Objectives:
· To define concepts, methods, and indicators of cost management.
· To develop the participants capabilities in cost management in different areas.
· To raise the skills of participants in planning, implementing and improvement programs.
* Total direct cost
Case Study:
Conclusion (Strength & Weakness points)
This information according to certain available resources.
· To define concepts, methods, and indicators of cost management.
· To develop the participants capabilities in cost management in different areas.
· To raise the skills of participants in planning, implementing and improvement programs.
1- Cost Management:
It is a powerful systematic method
to optimize the cost performance and
to optimize the cost performance and
Overcome the cost constraints.
Min. Max. Proactive Approach
Min. Cost Max. Performance
Cost Management Module Responsibility:
Cost manager
Block diagram:
Cost manager
Block diagram:
Main Output Forms & reports:
· Cost elements report
· Cost estimation report
· Cost analysis report
· Value engineering report
· Cost control (P.E. & KPI) report
Cost Terms:
§ Cash flow analysis determines the estimated annual costs and benefits for a project and the resulting annual cash flow.
§ Cost budgeting: Allocating the overall cost estimate to individual work items to establish a baseline for measuring performance.
§ Cost control: Controlling changes to the project budget.
§ Cost estimating: Developing an approximation or estimate of the costs of the resources needed to complete a project.
§ Direct costs are costs that can be directly related to producing the products and services of the project.
§ Indirect costs are costs that are not directly related to the products or services of the project, but are indirectly related to performing the project.
§ Life cycle costing considers the total cost of ownership, or development plus support costs, for a project.
§ Profits are revenues minus expenses.
§ A cost management plan is a document that describes how the organization will manage cost variances on the project.
§ Cost budgeting involves allocating the project cost estimate to individual work items over time.
2- Cost Estimation:
§ Total Materials cost
§ Total Labor cost
§ Total Equipment cost
§ Total Sub-contract
* Total indirect cost (overhead)
§ Project (job or site) overhead (10 to 20 %)
§ Office (management) overhead (5 to 10 %)
§ Sales tax (3 to 6 %)
· Risk estimation (for critical activities and resources)
(Owner === Change orders === from 0 up to 25%)
· Total cost = Direct cost + Indirect cost + Risk estimation
· Profit (10 to 20 %) For normal projects
· Price = Total cost + Profit
· Markup = Office overhead + Profit = (15 to 30 %)
· Profit = Revenue – Total cost
% = Revenue / Total cost
· Value Added reflects the internal resource utilization
= Revenue – External resources
% = Revenue / External resources
· Margin factor reflects the overhead utilization
= Revenue - Total direct cost
% = Revenue / Total direct cost
Price policy for construction projects:
Price limit = (1.3 to 1.7) ERC
Margin Factor = 1.3 to 1.5
Price Estimation Parameters:
Price = Total Cost * Weight Factor
1- Project information:
- Scope and requirements
- Location and Utilities
- HSE (Health-Safety-Environment) requirements
- Quality requirements
- Duration, etc.
2- Contractor information:
- Company strategy or policy
- Resource availability
- Available and unused capacity (work load)
- Overhead ratio
- Value added ratio
- Mob and De-Mob
- Contractor history (CV & Quality manual), etc.
3- Owner information:
- Owner strategy or policy
- Contract type
- Price measurement (LE or $)
- Payment condition (Cash flow)
- Bonus/ penalty
- Future projects
- Owner history, etc.
4- Market information:
- Competition level
- Relationships
- Environment conditions
- Limitations and constraints, etc.
Cost estimation & analysis:
- Direct cost:
- Materials 30
- Equipment 20
- Manpower 20
- Subcontractor 30
===
- Total direct cost: 100
- Project overhead 10
- Sector overhead 5
- Company overhead 5
===
- Total cost 120
- Profit 30
===
- Price 150
- External resource (M+S) 40
===
- Value added 110
- Margin factor 150/100 = 1.5
Example: Construction project
Example: Normal cost estimation & analysis:
- Direct cost:
- Materials 10 E
- Equipment 20 I
- Manpower 10 I
- Subcontractor 5 E
===
- Total direct cost: 45
- Room overhead 20 I
- Office overhead 10 I
===
- Total cost 75 I + E
- Internal resource 60
- External resources 15
Case Study:
The annual cost information of XYZ Company was as follows:
Cost element | Global | Projects 2006 | |||
2005 | 2006 | P1 | P2 | P3 | |
Revenue (M$) | 80 | 95 | 20 | 25 | 50 |
Total cost | 75 | 90 | 15 | 20 | 35 |
Direct costs | 40 | 50 | 10 | 15 | 25 |
Overhead | 35 | 40 | 5 | 5 | 10 |
Internal resources | 35 | 45 | 5 | 10 | 20 |
External resources | 40 | 45 | 10 | 10 | 15 |
Based on this information, discuss briefly the annual performance evaluation for this company.
