LESSON 1-1 – INTRODUCTION TO COST ENGINEERING

Cost engineering is the engineering practice devoted to the management of project cost. Cost
engineering consulting involves estimating, cost control, cost forecasting, investment appraisal, and
risk analysis.

This is value cost engineers bring to each construction project. Cost engineers do the budgeting,
planning, and monitoring to ensure that your construction project is viable and successful. It’s a fine
line between managing the cost, quality, and time required to see your project come to life.

A skilled cost engineer has the experience to anticipate problems and challenges before they result in
cost overruns and scheduling slow-downs. While we don’t want to dwell on the negative, we do want
you to understand why construction projects fail.

WHY CONSTRUCTION PROJECTS FAIL?

Construction projects fail because of communication break-downs and the inability to address
underlying issues. These core reasons for failure can be traced to some key factors in the management
of the construction project:

Poor Estimating
Accurate estimating is essential to construction project success. Estimating involves assessing
material, human, budgetary, and processing demands. Are the materials available? Have the permits
been filed and approved? Do we have a reliable workforce to complete the project? Are there ample
funds to manage any unexpected costs and interruptions?

Scope Creep
Scope creep is extremely common, regardless of the size of the construction project. It’s super
important that everyone understand the project goals – what needs to be built, what isn’t going to be
built, and why.

Delays
There are times when the paperwork, approvals, and regulations simply don’t all come together on-
time. While this is often considered a normal practice in construction, it doesn’t have to be this way.
The better planning, communication, and investigation into site regulations and permits – the easier it
is to prevent construction delays.

Confusing Specifications
The more specific the project details – the better. You, the client, have the right to be demanding and
make sure that the PCS team is interpreting your requests correctly. It’s important that the entire
construction team understands what you want.

Budgetary Problems
Budgetary problems can typically be traced back to the core issues of poor communication and lack of
planning. The cost engineer is responsible for planning all aspects of the construction project cost –
this includes the budget. You and your cost engineer need to have honest, open conversations about
what you can and can’t afford.

Inadequate Planning
The failure to properly plan always results in construction project failure. The more planning, double-
checking, reviews, and assessment before the project starts – the better.

WHAT IS COST ENGINEERING?

Cost engineering is critical to the success of your construction project. The Association for the
Advancement of Cost Engineering (AACE) defines cost engineering as:
 “Cost engineering is the application of scientific principles and techniques to problems of estimation;
cost control; business planning and management science; profitability analysis; project management;
and planning and scheduling.”

So, what does this mean for you and the success of your construction project? It means that cost
engineering consulting is crucial to avoiding the key reasons for construction project failure and
ensuring the success of your project.

You can expect your cost engineer to be guided by 3 core principles, ensuring that your project is
successful:

Areas for Improvement

When you meet with your cost engineer, ask about previous construction projects. Ask this person
about the project successes and failures. Ask the cost engineer about his or her change management
principles.

Assessment and Measurement

To successfully manage the entirety of the construction project costs, your cost engineer must have a
complete understanding of the resources available. This includes understanding the viability of these
resources (people, materials, budgets, time) and how these resources will be used.

Cost Control

Cost is about more than dollars. Cost control includes managing every aspect of the construction
project – the people, materials, permits, regulations, budget, scope, project details, and being
prepared for unexpected circumstances.

1.1 COST ENGINEERS: WHO ARE THEY AND WHAT DO THEY DO?

Article I-Section 2 -- The Association is Article I-Section 3 –- Total cost management is

dedicated to the tenets of furthering the that area of engineering practice where
concepts of total cost management and cost engineering judgment and experience are used in
engineering. Total Cost Management (TCM) is the application of scientific principles and
the effective application of professional and techniques to problems of business and program
technical expertise to plan and control planning.
resources, costs, profitability and risk.
That also includes the followings: cost
Simply stated, it is a systematic approach to estimating; economic and financial analysis; cost
managing cost throughout the life cycle of any engineering; program and project management;
enterprise, program, facility, project, product, or planning and scheduling; and cost and schedule
service. performance measurement and change control.

The full AACE International Constitution and Bylaws is available at:

www.aacei.org/aboutUs/govDocuments/constitution

TCM (which is Total Cost Management) and its sub-processes (strategic asset management and project
control) can be summarized as management processes which focused on the following:
• coming up with ideas for strategic assets;
• analyzing and deciding upon the best idea; and finally
• planning and creating the selected projects in a controlled way (for example, project control)

Who Performs the task?

Many people would say that “engineers” and “engineering” are most often responsible for creating
functional projects or strategic assets; they are correct. However, there are multiple elements to
engineering projects, such as (for example) a bridge project.
 Most people look at engineering and see the element of physical design and the calculation and
analysis tasks that are done to support the design of a bridge; again, they are correct. However, many people
do not see that beyond the physical dimension of the design of the bridge structure, there are also
dimensions of money, time, and other resources that are invested in the creation of the asset. These
investments are collectively referred to as COST.

Someone needs to estimate what the bridge might cost, determine the activities needed to design
and build the bridge, estimate how long these activities will take, etc. Furthermore, someone needs to
continually monitor and assess the progress of the bridge design and construction to ensure that the
completed bridge meets the owner’s objectives. This is a significant amount of work that requires special
skills and knowledge. That is why there is an engineer that is in charge of costing.

Cost Engineers Specialization

Cost engineers often specialize in one functional aspect of the project process. They may have titles
such as:
• Cost Estimator • Cost/Schedule engineer
• Parametric analyst • Project manager
• Strategic Planner • Project Control Leader
• Scheduler

WHAT DOES A COST ENGINEER DO FOR YOUR CONSTRUCTION PROJECT?

A cost engineer ensures that your construction project can and will be a success. For us at PCS, this means
we are connected with you and your project from start-to-finish. Our commitment to professional
construction standards means that our team:

• Assists with feasibility studies.

• Studies architect and engineer plans.
• Identifies costs and sets an overall budget.
• Creates project benchmarks.
• Plans costs to help the team stay on-track.
• Communicates with you through-out the project.
• Reviews and assesses project timelines.
• Resolves scope creep and any other project slow-downs.
• Assessing the project upon completion for areas of improvement.

Know that your cost engineer is the person who keeps all the pieces of your project working and fitting
together. Rely on your cost engineer to do the planning, scheduling, management, and review of your
construction project from start-to-finish.

