6%
0 1 2 3 4
+
15,000
50,000
Example 6.4
b)
200,000 100
-
i = 6%
0 1 2 3 4
+
10,000
100,000

Project Cost System Components

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Project Cost System Components

Uploaded by

Copyright:

Available Formats

1

Project Cost System

Chapter 4 - Project Cost System

Main Objectives of cost control are:

Chapter 4 - Project Cost System

Figure 4.1 Total Project Cost

Chapter 4 - Project Cost System

It refers to any kind of real or physical capital (fixed

Circulating capital is a term used by classical economists

Chapter 4 - Project Cost System

:costs which can be immediately associated in the

Finishing labor for a concrete floor slab

Chapter 4 - Project Cost System

Indirect Costs : costs which necessarily contribute to the support of

Job and office personnel salaries

Chapter 4 - Project Cost System

It represents the amount of cost to cover things up in early

Cost of raw material in early stage of project.

Chapter 4 - Project Cost System

Fee/profit Components of project cost Plant

Figure 4.2 Components of Project Cost

Chapter 4 - Project Cost System

Including electrical and mechanical component, e.g.

Chapter 4 - Project Cost System

Equipment and plant cost

A big part of total project cost, especially in big

Chapter 4 - Project Cost System

Equipment and plant cost can be estimated based on:

Chapter 4 - Project Cost System

Overhead, consists of:

Chapter 4 - Project Cost System

Chapter 4 - Project Cost System

Conceptual - Cost indices

Figure 4.3 Project Cost Estimating

Chapter 4 - Project Cost System

Conceptual and preliminary estimates

Chapter 4 - Project Cost System

The addition of indirect costs, plant and equipment, home-

Chapter 4 - Project Cost System

The major difference between estimates prepared by

As the overall project evolves from the owner’s

Cost indices show changes in cost over time

Cost in Year A = Cost in Year B x Cost Index in Year A

Chapter 4 - Project Cost System

Year Engineering News Record Marshall & Swift Installed Equipment

Chapter 4 - Project Cost System

A school building construction project has cost the

Chapter 4 - Project Cost System

Cost index for building construction in 1985 = 392(Table 4.1)

Cost of similar school building construction in 1990

Chapter 4 - Project Cost System

Whereas cost indices focus on cost changes over time, cost-

Cost Estimating using Cost Indices Method

Where C2 = estimated cost of new facility of capacity Q2

An acid factory with capacity of 50,000 ton per year worth

Chapter 4 - Project Cost System

Chapter 4 - Project Cost System

Plant cost ratios, examples of which are given in Table 4.2,

The degree to which shop fabrication is used on the equipment

Chapter 4 - Project Cost System

A variation on the plant cost ratio takes the cost of each

Chapter 4 - Project Cost System