Cost Estimation: Future Cost  f (Historical Cost)

Cost Elements:
Cost  f (technical , performanc e, schedule)
Total direct cost (TDC)
 BOQ * Unit Cost Project level - Certain Value
Direct Materials cost
SMART Items
Direct Labor cost
Direct Equipment/Machine cost
Direct Sub-contract cost
Total indirect cost (overhead): Uncertain Value
oTechnical Overhead: (Testing, Safety, Maintenance, etc)
 Site (factory, process, project) overhead = (10-20%) TDCMulti-Projects
level (Ratio)
o Office (Managerial or General) overhead = (5-10 %) TDC (15-30%)

Risk estimation (for critical / uncertain/abnormal activities / items / resources)

Client\Owner  Change orders  (0 - 25%)TDC Uncertain Value
0  Routine items
Total cost = Direct cost + Indirect cost + Risk estimation
PM Cost Management For Engineers 80
Pipe line: Non-Routine orders Building 1000 m:
• 10 m/d • 6 Month
• 100 m/d Relative Weights • 9 Month
• 500 • 12 Month
• 1000

Cost  f (technical, performance, schedule)

Tank: Welding: Product: 800 LE/m2: Pump: Pipeline: Scaffolding:

•Water • Horizontal Ton: • 100 m2 Water •Water •10 m
• Oil • Vertical • 0ne • 500 m2 Steam • Oil • 50 m
• Steam • Overhead • 10 • 1000 m2 Oil • Steam • 100 m
• Gas • Mixed • 1000 • 5000 m2 Fire • Gas • 200 m

PM Cost Management For Engineers 81

Cost Estimation accuracy

Pre-Feasibility Total Contract Project

Study Feasibility Management Management
Study
Error ± 20% ± 10% ± 5% ± 3%
PM Cost Management For Engineers 82
Estimation accuracy

Long term Medium term Short term Very short term

(2-5) year (6-12 ) month (1-6) month (1-30) day
Error ± <20% ± <10% ± <5% ± < 3%
PM Cost Management For Engineers 83
Rough Cut Estimation (Error < ± 10)  Based on Value Added
Type Electrical Mechanical Construction
& Asphalt

Material 35% 40% 55%

Total Cost 100% 100% 100%

Type Power stations & Gas PL off Gas PL on

Compressors

Material 55% 40% 60%

Total Cost 100% 100% 100%

PM Cost Management For Engineers 84
Rough Cut Estimation (Error < ± 10)
Type Electrical Mechanical Construction
& Asphalt
Labor 40% 30% 15%
Material 35% 40% 55%
Equipment 10% 15% 20%
Tech. Overhead 10% 10% 5%
Office Overhead 5% 5% 5%
Total Cost 100% 100% 100%

Type Power stations & Gas PL off Gas PL on

Compressors
Labor 15% 15% 10%
Material 55% 40% 60%
Equipment 15% 20% 15%
Tech. Overhead 10% 20% 10%
Office Overhead 5% 5% 5%
Total Cost 100% 100% 100%
PM Cost Management For Engineers 85
Gas Power Station = 10 MW  Lamp sum
Vendor / Supplier Survey  5 to 15 MW 0.90 $M/MW
15 to 30 MW 0.85 $M/MW
30 to 60 MW 0.80 $M/MW
Material Cost  10 * 0.9 = 9.0 $M
Type Power stations Cost estimation

Labor 15% 0.15 * 9.0 /0.55 = 2.45

Material 55% $ 9.0 M
Equipment 15% 0.15 * 9.0 /0.55 = 2.45
Tech. Overhead 10% 0.10 * 9.0 /0.55 = 1.64
Office Overhead 5% 0.05 * 9.0 /0.55 = 0.82
Total Cost 100% $ 16.35 M (Error < ± 10)
Base Cost ~ $ 16.5 M
Base Price Profit ~ 10% $ 18.0 M

PM Cost Management For Engineers 86

Office Building = 1500 M2
Material Survey  < 500 m2 200 $/M2
500 to 1000 M2 180 $/M2
1000 to 2000 M2 170 $/M2
Material Cost  1500 * 170 = 255,000 $

Type Building Cost estimation

Labor 15% 69,454

Material 55% 255,000
Equipment 15% 69,454
Tech. Overhead 10% 69,454
Office Overhead 5%
Total Cost 100% 463,636 (Error < ± 10)
Base Price 500,000

PM Cost Management For Engineers 87

 Steel Tanks (Material St. 37)
Total Weights = 1000 ton
Material cost rate = 5000 LE/ton
Total material cost  5000 * 1000 = 5,000,000 LE

Type Building Cost estimation

Labor 15%
Material 55% 5,000,000
Equipment 15%
Tech. Overhead 10%
Office Overhead 5%
Total Cost 100% 9,090,909
Base Price 11,000,000

PM Cost Management For Engineers 88

 Oil Well Type
Vertical Horizontal Infill
Cost Type
Labor 15% 10% 20%
Material 50% 55% 45%
Equipment 20% 20% 15%
Tech. Overhead 10% 10% 5%
Office Overhead 5% 5% 5%
Total Cost 100% 100% 100%

Type Vertical Cost estimation

Labor 15% .15*10/.5 = 3 $M

Material 50% 10$ (Given) – Depth 1000 m
Equipment 20% .2*10/.5= 4 $M
Tech. Overhead 10% .1*10/.5 =2 $M
Office Overhead 5% .05*10/.5 = 1 $M
Total Cost 100% 20 (Error < ± 10)
Base Price 22 $M
PM Cost Management For Engineers 89
Rough Cut Estimation  Base on the main parameter

