Project Cost Engineering

Course Outcomes (CO)

The student will be able to
1. Identify the basic elements of project cost
2. Apply and analyze various cost estimation
methods
3. Prepare and evaluate budget for engineering
projects
4. Implement tools and techniques for controlling
project cost
5. Apply software tools for estimating, budgeting
and controlling project cost
 Student Evaluation
Total Internal: 50 marks

Total External: 50 marks

The methodology of internal and external

evaluation will be communicated during
subsequent sessions.
Let’s recall few concepts of
‘Project Management Principles
and Practices’
 Let’s begin

Project Cost Engineering

1. Session Plan
2. Reading Material
 Quantity Surveying
Vs
Project Cost Engineering
 Project Cost Engineering

• What is a Project?

• Project Cost Engineering – Scope

• Need for studying this subject

 What is a Project

A project is a temporary work

undertaken to create a unique
product, service or result.
 Project - Examples

Giza Pyramid Complex

Three Gorges Dam Burj Khalifa

 Project - Examples

The Cochin International Airport in Kerala is setting example for the rest
of the world by contributing towards the environment.
It is the first ever fully solar powered airport with an inauguration
dedicated solar plant.
 Project - Examples

The Kathipara cloverleaf interchanges is the largest cloverleaf flyover in

the whole of Asia, situated at Alandur at the intersection and an
important road junction in Chennai.
 Project - Examples

Dreaming big - India on the global refining map

Heavy Engineering
Project - Examples

Residential Projects
Project - Examples

Engineering Services
Project Management Process Group
Process Group Interactions in a Project
 Project Knowledge Areas
A Knowledge Area represents a complete set of concepts, terms,
and activities that make up a professional field, project
management field or area of specialization.

1. Project Integration Management,

Project Cost
2. Project Scope Management, Engineering
3. Project Schedule Management,
4. Project Cost Management
5. Project Quality Management,
6. Project Resource Management,
7. Project Communications Management,
8. Project Risk Management,
9. Project Procurement Management and
10.Project Stakeholder Management
Case – Green building
Case – Mahindra World City
Chennai

(Pg. 6, 7 and 8)
 Project Cost Management
Project Cost Management includes the processes
involved in
planning,
estimating,
budgeting,
financing,
managing, and
controlling costs
so that the project can be completed within the
approved budget.
 Elements of Project Cost
• Direct cost: Cost associated directly with the project activities
(e.g. Material, Labour, etc)

• Indirect cost: Cost associated indirectly with the project

activities (e.g. Overheads such as rent, electricity bills, etc)

• Fixed cost: Fixed costs are costs that remain the same in total
regardless of changes in the activity level.

• Variable cost: Variable costs are costs that vary in total directly
and proportionately with changes in the activity level.

• Mixed (Fixed + Variable) cost: Mixed costs are costs that

contain both a variable element and a fixed element.
Mixed costs, therefore, change in total but not proportionately
with changes in the activity level.
Classify each cost as variable, fixed, or mixed

Direct material
Maintenance
Direct labor
Indirect materials
Depreciation
Utilities
Rent
Classify each cost as variable, fixed, or mixed

Direct material - V
Maintenance - M
Direct labor - V
Indirect materials - V
Depreciation - F
Utilities - M
Rent - F
 Layout of Project Cost Estimates

1. Above the line items

2. Below the line items

Layout of Project cost estimates
Layout of Project cost estimates
 Overhead Cost
Some examples of overhead costs are:

Rent, Utilities, Insurance, Office supplies, Travel,

Advertising expenses, Accounting and legal
expenses, Salaries and wages, Government fees and
licenses, Property taxes, etc
 Overhead Cost
Some examples of overhead costs are:
Rent, Utilities, Insurance, Office supplies, Travel,
Advertising expenses, Accounting and legal expenses,
Salaries and wages, Government fees and licenses, Property
taxes

Overhead costs can include fixed monthly and annual

expenses such as rent, salaries and insurance or variable
costs such as advertising expenses that can vary month-on-
month based on the level of business activity.

Some organizations also split up these costs into

manufacturing overheads, selling overheads and
administrative overhead costs.
At the end of this session, the
participant should be able to
understand

• Different methods of project cost

estimation.
• Factors governing selection of different
cost estimation methods.
• How to apply these methods in
estimating cost of a particular project.
Methods of Cost Estimation
 Project Cost Management

Plan Cost Management

Estimate Costs

Determine Budget

Control Costs
 Project Cost Management
Plan Cost Management
The process that establishes the policies, procedures, and
documentation for planning, managing, expending, and controlling
project costs.