Main Indicators:
· Profit = Price – Total cost
% = Price / Total cost
· Value Added = Price – External resources
% = Price / External resources
· Margin factor = Total project value - Total direct cost
% = Total project value / Total direct cost
Cost element | Global | Projects 2006 | |||
2005 | 2006 | P1 | P2 | P3 | |
Revenue (M$) X/2006 (%) | 80 | 95 100 | 20 | 25 | 50 |
Total cost (M$) X/2006 (%) | 75 | 90 100 | 15 | 20 | 35 |
Profit (M$) (%) X/2006 (%) | 5 | 5 100 | 5 | 5 | 15 |
Value Added (M$) (%) X/2006 (%) | 40 | 50 100 | 10 | 15 | 35 |
Margin factor (M$) (%) X/2006 (%) | 45 | 55 100 | 15 | 20 | 35 |
Cost Performance Evaluation
- 2005/2006:
-
- P1/2006:
-
- P2/2006:
-
- P3/2006:
-
3- Pricing the project:
Tender Process:
· Rough-cut estimation (error ±7-10%) based on history
§ Unit price
Process planning:
· Detailed estimation (error ± 3-5%)
§ Detailed price
§ Unit price
Example:
Project Cost Estimation Based on Unit price
Item # | Description | Unit | Estimated Quantity | Unit Price $ | Estimated Amount $ |
1 | Excavation #1 | M3 | 3600 | 1.2 | 4320 |
2 | Excavation #2 | M3 | 350 | 7.7 | 2695 |
3 | Concrete #1 | M3 | 120 | 6 | 720 |
4 | Concrete #2 | M3 | 200 | 18 | 3600 |
5 | Concrete #3 | M3 | 120 | 60 | 7200 |
6 | Concrete #4 | M3 | 280 | 80 | 22400 |
7 | Steel #1 | ton | 120 | 290 | 34800 |
8 | Steel #2 | ton | 65.5 | 410 | 26855 |
9 | Painting (subcontractor) | l.s. | Job | - | 3120 |
Total Estimated Amount ($) | 105710 | ||||
Example:
Project Cost Estimation Based on Detailed price
# | Des. | Unit | E.Q. | Mat $ | Lab $ | Eq $ | Sub $ | TDir $ |
1 | Ex. #1 | M3 | 3600 | - | 1376 | 1819 | - | 3195 |
Ex. #2 | M3 | 350 | - | 1430 | 553 | - | 1983 | |
3 | M3 | 120 | 185 | 279 | 66 | - | 530 | |
4 | M3 | 200 | 1628 | 1008 | 53 | - | 2689 | |
5 | M3 | 120 | 3324 | 1807 | 131 | - | 5262 | |
6 | M3 | 280 | 8820 | 7424 | 272 | - | 16516 | |
7 | ton | 120 | 11719 | 14133 | 119 | - | 25971 | |
8 | ton | 65.5 | 12764 | 5909 | 734 | - | 19407 | |
9 | Paint. | l.s. | Job | - | - | - | 2300 | 2300 |
Total direct cost = $ 77853
Job overhead (13.75%) = 10705
--------------
88558
Sales tax (3.0 %) = 2657
--------------
91215
Markup (15.0 %) = 13682
--------------
104897
Bond = 370
--------------
Total Project Bid = $ 105267
Margin factor = Total project bid / Total direct cost
= 1.3521
Unit price = Unit direct cost * Margin factor
# | Des. | Unit | BOQ | Unit Price $ | Total Value |
1 | Ex. #1 | M3 | 3600 | 1.20 | 4320 |
2 | Ex. #2 | M3 | 350 | 7.66 | |
3 | M3 | 120 | 5.97 | ||
4 | M3 | 200 | 18.18 | ||
5 | M3 | 120 | 59.29 | ||
6 | M3 | 280 | 79.75 | ||
7 | ton | 120 | 292.62 | ||
8 | ton | 65.5 | 400.61 | ||
9 | Paint. | l.s. | Job | - | 3110 |
Total Estimated Amount ($) | |||||