PARAMETRIC ESTIMATING: Curve

Item Cost Item Main Parameter
Air Condition $/unit Power (1 to 10 HP)

Heat Exchanger $/unit Surface area (500 to 1000 m2)

Excavation $/m3 Depth (1 to 100 m)

Building $/m2 Height (3 to 30 m)

Oil Pipe line $/km Diameter (1 to 20 inch)

Welding $/m Thickness

Oil Well $M/well Depth (100 to 1000 m)

Well Casing $M/Case Depth (20 to 50 m)

Power station $M/MW Capacity (5 to 60 MW)

PM Cost Management For Engineers 90

Rough Cut Estimation
PARAMETRIC ESTIMATING: Curve

$5,000
Cost $ = f(HP)

$2,000
(Error < ± 5)

$1,000
$ 800

$500
4 HP

1 2 3 4 10

Air Condition – Main Parameter (HP)

PM Cost Management For Engineers 91
Rough Cut Estimation
PARAMETRIC ESTIMATING: Curve

$20,000
Cost $ = f(SA)

$10,000
(Error < ± 5)

$5,000

$ 4000

$3,000 2000 M2

500m2 1000 2000 10000

Shell & tube heat exchanges – Main Parameter (Surface area – M2)
PM Cost Management For Engineers 92
Rough Cut Estimation  Based on multi-parameters
Relative Weights (Error < ± 5)

Cost  f (technical, performance, schedule)

Oil Pipe Line 
Base  Normal  Wight 1.0 
Cast iron, D= 10 inch, l = 12 m, L=10 Km & Rate =0.5 km/day

Technical Performance Duration Rel.

Description Point Description Point Description Point Weight
10 inch 1.0 10 km 1.0 0.5 km/day 1.0 1.0
10 inch 1.0 10 km 1.0 1.0 km/day 1.2 1.2
15 inch 1.3 10 km 1.0 0.5 km/day 1.0 1.3
15 inch 1.3 10 km 1.0 1.0 km/day 1.2 1.6

PM Cost Management For Engineers 93

 Factory Overhead

Overhead
Allocation

Total Direct Total Direct

Costs Labor Costs

PM Cost Management For Engineers 94

Overhead Allocation:

Factory
Overhead
$50,000

Product #1 Product #2
Direct Costs $90,000 Direct Costs $60,000
Direct Labor $30,000 Direct Labor $30,000

? ?
Allocated

PM Cost Management For Engineers 95

 Factory Overhead
Allocation  Direct Cost

Overhead
$50,000

Product #1 Product #2
Direct Costs Direct Costs
$90,000 $60,000
(3) (2)
$30,000 $20,000
Allocated

PM Cost Management For Engineers 96

 Factory Overhead
Allocation  Direct Labor

Overhead
$50,000

Product #1 Product #2
Direct Labor Costs Direct Labor Costs
$30,000 $30,000
(1) (1)
$25,000 $25,000
Allocated

PM Cost Management For Engineers 97

 Cost & Price Estimation (Budget or Request for Quotation)
RFQ

Leader 7) Price Estimation  Budget or RFQ  Offer  Contract

(Decision
Maker) 6) Competition Level  Profit or Value Added or Margin Factor

5) Cost Estimation (Direct & Overhead)

4) Main Resources (BOM, BOE, BOL, SC)  Direct Cost

Cost
Engineer
3) WBS  BOQ  Main Activities  Time Master Plan

2) Project Scope of work  Requirements

1) Customer / User / Client Needs  Working Conditions

PM Cost Management For Engineers 98
 Cost Analysis

PM Cost Management For Engineers 99

Operational Cost Analysis: (Value & Ratio): (Annual Term)
Profit = Revenue – Total cost (5 to 20%)
Profitability % = 100 * Revenue / Total cost Main +

Internal Resource (Fixed cost) Utilization:

- Value Added reflects the internal resource utilization

= Internal resources + Profit or
= Revenue – External resources
% = 100 * Revenue / External resources

- Margin factor reflects the total overhead utilization

= Total Overhead + Profit
= Revenue - Total direct cost
% = 100 * Revenue / Total direct cost or
(135 to 175%)

- Markup factor reflects the office overhead utilization

= Office overhead + Profit
= Revenue – (Total direct cost + Technical OH)
% = 100 * Revenue / (Total direct cost + Technical OH)
(120 to 160%)

PM Cost Management For Engineers 100

 Value Added reflects the internal resource utilization

= Internal resources + Profit

= Revenue – External resources

% = 100 * Revenue / External resources

External Facility Revenue

Resources
Internal Resources
• Material = 100 • Production profile= 100
• Subcontract = 200 • Price = 10 / unit

Total External Resource Revenue = 100 * 10 =1000

= 100+200 = 300

VA= 1000 – 300 = 700 or VA ratio = 1000/300 = 333 %

PM Cost Management For Engineers 101
 Value Added

External Facility Revenue

Resources
Internal Resources

• NG = 1M$/day • LNG = 5$M/day

VA= 5 – 1 = 4 $M/day  Good negotiation

Shutdown  Reduce from 10 day to 7 days

Process saving = (3 day) * (4 $M/day) = 12 $M 

Bonus = (100,000 $/day) * (3 day) = 300,000 $

PM Cost Management For Engineers 102

Operational Cost Analysis: (Value & Ratio): (Annual Term)

Field Resource KPI (Main Indicators)

