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Cost Engineering and Control

Lecture # I
Introduction to Cost Engineering
(Ch # 1)

CE 591: Cost Engineering and Control Fall 2011

Rizwan Farooqui, Ph.D.

Lecture Outline
Cost Engineering Fundamentals Role of CEs During Evaluation Phase Role of CEs During Basic Design Phase Role of CEs in Contractor Selection Role of CEs During Construction CE Terms Incentives to Centralize Cost Engineering

CE 591: Cost Engineering and Control Fall 2011

Rizwan Farooqui, Ph.D.

Cost Engineering Fundamentals

AACE defines cost engineering as that area of engineering practice where engineering judgment and experiences are utilized in the application of scientific principles and techniques to the problems of cost estimation and cost control. Cost Engineering consists of cost estimating and cost control.

CE 591: Cost Engineering and Control Fall 2011

Rizwan Farooqui, Ph.D.

Cost Engineering Fundamentals

AACE recently introduced the concept of "Total Cost Management" (TCM), a systematic approach to managing cost throughout the life cycle of any enterprise, program, facility, project, product or service. This is accomplished through the application of cost engineering principles

CE 591: Cost Engineering and Control Fall 2011

Rizwan Farooqui, Ph.D.

Cost Engineering Fundamentals

Cost engineering is independent of industry type and project size. All "go or no-go" decisions on projects, whether they be Rs. 100,000 or Rs. 10 billion, are made on the basis of economics, which in turn relies on the availability and accuracy of a cost estimate.

CE 591: Cost Engineering and Control Fall 2011

Rizwan Farooqui, Ph.D.

Cost Engineering Fundamentals

Estimating is a methodology for forecasting and predicting cost and expenditure of a future project and to produce a budget. Cost control is a system in order to hold expenditure within budget by monitoring and appraisal of the cost performance. Both are dependent on data and information. Although planning and scheduling are not cost engineering techniques, functions of both depend on project plan and schedule.
CE 591: Cost Engineering and Control Fall 2011

Rizwan Farooqui, Ph.D.

Cost Engineering Fundamentals

Three important documents for project control
The cost estimate Contractual agreement Project schedule

CE 591: Cost Engineering and Control Fall 2011

Rizwan Farooqui, Ph.D.

Estimate Categories and Project Life Cycle Phases

CE 591: Cost Engineering and Control Fall 2011

Rizwan Farooqui, Ph.D.

Role of Cost Engineers in PLC

Cost Engineers should be involved in all phases of a project life cycle. Evaluation and Planning phase Conceptual Engineering phase Detailed Engineering phase Contractor selection phase Construction phase Why? Let us answer that.

CE 591: Cost Engineering and Control Fall 2011

Rizwan Farooqui, Ph.D.

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Role of CEs in Evaluation Phase

Go-No Go Decision Market analysis for the need for the facility New government or social requirements Commercial gains Use Bottom Line- Maximum return that can be made for the money invested: How much to invest? When to complete? Where to build? How competitive?
CE 591: Cost Engineering and Control Fall 2011

Require economic studies

Rizwan Farooqui, Ph.D.

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Role of CEs in Evaluation Phase

Economic studies cannot be made without investments, which, in turn, requires an estimate, and that, in turn requires a cost engineer (CE). Then, the need for cost control during all phases.

CE 591: Cost Engineering and Control Fall 2011

Rizwan Farooqui, Ph.D.

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Role of CEs in Evaluation Phase

Can be the most critical phase (Decision: what, where and why?). Phase of major high-level decisions (and indecisions!). CE provides cost estimates needed in the economic evaluations. In most cases, cost is the most important factor.

CE 591: Cost Engineering and Control Fall 2011

Rizwan Farooqui, Ph.D.

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Role of CEs in Evaluation Phase

Challenges & Issues Least information is available Key people in the project are thoroughly engrossed in the selection process
CEs are often not consulted at all or only superficially. CEs are brought into the picture at a later stage. Often they can, then, play only the role of "spoiler," uncovering the fact that a poor decision was made to proceed.
CE 591: Cost Engineering and Control Fall 2011

Rizwan Farooqui, Ph.D.