LESSON 1-2 – INTRODUCTION TO PROJECT MANAGEMENT

2.1 CONSTRUCTION MANAGEMENT

It is important to introduce the reader to a few additional CM terms and processes before diving deeper
into the accounting of construction. The focus of construction management here is on the role of the project
manager (PM) as an individual. The CM and the PM are both builders, but so are many other members of
the built environment (BE) team The term ‘builder’ is too generic; everyone on the project, including the
owner, architect, general contractor (GC), and the craftsmen contribute to the building process and each is
a ‘builder’ per se.

The owner-architect-GC-craftsmen were in the beginning all one and the same; they were the
builder. The qualities of the ancient builders included creativity, resourcefulness, intuition, problem
solving, among others. They just ‘knew’ what it took to get the job done. Later the owner and the builder,
or master-builder, split into two separate functions. It was the owner who provided the need and the
builder who satisfied those needs, in this case, with a building or a home At that time the master-builder
was both the designer and the builder, similar to the current design-build (DB) delivery method described.

The next split was between the builder and the designer. The builder would evolve into today’s
construction management or general contractor companies. The design element would also later be split
into architecture and engineering. Each of those also has many sub-divisions today and has been listed
later. There are many other BE participants including specialty engineers and consultants such as
waterproofing or elevator consultants; the list is quite extensive. Many of these are listed here:

• Structural engineer
• Civil engineer
• Mechanical engineer
• Electrical engineer
• Kitchen consultant
• Landscape architect
• Interior designer

DELIVERY AND PROCUREMENT METHOD

The three major companies and/or individuals which are the primary responsible parties in any
construction project include the project owner or client, the designer (architect or engineer), and the
general contractor. The relationships among these participants are defined by the delivery method used
for the project.

Basic differences in bid and negotiation procurement processes are also introduced along with the four
major design phases which coincide with various delivery and procurement options.

1. Traditional General Contractor Delivery

The most common method or project delivery is the traditional method and is represented in the
simple Figure 3.1 organization chart. The owner has separate contracts with both the designer and
the general contractor. There is no contractual relationship between the designer and the GC.
Typically, the design is completed before the contractor is hired in this delivery method..

2. Construction Management Delivery

There are two basic construction management delivery methods. One is the agency CM and the
other is the at-risk CM. The agency CM does not employ any subcontractors or direct craftsmen
and the pure at-risk CM employs all subcontractors and no direct craftsmen; different than the mix
employed by the traditional GC as described earlier.

The project owner has three separate contracts (one with the designer, one with the general
contractor, and one with the construction manager) in the agency construction management
delivery method as shown in Figure 3.2.
 In the construction manager-at-risk delivery method, the owner has two contracts (one with the
designer and one with the construction manager) as illustrated in Figure 3.3. This delivery method
is also known as the construction manager/general contractor (CM/GC) delivery method. In this
case, the designer usually is hired first, but the CM/GC is also contracted early in the design
development to perform a variety of preconstruction services.

3. Design-Build Delivery

The project owner has a single contract with a design-build (DB) contractor for both the design
and construction of the project in the DB delivery method, as diagramed in Figure 3.4. The DB
contractor may have a design capability within its own organization, may choose to enter into a
joint venture with a design firm, or may hire a design firm to develop the design

4. Procurement

Project owners solicit or procure both construction and design team members utilizing either bid
or negotiated procedures. Public project owners are often required by law to use an open bidding
process to allow all contractors an even chance of successfully landing new work. Private owners
can use whatever procurement method they choose, bid or negotiate, but often solicit contractors
they have had good experience within the past, and may ask a select few or even only one
contractor to submit a bid or negotiated proposal. Both private and public owners may use a
prequalification process to develop a short list of contractors to either bid or negotiate after they
have submitted a list of qualifications which suit that specific project.
DESIGN PHASES

All elements of any given project are not designed at the same time; different elements are started earlier,
and some proceed faster than others and include additional levels of detail. There are five major design
phases that most built environment projects experience. These design phases influence all of the other
introductory construction management topics discussed in this chapter including delivery, procurement,
contracting, and pricing methods differently with respect to when the contractor estimates the project and
when and how the contractor is chosen and begins their cost accounting processes. The design phases
include:

• Programming,
• Conceptual design,
• Schematic design (SD),
• Design development (DD), and
• Construction documents (CDs)

Additional design definition and detail is added at each of these levels which allow the contractor to develop
more accurate estimates and reduce contingencies. Ideally this additional detail also reduces the client’s
risks.

CONSTRUCTION CONTRACTS

The construction contract is the most important construction document. It has significant impacts on how
costs are accounted for, especially in an open-book contract. It is a legal document that describes the rights
and responsibilities of the parties, for example, the owner and the general contractor. Five things must be
aligned for a contract to exist:

• An offer to perform a service,

• An acceptance of the offer,
• Some conveyance, i.e. transfer of a completed building for money,
• A legal agreement, and
• Only authorized parties can sign the agreement, for example the officer-in-charge or chief
executive officer (OIC or CEO)

The intent of the contractual agreement and the contract documents describe the completed project and
the terms and conditions the parties (usually the project owner and the general contractor) must adhere
to in order to accomplish the work. The contractor is expected to have the professional expertise required
to understand the contract documents and select appropriate subcontractors and qualified craftsmen,
materials, and equipment to complete the project safely and achieve the specified quality requirements.

The contract documents usually include at least the following five essential elements. They are listed here
in what had been considered a relative order of precedence, but today most see them as complementary;
all of these documents must work together:

1. The contract agreement,

2. Special or supplemental conditions,
3. General conditions,
4. Technical specifications, and
5. Drawings.

The terms and conditions of the relationship between the primary parties are defined solely within the
contract documents. These documents should be read and completely understood by the contractor before
deciding to pursue a project. They also form the basis for creating a project estimate and schedule. To
manage a project successfully, the project manager must understand the organization of the contract
documents and the contractual requirements for his or her project. This knowledge is essential if the PM
has any expectation of satisfying the expectations of his or her company executives as well as that of the
project owner.
The contract agreement itself is either a generic standard template or a specially prepared document to
suit a specific project owner or a specific project. Most government agencies use standard formats for
developing construction contract documents. Specific requirements are contained in the general conditions
and special conditions of the contract. A particular project could utilize many potential combinations of
delivery, procurement, pricing methods, contract formats, and contractor organizational structures as
shown in Figure 3.5.

Both closed- and open-book contracts will define change order markups in their contract as well. Excerpts
from AIA A102 Articles 7 and 8 pertinent to how the project will be estimated and accounted for follow.

