DILLA UNIVERSITY

_____________________________________

Department: Construction Technology and Management

COURSE: COST ENGINEERING

 Course Objective
• Study the importance of cost engineering
•Understand the basic nature of costs incurred in
construction Projects
• Learn the cost estimating techniques and study
their importance in construction life cycle
• Identify the risk involved (in terms of cost) in
contract forms and make proper arrangements
• Execute detailed cost calculation
• Economic analysis of projects
• Be able to analyze the Life Cycle Costs (LCC)
 Importance of Cost engineering and cost
management

• Construction projects have poor track record for meeting

budget goals
• All construction sector development projects finished at a
cost higher than that estimated
• The cost of handling claims and in some cases the
arbitration process due to either the under estimated works
or unrealistic scope of work, is enormous
• Cost engineers lack of projecting project cost based on
sound principles and workable practices.
 Cost Engineering
“Accurately forecasting the cost of future projects is vital to
the survival of any business.“

Cost engineering is concerned with problems of፡

 Cost Estimation
 cost control,
 business planning and
 management science, planning, scheduling, and profitability analysis
 Cost Engineering (Cont’d)

It needs understanding of
 Construction Technology
 Management Theory and technique: precontract
planning, tendering policy and the organization of
resources
 Quantity surveying including an understanding of
contract documentation and forms of contract
 Construction economics
 Cost Estimation

• Cost estimating is the process of analysing a specific

work and predicting the cost of performing it.

• Cost estimates are performed at a certain point in

time, based on information available at the time with
given resources and time constraints.
 Construction Project Life Cycle
Cost estimating techniques and accuracy vary along life cycle

Conceptual/ Design/ Execution/

Definition/ Development Implementation Closing
Feasibility
Cost date/information

Process of the project

Objective is to hit the
target or at least get
close to it.
Subjective
 Estimates are based on:

•Previously recorded data (historical data)

•The estimators own past experience.
•Previous experience of others.
•Hunches (Perception).
Historical date Subjective hunches

Variance

Information provided
Estimating experience
by others
 costs associated with construction projects
a) Initial Capital Cost
• 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
 b) Subsequent Operation and Maintenance Costs

 Land rent if applicable

 Operating Staff
 Labor and Material for Maintenance and repairs
 Periodic renovations
 Insurance and Taxes
 Financing costs
 Utility
 Owner’s other expenses
Building Costs, Non Building Costs, & Life cycle costs
 Definition and Terminologies to
Cost Engineers
• Construction Cost
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
Average Original Value
100%
Depreciation Value

Full Depreciation
Residual Value

Residual Value

Useful Life “n” years

 Con’t…..

• Interest Value/ Cost of capital

Value of goods foregone by not using resources at their best allocation.
Opportunity cost
• All-in Material Rate
A rate which includes the cost of material delivered to site, waste,
unloading, 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

General Overhead Costs

• Overhead Costs
Site Overhead Costs

• 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 Categories

i. Fixed Cost,
Do not vary with respect to output (over the period
being considered)
ii. Variable Cost,
Vary with respect to output
b b
i i
r r
r r
VC

FC

0
Output/ Output/
volume volume
Total Cost = Fixed Cost +Variable Cost
b
i
r
r TC=FC+VC

FC

Output

Fixed cost is a short-run concept. All costs are

variable in the long run.
 Cost Engineering Traits

1. Conflicting Issues of quality, size, performance and cost

2. Cost Engineering combines both science and art

3. Costing can only be as accurate as the information

upon which it is based

4. Cost estimate accuracy increases as the design becomes

more precisely defined

5. Cost estimate is based on previous estimates

 Cost Engineering Traits (cont’d)

Inputs
•Scope Definition
•Time to Prepare
•Quality of Cost
Costing
Data Accuracy
•Cost Engineers
Skill
 The Function of Cost Engineering in
Construction

