Chapter One: Fundamental Principles of Cost Engineering

1.1 Introduction
Before taking up any construction work for its execution, the owner or builder should have a
thorough knowledge about the volume of work that can be completed within the limits of his
fund or the probable cost that may be required to complete the contemplated work. It is therefore
necessary to prepare the probable cost or estimate for the intended work from its design plan and
specifications. Otherwise it may so happen that the work has to be stopped before its completion
due to shortage of funds and or materials.
What is Cost engineering?
 According to the Association for Advancement of Cost Engineering (AACE), cost
engineering is defined as that area of engineering practice where engineering judgment
and experience are utilized in the application of scientific principles and techniques to the
problem of cost estimation, cost control and profitability.
 The discipline of ‘cost engineering’ can be considered to encompass a wide range of cost
related aspects of engineering and program management, but in particular cost
estimating, cost analysis/cost assessment, design-to-cost, schedule analysis/planning and
risk assessment.
 In most instances, the output of a cost engineering exercise is not an end in itself but
rather an input to a decision-making process.
Importance of cost engineering
 Cost will be a constant source of concern, but will be particularly to the forefront
 when considering different technical options,
 in conducting cost/technical trade-offs,
 in establishing budgets,
 in the submission and evaluation of price proposals,
 in preparing for contract negotiations, and
 in assessing the cost impact of introducing changes to existing designs.
 Awareness of the related cost is a key factor in the choice of approaches and design
solutions, but traditionally the roles of establishing design solutions and of assessing the
related costs have been separated both in time and responsibility.

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  The alternative offered by cost engineering is to have cost information available when
design choices are being made, so that they will be made in the knowledge of
approximately what the different potential solutions are likely to cost. This awareness of
the likely cost is essential to be able to make effective cost/benefit trade-offs.
 In other circumstances where cost is a critical factor, such awareness of costs can be
applied in a design-to-cost approach whereby the cost influence directly drives the choice
of solution.
 Cost engineering therefore embraces many facets of project management and
engineering.
There are many costs associated with construction projects. Some are not directly associated with
the construction itself but are important to quantify because they can be a significant factor in
whether or not the project goes forward and feasible. These include the initial capital cost and the
subsequent operation and maintenance costs.
Each of these major cost categories consists of a number of cost components:
 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
The operation and maintenance cost in subsequent years over the project life cycle includes the
following expenses:
 Land rent, if applicable
 Operating staff
 Labor and material for maintenance and repairs
 Periodic renovations
 Insurance and taxes

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  Financing costs
 Utilities
 Owner's other expenses
It is important for design professionals and construction managers to realize that while the
construction cost may be the single largest component of the capital cost, other cost components
are not insignificant. Early on, the owner wants to understand the nature of these costs as well as
have some indication of what the construction itself will cost in order to analyze the life cycle
costs and determine the worthy fullness of the investment.
The Cost-Benefit Analysis can serve as a decision-making tool to address all the costs and the
corresponding associated benefits worth to the owner.
Cost Engineering is a dynamic process that begins in the very early stages of a project and ends
when the project is turned over to the owner. As a project moves along time, the amount of
information generated increases. The information improves an estimate’s accuracy but also costs
more to develop and takes more time. Cost estimating is critical in the development of the
project because it informs the owner of costs, which in turn guide design decisions.
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.
A good data base of actual costs from past project experiences facilitates the preparation of a
quick and accurate cost estimate. Cost Engineers spent considerable time and resources
developing and protecting this data base. Each new project provides a clearer picture of the
actual cost of construction and adds to the value of the data. Larger design and construction
companies maintain their own data bases. Smaller companies may rely on the data developed
from independent cost consultants and cost data suppliers.

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1.2 Definitions and Terminology for Cost Engineers
Prior to the disposition of the overall concept of costing, it would be to the interest of Cost
Engineers to define the following terminology for an ease reference and common understanding
as they are used in the Construction Industry.
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: Costs of goods/equipment/ or plant distributed for the whole
useful life to compensate its deterioration to the work.
Although a nonlinear relationship exists, a linear or a straight-line method is often preferred.

Residual Value: refers to current value of goods determined by reducing the depletion cost from
the original value.
• Interest Value/Rate: Value of goods foregone by not using resources at their best
allocation.
- E.g. Opportunity Cost. An interest rate is accounted for cash deposited in any
bank being a compensation granted for not using the money at its best allocation.
(e.g. Investment)
• 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.

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 • 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.
• Direct Costs: 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.
o Secretarial services,
o Transportation facilities,
o Administrative works,
o Utility provisions: energy, water, communication, sanitation

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 Costs: the sum added to an estimate in respect of the general overhead costs
including profit and risk.

