2. COST ENGINEERING IS THE APPLICATION OF
SCIENTIFIC PRINCIPLES AND TECHNIQUES TO
PROBLEMS OF ESTIMATION, COST CONTROL,
BUSINESS PLANNING AND MANAGEMENT SCIENCE,
PROFITABILITY ANALYSIS, PROJECT
MANAGEMENT, AND PLANNING AND
SCHEDULING . WITH THE OBJECTIVE TO ACHIEVE
THE LOWEST COST.
INTRODUCTION
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3. ESTIMATE ACCURACY
From an owner’s perspective, if the cost estimate is not accurate, the
financial return from the capital investment may not be realized; and
compounding this problem is the fact that other deserving projects
may not have been funded. It is obvious that estimating is critical for
the economic and optimal use of an owner’s limited capital budget.
From a contractor’s perspective, accurate estimating is just as
important. In a lump-sum bidding situation, the profit margin of the
contractor is dependent on the accuracy of his estimate. If the project
I s exceptionally large, the loss from an inaccurate estimate on a
lump-sum bid can potentially put a contractor out of business. For
cost-plus projects, the contractor will face less direct economic risk
from an inaccurate estimate, but the damage to the contractor’s
reputation can be severe.
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4. ESTIMATE
CLASSIFICATIONS
Estimate classifications are
commonly used to indicate
the overall maturity and
quality for the various types
of estimates that may be
prepared; and most
organizations will use some
form of classification system
to identify and categorize
the various types of project
estimates that they may
prepare during the life cycle
of a project.
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6. 1- COST STRUCTURING
It is important to further structure the cost elements within
the material, labor, and other resource categories in order
to understand how they influence the total cost of the
activity or asset and to get a better understanding of how
they can be controlled. This structuring sorts the cost
elements into direct costs, indirect costs, fixed costs, and
variable costs. In practice, some costs may fall in more than
one of these groupings.
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7. 1-1.Direct Costs
Direct costs are those resources that are expended solely to
complete the activity or asset. In other words, “Any cost that
is specifically identified with a particular final cost objective,
but not necessarily limited to items that are incorporated in
the end product as material or labor” . Thus, the direct cost
of a foundation for a house includes equipment for trenching
for the footings, the wooden forms (if not reusable), the
concrete, and the labor to place and finish the concrete.
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8. 1-2. Indirect Costs
Indirect costs are those resources that need to be expended to
support the activity or asset but that are also associated with
other activities and assets.
Indirect costs also may be referred to as “overhead costs” or
“burden costs.” Indirect costs are general administrative
activities associated with operating the business, costs for
providing and maintaining field equipment or a
manufacturing facility, and expenses for utilities, taxes,
légal services, etc.
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9. 1-3. Fixed Costs
Fixed costs are those cost elements that must be provided
independent of the volume of work activity or asset production
that they support.
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1-4. Variable Costs
Variable costs are those cost elements that must be provided
and are dependent on the volume of work activity or asset
production that they support. Again, these can be either director
indirect costs.
10. Examples of Cost
Structure
Components
Direct
Material: drafting paper, concrete, nails, lumber, deck
screws, paint, turpentine
Labor: draw plans, get permit, get materials, construct
footings, erect deck, paint deck
Other: building permit fee
Indirect
Material: pencil, brushes, drop cloth
Labor: wife’s support in making lunch
Other: use of house to draw plans, shovel, power saw,
power drill, electricity, pickup truck, gasoline
Fixed
Direct: get permit
Indirect: use of house to draw plans, shovel, power saw,
power drill, pickup truck, pencil, brushes, drop
cloth
Variable
Direct: drafting paper, building permit fee, concrete,
nails, lumber, deck screws, paint, turpentine,
draw plans, get materials, construct footings,
erect deck, paint deck
Indirect: wife’s support in making lunch, electricity, gasoline
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11. 2- Cost Elements
Cost-Based Estimates contain six basic elements:
Time, Equipment, Labor, Material, Overhead and
Profit. Each item of work on a project can be broken
up into tasks that it takes to complete the item of work.
Each of these tasks contains the six basic elements
that result in the cost for the project.
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12. 2-1.Materials
TYPES OF
MATERIALS AND
RELATED
INFORMATION
Materials, for purposes of
differentiation, can be segregated
into four basic categories:
1. raw materials,
2. bulk materials,
3. fabricated materials, and
4. engineered or designed materials.
These categories are differentiated
on the criteria of the amount of
processing required for the material
to be useful for its intended purpose.
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13. 2-2.Labor
LABOR
CLASSIFICATIONS
The following definitions were taken or adapted from
AACE International’s Cost Engineer’s Notebook [1].
• Direct Labor—The labor involved in the work
activities
that directly produce the product or complete the
installation being built.
• Indirect Labor—The labor needed for activities that
do
not become part of the final installation, product, or
goods produced, but that are required to complete the
project.
• Overhead Labor—The labor portion of costs inherent
in
the performing of a task (such as engineering,
construction, operating, or manufacturing), which
cannot be charged to or identified with a part of the
work, and, therefore, must be allocated on some
arbitrary basis believed to be equitable, or handled as a
business expense independent of the volume of
production.
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14. 2-3.Equipment,
Parts, and Tools
ESTABLISHING AN
EQUIPMENT
VALUATION
DATABASE
Equipment Value Categories:
Replacement Cost New :has the
following subcategories:
Reproduction Cost .
Replacement Cost .
Fair Value .
Market Value, also contains several
subcategories:
1.Fair Market Value-in-Place .