1. Arranging finance, administrative approval and fund

allotment
2. Guide decision making among alternatives
3. Provides guidelines to the designer (on material, size)
4. Prepare engineering estimate
5. Negotiation tool between contracting parties
6. Help in fixing completion periods
7. To justify investment : Cost benefit analysis
8. To invite tenders and prepare bills for payment
9. For Valuation purposes
 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.
i. Project Size
As projects get bigger, they get more expensive but at
a less rapid rate
Economy of scale

0 Output
 Sources of Economy of Scale:

•Exploiting (spreading) unavoidably fixed costs

•Taking advantage of the division of labor
(specialization)
•Taking advantage of the specialization of
equipment
•Inventories
•Purchasing: Lower prices for inputs
ii. Quality
As the quality specifications increase the costs of
projects also get higher.

iii. Location
Various location difficulties described are:
1. Remoteness
2. Confined sites
3. Labor availability
4. Weather
5. Design considerations (related to location).
6. Destruction and site security
iv. Construction Time
The longer the construction, the higher uncertainty in
the estimates.

v. Other Reasons
• Market conditions (work load)
• Complexity of projects
• Emerging or new markets
 Summary of reasons for Variability of Estimates

1. Quantity take off. 12. Cost associated with the

2. Material Costs. time element of the construction
3. Labor Costs. project and escalation
4. Labor productivity costs.
forecasts. 13. Overheads.
5. Work Methods. 14. Profit element.
6. Equipment costs. 15. Contingency and risk
7. Indirect Job costs. allocation.
8. Subcontractor quotations. 16. Errors in estimate
9. Material suppliers formulation.
quotations 18. Basis of information used to
10. Unknown site conditions. formulate estimate.
11. Location Factors. 19. Market forces.
 Chapter 2

Construction Pricing and

Contracting
 Chapter Summary

• Discuss how pricing policy is adopted by managers and discuss the

major issues considered to adopt a certain pricing policy

• Identify the pricing arrangements in contracts and discuss what bidding

strategy can be adopted by a firm from a project to maximize wealth.

• For a strategy to be adopted one needs to know the tendering

procedures and the associated issues.

• Determining a firm’s mark-up target

• Identify the clauses in contracts for risk allocation and their effect on
pricing

• Discuss the major construction contracts and their risk structure to the
contracting parties
 2.1 Tendering Policy and Procedure
Introduction

Factors that need to be considered in construction pricing

• Work at hand,
• The geographical areas in which the firm will operate,
• Type of client the organization is to favor, ( private, local authority,
community services, )
• Projected risks and uncertainties of the project,
• Form of the bid: (open, short-listed, pre-qualification, etc)
 Bidding Strategy

 evolved for determining the optimum bid, which will be the relationship
between maximum profit and the probability of being the lowest tenderer.

Bid Qualification
Procedure
Bidding Form

Competitive Bid Negotiated Bid

Short listed Open Bid

One Stage Two Stage

Procedure Procedure

Pre-Qualification Post
Qualification
 2.1.1 Tendering Procedure
Procedure for tendering:

i) Decision to Tender

• Production workload,
• Future commitments,
• Market,
• Capital,
• Associated risk,
• Prestige, reputation
• Estimating workload,
• Time for preparation of tender,
 Tendering Procedure(Cont’d)

ii) Collection of Information

Some of the factors required include:
• Examination of contract documents, with preliminaries
attached with the tender,
• Enquiries to suppliers and sub-contractors with a time
scale,
• Site and locality visit,
• Discussion with site management, plant and planning
department,
• Evaluation of alternatives
• Preparation of detailed construction method statement
and pre-tender programme, developed to include
production outputs, gang sizes, plant details, etc.
 Tendering Procedure(Cont’d)
iii) Preparation of Estimate

Having assembled all the information, the next task of the

estimating staff is to build the cost of the unit rates.
 This requires the calculation of all-in rates for labor, plant,
materials and extending these, using the production details
from the pre-tender programme.
The cost of any on site administration and services, known
as project overheads is also calculated. These net
production costs, together with a project appraisal report
are then submitted to management for adjudication.
 Tendering Procedure (Cont’d)

iv) The Tender

The management of the firm would consider the
mark-up required on the estimated production
costs, to cover the firm’s overheads, profit and risk of the
tender. These additional costs included, the tender figure
can then be determined and submitted.
v) Action with Tender Results
 2.1.2 Firm’s Mark-Up