Article 7, Costs to be reimbursed:

7.2.1: Wages of construction workers employed at the site (i.e. carpenters and laborers)
7.2.2: Salaries of supervisory personnel stated at the site (i.e. superintendent, project manager, and jobsite
cost accountant)
7.2.4: Taxes, insurance, benefits for personnel (i.e. labor burden)
7.5.2: Rental charges for equipment

Article 8, Costs not to be reimbursed:

8.1.1: Salaries of personnel stationed at the office (i.e. CEO and accountants and marketing staff)
8.1.2: Expenses of the principal office, other than the site office
8.1.3: Home office overhead and general expenses

PROJECT MANAGEMENT

Project management is both a process and an individual or a company which includes the application of
knowledge, skills, tools, and techniques to the many activities required to complete a project successfully.
In construction, project success generally is defined in terms of safety, quality, cost, schedule, and document
control. The construction team’s challenge is to balance quality, cost, and schedule within the context of a
safe project environment and document all aspects accordingly.

The project manager and superintendent share leadership oversight of the contractor’s job site project
team and are responsible for identifying project requirements and leading the team in ensuring that all are
accomplished safely and within the desired budget and time frame. The focus of the superintendent is on
the field installation side and the PM on the office and field management side.

There are five major phases of a construction project which overlap with the accounting cycle. These phases
include planning or preconstruction, start-up, control, close-out, and post-project analysis. During project
planning, the project manager, superintendent, and upper management evaluate specific risks that are
associated with the project, particularly those related to safety, cost, quality, and schedule.
During start-up the project manager and superintendent mobilize the project management team, educate
them regarding the project and associated risks, and conduct team-building activities. The project
management office is established, and project cost accounting systems are initiated. Vendor accounts are
established, and materials and subcontract procurement initiated. Project cost, schedule, safety, and quality
control systems are established to manage all aspects of project execution.

Project control is a broad encompassing term which involves ‘controlling’ or ‘managing’ the project during
construction, interfacing with external members of the project team, anticipating risks by taking measures
to mitigate potential impacts, and adjusting the project schedule to accommodate changed conditions. The
project manager monitors the document management system, quality management, cost control, and
schedule control systems, making adjustments where appropriate in conjunction with his or her project
team which includes the superintendent and the jobsite cost accountant.

Project close-out includes not only completion of the physical construction of the project, but also
submission of all required documentation to the owner, and financial close-out. The project manager must
pay close attention to detail and motivate the project team to close out the project expeditiously to
minimize jobsite overhead costs.

Post-project analysis, if conducted, involves reviewing all aspects of the project to determine lessons that
can be applied to future projects. Issues such as: estimated cost versus actual cost, planned schedule versus
actual schedule, quality control, supplier and subcontractor performance, construction equipment choices,
effectiveness of communications systems, and work force productivity should be analyzed. Many
contractors skip this phase, and simply go to the next project. Those who conduct post-project analyses
learn from their experiences and continually improve their procedures and techniques.

GENERAL CONTRACTOR ORGANIZATION

The goal in developing a project management organization is to create the minimum organization needed
to manage the project effectively. If the project is unusually complex, it may require more technical people
than would be required for a simpler project. If the project is located near other projects or the contractor’s
home office, technical personnel can be shared among projects or backup support can be provided from
the home office. If the project is located far from the contractor’s home office, such as with our case study,
the jobsite office must be self-sufficient.

General contractors organize their project management teams in either one of two models. In one type of
project management concept, estimating, accounting, and scheduling are performed in the contractor’s
home office by staff specialists as illustrated in Figure 3.7. In an alternative organizational structure,
estimating, accounting, and scheduling are the project manager’s responsibilities, as illustrated in Figure
3.8.
Both the PM and the superintendent will report to an individual or individuals within the contractor’s
upper-management or officer corps. The PM and the superintendent need to work together as a cohesive
team, each with his or her areas of specialization, in order for the project to be successful. The choice of
project management organizational structure is made by the contractor’s corporate officers such as the
CEO.

CONTRACTOR TEAM MEMBERS AND RESPONSIBILITIES

Construction team member responsibilities will vary from company to company and from project to
project. The Officer-In-Charge (OIC) is the principal official within the construction company who is
responsible for construction operations. He or she generally signs the construction contract and is the
individual to whom the client turns in the event of any problems with the project manager. The OIC may
also be the vice president for operations, chief operations officer (COO), district manager, senior PM, or
may be the construction company owner or chief executive officer In the case of a small contractor, these
may all be the same person who may also be the PM and superintendent.

The Chief Financial Officer (CFO) is often an equity partner within the construction firm. This individual
is responsible for all of the accounting operations of the company including taxes, accounts payable,
accounts receivable, and internal financial statements including the balance sheet and income statement.
The general contractor’s CFO often communicates directly with the Bureau of Internal Revenue (BIR), the
client’s CFO, and the CFOs of the subcontractors as well. The CFO may also be involved with running the
contractor’s independent equipment rental operations or real estate development arms if applicable.

The Project Manager reports to the officer-in-charge and has overall responsibility for completing the
project in conformance with all contract requirements; this is typical for the general contractor, project
owner, designers, and subcontractor PMs as well. He or she organizes and manages the contractor’s project
team.

The Superintendent is responsible for the direct daily supervision of construction field activities on the
project, whether the work is performed by the contractor’s direct craftsmen or those employed by
subcontractors. On larger projects this is delegated to and accomplished by last planners, or those directly
responsible for the work, such as assistant superintendents and/or foremen.

Project Engineers or Field Engineers (PEs or FEs) typically reports to the project manager and are
responsible for coordinating daily details relating to field construction and documentation. On small
projects, the PE’s responsibilities may be performed by the PM. On large projects there may be multiple
PEs. Specific PE responsibilities include: processing submittals and requests for information and
maintaining associated tracking logs; preparing contract documents and correspondence and maintaining
the contract file; and reviewing subcontractor invoices and requests for payment.

If the project is of sufficient size or remotely located or of a contract nature which warrants a Jobsite Cost
Accountant or Cost Engineer, that person will have similar responsibilities and background as the project
engineer, and may be called a project engineer, but with primarily a cost focus. The jobsite cost accountant
will work closely with the project manager to record costs, prepare monthly pay requests, and forecast
future expenditures. The jobsite cost accountant will also work closely with the superintendent and help
prepare cost control work packages, amongst other financial responsibilities.