Factory / Site / Internal resources Profit + Value added
Plant / Workshop Technical overhead
Office overhead
Main Contract / Technical overhead Profit + Margin factor
Sub Contractor Office overhead
Consultant Office overhead Profit + Markup
Design Dept. Technical overhead Profit + Margin factor
Office overhead
Civil / Mech. / Internal resources Profit + Value added
Elec. Dept. Technical overhead
Office overhead

PM Cost Management For Engineers 103

 Elements of Petroleum Refining

Refinery
(Processing)

Crude Oil Product

(Upstream) (Downstream)
PM Cost Management For Engineers 104
 Cash Margin

Refinery Margin (US$/EDC)= Product Value –

(Raw Material Cost + Operating Cost)

Cash Margin
Operating Cost
(Utilities, Maintenance, and
Product Value Personnel Costs)
(Σ Price × Amount)
Raw Material Cost
(Σ Price × Amount)

PM Cost Management For Engineers 105

 Future Cost  f (Historical Cost)
Annual cost 2008:

Revenue = 220 $M

Total cost = 200 $M

Margin Factor  Classification (Direct & Overhead):

Total Direct = 140$M (Material, Labor, Equipment, Sub-Contractors)

Technical Overhead = 40 $M (Safety, Planning, Design, Labs, Analysis, .. etc.)

Office overhead = 20 $M

Value Added  Classification (Internal & External):

External Resource = 100 $M (Material, Sub-contractors)

Internal Resource = 100 $M

PM Cost Management For Engineers 106

 Future Cost  f (Historical Cost)
Annual cost 2008:
Revenue = 220 $M
Total cost = 200 $M
Total Direct = 140$M
External Resource = 100 $M
Technical Overhead = 40 $M
Performance Evaluation 2008:
Profit = R- TC = 220 – 200 = 20 $M (20/200 = 10 % TC)
Overhead = TC-TD = 200 – 140 = 60 $M (60/140 = 43 % TD)
Margin factor = R – TD = 220 – 140 = 80 $M (80/140 = 60% TD)
Value Added = R – ER = 220 – 100 = 120 $M (120/100 = 120% ER)
Markup = Revenue – (Total direct cost + JOH)
= 220 – (140 + 40) = 220 – 180 = 40 (40/180 = 22% TD+JO

Targets 2009:
Profit = 10 + 5 (Optimistic + Applicable) = (10 to 15) % TC
Margin factor = 60 + 10 = (60 to70) % TD
Value Added = 120 + 20 = (120 to 140)% ER
Markup = 22 + 5 = (22 to 27) % TD+JO

PM Cost Management For Engineers 107

Brain Storming:
Discuss the following figure.

Percent % Cost Analysis

200

175
Value Added
150
Margin factor
125
Profit
100

75

50

25

0
1990 1995 2000 2005
Year
PM Cost Management For Engineers 108
 Cost / Price /Profit / Value Analysis
Old Equation:  Cost-Base Price Estimation (Offer)
Cost + Profit = Price  Fixed price? Routine products
New Equation:  Market-Based Price Estimation
(Strong Competition level  Variable price)

Price (Market demand or Negotiation) - Cost = Profit

The key to profitability: (Project Manager Target)
Cost reduction & Performance Improvement
Performance  Design, Quality, Safety, Time, Relations, Doc. , etc.
Scientific Approach:.
Value Engineering / Value Analysis / Value Management
(Max. Performance & Min. Cost)  Win/Win Approach
PM Cost Management For Engineers 109
 Price Estimation Policy

Work load Order type Contribution

Used capacity Direct order Long Term Value Added:
or (Single source) • New customer
Unused capacity or • New Technology
Open book • Relations
(Multi-source)

Resource type:
• External Resource cost (ERC)
• Internal Resource cost (IRC)

PM Cost Management For Engineers 110

Price Estimation Policy:
Must be Customized  Case by Case
Work load Order type
level Direct order Open book
(Used %) (Single source) (Multi-source)
Capacity
utilization Optimistic case
ratio
U > 80%
60-80%
Value
Engineering

<60%
Worst case

PM Cost Management For Engineers 111

Price Estimation Policy: Price Matrix
For example: XXX Petroleum Contractor
Work load Order type
level Direct order Open book
(Single source) (Multi-source)
Capacity
utilization Profit (25 to 15%) Profit (20 to 10%)
ratio
U > 80%
Value
Engineering
60-80% Profit (20 to 10%)
Profit (15 to 5%)
Profit (5%) to
<60% Profit (15 to 5%) Price= ERC + 0.8 IRC
PM Cost Management For Engineers 112
Productivity
A measure of the effective use of resources, usually expressed as
the ratio of output to input

Outputs
Productivity =
Inputs

Productivity Growth =
Current Period Productivity – Previous Period Productivity
Previous Period Productivity

Productivity ratios are used for:

• Planning workforce requirements
• Scheduling equipment
• Financial analysis
PM Cost Management For Engineers 113
Single-Factor Productivity
• Labor Productivity = Output ($ or units) / Labor inputs ($ or hours)

• Machine Productivity = Output ($ or units) / Machine inputs ($ or hours)

• Material Productivity = Output ($ or units) / Material inputs ($ or hours)

• Energy Productivity = Output ($ or units) / Energy inputs ($ or kwh)

• Capital Productivity = Output ($ or units) / Capital inputs ($ or hours)

Multi-Factor Productivity
• Multi-factor productivity = Outputs / (Labor + Machine + …)

 Inputs are often expressed in dollars

Total Productivity
Total productivity = Outputs / All inputs
 Inputs are often expressed in dollars