-To determine firm’s mark-up target, it is required establish:

i) Return on Capital Employed (ROCE), which is made to account the
following costs:
 The average weighted cost of capital ( Interest of capital employed)
 Profit margin (dividends, capital reserves...)
 Corporate obligations such as taxations and deprecation costs.
 Contingencies to cover uncertainties ( Risks)
ii) Annual Turnover on contracts. This can be obtained from the firm’s
short-term plan committed or planned for execution in the current
year.
iii) General overhead costs (off-site administration)
 General overheads

Costs entailed in administering the company and

providing off-site administration
The general overheads vary with individual firms, but a
broad list may include:
• Rent, rates on office ,
• Fees, salaries and wages for directors and office staff,
• Office equipment, stationary, postage, telephones, cars
• Office heating and lighting
• Insurances on office and staff
• Interest on capital borrowed
 Express these Costs as a percentage of
previous year’s turnover
 Example

Assumptions
Capital Employed: Birr 2,000,000
Turnover on contracts for year: Birr 4,000,000
General overheads: Birr 160,000
Return on Capital Employed 17%
Target: Contracts must contribute (Head office Mark-up)
General overheads Birr 160,000
Return ( ROCE) 17% ( 2,000,000 ) Birr 340,000
Head office Mark-up = Birr 500,000

Production Costs = 4,000,000 – 500,000 = Birr 3,500,000

Mark-up on contracts = (500,000 / 3,500,000) x 100 = 14.3%
 2.3 Types of Construction Contracts

In addition to serving as a means of pricing construction,

contracts also structure the allocation of risk to various
parties involved:
1. Lump Sum Contract
All risk assigned to the contractor
2. Unit Price Contract
The risk of inaccurate estimation of uncertain quantities for
some key tasks has been removed from the contractor
 Example

Description Estimate Unit prices (Birr) Tender Amount ( Birr)

Quantity Contr. A Contr. B Contr. A Contr. B
Masonry Works 50 m3 250 400 12,500 20,000
Re. Bars 5000 kg 8 6 40,000 30,000
52,500 50,000

Description Actual Unit prices (Birr) Actual Amount ( Birr)

Quantity Contr. A Contr. B Contr. A Contr. B
Masonry Works 200 m3 250 400 50,000 80,000
Re. Bars 5100 kg 8 6 40,800 30,600
90,800 110,600
3. Cost + Contracts
 Cost Plus Fixed Percentage Contract
Purpose: for new approach/technology yet to be analyzed
 The owner takes all the risks of cost overruns
 Cost Plus fixed fee contract
 Cost plus variable percentage contract
4. Target Estimate Contract
Actual costs measured against target estimates of the
contractor.

5. Guaranteed Maximum Cost Contract

Suitable for turnkey operations
 2.2 Contract Provisions for Risk
Allocation

All Pricing arrangements have some common

features in the form of the legal documents binding
the owner and the supplier (s) of the facility.
Common types of Pricing arrangements are:
1) Competitive Bidding 2) Negotiated Contracts
• Final bid submitted • Reimbursement is direct
on lump sum or project cost plus the
unit price basis contractor’s fee
All forms of construction pricing arrangements
pose differed level of risk to the parties in the
contract. Hence, it is important to identify the
provisions for risk in contracts
 Partial list of responsibilities assigned to different
parties in a contract(DBB)

 Force majure : "Acts of God" and other external

events such as war, etc
 Differing site conditions,
 Delays and extensions of time,
 Liquidated damages,
 Occupational safety and health of workers,
 Termination for default by contractor,
 Suspension of work,
 Price variation adjustments,
 Etc.
 Risks and Incentives on Construction Quality