Foremen are last planners who report directly to the superintendent and are responsible for the daily
direct supervision of craftsmen on the project. The construction firm will assign foremen for work that is
performed by the company’s own construction craftsmen. Foremen for all subcontracted work will be
assigned by each subcontractor. Specific responsibilities include: coordinating the layout and execution of
individual trade work on the project site; verifying that all required tools, equipment, and materials are
available before work commences; and preparing daily or weekly time sheets for their crews.
LESSON 2 – COST ELEMENTS
2.1 COST

Cost is a basic “yard stick” by which activities and assets are measured and compared. The word cost is so
commonly used and generally related to monetary value, we often lose sight of its true meaning and
importance as a cost engineering concept. The need to understand and enumerate the attributes of cost,
produced the engineering discipline of cost engineering.

Cost is one of the three fundamental attributes associated with performing an activity or the acquisition of
an asset. These are (1) price (cost), (2) features (performance), and (3) availability (schedule).

Main Concept:
Cost is the value of an activity or asset. Generally, this value is determined by the cost of the resources
that are expended to complete the activity or produce the asset. Resources utilized are categorized as
material, labor, and “other.” Although money and time are sometimes thought of as resources, they only
implement and/or constrain the use of the physical resources just listed. The final activity or asset
produced depends on what can be “afforded,” given the money and time allocated to the project. Normally,
you think of material as the physical composition of the asset. However, the value of the asset may also
include the cost elements of scrap material or manufacturing spares, construction form work and
expendable safety items, and the cost of transporting the material to the work site.

The path by which resources are converted (via a “project”) to activities and assets is illustrated in Figure
1.1

EXAMPLE 1
The following example illustrates the resource
cost categories:
John decides to build a deck on the
back of his house. He draws up plans for the
project, gets the building permit from the city,
buys the material, hauls it home, and constructs
the deck. The cost elements and categories
associated with building this asset are shown in
Table 1.1. Notice that some of these cost
elements are not part of the physical deck but
are necessary in order to complete the project.

Furthermore, some of the cost elements are not part of the work activity needed to get the deck built but
are essential to support the project. In the next section, we will see how these cost categories are structured.

Cost Structuring

It is important to further structure the cost elements within the material, labor, and other resource
categories in order to understand how they influence the total cost of the activity or asset and to get a better
understanding of how they can be controlled. This structuring sorts the cost elements into direct costs,
indirect costs, fixed costs, and variable costs. In practice, some costs may fall in more than one of these
groupings.

1. Direct Costs are those resources that are expended solely to complete the activity or asset. In other
words, “Any cost that is specifically identified with a particular final cost objective, but not
necessarily limited to items that are incorporated in the end product as material or labor”.
 Example:
Foundation of House → Direct Cost: trench, forms, concrete, labor
Metal Bowl → Direct Cost: metal sheet stock, operator labor

2. Indirect Costs are resources that need to be expended to support the activity or asset but that are
also associated with other activities and assets. In other words, “Any cost not directly identified
with a single final cost objective but identified with two or more final cost objectives”. Therefore,
indirect costs are allocated to an activity or asset based upon some direct cost element, such as
labor hours, material cost or both. Indirect costs also may be referred to as “overhead costs” or
“burden costs.” They are general administrative activities associated with operating the business.
Examples are costs for providing and maintaining field equipment or a manufacturing facility, and
expenses for utilities, taxes, legal services, etc.

3. Fixed Costs cost elements that must be provided INDEPENDENT of the volume of work activity or
asset production that they support. These can be either direct or indirect costs. The tools are an
indirect fixed cost only if they are owned. If they are leased or provided as part of the labor charge,
they would fall into a different classification.

Example:
Tool used to stamp for Metal Bowl is Direct Fixed Cost (Specifics).
Tools used to finish Concrete Foundations are Indirect Fixed Cost (reusable).

4. Variable Costs are cost elements that must be provided and are DEPENDENT on the volume of
work activity or asset production that they support. Again, these can be either direct or indirect
costs.

Example:
Materials used to form Metal Bowl is Direct Variable Cost (Amount Varies)
Transportation/distribution used to operate the Stamping Machine is Indirect Variable
Cost (Varies, but considered Overhead Cost)

In business practice, cost element information may be

grouped in a variety of ways to provide the basis for
management decisions.

EXAMPLE 2

John tries to better understand the costs

associate with building the deck. He structures the
costs as shown in Table 1.3

2.2 PRICING

In the following pages, pricing is established as a set of management processes (tools and techniques)
required to establish the cost of an endeavor (project, business).
Cost and Pricing: Is There a Difference?

The process of planning and controlling the costs associated with running a business. It is to keep your job
on budget and avoid the project eating into your bottom line. In other words, effective cost management
sets a standard for all project costs.

Price refers to “the cost at which something is bought or sold”. Pricing refers to a set of tools and techniques
used to establish an output-cost. The difference is subtle, and in real-world applications, it is not incorrect
to use these terms interchangeably, as long as there are terms of reference.

The goal of this topic on pricing is to serve as “a guide to the subject matter in which a cost engineer and a
cost manager should be both knowledgeable and competent”. Tools and techniques used to establish cost:
pricing strategies, sales and revenues, return on investment (ROI), return on sales (ROS), and break-even
analysis.

Analysis of the Pricing Process

In Figure 2.1, the process of pricing is described in terms of

its inputs, tools and techniques, and output. These are
described separately in this chapter with the focus being on
the tools and techniques. The inputs are the documentable
items that will be acted upon and include but are not limited
to: work breakdown structure (WBS), historical records,
cost estimation and cost management system. The tools and
techniques are the mechanisms applied to the inputs to
produce the outputs and include pricing strategies, sales
and revenues, ROI, ROS, and break-even analysis.

Pricing Strategies

Pricing Strategies must be developed for each individual situation. Choosing the pricing strategy for your
business requires research, calculation, and a good amount of thought. Simply guessing may put you out of
business. Here's what you need to know.

Too many businesses set their pricing without putting much thought into it. This is a mistake causing them
to leave money on the table from the beginning. The good news is that taking the time to get your product
pricing right can act as a powerful growth lever. If you optimize your pricing strategy so that more people
are paying a higher amount, you'll end up with significantly more revenue than a business who treats
pricing more passively. This sounds obvious, but it's rare for businesses to put much effort into finding the
best pricing strategy.

Pricing strategies refer to the processes and methodologies businesses use to set prices for their products
and services. If pricing is how much you charge for your products, then product pricing strategy is how you
determine what that amount should be. There are different pricing strategies to choose from but some of
the more common ones include:

1. Value-based pricing
With value-based pricing, you set your prices according to what consumers think your product is worth.
We're big fans of this pricing strategy for SaaS businesses.