Estimate Costs
The process of developing an approximation of the monetary
resources needed to complete project activities.

Determine Budget
The process of aggregating the estimated costs of individual activities
or work packages to establish an authorized cost baseline.

Control Costs
The process of monitoring the status of the project to update the
project costs and managing changes to the cost baseline.
 Estimate Costs

ITTO
Inputs for Estimating Cost
Estimate Costs
 Enterprise Environmental Factors
Enterprise environmental factors refer to conditions,
not under the control of the project team, that
influence, constrain or direct the project.
Enterprise environmental factors include, but are not
limited to:
• Organizational culture, structure and governance
• Geographic distribution of facilities and resources
• Government or industry standards
• Infrastructure
• Existing resources
 Organizational Process Assets
Organizational Process Assets include, but are not
limited to:
• Organizational standard processes, policies and
process definitions
• Templates
• Historical information and Lessons learned
EEF & OPA considerations during cost
estimation
 Accuracy of Estimates
1. Rough Order-of-magnitude estimates (ROM):
used in the planning and initial evaluation stage
of a project ( -25 to +75 %) .

2. Semi detailed or Budget, estimates: used in the

preliminary or conceptual design stage of a project
(-10 to +25 %).

3. Definitive (detailed) estimates: used in the

detailed engineering/construction stage of a project
(-5 to +10 %).
 Cost Estimate Classification Matrix for Building and General
Construction Industries

Source: AACE International Recommended Practice No. 56R-08, Cost Estimate Classification System – As applied
in Engineering, Procurement, and Construction for the building and general construction industries.
Estimate Costs: Tools and Techniques
1. Expert Judgment
2. Analogous Estimating
3. Parametric Estimating
4. Bottom-Up Estimating
5. Three-Point Estimating
6. Data analysis (Alternatives analysis,
Reserve analysis, Cost of quality)
7. Project management information system
8. Decision making (voting)
 1. Expert Judgment

Expert judgment, guided by historical

information, provides valuable insight about
the environment and information from prior
similar projects.

Expert judgment can also be used to

determine whether to combine methods of
estimating and how to reconcile differences
between them.
 2. Analogous Estimating
Analogous cost estimating uses the values such as
scope, cost, budget, and duration or measures of
scale such as size, weight, and complexity from a
previous, similar project as the basis for
estimating the same parameter or measurement for
a current project.

When estimating costs, this technique relies on the

actual cost of previous, similar projects as the
basis for estimating the cost of the current project.
 2. Analogous Estimating

Analogous estimating is most reliable when the

previous projects are similar in fact and not just in
appearance, and the project team members
preparing the estimates have the needed expertise.
 3. Parametric Estimating

Parametric estimating uses a statistical

relationship between relevant historical data
and other variables to calculate a cost estimate
for project work.

This technique can produce higher levels of

accuracy depending upon the sophistication and
underlying data built into the model.
 Analogous Vs Parametric

Analogous Estimation Parametric Estimation

Parametric Estimation uses
Analogous Estimation uses historic data historic data from a previous project to
from a previous similar Project. prepare a mathematical or statistical
model.

It usually does not produce very accurate It usually produces more accurate
estimates. The accuracy of the estimates estimates. The accuracy of the
also depends on expertise and experience estimates depends on the sophistication
of the person who does the estimation. of model used and details available in
the historical data.
It is usually less costly and It is usually more costly and time
time consuming to perform Analogous consuming to perform Parametric
Estimation. Estimation.
 3. Parametric Estimating

Parametric estimation types:

1) Index and Power sizing

2) Learning curve
3) Cost Estimating Relationship (CER)

We will discuss these techniques in our

subsequent sessions (while solving numerical)
 4. Bottom-Up Estimating

Bottom-up estimating is a method of estimating a

component of work.
The cost of individual work packages or activities
is estimated to the greatest level of specified
detail. The detailed cost is then summarized or
“rolled up” to higher levels for subsequent
reporting and tracking purposes.
The cost and accuracy of bottom-up cost
estimating are typically influenced by the size and
complexity of the individual activity or work
package.
Bottom – up
Bottom up approach and WBS
WBS
 WBS - Exercise
You have been appointed by your company to manage a
project involving construction of a small commercial
building with two floors of 15,000 gross square feet each.

One floor is planned for small retail shops and the other
floor is planned for offices.