Most claims and disputes arise most frequently from

lump sum and unit price contracts for both public and
private owners, the following factors associated with
lump sum contracts are particularly noteworthy:
 Unbalanced bids
 Change orders subject to negotiated payments
 Changes in design or construction technology
 Incentives for early completion
 Reading Assignment

Cost Control on PPA GCC

 Change in Bill of Quantity  Read and summarize
PPA provisions for
 Variations risk allocation,
 payment for variations focusing on Cost
 Cash Flow forecasts Control clauses
 Payment Certificates  Section 7(GCC-Part D
 Payments Clause 37-54)
 Compensation Events etc

You can find PPA General Conditions of

Contract
47
 Quiz

Who is Risk Taker Unit Price Contract

Provision (DBB)

1. Occupational safety and health of workers

2. Delays and extensions of time,
3. Force majure : "Acts of God"
CHAPTER THREE

Cost Estimating
Approach
 Contents
• Factors Affecting Quality and Accuracy of Estimation

• Types of Estimation

• Methods of Estimation

• Data needed for Parametric Cost Estimation

• Adjustments needed to parametric Data

• Factors Affecting Building Costs

• Common Errors in Estimating

• UNIT RATE (Calculation….)

Quality and accuracy of cost estimate depends on:
• Time Available
• Information Available
• Techniques Employed/working methodology
• Expertise and Experience of the Estimator
• Design accuracy
• National Currency situation
• Unexpected pandemic like covid-19 and war
• Ambition of client
• Etc.
 Types and methods of Estimates

I. Types of Estimates
A) Approximate Estimate
 Preliminary Estimates:
 In the early planning phases
 To match an owner's needs
 To establish scope (size) & quality expectations.
 A contingency included 15%.

 Intermediate Estimates
The primary purpose of the intermediate estimate is to determine project
feasibility from the concept of the general project by Evaluating with
alternative construction assemblies and systems.
B) Detailed Estimate
- Final Estimates
 After design is completed
 contingency would be reduced to zero
 Methods of Estimating

• Project Comparison or Parametric Cost Estimating - comparing one

project to another similar unit based on unit rates per activity.
• Area & Volume Estimating - calculate the volume of common bodies.
• Assembly & System Estimating - breaks down a project into its major
components like roofs, walls, electrical system.
• Unit Price & Schedule Estimating - focused on identifying a cost for the
materials, equipment, and labor for each of the components within a
building.
 Relative Accuracy of Estimate Methods

Relative Accuracy

Time Spent Preparing Estimate

 Level of Information along a Project life-cycle

Concept Design Implement Comm Operation

Concept
Design
Implement
Commission Operation phase
 Estimating Methods (Cont’d)

1. Project Comparison Estimating or Parametric Cost Estimating

Used in early planning stages
Little information is known about the program
Overall project parameters are only known
 Estimating Methods (Cont’d)

2. Square Foot & Cubic Foot Estimates

Used for developing both preliminary and intermediate budgets
based on historical data
Needs measurement and calculation of floor areas and volumes
of the proposed spaces

3. Assembly & Systems Estimates

Assemblies or systems group the work of several trades or
disciplines and/or work items into a single unit for estimating
purposes
Intermediate level estimates performed when design drawings
are between 50% and 75% complete
 Estimating Methods (Cont’d)

4. Unit Price and Schedule Estimating

The work is divided into the smallest possible work increments, and a
"unit price" is established for each piece
Detailed estimates performed when design drawings are complete
Most accurate means of projecting construction costs
 Purpose of approximate estimate:

 To investigate feasibility:

 To save time and money:

 To investigate benefit and comparison of cost with utility:

 Adjustment of Planning:

 To obtain administrative approval:

 For insurance and tax schedule:

 Estimating Methods (Cont’d)

Data needed for Parametric Cost Estimation

1. Historical/past project data set

 Gross area
 Number of Floors
 Volume
 Assignable gross area
 Surface area to volume ratio
 Exterior Finishing
 Interior finishing
2. Cost Indexes
Over time and space
 Location index
 Price and labor indices
 Estimating Methods (Cont’d)