2. Competitive pricing
When you use a competitive pricing strategy, you're setting your prices based on what the competition is
charging. This can be a good strategy in the right circumstances, such as a business just starting out, but it
doesn't leave a lot of room for growth.
3. Price skimming
If you set your prices as high as the market will possibly tolerate and then lower them over time, you'll be
using the price skimming strategy. The goal is to skim the top off the market and the lower prices to reach
everyone else. With the right product it can work, but you should be very cautious using it.

4. Cost-plus pricing
This is one of the simplest pricing strategies. You just take the product production cost and add a certain
percentage to it. While simple, it is less than ideal for anything but physical products.

5. Penetration pricing
In highly competitive markets, it can be hard for new companies to get a foothold. One way some companies
attempt to push new products is by offering prices that are much lower than the competition. This is
penetration pricing. While it may get you customers and decent sales volume, you'll need a lot of them and
you'll need them to be very loyal to stick around when the price increases in the future.

6. Economy pricing
This strategy is popular in the commodity goods sector. The goal is to price a product cheaper than the
competition and make the money back with increased volume. While it's a good method to get people to
buy your generic soda, it's not a great fit for SaaS and subscription businesses.

7. Dynamic pricing
In some industries, you can get away with constantly changing your prices to match the current demand
for the item. This doesn't work well for subscription and SaaS business, because customers expect
consistent monthly or yearly expenses.

Essentially two situations frequently appear when one is pursuing a project. These situations that often
occur in competitive acquisitions are referred to as Types I and II. Type I acquisitions is to win the project
and execute it profitably and satisfactorily according to contractual agreements. Type II acquisition is an
example of a “must win” situation where the price is determined by the market forces.

BUSINESS AND ECONOMIC RATIOS: AN OVERVIEW

A business can normally forecast its outgoings, but incomings can be more difficult to predict. Even a
business that appears to be successful can flounder if it does not generate enough cash to pay its obligations.
The following ratios provide the necessary guidance to assist in the successful planning of a business: ROI
(Return on Investment); ROS (Return on Sales); and Break-even Analysis.

A business begins with the following set of inputs or resources:

• Natural resources—These form the basic ingredients of the product or assist in its manufacture.
This includes such resources as coal and steel, which one day will be exhausted; and assets, such
as buildings, that help in the production process.
• Capital—This includes the assets through which business is done or the cash that makes this
possible. Therefore, a shop is capital, as is an oil refinery.
• People—Normally referred to as the most important assets a business has, the abilities of its
employees are vital to the success of any business. The attitudes shown by both employees and
managers will shape much of what happens within any business.

Managers or entrepreneurs will be called upon to lead, and workers/employees will be responsible for
making the goods/services that the customers want. If any member of this process gets it seriously wrong,
then the livelihoods of all can be threatened. Obviously, these inputs vary in nature and importance from
one business to another. However, they offer a background to understanding these business economic
ratios. If you are doing something exceedingly well, you need to know it. And if something is wrong, it’s
better to find out sooner than later.
ROI (Return on Investments) - is one of several approaches to building a financial business case. The term
means that decision makers evaluate the investment potential by comparing the magnitude and timing of
expected gains to the investment costs.
Simple ROI: ROI is frequently derived as the return (incremental gain) from an action divided by the cost
of that action (Investment) —that is simple ROI.

Simple ROI = (𝐺𝑎𝑖𝑛𝑠 −𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡)⁄𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡

Example:
What would be the ROI for a new marketing program that is expected to cost ₱5,000,000
over the next five years and deliver an additional ₱7,000,000 in increased profits during the same
time?
Simple ROI = (₱7,000,000 – ₱5,000,000)/ ₱5,000,000 = 40%

Break-Even Analysis - involves finding the level of sales necessary to operate a business on a break-even
basis. At breakeven, total costs equal total revenue. You don’t make any money, but you don’t lose any
money either. If you produce more units than at the break-even level, you will be generating a profit. If you
produce less than the breakeven level, you will be losing money.

Terms used in Determining Break-Even Analysis:

▸ Selling Price (SP)—This is the price that each unit will sell or retail for.
▸ Variable Costs (VC)—These consist of costs that vary in proportion to sales levels.
▸ Contribution Margin (CM)—This is equal to sales revenues less variable costs or SP – VC.
▸ Fixed Costs (FC)—These costs remain constant (or nearly so) within the projected range of sales
levels.
▸ Units (X)—The unit is another way to say number of items sold or produced.

2.3 MATERIALS

Materials are a key element in most projects and production endeavors. There may be isolated instances,
such as a service call for the adjustment of a component, where no materials are required. However, in most
cases, materials and their related issues must be addressed by those responsible for the project.

Materials have the quality of being purchased by those utilizing them, rather than being manufactured by
the subject entity. Materials are a key resource in almost any economic endeavor. Materials range from the
simplest of raw materials to the most complex fabricated materials with a large range in between. Practical
selection of materials for a given application must always consider materials competition issues. Materials
compete on a number of characteristics:
cost, availability, service life, weight, corrosion/wear resistance, machinability, weldability, and
other ease-of-fabrication criteria

A standard phrase used in industry is “there are no bad materials just bad applications of materials.” The
strong performance of materials in one application does not guarantee success in a differing application
and sometimes the differences may be difficult to ascertain. The automotive industry is a prime example of
continued competition among materials due to various factors, such as weight with its attendant impact on
fuel economy. Steel has been replaced in numerous applications in autos by the advent of high-performance
plastics and aluminum. Steel auto applications have also witnessed significant changes through the advent
and improvements of high strength, low-alloy steels.

Materials Handling. In the materials area, the materials handling issue is a significant concern regarding
cost structure and system efficiencies. Materials handling is a requirement of the production process, but
inefficiencies in this area create plant-wide problems. Poor materials handling can result in damage to
either raw materials or the finished product. An inefficient materials handling system can slow production
operations creating other excessive costs due to production delays.