# | Des. | Unit | (1) E.Q. | (2) TDir $ | (3) Margin | (4)= (2)*(3) E.A. $ | (5) = (4)/(1) Unit Price $ |
1 | Ex. #1 | M3 | 3600 | 3195 | 1.3521 | 4320 | 1.20 |
2 | Ex. #2 | M3 | 350 | 1983 | 1.3521 | 2681 | 7.66 |
3 | Co. #1 | M3 | 120 | 530 | 1.3521 | 717 | 5.97 |
4 | Co. #2 | M3 | 200 | 2689 | 1.3521 | 3636 | 18.18 |
5 | Co. #3 | M3 | 120 | 5262 | 1.3521 | 7115 | 59.29 |
6 | Co. #4 | M3 | 280 | 16516 | 1.3521 | 22331 | 79.75 |
7 | St. #1 | ton | 120 | 25971 | 1.3521 | 35115 | 292.62 |
8 | St. #2 | ton | 65.5 | 19407 | 1.3521 | 26240 | 400.61 |
9 | Paint. | l.s. | Job | 2300 | 1.3521 | 3110 | 3110 |
Total Estimated Amount ($) | 105465 | ||||||
Project Budget for a Design Firm | |
Budget Summary Personnel Architectural Division Engineering Environmental Division Total Other Direct Expenses Travel Supplies Communication Computer Services Total Overhead Contingency and Profit Total | $ 67,251.00 45,372.00 28,235.00 $140,858.00 2,400.00 1,500.00 600.00 1,200.00 $ 5,700.00 $ 175,869.60 $ 95,700.00 $ 418,127.60 |
Engineering Personnel Detail Senior Engineer Associate Engineer Engineer Technician Total | $ 11,562.00 21,365.00 12,654.00 $ 45,372.00 |
Project Budget for a Wharf Project
(Amounts in Thousands of Dollars)
Project Budget for a Design Firm | |
Budget Summary Personnel Architectural Division Engineering Environmental Division Total Other Direct Expenses Travel Supplies Communication Computer Services Total Overhead Contingency and Profit Total | $ 67,251.00 45,372.00 28,235.00 $140,858.00 2,400.00 1,500.00 600.00 1,200.00 $ 5,700.00 $ 175,869.60 $ 95,700.00 $ 418,127.60 |
Engineering Personnel Detail Senior Engineer Associate Engineer Engineer Technician Total | $ 11,562.00 21,365.00 12,654.00 $ 45,372.00 |
Contract types:
§ Turn key
§ Lumpsum
§ Unit price
§ Cost plus
Payment conditions:
§ Value
§ Time
§ Performance (milestones, worktypes, Man-hour)
Case: method of payments for turn key contract:
"Power Station Projects"
Item | Itemized (%) | Total (%) | Duration (Month) |
Design | 5 | 5 | 4 |
Material procurement | 50 | 55 | 2 |
Installation | 15 | 70 | 3 |
Testing (protection) | 10 | 80 | 6 |
PAC | 10 | 90 | 12 |
FAC | 10 | 100 | 24 |
or
Item | Itemized (%) | Total (%) | Duration (Month) |
Down-payment | 20 | 20 | 0 |
Valid ship documents | 20 | 40 | 2 |
Received in good conditions on site | 30 | 70 | 3 |
Testing (protection) | 10 | 80 | 6 |
PAC | 10 | 90 | 12 |
FAC | 10 | 100 | 24 |
Gas Pipeline 100 Km
Payment | Down | First | Second | Third |
Value | 25% | 25% | 25% | 25% |
Time | 0 | 30 day | 60 day | 120 day |
Tech. conditions: | % | % | % | % |
A1 | 0 | 100 | 100 | 100 |
A2 | 0 | - | 50 | 100 |
A3 | 0 | 100 | 100 | 100 |
A4 | 0 | - | 50 | 100 |