Adjustments to Historical Data

•More accurate estimates made with this method make adjustments and
additions for:-

1. Inflation
To account for changes in value for money;
 Historical escalation index;
 Predictive Escalation index;
2. Price Indices
- regional cost indices,
- local labor market rates, and
- interpolation between available cost tables.
 Estimating Methods (Cont’d)

Factors Affecting Building Costs

 Construction Factors
 Construction method and productivity
 Design Factors
1. Building function
2. Structural system
3. Height of building
4. Complexity of foundation work
5. Exterior finishing
6. Quality of interior decorating
7. Accessibility to the site
 • Common Errors in Estimating

1. Procedural errors
1) accuracy in pricing; 2) cost involved in pricing; 3) time
required for pricing; 4) availability of methods of pricing; and 5)
availability of price data
2. Human errors
 changes in design and incomplete information;
 accidental errors caused by procedural mistakes, e.g. omitting
items, using wrong dimensions;
 judgmental errors caused by poor or wrong judgment on the
part of the estimator, e.g. overlooking, poor pricing, and not
allowing wastage
3. Uncertain nature of the project
 UNIT RATE
Labor costs include
-Standard wages
-Extra pay
-Supplementary pay
-Social Service payments
-Supplements
-Other payments

Material costs
- Construction/Building material Equipment costs:
- Operating supplies Standing Costs:
- Loading, unloading and transportation costs Operating Costs:
- Wastages
 Indirect Costs
 Site over head costs

 General overhead costs

 Risks and profit

Site overhead cost

Time-independent costs Time-dependent costs
–Costs for site plant/ site installations – Commissioning /holding costs
–Cost for site facilities – Operating costs
– Engineering and controlling – Costs for contractor’s agent
–Operation risks

–Special costs
 Indirect Costs
General overhead costs
It is a contractor or Subcontractor's office expenses known as:

 office rent or lease expense

 office supplies

 Utilities

 Insurance

 Communication

 office equipment

 Furniture and taxes.

 Indirect Costs
Contingency risk and profit
• Risk is a contingency plan executed when the risk presented. The purpose
of the plan is to lessen the damage of the risk when it occurs. Without the
plan in place, the full impact of the risk could greatly affect the project. The
contingency plan is the last line of defense against the risk. It is good up to
5%.

• Profit is the amount of money left over after subtracting overhead, labor,
and materials costs from a contract price. It is good 10% of contractors
profit from total bid sum.
 TOTAL COST OR BID SUM

• Direct cost + Indirect cost = bid sum

• Direct cost + Site overhead Cost = Production cost

• Production cost +General overhead cost = Self-costs

• Self- costs + Risk& profit = Bid sum

• Bid sum + Vat = Bid sum inclusive vat.

 UNIT RATE

Calculation…….

 Material cost = it consumes around 60% of the total bid sum.

 Labour cost = it consumes around 20% of the total bid sum.
 Tools and equipment = consumes around 10% of the total bid sum.
 Class activity
1. Ato Mesfin has a G+6 building which is being under construction in dilla
city and he wants to purches concrete materials from the sales agent.
Cement from Ethio cement factory at holeta ethiopia 400km from the
construction site, sand from zeway ethiopia 250km from the site also
coarse aggregate and water from dilla city 300m from construction site.
The original cost of cement 2500birr/quintal with transportation and 10
birr charge for loading and unloading, 24000 birr for one truck(14m3) of
sand and 29000 birr for one truck (16m3) coarse aggregate also charge
5birr/km for fine and coarse aggregate transportation fee. Paid 35birr/m3
for water fee, use 0.5 w/c for 273kg of cement as per concrete mix design.
Then calculate the material cost of 1m3 concrete?
 Class activity