Materials Handling Principles

All materials manufacturing situations are somewhat different. However, there are some basic principles
in this area that find wide application. These basic principles include:
• material movement should be over the shortest distance possible
 • terminal time should be in the shortest time possible, since the objective is to move materials
• eliminate manual material handling when mechanized methods are feasible
• avoid partial transport loads since full loads are more economical; and, finally
• materials should be readily identifiable and retrievable

Materials Handling Decision Factors

There are four basic decision factors that affect materials handling. These four factors are:
• Material To Be Handled - will impact numerous other decisions. For example, such materials as
pipe or structural steel in a fabrication facility will require overhead cranes and forklifts for their
movement.
• Production System Type - will be divided into job shop or batch process and continuous process
types. Many job shops perform unique jobs, and large investments in single application equipment
are often not economical.
• Facility Type - will govern materials handling decisions. Rectangular facilities versus other facility
shapes will govern production layout and hence material handling decision.
• Materials Handling System Costs - and their economic feasibility will be dependent on labor
costs in the capital/labor trade-off equation. Predicted demand for a facility can help in the
economic and practical evaluation of alternatives.

Types Of Materials and Related Information

• Raw Materials - are those materials utilized in a production or fabrication process that require a
minimum amount of processing to be useful.
• Bulk Materials - The bulk materials category is distinguished by its availability.
• Fabricated Materials - bulk materials transformed into custom-fit items for a particular product
or project.
• Engineered/Designed Materials - constitute a category requiring substantial working in order
to attain their final form. Design or engineered materials are also based on shop drawings.

Production Materials Purchase and Management

Materials Quality. Materials procurement must focus on the proper quality of the required materials. This
implies the existence of predetermined standards and specifications to measure materials acceptance.

Materials Vendor Surveillance and Materials Traceability. Vendor surveillance may require periodic
inspection by purchasers at the vendors’ location(s) to ensure conformance with performance standards
and specifications. Materials traceability is accomplished by means of mill certifications. Materials
traceability is a key issue, because the improper substitution of one improper type of material for the
specified material can lead to significant in-service problems and defects.

Materials Quantity. Funds spent to acquire materials are a cost to the firm until these same materials can
be sold as part of the completed product. Materials storage is a further burden that can sometimes exceed
the value of the materials. Ordering too-small materials quantities may create higher costs through missing
the economies of volume discounts.

Just-In-Time Inventory Techniques. The just-in-time concept implies that the exact materials quantities
needed are delivered at the exact time needed. The goal is to reduce inventories

Expediting. Involves the monitoring of all steps in the procurement cycle to ensure on-time delivery of the
necessary materials. Analysis of potential delays is a key element in the expediting process.

Global Materials Decisions. Materials fabrication decisions as to locations and methods are being made
on a global basis.
COST ESTIMATING

Cost estimating is one of the cornerstones of cost engineering and total cost management. The objective of
this chapter is to introduce the students to various classifications of cost estimates, and the estimating
methodologies and procedures used to prepare cost estimates.

Cost estimating is the predictive process used to quantify, cost, and price the resources required by the
scope of an investment option, activity, or project. The output of the estimating process, the cost estimate,
may be used for many purposes, such as
• determining the economic feasibility of a project,
• evaluating between project alternatives,
• establishing the project budget, and
• providing a basis for project cost and schedule control.

Cost estimating may be used to quantify, cost, and price any investment activity, such as building an office
building or process power plant, developing a software program, or producing a stage play. The basic
estimating steps are the same:
• understand the scope of the activity to quantify the resources required,
• apply costs to the resources,
• apply pricing adjustments, and
• organize the output in a structured way that supports decision-making.

2.4 LABOR

Labor includes the work of the engineer who prepares the design, the foreman supervising the field work,
or the technician that maintains the wave soldering equipment. The “Other” cost category consists of
resources needed to support the activity and/or asset. An example would be the facilities needed to
produce an activity or asset, which would include the tooling, miscellaneous equipment, electricity, taxes,
and maintenance, etc., necessary to keep the facility available for use.

Labor Classifications

• Direct Labor—The labor involved in the work activities that directly produce the product or
complete the installation being built.
• Indirect Labor—The labor needed for activities that do not become part of the final installation,
product, or goods produced, but that are required to complete the project.
• Overhead Labor—The labor portion of costs inherent in the performing of a task (such as
engineering, construction, operating, or manufacturing)

Table 4.1 provides examples of different labor classifications and costs. The examples are not all-inclusive
and only serve to illustrate the elements of each type of labor.
The difference between indirect and overhead labor appears to be somewhat vague. Depending upon the
size of a project, plant, or office and its location, some elements could shift from indirect to overhead, and
there may be instance where direct labor moves to indirect and overhead as well.

For example, if the construction project is small, payroll and accounting may be located offsite and may be
composed of personnel who are splitting their time between several projects at different locations. In this
instance, this function could be an indirect or an overhead. Therefore, it is imperative that the estimator
and/or cost engineer understand where within his project, industry, and company each of these costs are
included, so that they can be correctly estimated and included in the estimate and budget.

Base Wages. The base wage is the amount that will go directly to the employee. Base wages are usually
calculated on a per hour basis. However, it can also be a breakdown of weekly or monthly base salary
prorated to a daily or hourly rate. The reason for an hourly breakdown is that estimates are usually based
upon the amount of work hours to complete. Therefore, the labor cost rates need to be developed on a
comparable basis. If one is costing out craft labor, their pay rate is usually given in hourly increments.

Supervision, support staff, and engineering, etc., often are paid on a weekly, bi-weekly, or monthly rate.
This rate can also be broken down to an hourly rate for estimating and payroll purposes.

Examples of base wages:

• craft personnel—₱250.00 per hour,
• supervision—₱12,000 per week divided by 40 hours per week = ₱300.00 per hour, and
• engineering— ₱780,000 per year divided by 2,080 hours per year = ₱375 per hour
(2,080 hours = 5 days per week at 8 hours per day for 52 weeks).

Fringe Benefits

Paid time off (PTO)—Most employees have additional benefits of time off for local and national holidays,
vacation, and sick time. Therefore, in developing a unit cost for labor, a factor is added to increase the
estimated and booked cost per hour worked each week to cover PTO.

Most companies transfer this money to special fund to be used when an employee takes paid time off.

For example, an engineer gets 5 days of sick time, 10 days of vacation, and 10 holidays per year.
His base salary is ₱375 per hour. Adders are:

sick time: 5 days at 8 hours /day @ ₱375 = ₱15,000 per year

vacation: 10 days at 8 hours /day @ ₱375 = ₱30,000 per year
holiday: 10 days at 8 hours /day @ ₱375 = ₱30,000 per year
TOTAL: ₱75,000 per year, for 25 days
 This Engineer is now working 2,080 hours (52 weeks x 40 hours per week) less 25 days at 8 hours
or 200 hours (25 days x 8 hours/day) for PTO. So, his productive time is 1,880 hours (2080 hrs
subtracted by 200 hrs).
Hourly cost:

₱375 base wage + ₱39.89 PTO adder (₱75,000 divided by 1,880 hours) = ₱414.89 total.