A5 | 0 | - | 50 | 100 |
Cash in/ Cash out Analysis
Month | Contract Expenses | Payments Received |
1 2 3 Total | $ $ $ $ | $ $ $ $ |
4- Cost Standard Information:
Case study #1:
Project description: "Power Stations"
Standard information:
Base year 2005 Price change = 7 to 10 % annual
Power (MW) | Estimated investment (M$/MW) |
<15 | 0.60 to 0.70 |
15 to 60 | 0.50 to 0.60 |
>60 | 0.45 to 0.50 |
Power (15 to 60 MW):
Phase | Cost % | Duration | Accuracy % |
Pre-Investment: · Pre-feasibility study · Feasibility study | 0.2-0.5 1.0-2.0 | 1w-1m 1-3 m | ± 20 ± 10 |
Investment: (Project management) · Contracting · Detailed Design · Procurement · Construction · Startup & testing | 0.1-0.5 3.0-5.0 50-60 20-25 3.0-5.0 | 1-2 m 1-3 m 1-3 m 3-6 m 1-2 m | ± 5-10 |
Operational: (operational management) · Production · Maintenance · Planning & control | 10-20 LE/ ton steam | 15-20 y | ± 3-5 |
Case study #2:
Project description: "Water Systems"
Standard information:
Base year 2005 Price change = 7 to 10 % annual
Flow rate 30 to 120 m3/hour & Total head 30 to 120 m
Main item | Estimated investment |
Pump unit (Supply and installation 2 pumps, motor, valves, etc.) | 200 to 400 $/m3 flow rate |
Piping system (Pipe lines, valves, utilities, ..etc.) | 16 to 24 $/m length |
Tank system (Reinforced concrete) | 20 to 40 $/m3 tank capacity |
Useful rules:
Pipe: V = 1.5 to 3.5 m/s Q = V * A di = (5 to 20) cm
Pump: Centrifugal H= hs + Losses = (1.5 to 2.5) hs
Valves: Check valve, Control valve & Manual valve.
Tank size: (2 to 10) hours
Case Study:
Project description: Water System
· Flow rate 40 m3/hour Static head = 30 m
· Piping length 500 m
· Target duration: 90 day Start date: 1/1/2007
Required:
1. Select the water system.
2. Construct the master plan.
3. Construct the project cost profile and S-curve.
4. Construct the payment conditions.
5. Construct the review control (target performance) chart.
Case study #3:
Project description: "Gas Pipe Lines"
Standard information:
§ Technical Standards: API 1104 Class: GL1
§ Specs: 20 inch pipe & Max pressure 40 bar & L(10 to 100) km
§ Base year 2005 & Price change = 7 to 10 % annual
Activity ID | Activity Description | Performance rate Km/day | Pred-ecessor | Estimated Cost1000$/Km |
ES | Survey | 4 | - | 0.1 |
ED | Design | 4 | ES SS2, FF2 | 0.2 |
CE | Excavation | 2 | ED SS4, FF2 | 1 |
CS | Stringing (pipe laying) | 4 | CX, SS1, FF1 | 80 |
CW | Welding | 1 | CS SS1, FF1 | 4 |
CN | NDT | 2 | CW SS1, FF1 | 2 |
CW | Coating & Wrapping | 2 | CN SS1, FF1 | 0.4 |
CL | Lowering | 4 | CW SS1, FF1 | 0.2 |
CB | Backfilling | 4 | CL SS1, FF1 | 0.6 |
CH | Hydro-test | (3 days) | CB, FS0 | 0.02 |
This information according to certain available resources.