Ato Henok has a construction PLC wants to employee project manager with
monthly wage 150,000 birr quarterly in a year, monthly 3000 birr for
transportation charge, 10 hour overtime in a week (6 days) for 40%
increment, and extra pay for long continuity service charge 150 birr in a
week for 70% of increment. Then calculate the hourly cost of project
manager?
 Class activity
Calculate hourly cost of such tools equipment's
No Item Description Charge
1 Dozer - Original cost 20,000,000 birr
- Useful life 10 year
- yearly repair cost 100,000 birr
- salvage value 200,000birr
- interest rate 7%
2 Excavator - rental cost 6,000,000 birr
- Useful life 5 year
- monthly repair cost 50,000 birr
- salvage value 200,000birr
- interest rate 5%
3 Compactor - Original cost 1,500,000 birr
- Useful life 10 year
- Monthly repair cost 80,000 birr
- salvage value 100,000birr
- interest rate 5%
4 Tools Monthly rental charge 5000birr
 Semester Project work
No Description Unit Quantity Rate Amount
1 Site clearance (clear the top soil at the depth of 20cm). M2 2000
2 Bulk excavation (cut the weak soil at the depth of 50cm to M3 400
get the hard soil).
3 Trench excavation at the depth of 1m with 50cm thickness M3 220
for stone masonry work.
4 Pit excavation for foundation. M3 300
5 Back fill the excavated soil for the entire foundation work. M3 430
6 Cart away activity at 5km haul distance from the site. M3 -
7 Lean concrete work around entire foundation area. M3 800
8 C-25 concrete work for the entire foundation work M3 2200
including pad, foundation colon, grade beam with ground
floor slab.
9 C-30 concrete work for typical ground, first and second M3 4000
floor column and slab.
10 Rebar work for substructure activity with a diameter of Ø8, kg 15,000
Ø10, Ø12, Ø14, Ø16, and Ø18.
11 Rebar work for super structure activity with a diameter of kg 10,000
Ø8, Ø10, Ø12, Ø14, Ø16, and Ø18 for G-2 building.

12 Formwork activity for the entire foundation work. M2 270

13 Formwork activity for typical ground, first and second floor M2 830
activity.
14 Block work activity for typical ground, first and second M2 800
floor 20cm thickness HCB wall.
15 Block work activity for typical ground, first and second M2 600
floor 15cm thickness HCB wall.
16 Plastering and painting work for typical G-2 building floor M2 1400
walls
 Tools and Equipment Information
No Item Description Charge
1 Dozer - Original cost 20,000,000 birr
- Useful life 10 year
- yearly repair cost 100,000 birr
- salvage value 200,000birr
- interest rate 7%
2 Excavator - rental cost 6,000,000 birr
- Useful life 5 year
- monthly repair cost 50,000 birr
- salvage value 200,000birr
- interest rate 5%
3 Compactor - Original cost 1,500,000 birr
- Useful life 10 year
- Monthly repair cost 80,000 birr
- salvage value 100,000birr
- interest rate 5%
4 Truck (16m3) - Original cost 5,000,000 birr
- Useful life 5 year
- Monthly repair cost 50,000 birr
- salvage value 100,000birr
- interest rate 5%
5 Mixer - Original cost 200,000 birr
- Useful life 5 year
- Monthly repair cost 10,000 birr
- salvage value 20,000birr
- interest rate 5%
6 Vibrator - Original cost 150,000 birr
- Useful life 5 year
- Monthly repair cost 5,000 birr
- salvage value 15,000birr
 Selected manpower information
No Item Description
1 Forman - 15,000birr monthly standard wage.
- 20birr hourly extra pay for 70% of Forman overtime.
- 10birr/hr Production bonus for 60% of increment.
- 3000birr monthly transportation charge for 20% increment.
2 Carpenter - 15,000birr monthly standard wage.
- 2000birr monthly transportation charge for 30% increment.
3 Mason - 10,000birr monthly standard wage.
- 500birr monthly transportation charge for 70% increment.
4 Gang leader - 10,000birr monthly standard wage.
- 1000birr monthly transportation charge for 10% increment.
Assume: - 24 days per month and 10 work man day

1. Prepare cost break down for each listed activity to get unit rate production cost.
2. Prepare cumulative bid sum/ total project cost with and without vat.
3. Calculate the individual activity completion period.