Medical & Life Insurance Benefits. Some firms and labor contracts include contributions to a medical and
life insurance program. These costs are usually can be calculated on an hourly, weekly, or monthly cost
basis and added to the per hour work cost.

- Example: If the firm that employs the engineer in the previous example contributes ₱7,500/month
for medical and other insurances, the following should be added to the hourly costs:
7,500/month x 12 months = ₱90,000 /year divided by 1,880 hours = ₱47.87 per hour

- Example: If the company contributes to Security Services and other retirement plans for the
engineer, the following should be added: ₱2500/month x 12 months = ₱30,000/year divided by
1,880 hours = ₱15.96 per hour

Government Mandated Benefits. These benefits include such items as government retirement funds,
unemployment insurance, retirement healthcare insurance, etc. In the Philippines, these funds are federal
old age insurance (Social Security Services), PhilHealth, Government Service Insurance System, etc. These
costs are usually calculated on a straight percent of the worked hours.
Continuing with our example engineer, we will add the following:
-- Retirement (6.2%) = .062 x ₱375 = ₱23.25
-- Retirement medical (1.35%) = .0135 x ₱375 = ₱5.06
-- State unemployment (1.0%) = .01 x ₱375 = ₱3.75
-- Total government mandated benefits = ₱32.06

Summary of Engineer’s Wages Example

The cost basis for an engineer who makes ₱780,000 is summarized in Table 4.2:

Engineer/Contractor Overhead and Profit. The previous calculations will apply for the direct hire of
individual workers. When hiring contract employees, or estimating an engineer or contractor’s costs, labor
rates are usually broken down differently:
▸ base wages including fringes,
▸ worker’s compensation (if applicable),
▸ overhead, and
▸ profit (if applicable for time and material situations)

Fully-Loaded or Billing Rate. A fully-loaded rate is the base salary plus adders that will be paid for an
hours work on the job. An owner employing a contractor on time and material basis only pays for the
workers time when he is on the job. If he is sick, on vacation, or holiday, the contractor cannot bill the
owner. However, the payment rate charged usually includes funds to cover this paid time off. The
contractor either places the funds in a separate account for use when the worker is off or, if the worker is
in a union, the union may get the funds to disburse when the worker is off. All estimates relating cost of
labor to work performed are usually calculated using the fully-loaded rates.

Overtime Wages. Overtime can range from straight time pay for the additional hours beyond the standard
workweek of 40 hours or 8 hours per day, to 1.5 and 2.0 times the regular pay. When developing the
overtime formula, the estimator needs to consider that some benefits are calculated on an 8- hour day or
40-hour week and are not added to overtime hours.

Benefits such as PTO, some insurance, and some government funding programs may be included in this
category. Government funded retirements, such as GSIS and PhilHealth, are calculated as a percentage of
the wage and are usually added to the overtime rate. The estimator needs to confirm what needs to be
added for the specific work area that the project is located in order to develop the correct rate.

Example:
A craft worker earning $25.00 per hours is working overtime at 1.5 times his base rate at $ 37.50. PTO
adders, company insurance adders, and state unemployment are not included. Federal retirement and
medical is included at 7.55 percent, which equals $2.83. The total cost per hour for 1.5 overtime is $40.33.

Take Note: Most estimates are for groups of workers who have a variety of backgrounds, years of experience,
etc. Since you don’t know whose part of the actual team will be, you must make some assumptions in order to
develop a comparable base wage rate to use. In most cases you will build a weighted average team.

Example:
A contractor needs to make up time in his schedule. If he works the concrete crew 10 hours per day for two
weeks and 10 hours a day on two Saturdays, how much extra will it cost him?

Take Note: (For this example, Overtime is paid for all hours over eight, Monday thru Friday and the first eight
hours on Saturday. Double-time is paid for hours greater than eight on Saturday and the first eight hours on
Sunday).
 Monday thru Friday = 2 hours per day = 10 hours of 1.5 time
Saturday = 8 hours (Overtime)
Total 1.5 time = 18 hours, Saturday Double time = 2 hours

Crew Cost (1.5 times) = $29.58/hour x 9 workers x 18 hours x 2 weeks

= $ 9,584
Crew Cost (2.0 times) = $ 39.44/hour x 9 workers x 2 hours x 2 weeks
= $ 1,420
Total = $11,004

Normal time cost if no. OT worked = $23.83/hour x 9 workers x 40 hours x 2 weeks = $ 17,158

Indirect and Overhead Labor

There are two methods of determining these costs that will be addressed: The first method is to do a direct
estimate of the indirect staff required and cost them out the same way as the direct work crews.

For example, if we were building a manufacturing facility that will take a year, the indirect support could
consist of the personnel listed in Table 4.4 using wage rates determined by methods explained earlier:

The second method will be to use Historical Job Percentages to determine an appropriate allowance for
indirect labor.

For example,
Estimated Total Materials = $360, 000
 Indirect Costs at 25% = $90,000 (25% company historical data); or

Estimated Direct Labor = $250,000

Indirect Labor at 30% = $ 75,000

In the second example, material and other indirect costs would have to be estimated separately. The choice
of methods will depend upon how much detailed information is available for the estimator to use in
developing his estimate.

2.5 EQUIPMENT

Selecting, purchasing, tracking, storing, maintaining, and selling equipment, parts, and tools is an important
project management function that can greatly impact project schedules and costs. This chapter outlines
current issues and industry practices regarding equipment for the cost engineer.

Equipment Types

How many different types of construction equipment are there? There is likely close to an infinite list of
different types of equipment, and it would be difficult to cover each one. Tools are differentiated from
equipment for this example as tools would be purchased for a project and are expendable, but equipment
might be rented and depreciated and should last longer than for just one project.

Following are just a few basic lists of equipment which the construction team might encounter:

Heavy-Civil Contractors:
• Graders,
• Dozers or bulldozers,
• Dump trucks,
• Track hoes or excavators,
• Compactors,
• Scrapers, and others.

Marine Contractors:
• Barges and Tugboats,
• Marine cranes,
• Pile drivers,
• Under-water equipment, including welders, and others.

