CHAPTER ONE

1.Fundamental Principles of Cost Engineering

1.1 Introduction
 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.
 It needs understanding of
 Construction Technology
 Management Theory and technique: pre contract
planning, tendering policy and the organization of
resources
 Quantity surveying including an understanding of
contract documentation and forms of contract
 Construction economics
 Cont….
 Before taking up any construction work for its execution,
the owner or builder should have knowledge about
the volume of work
 its design plan and
Specifications etc.
 There are many costs associated with construction
projects. Some are not directly associated with the
construction itself .these include
1.Ownership cost
2.operating and maintenances cost
 1.Ownership cost
Except for the one-time initial capital cost of purchasing
the machine, ownership costs are fixed costs that are
incurred each year .
Almost all of these costs are annual in nature and include
– Initial capital cost
– Depreciation
– Investment (or interest) cost
– Insurance cost
– Taxes
– Storage cost
 Initial capital cost
 The major cost categories under initial capital cost is:
 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
 Owner's general office overhead
 Inspection and testing
 2. Operating and maintenances cost
 Operation costs are those costs associated with the
operation of a piece of equipment.
 These usually occur only when the equipment is being used
 The cost of maintenance and repair will vary considerably
with the type of equipment and material
 These cost include
 Operating staff
 Labor and material for maintenance and repairs
 Periodic renovations
 Insurance and taxes
 Financing costs
 Utilities
 Owner's other expenses
Building Costs, Non Building Costs, & Life cycle costs
 1.2 Terminology for Cost Engineers
The following terminology can define Cost Engineers .
 Construction Costs :valued consumption of goods
/material/ and performance /labor work/ of different kind
and amount for the purpose of the production
 Depreciation/ Depletion Costs: Cost of goods/equipment/
or plant distributed for the whole useful life to compensate
its deterioration to the work.
Average Original Value
100%
Depreciation Value
Residual Value

Full Depreciation
Residual Value

Useful Life “n” years

Residual Value: refers to current value of goods determined by reducing

the depletion cost from the original value.
 Cont...
 Interest Value/ Cost of capital: Value of goods foregone by
not using resources at their best allocation.
 All-in Material Rate: A rate which includes the cost of
material delivered to site, waste, unloading, handling,
storage and preparing for use.
 Basic Material Price/Index: Unit price of the material
including transportation, unloading, waste, 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.
 Cont...
 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
 Overhead Costs :Costs incurred not to the direct itemized works
but indirectly to the overall production and performance of the
work. E.g.
 Secretarial services,
 Transportation facilities,
 Administrative works,
 Utility provisions: energy, water, communication,
sanitation,

Overhead Costs General Overhead Costs

Site Overhead Costs

 Cont...
 General Overhead Costs: The cost of administering a
company and providing off-site services. The
apportionment of head office overheads to projects and to
the company as a whole is decided by management as part
of management policy.
 Site Overhead Costs: The cost of administering a project
and providing general plant, site staff, facilities and site
based services and other items not included in all-in rates.
 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 Engineering and Cost estimating
 Cost Engineers consider past projects while anticipating
new factors. Some of these factors include:
 Current technologies,
 Market demand and supply of material and labor,
 Quantities of materials,
 Collective bargaining agreements of suppliers and
buyers,
 Level of quality,
 Requirements for completion(completion time&
resource)
 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.
 Accurately forecasting the cost of future projects is vital to
the survival of any business.“
 Cost estimates are performed at a certain point in time, based
on information available at the time with given resources and
time constraints.
 Cost Benefit Analysis is a technique for assessing the
monetary social costs and benefits of a capital investment
project over a given time period
 Cost benefit analysis provides a way of evaluating trade-
offs, setting priorities, and finally making choices about
how to allocate scarce resources among competing uses.
 Cost Estimation
 Inputs to the cost estimating
 the project scope statement
 the work breakdown structure
 staffing management plan
 The main outputs of the cost estimating process are the
Activity Cost Estimates
 The Estimating Problem
How does a cost engineer estimate the cost of a construction
project?
 The estimates are all scattered
around the target of actual
cost. Hitting the target is not
a common occurrence and is
an inbuilt problem of
estimating.
Fig. The estimating objective: to hit the target at least get close to it
 Variability of Estimates
The following are where cost variances between one estimate
and another can occur:
 Quantity take off.
 Material Costs.
 Labor Costs.
 Labor productivity forecasts.
 Work Methods.
 Construction equipment costs.
 Indirect Job costs.
 Subcontractor quotations.
 Quotations from material suppliers.
 Unknown site conditions.
 Location Factors.
 Cost associated with the time element of the construction
project and escalation costs.
 Estimates are based on
 Each assessment the estimator performs is based on:
 Previously recorded data (historical data)
 The estimators own past experience.
 Previous experience of others.
 Hunches/intuition

Historical date Subjective hunches

Variance

Information provided
Estimating experience
by others
Figure above indicates the factors influencing variance in an estimate.
 1.3 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
Inputs
•Scope Definition
•Time to Prepare Costing
•Quality of Cost Data Accuracy
•Cost Engineers Skill
6. Cost estimate is based on previous estimates
7. Costing requires standard computing methodology and
procedures:
 Costing as a consequence becomes more complex
reflecting the many different factors that go into each
unit of work.
 strict methods and procedures that mistakes can be
minimized
1.4 The Function of Cost Engineering in Construction

 Arranging finance, administrative approval and fund

allotment
 Guide decision making among alternatives
 Provides guidelines to the designer (on material, size)
 Prepare engineering estimate
 Negotiation tool between contracting parties
 Help in fixing completion periods
 To justify investment : Cost benefit analysis
 To invite tenders and prepare bills for payment .
 For Valuation purposes
 1.5 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.
• The accuracy of costing is directly affected by the ability of
the Cost Engineer to properly analyze these basic issues.
 1. Project Size
• As projects get bigger, they get more expensive but at a less
rapid rate
• because the larger the project, the more efficiently people
and equipment can be used.
• On large commercial building and heavy engineering
projects, worker productivity is plotted into learning curves.
Time required per unit

Learning Curve

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.
 Cont...
• Typical project size and method for modifying for economy
of scale
Building Type Median Cost per Typical Size Gross
M2 (USD) M2
Apartments 550 1890

Banks 1233 378

Colleges 1074 4,500

Gymnasiums 770 1728

Determine the cost per m2 of 3780 m2 apartment building

 Cont...
• Example: Determine the cost per m2 of 3780 m2 apartment
building.
Area Conversion Scale = Proposed Area/ Typical Size
= 3780/1890 = 2.0
From the conversion curve, one can get a cost multiplier index
of 0.95
Adjusted Cost per m2 = 0.95 x 550 = 522.5 USD
2.Quality
• As the quality specifications increase the costs of projects
also get higher.
3.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
4.Construction Time
The longer the construction, the higher uncertainty in the
estimates
5.Other Reasons
• Market conditions
• Complexity of projects
• Emerging or new markets
Thank you