PM Cost Management For Engineers 114

 Total Productivity
--
--

--

--

Partial
Productivity

PRODUCTIVITY LEVELS:
Level Productivity indicators
Top
management Monetary indicators
Middle
Management
Operational Technical indicators
management
PM Cost Management For Engineers 115
Standard Performance Information “Should be customized”
Planned Performance
Contractor Total Cost Y1 LE
Total Price Y2 LE
Point of View
Unit Profit Y3 LE
Margin factor Y4 LE
rate Duration Z day
Performance rate 100/5 = 20 man-day
Average Profit 20%
Ratio Analysis Technical overhead 20%
(Historical data) Office overhead
Risk cost
5%
5%
Bonus 100 LE/day

• Total Direct cost 5000

Direct Cost Elements • Labour cost rate 50
(Unit Cost) • Man-hour 100

BOQ = X m2
Bill of quantities Quality Plan
Technical levels Safety Plan
Job Plan

Scope of work: Office Building Standard unit: 1000 m2

PM Cost Management For Engineers 116

Standard Performance Information “Should be customized”
Planned Performance
Contractor Total Cost Y1 LE
Total Price Y2 LE
Point of View
Unit Profit Y3 LE
Margin factor Y4 LE
rate Duration Z day
Performance rate 15 day/Km
Average Profit 20% TC
Ratio Analysis Technical overhead 20% TDC
(Historical data) Office overhead
Risk cost
5% TDC
10 % TDC
Bonus 1000 LE/day

• Material cost 100,000 LE/Km

Direct Cost Elements • Machine cost 10,000
(Unit Cost) • Labour cost 15,000
• Subcontractor -

BOQ = X Km
Bill of quantities Quality level 10
Technical levels Safety level 10

Scope of work: NG Pipe line Standard unit: 1 KM 20 inch

PM Cost Management For Engineers 117

Standard Performance Information “Should be customized”
Planned Performance
Contractor Total Cost 1,750,000 LE
Point of View Total Price 2,100,000 LE
Unit Profit 350,000 LE (20%)
Margin factor 850,000 LE (168%)
rate Duration 90 to 75 day (2 crew)
Performance rate 15 day/Km
TC= Profit 20% TC
Ratio Analysis Technical overhead 20% TDC
1,250,000*1.35=
(Historical data) Office overhead 5% TDC
1,687,500 Risk cost 10 % TDC
Bonus 1000LE/day

• Material cost 100,000 LE/Km

• Machine cost 10,000
TDC = Direct Cost Elements • Labour cost 15,000
1,250,000 (Unit Cost) • Subcontractor -

Bill of quantities BOQ = 10 Km

Quality level 10
Technical levels Safety level 10

Scope of work: NG Pipe line Standard unit: 1 KM 20 inch

PM Cost Management For Engineers 118

Cost Engineering Steps:
• Technical Classification  Types, Materials, Size
• Select Standard Unit for each type  Most common
• Cost Classification  Cost matrix  (Direct, Indirect, Internal, External  Total)
• Standard Cost  Rough cut estimation for RFQ  Error < 5%
• Customer  Tender Study
• Cost estimation
• Load analysis & Competition level  Price estimation & Price limits (normal, lower)
• Price Negotiation  Actual price
• Contract Price
• Detailed Cost Analysis  Detailed Design  BOQ  Resources
• Construction phase  Actual resources
• Actual Cost elements
• Performance evaluation  Actual performance / Planned performance
• KPI for each managerial level  operational, middle, top
• Corrective actions & learned lessons for future
• Long term continuous improvement

PM Cost Management For Engineers 119

 Case Study:
A company needs a part which is currently purchased for LE 100/unit and annual demand
50,000 unit. When studying the possibility of manufacturing the part, the company found
that three alternative production lines (A , B, or C) are available.
Item Line (A) Line (B) Line (C)
Equipment & Tools:
– First cost (LE) 200,000 400,000 600,000
– Life (year) 3 4 5
– Salvage value ( % First cost) 10% 15% 20%
Maximum operating hours (hour/year) 1500 2000 2500
Material Cost (LE/unit) 15 12 10
Technical Workers:
– Numbers 3 2 1
– Rate (LE/hour) 10 15 20
– Output (Unit/hour) 20 25 30
Production defect ratio 15% 10% 5%
Technical overhead “fixed” (% direct cost) 20% 15% 10%
Office overhead “fixed” (% manufacturing cost) 10% 10% 10%
What is the optimum decision (part purchase, A, B, or C) to be taken by the company?
PM Cost Management For Engineers 120
 Capacity Analysis
A company needs a part which is currently purchased for LE 100/unit and annual demand
50,000 unit. When studying the possibility of manufacturing the part, the company found
that three alternative production lines (A , B, or C) are available.