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

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1.3 Cost Engineering Traits
Cost Engineering shares common traits of the following:
Conflicting Issues of quality, size, performance and cost: As projects develop, there is
continual competition among issues of quality, size, performance and cost. Owners want to have
the biggest facility with the best finishes and systems that will perform over time with least
possible amount of money. With these criteria, it is likely that conflicts are bound to arise.

The design and construction team use estimates to ensure that good cost information
developed and a feedback loop established so that these conflicts can be addressed as
quickly as possible. As project information becomes available, it is passed through a
costing exercise. The owner can then decide to proceed based on this information or
ask for some alteration in the design. The designer can then devise ways to meet the
cost targets. Through this feedback loop, conflicting demands of cost versus
performance can be resolved.
Cost Engineering combines both science and art: Cost estimates are a product of
information supplied by the designer, the owner and the suppliers. Experienced Cost Engineers
use much judgment in interpreting and configuring this information.

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 Cost Engineering does not offer guarantees of costs: Used properly, however, can be
important tool in bringing a project under or at budget. The costs developed during design and
even at the bidding stage are almost never the final and complete costs of the project.
Costing can only be as accurate as the information upon which it is based: Cost
accuracy depends on many factors. Document completeness, data base accuracy, the skill and
judgment of the Cost Engineer.
Cost estimate accuracy increases as the design becomes more precisely defined: A
normal feature of the design process is that earlier stages of design are less precise than later
stages. Cost information provided at schematic and preliminary design will by nature be less
accurate than the ones provided at design developments.

Cost estimate is based on previous estimates: A good, accurate estimate does not stand
alone. It is the product of lessons learned from previous estimates.
Costing requires standard computing methodology and procedures: As the design
proceeds, the level of details increases. Costing as a consequence becomes more complex
reflecting the many different factors that go into each unit of work. Calculations increase in
number and the potential to leave something out becomes greater. Only through adherence to
strict methods and procedures that mistakes can be minimized.
1.4 The Function of Cost Engineering in Construction
 From an owner’s perspective, ascertain the necessary amount required to complete the
proposed work for his decision and arranging finance for the same. For public

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 construction works, cost estimates are required to obtain administrative approval,
allotment of fund and technical sanction.
 It can guide the decision among two or three possible options. Identifying costs early
facilitates sound decision making, but such estimates will have little hard design
information.
 Cost Engineering offers guidelines to the designer, who selects materials and sizes the
project to fall within the owner’s budget. As the project proceeds, the design must be
continually compared to this budget. If it begins to exceed the budget, the designer must
determine the best alternatives for cost reduction.
 At the end of the design process, estimates are prepared to figure the bid prices of
individual contractors under the competitive bidding.
 Cost estimates form the base core for negotiation between the signing parties in a contract
agreement. The project management team often prepares a detailed estimate at this point
to verify the accuracy of the bid prices and to negotiate with the trade contractors.
 Cost engineering can be used by the project manager to define the scope of the work for
each subcontractor as well as determine fair pricing. Because each estimate is broken
down by units of work, the project manager can extract information regarding quantity
and cost for the particular situation. Cost Engineering can also be used as a planning tool.
Procurement specialists use to define how much of a given item will need to be
purchased. In the field, superintendents consult the estimate to determine the total
quantity of work to be built in a particular location, the total number of hours needed to
do the work, and the materials required.
 Cost Engineering can also help to fix up completion period from the volume of works
involved in the estimate.
 Cost Engineering helps to justify investments from cost-benefit analysis.
 Estimate is required to invite tenders and prepare bills for payment.
 Cost Engineering helps for valuation of existing property which itself is for a number of
purposes.

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1.5 Considerations in Costing
Project price is affected by the size of the project, the quality of the project, the location,
construction time, and other general market conditions. The accuracy of costing is directly
affected by the ability of the Cost Engineer to properly analyze these basic issues.

Project Size:

The size of the project is a factor of the owner’s needs. At the conceptual stage, size is an issue
of basic capacity, such as apartment units for a real estate developer or kilometers of roadway for
highway engineering. As the project becomes better defined, its size begins to be quantified more
accurately.
The principle of economy of scale is an important factor when addressing project size.
Essentially as projects get bigger, they get more expensive but at a less rapid rate. This occurs
because the larger the project, the more efficiently people and equipment can be used. Also, a
people repeat task, they get better and faster, reducing the cost of labor. On large commercial
building and heavy engineering projects, worker productivity is plotted into learning curves. Cost
Engineers treat project size by establishing tables that recognize the typical size of a project and
a respective price and then adjust up or down from this norm.

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As operations continue, crews learn so that the time required to complete the next like unit is
less.
In general, for buildings built to the same specification in the same locality, the larger building
will have the lower unit area cost. This is mainly to the decreasing contribution of the exterior
walls plus the economy of scale usually achievable in larger buildings. As an example, the area
conversion scale shown below will give a factor to convert costs for the typical size building to
an adjusted cost for the particular project.

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