Cost Engineering

CoTM 3212

1. Basics of cost engineering

Inst. Temesgen A.(MSc)

Importance of Cost engineering
and cost management
•Construction projects have poor track record for
meeting budget goals
•All construction sector development projects
finished at a cost higher than that estimated
•The cost of handling claims and in some cases the
arbitration process due to either the under estimated
works or unrealistic scope of work, is enormous
•Cost engineers lack of projecting project cost based
on sound principles and workable practices.
Cost Engineering
“Accurately forecasting the cost of future projects is vital to
the survival of any business.“

Cost engineering is concerned with problems of cost

estimation, cost control, and business planning
and management science, including problems of
project management, planning, scheduling, and
profitability analysis of engineering projects and
processes.
Cost Engineering (Cont’d)

It needs understanding of
✓ Construction Technology
✓ Management Theory and technique: precontract
planning, tendering policy and the organization of
resources
✓ Quantity surveying including an understanding of
contract documentation and forms of contract
✓ Construction economics
Cost Estimation
Cost estimating is the process of determining
quantities and predicting or forecasting, within a
defined scope, the costs required to construct and
equip a facility.

Cost estimates are performed at a certain point in

time, based on information available at the time with
given resources and time constraints.
There are many costs associated with construction
projects
a) Initial Capital Cost
• Land acquisition, including assembly, holding and improvement
• Planning and feasibility studies
• Architectural and engineering design
• Construction, including materials, equipment and labor
• Field supervision of construction
• Construction financing including overhead costs
• Insurance and taxes during construction
• Owner's general office overhead
• Equipment and furnishings not included in construction
• Inspection and testing

b) Subsequent Operation and Maintenance Costs

Terminologies for Cost Engineers

• Construction Cost
Valued consumption of goods /material/ and performance /labor work/ of
different kind and amount for the purpose of the production
• Depreciation/ Depletion Costs
Costs of goods/equipment/ or plant distributed for the whole
useful life to compensate its deterioration to the work
Average Original Value
100%
Depreciation Value

Full Depreciation
Residual Value

Residual Value

Useful Life “n” years

Terminologies for Cost Engineers

• Interest Value/ Cost of capital

Value of goods foregone by not using resources at their best allocation.
Opportunity cost
• All-in Material Rate
A rate which includes the cost of material delivered to site, waste,
unloading, handling, storage and preparing for use.

• All-in Labor Rate

A compounded rate which includes payment to operatives and the costs
which arise directly from the employment of labor.

• All-in Plant Rate

A compounded rate which includes the costs originating from the
ownership or hire of plant together with operating costs.
Terminologies for Cost Engineers

• Direct Cost
Costs directly rendered to the production of the work.
It includes, all-in material costs, all-in labor costs and all-in plant costs

General Overhead Costs

• Overhead Costs
Site Overhead Costs

• Mark-up Cost
The sum added to an estimate in respect of the general overhead
costs including profit and risk.

• Production Cost
Costs representing the sum of direct costs (all-in costs) and site
overhead costs. Costs required for production of the works on site.
Cost Categories

i. Fixed Cost,
Do not vary with respect to output (over the period
being considered)
ii. Variable Cost,
Vary with respect to output
b b
i i
r r
r r
VC

FC

0
Output/ Output/
volume volume
Total Cost = Fixed Cost +Variable Cost
b
i
r
r TC=FC+VC

FC

Output

Fixed cost is a short-run concept. All costs are

variable in the long run.
Considerations in Costing

Project price is affected by

i. size of the project,
ii. quality of the project,
iii. Location of the project,
iv. construction time, and
v. other general market conditions.
i. Project Size
As projects get bigger, they get more expensive but at
a less rapid rate
Economy of scale

0 Output
Sources of Economy of Scale:
•Exploiting (spreading) unavoidably fixed
costs
•Taking advantage of the division of labor
(specialization)
•Taking advantage of the specialization of
equipment
•Laws of a Geometry : Cube Square Rule
•Inventories
•Purchasing: Lower prices for inputs
Learning Curve
Experience lowers costs today and in the future.
Also known as “Experience curve”
Time required per unit

Number of Units
Example:

The area conversion scale shown below gives a factor to convert

costs for a typical size building to an adjusted cost for the particular
project.

1.20 Cost Multiplier

Curve
1.15
Cost Multiplier Index

1.10
1.05
1.00
0.95
0.90
0.85
0.80
0.5 0.6 0.7 0.8 0.9 1.0 2.0 3.0
Area Conversion Scale
Typical project size and method for modifying for economy
of scale

Building Type Median Cost per M2 Typical Size Gross

(Birr) M2
Apartments 550 1890
Banks 1233 378
Colleges 1074 4,500
Gymnasiums 770 1728

Determine the cost per m2 of 3780 m2 apartment

building
ii. Quality
As the quality specifications increase the costs of
projects also get higher.

iii. Location
Various location difficulties described are:
1. Remoteness
2. Confined sites
3. Labor availability
4. Weather
5. Design considerations (related to location).
6. Vandalism and site security
iv. Construction Time
The longer the construction, the higher uncertainty in
the estimates.

v. Other Reasons
• Market conditions (work load)
• Complexity of projects
• Emerging or new markets
Difficulties in costing
Example: What are the difficulties presented in pricing
a block work item

1. Choice of work method

2. Output of Crew

3. Cost of Labor

4. Cost of material and % of wastage allowance

5. Addition of overheads and profit

Cost Engineering Traits

1. Conflicting Issues of quality, size, performance and cost

2. Cost Engineering combines both science and art

3. Cost Engineering does not offer guarantees of costs

4. Costing can only be as accurate as the information
upon which it is based
5. Cost estimate accuracy increases as the design becomes
more precisely defined
6. Cost estimate is based on previous estimates
Cost Engineering Traits (cont’d)

Inputs
•Scope Definition
•Time to Prepare
•Quality of Cost
Costing
Data Accuracy
•Cost Engineers
Skill
The Function of Cost Engineering in
Construction
1. Arranging finance, administrative approval and fund
allotment
2. Guide decision making among alternatives
3. Provides guidelines to the designer (on material, size)
4. Prepare engineering estimate
5. Negotiation tool between contracting parties
6. Help in fixing completion periods
7. To justify investment : Cost benefit analysis
8. To invite tenders and prepare bills for payment
9. For Valuation purposes
 Summary of reasons for Variability of Estimates

1. Quantity take off. 12. Cost associated with the

2. Material Costs. time element of the construction
3. Labor Costs. project and escalation
4. Labor productivity costs.
forecasts. 13. Overheads.
5. Work Methods. 14. Profit element.
6. Equipment costs. 15. Contingency and risk
7. Indirect Job costs. allocation.
8. Subcontractor quotations. 16. Errors in estimate
9. Material suppliers formulation.
quotations 18. Basis of information used to
10. Unknown site conditions. formulate estimate.
11. Location Factors. 19. Market forces.