Item Line (A) Line (B) Line (C)

Maximum operating hours 1500 2000 2500
(hour/year)
Technical Workers:
– Numbers 3 2 1
– Rate (LE/hour) 10 15 20
– Output (Unit/hour) 20 25 30
Production defect ratio 15% 10% 5%
Planned capacity 50,000 50,000 50,000
Maximum capacity 1500*20*(1-0.15)=25500 45000 712500
Capacity evaluation Rejected Rejected Accepted

Then:
What is the optimum decision (part purchase or Line C) to be taken by the company?
PM Cost Management For Engineers 121
Cost Analysis for Part Purchase :
Annual demand = 50,000 unit Price = 100 LE/unit
Annual budget = 100*50,000 = 5,000,000 LE/year
Cost Analysis for Line (C):
Planned demand = 50,000 unit/year
Actual production = 50,000 *(1 + rejected ratio) = 50,00*1.05= 52500

• Annual Material cost = 52,500 * 10 = 525,000 LE/year

• Annual Labor cost = (52500 unit) * (20 LE/hr) / (30 unit/hr) = 35000 LE/year
• Annual depreciation (SL) = (600000-120000)/5 = 96,000 LE/year
• Total Direct cost = 656,000 LE/year

Technical overhead = 10% TDC = 65,600 LE/year

Manufacturing cost = 721,600 LE/year
Office overhead = 10% Manf. = 72,160 LE/year
• Total cost = 793,760 LE/year
• Unit Cost = 793,600 / 50,000 = 15.875 LE/unit

PM Cost Management For Engineers 122

Case:
A company needs a part which is currently purchased for LE 100/unit and annual demand
50,000 unit. When studying the possibility of manufacturing the part, the company found
that three alternative production lines (A , B, or C) are available.
Item Line (A) Line (B) Line (C)
Equipment & Tools:
– First cost (LE) 200,000 400,000 600,000
– Life (year) 3 4 5
– Salvage value ( % First cost) 10% 15% 20%
Maximum operating hours (hour/year) 1500 2000 2500
Material Cost (LE/unit) 15 12 10
Technical Workers:
– Numbers 3 2 1
– Rate (LE/hour) 10 15 20
– Output (Unit/hour) 20 25 30
Production defect ratio 15% 10% 5%
Technical overhead “fixed” (% direct cost) 20% 15% 10%
Office overhead “fixed” (% manufacturing cost) 10% 10% 10%
What is the optimum decision (part purchase, A, B, or C) to be taken by the company?
PM Cost Management For Engineers 123
Case Study:
Scope of work: Power Towers
Units produced =100 units Labor effort = 250 man-hour
Raw material = 150 ton Final weight = 140 ton
Single-Factor Productivity
Labor Productivity = Units produced / man-hours used
= 100/ 250 = 0.4 units/man-hour
= 250/100 = 2.5 man-hour/unit
Material Productivity
Yield = Final weight / Raw material weight
= 150 / 140 = 93%

Material Productivity = Units produced / raw material

= 100 / 150 = 0.67 unit/ton
= 150/100 = 1.5 ton/unit
PM Cost Management For Engineers 124
Example:
Old System:
Staff of 4 works 8 hrs/day 8 units/day
Labor cost = $640/day Overhead = $400/day

New System:
14 units/day Overhead = $800/day

Old labor 8 units/day

productivity = = .25 units/man-hr
32 man-hour

New labor 14 units/day

productivity = = .4375 units/man-hr
32 man-hour

Productivity Growth =
(0.4375 – 0.25) / 0.25 = 0.75 = 75%
PM Cost Management For Engineers 125
Example:
Old System:
Staff of 4 works 8 hrs/day 8 units/day
Labor cost = $640/day Overhead = $400/day

New System:
14 units/day Overhead = $800/day

Old multifactor 8 unit/day

productivity = = .0077 unit/dollar
$640 + $400

New multifactor 14 unit/day

productivity = = .0097 unit/dollar
$640 + $800

Productivity Growth =
(0.0097 – 0.0077 ) / 0.0077 = (97-77)/77 = 0.26 = 26%
PM Cost Management For Engineers 126
Manufacturing Cost Analysis: (Product or Process)

Prime Costs include:

Direct Materials Direct Labor Manufacturing

Overhead

Prime Cost ratio = Prime cost / Total cost

PM Cost Management For Engineers 127
Manufacturing Cost Analysis: (Product or Process)

Conversion Costs include:

Direct Materials Direct Labor Manufacturing

Overhead

Conversion Cost ratio = Conversion cost / Total cost

PM Cost Management For Engineers 128

Case:
Project overview: IT Center “10 Labs”
Cost Elements: (Cost estimation)
• Material cost = $100,000/lab
• Labor cost = $15,000/lab
• Equipment cost = $10,000/lab
• Sub-contractor = $ 0.0
• Risk estimation = 10% TDC
• Project overhead = 20% TDC
• Office overhead = 5% TDC
• Profit = 20% TC

PM Cost Management For Engineers 129

Required: Cost Analysis: (Target)
Total direct cost = 1,250,000
Total Materials cost = 1,000,000
Total Labor cost = 150,000
Total Equipment cost = 100,000
Total Sub-contract = 0.0

Risk estimation = 10% TDC = 125,000

Total indirect cost (overhead) = 312,500
Project overhead = 20% TDC = 250,000
Office overhead = 5% TDC = 62,500

Total cost =Direct cost +Indirect cost +Risk = 1,687,500

Profit = 20% TC = 337,500

Total Price = Revenue = TC + Pr = $2,025,000

Unit Price = Total Price/ Quantity = $202,500/lab

PM Cost Management For Engineers 130

Total cost = Direct cost + Indirect cost + Risk = 1,687,500

Profit = 20% TC = 337,500

Total Price = Revenue = TC + Pr = $2,025,000

Margin Factor = R-TDC = 2,025,000 – 1,250,000

= $ 775,000
= 162 %

Markup Factor = R-(TDC+JOH)

= 2,025,000 – (1,250,000+250,000)
= 2,025,000 – 1,500,000
= $ 525,000
= 135 %

PM Cost Management For Engineers 131

Case Study: Gas pipe line 120 km
Value
Cost item Total Internal External
- Direct cost:
 Materials 30 - 30
 Equipment 20 15 5
 Manpower 20 10 10
 Subcontractor 30 - 30