NB: - you can specify your assumption for any necessary information. For example assign your
standard productivity rate, site and general overhead cost per percent, risk and profit per
percent, utilization factor for the specified labors, costs of material, labor, tools and
equipment but have to specify information source. In addition to that, you have the right to
specified number of labors, tools and equipment’s to prepare unit rate production cost for
your project.

Project submition and presentation date: December 10/2016 E.c.

UNIT 4
Cost Control
 4.1 Cost Control Overview

• Cost control in construction is the process by

which managers keep expenses under
control by managing labor, material, and
overhead costs to ensure that the project
finished on the specified budget.
 4.2 Objectives of cost control

 To forecast the project cost.

 To identify work items having excessive cost.
 To update the trends of the company for future work.
 To reduce unnecessary cost.
 To perform the project on schedule time.
 To define the project progress.
 Etc.
4.3 Cost Control Cycle
 4.4 Techniques of cost control
 Purchase correct quantities
 Order optimal material sizes
 Verify quantities ordered, received, and billed
 Verify quantities
 Verify quantities billed
 Protect materials on-site
 Eliminate rework
 UNIT 5
Value Engineering
 Definition of Value Engineering
• Value engineering is a methodology that ensures the owner is not
over-paying for quality when less expensive option exists.
• Value engineering is a methodology used to analyze the function of
the goods and services. functions of the user at the lowest total cost
without reducing the necessary quality of performance.

• VE is an effective technique for reducing costs, increasing productivity

and improving quality.

In general definition:
VE is a technique directed toward analyzing the functions of an item or
process to determine “best value”, or the best relationship between worth
and cost. In other words, “best value” is represented by an item or process
that consistently performs the required basic function and has the lowest
life-cycle cost.
 Definition of Value
• The real objective of VE is “value improvement” and that may not result in an
immediate cost reduction.

• VE is a systematic, low-cost approach to assessing the “value” of a project.

Typically, VE on projects can be used to gain the following benefits:
 Cost reductions
 Time savings (schedule savings)
 Quality improvements
 Isolation of design deficiencies.
 Definition of Value
VE is not cost cutting. VE is a systematic method to improve the “value” of goods or
products and services by using an examination of function/purpose. Value, as defined,
is the ratio of function to cost. Value can, therefore, be increased by either improving
the function or reducing the cost.

Function (desired performance)

Value = ──────────────────
Overall costs

–Function = the specific work that a product must do

–Quality = the owner or user’s needs, desires, and expectations
–Cost = the life-cycle cost of the project
–Value = The most cost-effective way to reliably accomplish a function
that will meet the requirements, needs, quality, and expectations of
the user.
 When to Apply Value Engineering

• VE should be performed as early stage as possible -

before commitment of funds approval of systems,
services, or design to maximize results. Contribution
of potential savings from VE applications is much
greater at earlier stages of a project.
Timing of Value Engineering/Analysis/Improvement
Planning
Value Value Analysis
Engineering
Design
Value
Beginning Design Improvement
Construction

End of Design Operation &

Beginning of Construction Maintenance
 Timing of Value Engineering/Analysis/Improvement (cont’d
Construction Management Role

Conceptu Planning Design Biddin Constructio Occupanc

al Phase Phase Phase g n Phase y Phase
Phase

Value Engineering
 Steps in Value Engineering

• 5 phases of VE
– Information
– Formation/design
– Evaluation
– Planning and Development
– Presentation or Implementation
 When to Applied VE?

• High cost or high volume of work.

• Item must already seem to give poor value or

performance.

• When need of client is vast and complicated.

• When the undefined work environment/condition is

there.

• Etc.
 Value Improvement
Quiz
1. How to improve value and discus the
mechanisms of Value improvement????..
2. Discus the general concepts of VE???.
 Summary

• Value engineering focuses on reducing the

life cycle cost of the project
• To achieve successful result you should
remove elements that make poor value or
do not add value