Develop the first three levels of a representative WBS

adequate for all project efforts from the time the decision
was made to proceed with the design and construction of
the building until initial occupancy is completed.
WBS - Exercise
Bottom – up
Top - down
Top Down Vs Bottom up approach
 5. Three-Point Estimating
The accuracy of single-point activity cost estimates may
be improved by considering estimation uncertainty and
risk and using three estimates to define an approximate
range for an activity’s cost:

• Most likely (M). The cost of the activity, based

on realistic effort assessment for the required work
and any predicted expenses.
• Optimistic (O). The activity cost based on
analysis of the best-case scenario for the activity.
• Pessimistic (P). The activity cost based on
analysis of the worst-case scenario for the activity.
 5. Three-Point Estimating
Depending on the assumed distribution of values within the
range of the three estimates the expected cost, cE, can be
calculated using a formula.
Two commonly used formulas are triangular and beta
distributions. The formulas are:
• Triangular Distribution
E = (O + M + P) / 3
• Beta Distribution (from a traditional PERT analysis)

E = (O + 4M + P) / 6
Cost estimates based on three points with an assumed
distribution provide an expected cost and clarify the
range of uncertainty around the expected cost.
ABC Travels are planning on implementing a travel
booking system. In the past they were using a
completely manual system, which caused errors and
delays for their customers. The project manager is
confident that the implementation will be completed in
6 weeks, with a most optimistic estimate being 4 weeks,
and the worst case scenario might take it to 11 weeks.
What must be the three point estimate for this travel
booking system implementation? Use Beta
Distribution (traditional PERT analysis)
A: 4 weeks
B: 6 weeks
C: 11 weeks
D: 6.5 weeks
Answer: ( 4 + 4x6 + 11) / 6 = 6.5 weeks
Cost estimation for a proposed parking that is to
contain 135 parked cars. Use three point estimation
technique
Project No. Cost in Lakhs No. of Cars

1 466,580 150
2 290,304 80
3 525,096 120
4 349,920 90
5 259,290 60
6 657,206 220
7 291,718 70
8 711,414 180
Project Cost in Lakhs No. of Cars Unit cost
No. per car
1 466,580 150 3110.5
2 290,304 80 3628.8
3 525,096 120 4375.8
4 349,920 90 3888
5 259,290 60 4321.5
6 657,206 220 2987.3
7 291,718 70 4167.4
8 711,414 180 3952.3
Using 3 point estimate,
Optimistic = 2987.3
Pessimistic = 4375.8
Most likely = Average of all = 30431.6 / 8
= 3803.95
The cost per car
= (2987.3 + 4 x 3803.95 + 4375.8) / 6
= 3763.15 per car

For 135 cars, the total cost for parking

= Rs. 3763.15 x 135 = 5,08,025 INR
 6. Data Analysis

• Alternatives analysis

• Reserve analysis

• Cost of Quality
 Reserve Analysis

• Contingency Reserves: “Known – Unknowns”

• Management Reserves: “Unknown Unknowns”

Cost of Quality
 7. Project Management Information System

• Spreadsheets
• Simulation software
• Statistical analysis tools

The above tools helps to simplify the cost

estimation process.
 8. Decision making

Voting method
Estimate Costs: Tools and Techniques
1. Expert Judgment
2. Analogous Estimating
3. Parametric Estimating
4. Bottom-Up Estimating
5. Three-Point Estimating
6. Data analysis (Alternatives analysis,
Reserve analysis, Cost of quality)
7. Project management information system
8. Decision making (voting)
 Parametric Cost Estimating
Parametric cost estimating is the use of historical
cost data and statistical techniques to predict future
costs.

1. Index and Power Sizing Technique

2. Learning curve
3. Statistical technique used to develop cost
estimating relationship (CER)
Cost drivers used in Parametric
Cost Estimating
 Parametric Cost Estimating
Parametric cost estimating is the use of historical cost
data and statistical techniques to predict future costs.
Statistical techniques are used to develop cost estimating
relationships (CERs) that tie the cost or price of an item
(e.g., a product, good, service, or activity) to one or
more independent variables (i.e., cost drivers)
Various statistical and other mathematical techniques are
used to develop the CERs. For example, simple linear
regression and multiple linear regression models, which
are standard statistical methods for estimating the value
of a dependent variable (the unknown quantity) as a
function of one or more independent variables, are often
used to develop estimating relationships.
 Indexes

Above equation is sometimes referred to as the ratio

technique of updating costs and prices.
 Indexes
Costs and prices vary with time for a number of reasons,
including
(1) technological advances,
(2) availability of labor and materials, and
(3) inflation

An index is a dimensionless number that indicates how a

cost or a price has changed with time (typically escalated)
with respect to a base year.