- Total direct cost 100 25 75

- Project overhead 10 5 5
- Sector overhead 5 5 -
- Office overhead 5 5 -
- Total cost 120 40 80
- Price 150
- Profit 30 (25 %)
- Value added 150 – 80 = 70 (47 %) > 25%
- Margin factor 150/100 = 1.5

PM Cost Management For Engineers 132

Case Study:

Projects
Cost item A B C
- Direct cost:
 Materials 15 13 9
 Equipment 1 5 12
 Manpower 1 7 11
 Subcontractor 20 10 2
- Total direct cost 37 35 34
- Project overhead 1 2 3
- Sector overhead 2 2 2
- Total cost 40 39 38
- Price 50 48 46
- Profit 10 9 8
- Value added 15 25 35
PM Cost Management For Engineers 133
Case Study
Scope of work: Steel Structure for Power Towers 1000 ton

Direct cost elements: Resource type

• Material type: St 37
• Material Cost rate = 4000 LE/ton Outdoor
• Labor productivity = 10 m-h/ton Indoor
• Labor rate = 10 L.E/hour
• Machining cost rate = 200 LE/ton Indoor
• Tools & Supplies cost rate = 50 LE/ton Indoor
• Painting cost rate = 20 LE/m2 Indoor
• Painting surface area = 20 m2/ton

Overhead cost elements:

• Tech. Overhead= 30%Total Direct Cost Indoor
• Office Overhead = 5% Manufacturing cost Indoor

Based on this information, discuss & analysis the project price policy.

PM Cost Management For Engineers 134

Scope of work: Steel Structure for Power Towers 1000 ton
• Material Cost rate = 4000 LE/ton
• Material Cost = 4000*1000 = 4,000,000 LE
• Labor productivity = 10 m-h/ton
• Labor rate = 10 L.E/hour
• Labor cost = 10*10*1000 = 100,000 LE
• Machining cost rate = 200 LE/ton
• Machining cost = 200*1000 = 200,000 LE
• Tools & Supplies cost rate = 50 LE/ton
• Tooling cost = 50 *1000 = 50,000 LE
• Painting cost rate = 20 LE/m2
• Painting surface area = 20 m2/ton
• Painting Cost = 20 * 20 *1000 = 400,000 LE
• Total direct Cost = 4,750,000 LE
• Tech. Overhead= 30%Total Direct Cost = 1,425,000
• Manufacturing cost = 6,175,000
• Office Overhead = 5% Manufacturing cost = 308,750
• Total overhead = 1,425,000+308,750 = 1,733,750
 Total Cost = 6,483,750 LE
PM Cost Management For Engineers 135
 Cost Classification
Scope of work: Steel Structure for Power Towers 1000 ton

Direct Cost Indirect Cost Total

External
Cost

Internal
Cost

Total

PM Cost Management For Engineers 136

Price Estimation Policy: Price Matrix
For example: XXX Petroleum Company
Work load Order type
level Direct order Open book
Capacity Profit (25 to 15%) Profit (20 to 10%)
utilization Price ( to )
ratio
Prices ( to )
U > 80%
Profit (20 to 10%) Profit (15 to 5%)
60-80% Price ( to ) Price ( to )

Profit (15 to 5%) Profit (5%) to

<60% Price ( to ) Price= ERC + 0.8 IRC
Price ( to )
PM Cost Management For Engineers 137
Case Study:
Scope of work: Power station project – Lump sum project
Contractor  Cost estimation elements:
$M Direct Cost Indirect Cost
External Resources 6 1
Internal Resources 3 2
Based on this information, discuss the following:
1) Price estimation policy for price negotiation  RFQ “Request For Quotation”
2) If the contract price is 13 $M, analyze the cost-price indicators.
3) If the actual cost details are as follows:

$M Direct Cost Indirect Cost

External Resources 6.25 1.25
Internal Resources 2.00 1.50

discuss the cost performance analysis.

4) KPI report  One page management  Top Management
PM Cost Management For Engineers 138
Cost Estimation Elements:

$M Direct Cost Indirect Cost Total

External Resources 6 1 7

Internal Resources 3 2 5

Total 9 3 12
Cost Estimation Analysis:

PM Cost Management For Engineers 139

1) Price estimation policy for price negotiation.

Work load Order type

level Direct order Open book
Capacity
utilization Profit (25 to 15%) Profit (20 to 10%)
ratio
U > 80%

60-80% Profit (20 to 10%) Profit (15 to 5%)

Profit (5%) to
<60% Profit (15 to 5%) Price= VC + 0.8 FC

PM Cost Management For Engineers 140

1) Price estimation policy for price negotiation.
Price = total cost * (1+profit ratio)
For example: 25% Profit  Price = 12 * 1.25 = 15 $M
Work load Order type
level Direct order Open book
U > 80% 15 to 13.8 14.4 to 13.2
60-80% 14.4 to 13.2 13.8 to 12.6
<60% 13.8 to 12.6 12.6 to 11.0
Recommendation: Price= VC + 0.8 FC = 7 + 0.8 *5 = 11.0

For example, if the price range (from 13.8 to 12.6)

Negotiation Policy:
-
-
-
-
-
PM Cost Management For Engineers 141
2) If the contract price is 13 $M, analyze the cost-
price indicators.
Cost Indicator Value $M Ratio % Evaluation
Profit
Margin Factor
Value Added

Recommendation:
-
-
-
-

PM Cost Management For Engineers 142

Target Cost elements:

$M Direct Cost Indirect Cost Total

External Resources 6 1 7

Internal Resources 3 2 5

Total 9 3 12
Actual Cost elements:

$M Direct Cost Indirect Cost Total

External Resources 6.25 1.25 7.5

Internal Resources 2.00 1.50 3.5

Total 8.25 2.75 11

PM Cost Management For Engineers 143
3) Cost Control:
Cost Indicator Planned Actual Variance Var. % Evaluation
Total Cost
….
Profit

Margin Factor

Value Added

….