Case Study:
Project description: Gas Pipe Line 60 Km
· Target duration: 90 day Start date: 1/1/2007
· Down time cost rate = $10,000 /day
· Bonus= $20,000/week Penalty= $30,000/week
Required:
1. Construct the master plan.
2. Construct the project cost profile and S-curve.
3. Construct the payment conditions.
4. Construct the review control (target performance) chart.
Case study #4:
Project description: "Underground 132 KV Cables"
Standard information:
§ Technical Standards: IEC 840 or SEC-CRB 5/16
§ Specs: 1200 mm2 Class: CL1
§ Main load current 850 A & Max load current 930 A
§ Base year 2006 & Price change = 7 to 10 % annual
Activity ID | Activity Description | Performance rate Km/week | Estimated Cost 1000 $ / Km |
ES | Survey | 8 | |
ED | Design | 8 | |
EX | Excavation | 1 | 10 |
ST | Stringing (cable laying) | 2 | 500 |
S1 | First sheath test | 4 | 0.4 |
BF | Backfilling | 1 | 15 |
S2 | Second sheath test | 4 | 0.4 |
JT | Jointing | 1 | 10 |
HV | H.V. test | (2 days) | 10 Total |
This information according to certain available resources.
Case Study:
Project description: "Underground 132 KV Cables"
· Target duration: 40 week Start date: 1/1/2007
· Down time cost rate = $40,000 /week
· Bonus= $10,000/week Penalty = $15,000/week
Required:
1. Construct the master plan.
2. Construct the project cost profile and S-curve.
3. Construct the payment conditions.
4. Construct the review control (target performance) chart.
Case Study:
Scope & Requirements:
· Project Scope: New Way Construction
· Requirement : 50 Km
· Target duration: 2 month Start date: 1/1/2007
Required:
1. Estimate the total value
2. Construct the logic diagram
3. Construct the master plan.
4. Construct the cost profile and S-curve.
5. Construct the payment conditions.
6. Construct the review control (target performance) chart.
7. Manpower profile (Histogram)
8. Equipment profile (Histogram)
9. Material profile (Histogram)
10. Report the tender (offer) conditions
Tender (or offer) conditions:
1- Scope & Requirements:
· Project Scope: New Way Construction
· Requirement : 50 Km
2- Technical Information:
· Technical Standards: ASSHO
· Target duration: 2 month Start date: 1/1/2007
3- Financial Information:
· Price = 18,000,000 $M
· Bonus= $10,000/week Max. Bonus = $20,000
· Penalty = 0.1%/day from the value of the latest works
· Max. Penalty = 2% from the total value
4- Payment conditions:
5- Value Engineering:
In short,
Value engineering is a balance between cost and quality
in order to achieve the desired function.
Value Engineering is Min. Max. Proactive Approach
Min. Cost Max. Performance
V : f (P,C)
V : Value P : Performance C : Cost
Value Engineering (VE), also called:
· Value Management
· Value Analysis
· Target costing
VE is a powerful systematic approach to analysis & improve the value within certain performance, through continuous improvement process.
VE is a professional, function oriented, creative and systematic team management approach, used to analyze and improve value.
VE encourages relationship between construction and design.
VE differs from other cost-reduction activities in that it is function oriented, as it involves a searching analysis of the function of a product as opposed to just seeking lower costs in methods and processes to produce the same product.
Why Value Engineering?
· Maximize performance (quality, safety, time, etc.)
· Maximize value added
· Minimize cost
· Good communication management
· Good project management information system (PMIS)
· Good team approach
VE = Value improvement & minimum cost
What is the value?
“Value” =
The measurement of how well an item fulfills
its function, considering:
- Function or performance level
- Quality level
- Safety level
- Unused capacity
- Revenue, .. etc.
Example:
P = Performance
Q = Quality & safety level
C = Output cost rate
# | P 10 | Q 10 | C 10 | Value index = (P + Q) / C | Evaluation |
P1 | 8 | 5 | 6 | (8 + 5) / 6 = 2.17 | B |
P2 | 7 | 10 | 10 | (7 + 10) / 10 = 1.7 | C |
P3 | 9 | 7 | 7 | (9 + 7) / 7 = 2.29 | A |
“Function” =
The characteristic of an item
which meets the need or want of the user
§ “Basic function” = The feature or characteristic which is the primary reason for the existence of an item, from the user’s point of view
§ “Secondary function” = A feature which supports the basic function. It may make the item “sell” better or work better. i.e. it does not contribute directly to the accomplishment of a basic function.
The Value Engineering process determines possible ways of eliminating unnecessary expenses, while assuring that the quality, reliability, performance, consistency and other critical factors will meet the client’s satisfaction (Dell’ Isola, 1997).