Cranes:
• Tower cranes:
o Horizontal jib tower crane, also known as ‘hammer-head crane,’
o Luffing tower crane,
o Mobile tower crane, also known as self-erecting or ‘fast cranes’;
• Mobile cranes, including trawler or crawler cranes;
• Light cranes, including truck cranes also known as ‘cherry-pickers’ or boom trucks;
• Miscellaneous cranes not typically used for construction:
o Gantry cranes,
o Ship yard cranes,
o Bridge cranes;

Commercial and Residential Construction Equipment:

• Forklifts,
• Pickup trucks,
• Flatbed trucks,
• Backhoes,
• Scissor lifts,
 • Scaffolding is not necessarily considered equipment but the accounting for rental and erection and
maintenance is similar to other methods of equipment.

Light Equipment:
• Surveying equipment, including total-stations and lasers,
• Compressors,
• Welding machines,
• Construction electrical generators,
• Concrete vibrators and troweling machines and screeds, and others.

Equipment Ownership

All of these types of equipment may be owned by the construction company and most discussions on
construction equipment accounting and depreciation are focused on internally owned equipment. But
actually, very few construction companies own any equipment.

Most commercial and residential contractors will either set up separate equipment companies or will rent
from outside sources. Equipment may also be provided and operated by subcontractors as part of their
scope and obligations. There are advantages and disadvantages of all of these arrangements.

Internally Owned

Contractors that own and operate their own construction equipment endeavor to keep that equipment
busy on jobsites whenever possible. Upon purchase, a piece of equipment will simultaneously show up as
an asset on the contractor’s balance sheet in the amount of its book value, and as a liability in the amount
of the loan balance owed to the bank. These types of contractors are heavily leveraged and purchase
equipment through the use of long-term loans which require significant monthly payments.

Maintenance and repair costs for internally owned equipment will be charged to jobs if the equipment is in
use or charged to home office overhead if the equipment is idle. Contractors which own equipment must
keep it busy or bear significant financial risk. Conversely contractors may choose to own equipment if their
equipment requirements are unique and they do not want to be subject to availability and rental charges
from outside third party supply firms. Contractors which own equipment have the flexibility to adjust their
own internal rental charges which may allow them to be the low bidder on projects which are heavily
equipment dependent, such as civil and marine work.

Contractor Equipment Companies

To clients and even many on the contractor’s team, internally owned versus separate contractor equipment
companies may look identical, but they are actually significantly different with respect to accounting and
risk management. Many construction companies choose not to own their own equipment but rather set up
separate equipment companies or separate divisions, which own the equipment. These separate companies
are formed as limited liability corporations (LLCs) and will have a different name from the construction
company.

Experienced project owners which utilize open-book contracts, such as the AIA A102, do not see the
financial separation between the construction company and the construction company’s equipment
division that the contractors will represent. They often regard all equipment supplied by the contractor as
internally owned and strive to protect themselves from excessive equipment rental charges or
maintenance costs. The best method for them to do this is to contractually modify or insert language into
the A102 contract Articles 7.5.2 and 8.1 such as:

• Contractor’s monthly, weekly, or daily rental rates will not be in excess of the average rates charged
by the three largest local equipment suppliers;
• Contractor’s cumulative rental on any owned piece of equipment will not exceed 85% of the
purchase price (book value would be better but that would be difficult for the client to determine);
• Equipment repairs and maintenance of contractor-owned equipment will not be job-costed.
Outside Ownership

The easiest method to manage equipment rental from a project manager’s perspective is from outside
third-party suppliers which own and rent construction equipment as a main source of business. This
equipment is expected to be delivered to the jobsite in perfect condition and is expected to remain that way
during the course of construction. Equipment breakdowns have a significant effect on jobsite labor
productivity. Contractors can obtain bids from outside sources and negotiate rental rates and conditions.

An example rental purchase order for a forklift is included here as Figure 12.1. If equipment is rented with
an operator, a subcontract agreement should be developed by the jobsite team rather than a purchase
order.

A very important aspect to equipment rental is the management of economical rental durations. This again
is easier to control with outside rental companies than with internally owned equipment. Equipment rental
often is accompanied by mobilization or delivery charges and demobilization or pickup charges. There are
also more economical durations to rent equipment, for example it is more economical and potentially less
expensive to rent a welding machine for:

• One whole day rather than six hours,

• For one whole week rather than four days,
• For one whole month rather than three weeks, and
• For one whole year rather than ten months.
Subcontractor Ownership

The most cost-effective way for a general contractor (GC) to have equipment on the project is not to rent it
at all, either internally or externally, and require all of its subcontractors to provide their own equipment.
If a GC operates more as a construction manager (CM) and provides little to no direct labor, he or she may
also be able to avoid providing any equipment, or at least minimal equipment. The more equipment is
provided by subcontractors, the less the GC or CM needs to worry about idle time, maintenance and repairs,
or mobilization costs for equipment.

Equipment Operation

Although robots have garnered an increased role in construction today, they are not yet operating heavy
construction equipment. How the equipment is operated, by whom, and how it is contracted are important
aspects of construction cost accounting and risk management. There are a variety of methods for how
operation of equipment is handled.

1. Self-Operated

If contractors own their equipment, either as part of the construction company or through a separate but
internally owned equipment company, they will likely operate the equipment with their own forces. This
provides the contractor with the comfort that they know the equipment operator and his or her capabilities
and that those individuals are loyal to the construction company. The contractor will pay the operator as
they would any other construction craft employee.

2. Rented and Subcontractor-Operated

If equipment is rented from an outside supplier, the contractor may operate it with their own operating
engineer as discussed earlier, or they may employ a separate contractor to operate the equipment. This
may be the case with large equipment such as a tower crane, where the contractor does not have an
experienced or available OE in house, nor wants to take the chance on employing an operator off the street.

3. Subcontractor Provided

The general contractor will not need to concern itself with choice of equipment operators when
subcontractors provide their own equipment. It is the subcontractor’s responsibility to choose qualified
employees and handle their wage compensation and labor burden contributions. The subcontractor is also
responsible for all equipment licensing and maintenance expenses. The GC will still make sure that the
subcontractor is utilizing only qualified equipment operators.

4. Owner-Operators

Many single pieces of equipment are owned and operated by one individual. This is very common with
many forms of earthwork equipment including backhoes, track hoes, and dump trucks. Many long-haul
semi-trucks are driven by owner-operators. The general contractor will then pay the equipment owner an
hourly (or weekly or monthly) rate which combines the rental of the equipment along with the wages of
the owner.