C421

LU 5
Week 6

Project Cost &

Value Management
 Project cost management
❖ A project consists of a number of activities. Each of
these activities consumes resources. Resources cost
money. We can take certain steps through which we
can control the costs of these activities.

❖ Project cost management is all about controlling

cost of the resources needed to complete project
activities. Apart from these controllable costs, there
are certain aspects over which we do not have any
control.
Project cost management
Resources Planning Schedules
❖ The objective here is to prepare different resources
schedule such as labor and staff schedule, material
schedule, plant and equipment schedule, and
subcontractor or specialist’s schedule.

❖ As will be discussed later, these schedules show the

quantity requirement of each of these resources either
on a weekly basis or on a monthly basis. The basis for
preparing these schedules is the project time schedule.
 Cost Planning
Once the resource requirement is obtained, the estimate to complete each of
these can be prepared based on the unit cost of the resources and the total
units of the resources required. This process is called cost planning and it is a
must for project cost management.

Cost planning aims at ascertaining cost before many of the decisions are
made related to the design of a facility. It provides a statement of the main
issues, identifies the various courses of action, determines the cost
implications of each course, and provides a comprehensive economic picture
of the project.
 Cost Budgeting
Cost budgeting is the process of allocating the overall cost
estimate to individual work items of the project. Work items are
groups of similar activities taken from bill of quantities.
Collection of Cost related
information
The cost of an item or an activity is
collected essentially under the following
broad heads:

❖ Labour costs, which include

departmental labour and subcontract
labour
❖ Material cost
❖ Plant and equipment cost
❖ Subcontractor cost
❖ Consumables cost
❖ Overhead cost
 Labour Costs
❖ As mentioned earlier, in a project there can be two types of labour—one
that is directly employed by the main contractor and the other employed
by the subcontractor of the main contractor. While the former is referred
to as departmental labour, the latter is called subcontractor labour.
❖ While the source document for collection of departmental labour cost is
the daily labour attendance and allocation form, the source data for
knowing the subcontract labour cost is the subcontract bill.
❖ In addition, there is a certain component of miscellaneous labour that
cannot be associated with any activity cost codes; they are termed as
miscellaneous labour and find their place in overhead cost.
 Material Costs
Materials used at construction project sites are basically of two types:
Client’s supply: This is issued by the client for the execution of project.
The owners may issue it on free-issue basis or on chargeable basis.
Own purchase: The materials that a construction company purchases

- Bulk/Basic Materials
- Heavy Tools
- Scaffolding/Staging Materials
- Temporary Structures/ Installation
- Small tools
 Plant and Equipment Cost

❖ The components of plant and equipment cost include hire charges,

labour, fuel and oil, spares, running and maintenance cost, one-time
installation and erection cost, and dismantling cost.

❖ While some of the plants and equipment can be owned by the company
directly, other plants may be rented from agencies. Even when some
plants are owned by the company, they have a practice of debiting hire
charges as if these were taken from outside agencies.
 Subcontractor cost
❖ The source document for calculating subcontractor cost on a project is
work order issued to the subcontractor by the main contractor and the
periodic measurement bills. Relevant cost codes should be mentioned
against each item of work in a subcontractor bill.

❖ The subcontractor labour cost is recorded from relevant cost codes for
which the particular subcontractor is engaged, through the subcontractor
bill for the month. One can also mention the cost code for
the subcontractor labour in the work order or the measurement sheet.
 Overhead cost
❖ The overhead cost can be directly taken from the ledgers and grouped under
fewer cost codes, averting costing of individual vouchers at sites. Once the
basic elements of cost are collected for the period, some of the costs can be
reallocated to work items and overheads, if necessary.
❖ Also, the general overheads need to be allocated to all projects being
undertaken by the company in proportion to the contract value of the project.
The expenses related to staff that can be directly identified to ‘specific
projects’ shall be taken to the respective jobs.
❖ The common staff expenses and other administration expenses are allocated
to all the projects being undertaken by the contracting organization in
proportion to the invoicing of each of the projects.
 Cost codes
❖ These codes are designed based on the nature of the activity for which a
particular cost is incurred. Cost codes are allocated by the planning
department depending on the nature of activity at site. The cost codes
should be such that these are easily compatible with the bill of quantity.
The number of cost codes should be neither too large nor too small.

❖ The basic point is that all the expenses incurred in and for the project
should be recorded in one of the cost codes, no matter how small or how
large the number of cost codes for a project.
 Steps in the application of
value engineering
❖ Identification of structure with very high-cost implication in a project
❖ Identification of elements in a structure having high-cost implications
❖ Functional analysis of ‘why’ and ‘how’ for the element under consideration
❖ Alternative idea generation to satisfy the intended function
❖ Evaluation of alternatives/ideas. Listing of advantages/disadvantages
❖ Screening of alternatives based on rank. Rank assigned on subjective basis
❖ Perform second-stage analysis for alternatives retained
❖ Identify and evaluate performance criteria based on questionnaire survey
❖ Obtaining experts feedback on pair-wise comparison of performance criteria
❖ Generation of relative weights of performance criteria based on pair-wise criteria
❖ Calculation of total cumulative scores of alternative
❖ Selection of the best alternative
 Cost statement
Costing is a method of collecting expenses at the job site under various heads of
accounts called cost codes. The cost codes are to be finalized at the beginning of
the job and communicated to all section heads at the job site and all staff who are
empowered to authorize the indents.

In preparing the cost statement, the following system has to be adopted:

1. Allot cost codes: This has already been discussed
2. Collect (a) labour costs, (b) subcontractor costs, (c) materials cost, (d) consumables, (e)
plant costs, and (f) overheads cost. The method of collecting the costs and the
documents through which these are collected have already been explained
3. Determine provision for expenses
4. Determine deferred expenses
5. Compile above costs in the given formats, finalize total costs code-wise, and arrive at
project costs
Cost statement of plant and
equipment for a given month

Integrated cost
statement

Cost statement—without
plant cost allocation
 Value management in construction
❖ It is a systematic approach for obtaining value for the money spent. VE is one
of the most effective techniques known to identify and eliminate unnecessary
costs in product design, testing, manufacturing, construction, operations, and
maintenance. VE involves answering the question—‘What else will
accomplish the function of a system, process, product, or component at a
reduced cost?’ (Dell’Isola 1982)

❖ In value engineering, ‘function’ is that which makes the product work or

sell, and accordingly, we have ‘work’ functions and ‘sell’ functions. The basic
function is the primary function of a product or a service, while the
secondary functions are not directly accomplishing the primary purpose but
play a supporting role and provide additional benefits.
❖ Some other related terms used in value engineering are worth, cost and value. Worth refers
to the least cost required to provide the functions that are required by the user of the
finished project. Worth is established by comparison, such as comparing it with the cost of
its functional equivalent.
❖ Cost is the total amount of money required to obtain and use the functions that have been
specified. Value is the relationship of worth to cost as realized by the owner, based on his
needs and resources in any given situation. The ratio of worth to cost is the principal
measure of value.

❖ Thus, the value may be increased by—(1) improving the utility with no change in cost, (2)
retaining the same utility for less cost, and (3) combining improved utility with less cost. The
situation in which worth and cost are equal represents ‘fairness of deal’, while the situation
in which the worth of a project is more than the cost paid represents a situation of ‘good
bargain’. The situation in which worth is less than the cost paid for a project represents
‘poor value’. An optimum value is obtained when all utility criteria are met at the lowest
overall cost.
Q and A
To Do After This
Session:

Group Activity 5

Lu 5 Revision Questions

Lu Prescribed Reading