Recommendation:
-
-
-
-

PM Cost Management For Engineers 144

4) KPI report Conclusion: “One Page Management”
1) Subject Description:
Project: Power station project Contract: Lamp sum
Price: 13 $M Target cost: 12 $M Actual cost: 11 $M
2) Analysis:
Strength 1-
points 2-
3-
Weakness 1-
points 2-
3-
Area of 1-
Concern 2-
3-
3) Recommendation:
-
-
-
PM Cost Management For Engineers 145
Case Study:
Scope of work: Power Towers – Unit Price Project
Cost estimation elements for target production 1000 ton:
$M Direct Cost Indirect Cost
External Resources 300,000 150,000
Internal Resources 250,000 200,000
Based on this information, discuss the following:
1) Price estimation policy for price negotiation.
2) If the contract price is $ 1000/ton, analyze the cost-price indicators.
3) If the actual production is 800 ton and the cost details:
$M Direct Cost Indirect Cost
External Resources 250,000 130,000
Internal Resources 220,000 200,000
discuss the cost performance analysis.
4) KPI report “one page management”

PM Cost Management For Engineers 146

1) Price estimation policy for price negotiation.

Work load Order type

level Direct order Open book
Capacity
utilization Profit (25 to 15%) Profit (20 to 10%)
ratio
U > 80%

60-80% Profit (20 to 10%) Profit (15 to 5%)

Profit (5%) to
<60% Profit (15 to 5%) Price= VC + 0.8 FC

PM Cost Management For Engineers 147

1) Price estimation policy for price negotiation.
Work load Order type
level Direct order Open book
U > 80%
60-80%
<60%

Recommendation:

PM Cost Management For Engineers 148

2) If the contract price is $ 1000/ton, analyze the cost-
price indicators.
Cost Indicator Value $M Ratio % Evaluation
Profit
Margin Factor
Value Added

Recommendation:

PM Cost Management For Engineers 149

3) If the actual cost details are as follows:
$M Direct Cost Indirect Cost Total
External Resources
Internal Resources
Total

Cost Indicator Planned Actual Variance Var. % Evaluation

Total Cost
….
Profit
Margin Factor
Value Added
….

Recommendation:

PM Cost Management For Engineers 150

4) KPI report Conclusion: “One Page Management”
1) Subject Description:
Project: Power Tower Contract: Unit Price
Price: Target cost: Actual cost:
2) Analysis:
Strength 1-
points 2-
3-
Weakness 1-
points 2-
3-
Area of 1-
Concern 2-
3-

3) Recommendation:

PM Cost Management For Engineers 151

Exam: Scope of work: Steel Tanks (Material St. 37) for Y Petroleum Site
Lump sum Project = 11,000,000 LE
Material Cost Plus +50% of steel material cost more than 5000 LE/ton

Elements: Planned Total Actual .

• Steel Material quantity 1000 ton 1050 ton
• Steel Material cost 4500 LE/ton 5,800 LE/ton
• Welding electrodes & NDT 1,000 LE/ton 1,200,000 LE
• Painting process 1,000 LE/ton 950,000 LE
• Protection process 500 LE/ton 450,000 LE
• Technical Labor time 100 man-hour/ton 120,000 man-hour
• Technical Labor rate 25 LE/man-hour 25 LE/man-hour
• Machining cost 250 LE/ton 300,000 LE
• Transportation 500 LE/ton 400,000 LE
• Technical overhead 10% TDC 1,600,000 LE
• Office overhead 5% TDC 500,000 LE
Based on this information, Discuss & analysis the performance indicators for
each managerial level (operational, middle, and top management)
PM Cost Management For Engineers 152
I- Cost Performance Evaluation for Operational Management (Site Manager)
Cost Indicator Unit Planned Actual Variance Var. % Evaluation
Steel Material quantity
Steel Material cost
 Total Steel Material cost
Welding electrodes & NDT
Painting process
Protection process
Technical Labor time
Technical Labor rate
 Total Technical Labor cost
 Total Direct Cost
Technical overhead
Office overhead
 Total Cost
Price
 Profit

Recommendation:
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PM Cost Management For Engineers 153

II- Cost Performance Evaluation for Middle Management:
Cost Indicator Unit Planned Actual Variance Var. % Evaluation
Total Direct Cost
Technical overhead
Office overhead
Total Cost
Price
Profit
 Margin Factor
 Value Added
 Markup
 Material Productivity
 Labor Productivity
 Machine Productivity

Recommendation:
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PM Cost Management For Engineers 154

III- Cost Performance Evaluation for Top Management
KPI report “One Page Management”
1) Subject Description:
Scope of work: Contract: Client:
Planned Price: Actual Price: Planned cost: Actual cost:

2) Analysis:
Strength 1-
points 2-
3-
Weakness 1-
points 2-
3-
Area of 1-
Concern 2-
3-
3) Recommendation:
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PM Cost Management For Engineers 155