Indexes provide a convenient means for developing

present and future cost and price estimates from historical
data.
 Indexes
Above equation is sometimes referred to as the
ratio technique of updating costs and prices.
Use of this technique allows the cost or potential
selling price of an item to be taken from historical
data with a specified base year and updated with an
index.
This concept can be applied at the lower levels of a
WBS to estimate the cost of equipment, materials,
and labor, as well as at the top level of a WBS to
estimate the total project cost of a new facility,
bridge, and so on.
 Indexes

Construction Industry Development Council

www.cidc.in
(http://www.cidc.in/new/activities3a.html)

Engineering News Record Construction Index

http://www.enr.com/economics/quarterly_cost_r
eports
 Indexes

CCI Specimen August 2017

 Indexing the cost of a New Boiler

A certain index for the cost of purchasing and installing

utility boilers is keyed to 1988, where its baseline value
was arbitrarily set at 100. Company XYZ installed a
50,000-lb/hour boiler for $525,000 in 2005 when the
index had a value of 468.

This same company must install another boiler of the

same size in 2019. The index in 2019 is 542. What is the
approximate cost of the new boiler?
 Indexing the cost of a New Boiler

A certain index for the cost of purchasing and installing

utility boilers is keyed to 1988, where its baseline value
was arbitrarily set at 100. Company XYZ installed a
50,000-lb/hour boiler for $525,000 in 2005 when the
index had a value of 468.
This same company must install another boiler of the
same size in 2019. The index in 2019 is 542. What is the
approximate cost of the new boiler?

$608,013
 Indexes

Construction Industry Development Council

www.cidc.in
(http://www.cidc.in/new/activities3a.html)

Engineering News Record Construction Index

http://www.enr.com/economics/quarterly_cost_r
eports
 Indexes

CCI Specimen August 2017

 Power-Sizing Technique

X = cost-capacity factor to reflect economies of scale

The Rule of Six-tenths
 Power-Sizing Technique
An aircraft manufacturer desires to make a
preliminary estimate of the cost of building a 600-
MW fossil-fuel plant for the assembly of its new
long distance aircraft.
It is known that a 200-MW plant cost $100 million
20 years ago when the approximate cost index was
400, and that cost index is now 1,200.
The cost-capacity factor for a fossil-fuel power
plant is 0.79. Estimate the cost of building 600
MW plant.
What will be the cost estimate for 600 MW plant.
 Learning and Improvement
A learning curve is a mathematical model
that explains the phenomenon of increased
worker efficiency and improved
organizational performance with repetitive
production of a good or service.

The learning curve is sometimes called an

experience curve or a manufacturing
progress function; fundamentally, it is an
estimating relationship.
 The concept of Learning curve
Human performance of activities typically
shows improvement when the activities are
done on a repetitive basis: The time required
to perform a task decreases with increasing
repetitions. Learning curves display this
phenomenon.
The concept of Learning curve
 The concept of Learning curve
An 80 % learning curve is often used to illustrate the
learning curve model (possibly because the original
learning curve for aircraft industry was 80 %).

The learning rate must be between 50 and 100 %.

A 50 % learning rate would eventually result in no

labour time per unit – an absurd result

A 100 % learning rate implies no learning.

 The concept of Learning curve

Equation used for learning curve

Y=p (X) n

Y = Number of input resource units needed to produce

output unit ‘X’
p = Number of input resource units needed to produce the
first output unit
X = Output unit number
n = Log s / Log 2
s = learning curve in percent
 Learning curve
An activity is known to have an 80-percent learning
curve. It has taken a worker 10 hours to produce the first
unit. Determine expected completion times for these
units: the 2nd, 4th, 8th, and 16th

Unit Time (hrs) For 3rd unit:

1 10
2 8 Y = 10 x (3)log0.8/log2
4 6.4 = 7.02 hrs
8 5.12
16 4.096
 Learning curve
An airplane manufacturer is negotiating a contract
for the production of 20 small jets. The initial jet
required 400 days of direct labour. The learning
percentage is 80 percent. Estimate the expected
number of days of direct labour for:
a. The 20th jet.
b. All 20 jets.
c. The average time for 20 jets.
Solve in excel
Answer:
a:152 days, b: 4194 days, c: 210 days
 Learning curve
A home builder needs to schedule labor for the
construction of 24 homes in a subdivision. In the
past the builder has noted a 90% learning rate. If
the first home requires 2000 labor hours to build,
estimate the time required to build:
• The 4th house
• The 15th house
• All 24 houses
 Developing a Cost Estimating
Relationship (CER)
A CER is a mathematical model that describes the cost
of an engineering project as a function of one or more
design variables. CERs are useful tools because they
allow the estimator to develop a cost estimate quickly
and easily.
Furthermore, estimates can be made early in the design
process before detailed information is available.
As a result, engineers can use CERs to make early
design decisions that are cost-effective in addition to
meeting technical requirements.
 Developing a Cost Estimating
Relationship (CER)
Typical Equation Forms
 Developing a Cost Estimating
Relationship (CER)
There are four basic steps in developing a CER:

1. Problem definition
2. Data collection and normalization
3. CER equation development
4. Model validation and documentation
 Developing a Cost Estimating
Relationship (CER)

Linear regression

Multiple regression
 Developing a Cost Estimating
Relationship (CER)

Linear regression
Developing a Cost Estimating
Relationship (CER)
Spacecraft Weight (lb) Cost ($
million)
1 400 278
2 530 414
3 750 557
4 900 689
5 1130 740
6 1200 851
 Developing a Cost Estimating
Relationship (CER)

Y = a + bX
∑Yi = a x n + b ∑Xi

∑XiYi = a ∑Xi + b ∑Xi2

Using Excel programme, solving we get CER as

Cost = 48.28 + 0.6597 X
 Developing a Cost Estimating
Relationship (CER)

Multiple regression
Developing a Cost Estimating
Relationship (CER)
Month Material Number of Weight
Handling Moves moved
cost $ (Pounds)
Jan 2000 100 6000
Feb 3090 125 15000
Mar 2780 175 7800
April 1990 200 600
May 7500 500 29000
June 5300 300 23000
July 4300 250 17000
Aug 6300 400 25000
Sept. 5600 475 12000
Oct. 6240 425 22400
 Developing a Cost Estimating
Relationship (CER)
CER for the given problem is

Material Handling cost = 507 + 7.84 X1 + 0.11 X2

where
X1 = No. of moves
X2 = Pounds moved

Based on the above equation, we can estimate the material

handling cost for future month once the number of moves
and pound to be moved is estimated.
 Developing a Cost Estimating
Relationship (CER)
For e.g. in November, the company expects to have 350
moves with 17000 pounds of material to be moved.

So the material handling cost

= 507 + (7.84 x 350) + (0.11 x 17000)
= $ 5,121
Application of CER in real life
projects
Case Analysis
 Value Engineering
Value Engineering Checklist
Are all the functions provided required by the customer?
Can less-expensive material be used?
Can the number of different materials used be reduced?
Can the design be simplified to reduce the number of
parts?
Are all the machined surfaces necessary?
Would product redesign eliminate a quality problem?
Is the current level of packaging necessary?
Can a part designed for another product be used?
Estimate Costs: Tools and Techniques
1. Expert Judgment
2. Analogous Estimating
3. Parametric Estimating
4. Bottom-Up Estimating
5. Three-Point Estimating
6. Data analysis (Alternatives analysis,
Reserve analysis, Cost of quality)
7. Project management information system
8. Decision making (voting)
 References
• A Guide to the Project Management Body of Knowledge (PMBOK) 6th edition, Project
Management Institute
• Norman, Eric S., et al. Work Breakdown Structures: The Foundation for Project
Management Excellence, Wiley, 2011
• William G. Sullivan, Elin M. Wicks, C. Patrick Koelling, Engineering Economy, Prentice
Hall
• PMP Exam Prep, Rita Mulcahy
• Adithan, M.. Process Planning and Cost Estimation, New Age International
• Parviz Rad, Project Estimating and Cost Management, Management Concepts, Inc
• Jerry J. Weygandt, Paul D. Kimmel, Donald E. Kieso, Managerial Accounting – Tools for
Business decision making, John Wiley & Sons, Inc.
• Dr. Emad Elbeltagi, Cost Estimating
• Rodney D. Stewart, Richard M. Wyskida, James D. Johannes, Cost Estimator’s
Reference Manual, John Wiley & Sons, Inc
• Chris Hendrickson, Project Management for Construction - Fundamental Concepts for
Owners, Engineers, Architects and Builders, Prentice Hall
• Richard E. Westney, The Engineer's Cost Handbook - Tools for Managing Project Costs,
Marcel Decker, Inc.
• Dr. Scott J. Amos, Skills & Knowledge of Cost Engineering
• Ray R. Venkataraman and Jeffrey K. Pinto, Cost and Value Management in Projects, John
Wiley & Sons, Inc