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Role of CEs in Design Phase

During Design Phase, CEs Can be Jacks-Of-AllTrades providing cost input to: Designers Schedulers Contract Engineers Diplomats

CE 591: Cost Engineering and Control Fall 2011

Rizwan Farooqui, Ph.D.

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Role of CEs in Contractor Selection Phase

Review alternate value engineering proposals Determine reasonability and workability of bids (especially fixed price bids) Analyze contractor commercial terms for reimbursable contracts (hourly service and supervision cost, overhead cost, fee)

CE 591: Cost Engineering and Control Fall 2011

Rizwan Farooqui, Ph.D.

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Role of CEs in Construction Phase

CEs embark on dual roles Contractor CEs and Client CEs Client CEs: Protect and monitor economic decisions Contractor CEs: Assist in exercising cost control

CE 591: Cost Engineering and Control Fall 2011

Rizwan Farooqui, Ph.D.

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Role of CEs in Construction Phase

Contractor CEs Prepare (if not already) definitive control estimate Prepare change orders estimate Undertake the key role of cost control engineer for the contractor's project management team Provide input to the contractors' planning and scheduling team (e.g. labor workhour)
CE 591: Cost Engineering and Control Fall 2011

Rizwan Farooqui, Ph.D.

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Role of CEs in Construction Phase

Client/ Owner CEs Review contractors' detailed control estimates Review contractors estimates for extra costs and change orders (On a reimbursable project,) appraising and monitoring contractors' efforts in the area of cost control

CE 591: Cost Engineering and Control Fall 2011

Rizwan Farooqui, Ph.D.

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Basic Cost Engineering Terms

Cost engineer Owners versus Contractors definition Types of estimates Various terms used in various phases according to nature, requirement and precision of estimate

CE 591: Cost Engineering and Control Fall 2011

Rizwan Farooqui, Ph.D.

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Basic Cost Engineering Terms

Planning/ Evaluation Stage Estimates Screening Preliminary Quickie Order-of-magnitude/ guesstimates Rough, gross, scope, etc.

CE 591: Cost Engineering and Control Fall 2011

Rizwan Farooqui, Ph.D.

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Basic Cost Engineering Terms

Basic design stage estimates Preliminary Budget Semi-detailed

CE 591: Cost Engineering and Control Fall 2011

Rizwan Farooqui, Ph.D.

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Basic Cost Engineering Terms

Detailed Engineering-construction Estimates Definitive Appropriation Lump sum Detailed

CE 591: Cost Engineering and Control Fall 2011

Rizwan Farooqui, Ph.D.

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Example: A Process Plant Estimate

Percentage DIRECT COSTS (M+E+L) FIELD LABOR OVERHEADS (FLOH) ENGINEERING (BASIC/ DETAILED) MANAGEMENT FEE FUTURE ESCALATION CONTINGENCY TOTAL = 55.0 10.0 13.0 5.0 4.0 4.0 9.0 100.0

Identifies where effort and time are required to achieve best results in estimating and cost control
CE 591: Cost Engineering and Control Fall 2011

Rizwan Farooqui, Ph.D.

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Success Formula The Three Ds

Definition Documentation Discipline

CE 591: Cost Engineering and Control Fall 2011

Rizwan Farooqui, Ph.D.

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Incentives to Centralized System of CE

A focal point for all cost related matters CE expertise is developed with time Full time follow-up of the CE area on all projects Ongoing D&M of estimating methods Central data collection, analyses, and maintenance Reliable and Consistent Estimates and cost control CE function elevated to professional status with full recognition of its importance to PM
CE 591: Cost Engineering and Control Fall 2011

Rizwan Farooqui, Ph.D.

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Question/Queries?

CE 591: Cost Engineering and Control Fall 2011

Rizwan Farooqui, Ph.D.

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