The main objective of implementing Value Engineering is to improve the desired value by the use of all available resources while eliminating unnecessary costs, without sacrificing quality, performance, function or safety.
History of Value Engineering:
· Japanese firms in 1960’s picked up “value engineering” and adapted it into what is now Target Costing
· In the late 1980’s, U.S. firms realized benefits and value of Target Costing
· World War II in the United States
o War was a source of deficiency
o A need to satisfy those functions
o Process of function analysis was discovered to lower the product cost without altering its quality
· In 1965, a study was conducted by the US
o Seven factors or opportunities were responsible for about 95% of the overall savings (Dell’ Isola, 1997).
· In 1967, all the possible functions required by a client (verb-noun) were obtained, and then evaluated them in terms of cost to achieve the best improvement (Palmer, Kelly and Steven, 1996).
New Product cost determination – Cost reduction
(Reactive approach)
New Product cost determination – Value Eng.
(Proactive approach)
Value Engineering Steps:
VE is simply a systematic use of techniques which;
I- Pre-study preparation phase:
II- VE-study phase:
III- Post VE-study phase:
I- Pre-study preparation phase:
· Awareness (training, benchmarking, .. etc)
· Project selection
· Team selection
· Study scope of work
· Data gathering
II- VE-study phase:
· Information analysis
· ABC analysis (rule 80/20)
· Select the required items
· Determine the required function of an item,
· Function analysis (identify values for this function)
· Value analysis
· Establish the functions at the lowest overall cost without sacrificing quality, performance or safety.
· Evaluation & risk assessment
· Presentation
III- Post VE-study phase:
· Final presentation
· Final report
· Target plan
· Implementation
· Review & follow-up
"Continuous improvement process"
Evaluation Parameters
1. Goals & target & constraints
2. Leadership & org. structure
3. Change management
4. PMIS documentation
5. Cost plans
6. Job plans
7. Quality plans
8. Safety plans
9. Material plans
10. Standards & codes
11. Negotiation skills
12. Planning skills
13. Control skills
14. Risk assessment skills
15. Value engineering skills
16. Problem solving skills
17. Others skills
References:
1. Abdomerovic, M., Project Management Descriptors, Project Management Journal, PMI, PA, 1992, p42.
2. Acharya, Pfrommer and Zirbel (1995), “Think Value Engineering”, Journal of Management in Engineering, December 1995.
3. Al-Hammad and Hassanain (1996), “Value Engineering in the Assessment of Exterior Building Wall Systems”, Journal of Architectural Engineering, September 1996.
4. Assaf, Jannadi and Al-Tamimi, “Computerized System for Application of Value Engineering Methodology”, Journal of Computing in Civil Engineering, July 2000.
5. Basha and Gab-Allah (1991), “Value Engineering in Egyptian Bridge Construction”, Journal of Construction Engineering and Management, September 1991.
6. Beynon-Davies, P. Information System: An Introduction to Informatics in Organisations. Palgrave, 2002.
7. Cleland, D. I., Project Management: Strategic Design and Implementation, TAB Professional and Reference Books, PA, 1989.
8. Dell’ Isola (1997), “Value Engineering for Practical Applications for Design, Construction, Maintenance and Operations”.
9. Dell'Isola, A. J. "Value Engineering in Construction." Van Nostrand Reinhold Co. 4. Wideman, R. M., Cost Control of Capital Projects, BiTech Publishers, Vancouver, BC, Canada, Second Edition, 1995.
10. GangaRao, Ward and Howser (1988), “Value Engineering Approach to Low-Volume Road Bridge Selection”, Journal of Structural Engineering, September 1988.
11. Gee, A. F., “Bridge Winners and Losers – rapid evaluation of bridge designs and construction methods”, The Structural Engineer, Volume 65A, No.4, April 1987.
12. Kirk, S. (2001), “Program for Value Engineering Workshop/Training.”, Kirk Associates, 2001.
13. Palmer, Kelly and Steven (1996), “Holistic Appraisal of Value Engineering in Construction in United States”, Journal of Construction Engineering and Management, December 1996.
14. PMBOK® Guide, " A Guide to the Project Management Body of Knowledge ", an American National Standard ANSI/PMI 99-001-2004
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