2.Fair Market Value-in-Exchange.
3.Forced Liquidation Value.
4.Salvage Value/Part-Out Value.
5.Scrap Value.
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15. 2-4.Other Cost
Elements
Overhead cost : Overhead or
indirect expenses are outlays that are
incurred in achieving project
completion but that do not apply
directly to any specific work item.
Two kinds of overhead pertain to a
contractor’s operations , project
overhead and office overhead.
Economic cost : Elements of
economic costs are Taxation policies
and the respective rates ,
Depreciation, Currency variations
and Some aspects of inflation and
interest .
Engineering cost .
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17. Price Cost
Pricing, is adjusting the costs that
have been applied for specific
project conditions, and commercial
terms. Pricing includes adjustments
to cost to allow for overhead
and profit, to improve cash flow, or
otherwise serve the business
interests of the party preparing the
estimate. Thus, the level and type of
pricing adjustments depends on the
particular party preparing the
estimate.
Costing is the process of applying
unit costs to the individual
quantities of items associated with
the estimate. For a detailed
estimate, this is usually in the form
of labor hours, wage rates,
material costs, and perhaps
subcontract costs. These costs may
come from a variety of sources such
as an estimating database
(either in-house or commercial),
vendor quotes, the procurement
department, estimating experience,
etc.
COST AND PRICING—IS THERE
A DIFFERENCE?
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19. Summary Sheets
The total quantities are transferred from the quantity sheets to summary
sheets for pricing purposes.
On lump-sum projects, it is standard practice to transfer all quantities of
work pertaining to a single construction classification to the same summary
sheet before pricing them. As an example, concrete quantities and prices
would appear on a concrete summary sheet. Similar summary sheets are
prepared for the other work classifications, such as excavation, concrete
forms, masonry, and carpentry. On a unit-price job like the highway bridge,
each summary sheet lists the work types necessary to accomplish the total
quantity of a single bid item and may include several different classifications
of work.
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20. Example of Summary Sheets
Summary Sheet
Job: Highway Bridge Bid Item No. 6: Concrete, abutments Estimator: GAS
Cost Code Work Type Quantity Unit Calculations Labor Cost Equipment
Cost
Material Cost Total Cost
Direct Indirect
03150.20 Abutment forms,
prefabricate
1,810 sf Labor
labor unit cost = $1.96 per sf 1,810 x $1.96 = $3,548
Material
Ply form: $1.05 per sf 10% waste 50% salvage 1,810 x $1.05 x 1.10
x 50% = $1,045
lumber: $0.85 per bf 50% salvage 1.44 bf/sf 2 uses 1,810
x $0.85 x 1.44 x 50% = $1,108
$3,548 $1,596
$1,045
$1,108
$5,144
$1,045
$1,108
Total this account $3,548 $1,596 $0 $2,153 $7,297
03157.20 Abutment forms, place 3,620 sf Labor
labor unit cost = $2.02 per sf 3,620 x $2.02 = $7,312
Equipment
3 days of 50 ton crane time
3 x 8 x $105 = $2,520
Materials
nails, form ties, coating $0.28 per sf 3,620 x $0.28 = $1,014
$7,312 $2,559 $2,520 $1,014
$9,872
$2,520
$1,014
Total this account $7,312 $2,559 $2,520 $1,014 $13,405
03159.20 Abutment forms, strip 3,620 sf Labor
labor unit cost = $0.97 per sf 3,620 x $0.97 = $3,511
Equipment
1 day of 50 ton crane time
1 x 8 x $105 = $840
$3,511 $878 $840
$4,389 $840
Total this account $3,511 $878 $840 $0 $5,229
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21. ON THE RECAP SHEET, THE DIRECT COST OF THE ENTIRE QUANTITY
OF EACH BID ITEM IS OBTAINED AS THE SUM OF ITS LABOR,
EQUIPMENT, MATERIAL, AND SUBCONTRACT EXPENSES. THE SUM OF
ALL SUCH BID-ITEM DIRECT COSTS GIVES THE ESTIMATED TOTAL
DIRECT COST TO THIS ADDED THE JOB OVERHEAD, SMALL TOOLS,
TAX, MARKUP, AND THE PREMIUM CHARGE FOR THE PERFORMANCE
AND PAYMENT SURETY BONDS, GIVING THE TOTAL PRICE HE ENTIRE
PROJECT
2-Recap Sheet
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23. 3- Unit Price Schedule
The unit prices just computed have been obtained on
the basis that each bid item includes its own direct
cost plus its pro rata share of the project overhead,
small tools, tax, markup, and bond. If these unit
prices are now entered without change onto the bid
form, this is called a balanced bid. For several
reasons, a contractor may raise the prices on certain
bid items and decrease the prices on others
proportionately so that the bid amount
for the total job remains unaffected. This is called an
unbalanced bid.
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25. COST ENGINEERING IS OBVIOUSLY A VITAL COMPONENT TO
PROJECT SUCCESS.
THEY ARE USED NOT ONLY TO ESTABLISH PROJECT
BUDGETS, BUT ALSO TO PROVIDE ACCURATE INFORMATION
TO SUPPORT SCHEDULING , COST MONITORING, AND
PROGRESS MEASUREMENT OF A PROJECT DURING
EXECUTION.
THE INTEGRATION OF COST ENGINEERING AND COST
MANAGEMENT PRINCIPLES USED IN MANAGING THE TOTAL
LIFE CYCLE COST INVESTMENT IN STRATEGIC ASSETS.
Conclusion
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