Case :
Scope of Work: Product: Car Manufacturing Process : XXX Car Assembly
1) Capacity Information:
Item Unit Period 2009
First Quarter Second Quarter
Design capacity Car/month 150
Effective capacity Car/month 140
Planned quantity Car/Quarter 300 360
Total Actual quantity Car/Quarter 240 270
Rejected quantity (rework) Car/Quarter 9 12
2) Critical Resource Information:
Item Unit Period 2009
First Quarter Second Quarter
Technical Labor Man-hour 10000 9000
Ass. Line working hours Hour 600 750
3) Actual Assembly Cost Information:
Item Unit Period 2009
First Quarter Second Quarter
Total Internal Resource cost MLE 1.440 1.460
Total External Resource cost MLE 0.360 0.438
Assembly Price LE/Car 7000 7500

Based on this information; discuss the performance evaluation for each managerial level:
1) Operational level 2) Middle level 3) Top level (KPI report)
PM Cost Management For Engineers 156
Operational Level:
Scope of Work: Product: Car Manufacturing Process : XXX Car Assembly
1) Capacity Indicators: Unit First Quarter Second Quarter Variance Evaluation
(Q2 –Q1) (Q2 to Q1)
Design capacity Car/3m 450 450 - -
Effective capacity Car/3m 420 420 - -
Planned quantity Car/3m 300 360 + 60 Good
Total Actual quantity Car/3m 240 270 + 30 Good
Rejected quantity (rework) Car/3m 9 12 - -
% 3.8% 4.4% + 0.6% Bad
Performance= Actual / Planned % 80% 75% - 5.0% Bad

2) Productivity Indicators: Unit First Q. Second Q. Variance Evaluation

Labor Productivity Man-hr/car 33.33 25.00 - 8.33 Good
Ass. Line Productivity Hour/car 2.50 2.78 + 0.28 Bad

3) Cost Indicators: Unit First Q. Second Q. Variance Evaluation

Internal Resource cost LE/Car 6000 5470 - 530 Good
External Resource cost LE/Car 1500 1622 +122 Bad
Unit Cost LE/Car 7500 7092 - 408 Good
Assembly Price LE/Car 7000 7500 + 500 Good
Profit (+) / Losses (-) LE/Car - 500 + 408 + 908 Good
%

PM Cost Management For Engineers 157

Middle Level:
Scope of Work: Product: Car Manufacturing Process : XXX Car Assembly
1) Capacity Indicators: Unit First Quarter Second Quarter Variance Evaluation
(Q2 –Q1) (Q2 to Q1)
Performance = Actual / Planned % 80.0% 75.0% - 5.0% Bad
Quality Rate =(Total-Rej.)/Total % 96.3% 95.6% - 0.7% Bad
Efficiency =Actual / Effective % 57.1% 64.3% + 7.2% Good
Load = Planned / Effective % 71.4% 85.7% + 14.3% Good
Utilization = Actual / Design % 53.3% 60.0% + 6.7% Good
Effectiveness= Effective / Design % 93.3% 93.3% 0.0% Normal
Overall Performance (Average) % 75.23% 78.98% + 3.75% Good

2) Productivity Indicators: Unit First Q. Second Q. Variance Evaluation

Labor Productivity Man-hr/car 33.33 25.00 - 8.33 Good
Ass. Line Productivity Hour/car 2.50 2.78 + 0.28 Bad

3) Cost Indicators: Unit First Q. Second Q. Variance Evaluation

Internal Resource cost LE/Car 6000 5470 - 530 Good
External Resource cost LE/Car 1500 1622 +122 Bad
Unit Cost LE/Car 7500 7092 - 408 Good
Assembly Price LE/Car 7000 7500 + 500 Good
Profit (+) / Losses (-) LE/Car - 500 + 408 + 908 Good
% - 6.7 % + 5.8% +12.4 %
Value Added = Price – ER LE/Car 5878 5000 - 878 Bad

PM Cost Management For Engineers 158

3) Top Level  KPI report “One Page Management”
1) Subject Description:
Scope of Work: Product: Car Manufacturing Process : XXX Car Assembly
Global Trend: Second Quarter  First Quarter
2) Analysis: Overall Performance = + 3.75% & Profit = + 408 LE/car
Strength 1- Efficiency =Actual / Effective 7.20 %
points 2- Labor Productivity = Man-hr/car 8.33 %
3- Profit = Price – TC 12.40 %
Weakness 1- Performance = Actual / Planned 5.0 %
points 2- Ass. Line Productivity 0.28 Hour/car
3- Value Added = Price – ER 878 LE/car
Area of 1- Worker training & motivating to improve the performance ratio
Concern 2- Line balancing to improve the line productivity
3- Value engineering to improve the value added
4-
5-
3) Recommendation:
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PM Cost Management For Engineers 159

Case:
Scope of Work: Excavation Process
BOQ= 150,000 m3 Duration 2 month
1) Capacity Information:
Item Unit 2009 - Month
January February
Design capacity / Equipment M3/hr 40 40
Effectiveness= Effective / Design % 85 85
Planned Month working days Day 26 24
Planned Daily working hours hr/day 10 10
Total Actual quantity M3 80,000 70,000
Rejected quantity (rework) M3 2,000 1,500
2) Critical Resource Information:
Item Unit 2009 - Month
January February
Technical Labor Man 24 26
Equipment Equipment 12 10
3) Actual Assembly Cost Information:
Item Unit 2009 - Month
January February
Total Internal Resource cost LE 800,000 700,000
Total External Resource cost LE 500,000 450,000
Unit Price LE/M3 20 20

Based on this information; discuss the performance evaluation for each managerial level:
1) Operational level 2) Middle level 3) Top level (KPI report)

PM Cost Management For Engineers 160