Cost Engineering

Project Cost Management

August, 2021
Resource
Cost Estimating Budgeting Cost Control
Planning

Inputs
Products
Historical Information Tools
Resource
WBS Expert Judgement
Requirement
Project scope statement Alternative identification
Resource pool description Project management software's
Activity duration

Figure 4.1 Resource Planning process

 Inputs
Tools Products
Resource Requirement
Bottom-up Estimating Cost estimate
WBS
Analogues Estimating Supporting detail
Resource rating
Parametric Estimating Cost
Funding profile
management
Activity duration estimate Design to cost plan
Historical information Estimating
Chart of account Estimating Computer tools
publications

Figure 4.2 Cost estimating process

Tools Products
Inputs
Bottom-up Estimating Cost Baseline
Cost estimate
Cost management plan Analogues Estimating
WBS Parametric Estimating
Design to cost
Project Schedule Estimating
Resource Available Computer tools

Figure 4.3 Cost budgeting process

Inputs Tools Products
Cost baseline Cost change Revised Cost estimates
control system
Performance reports Budget updates
Performance
Change requests measurements Corrective action
Cost management Earned value Project closeout
plan management Estimate at completion
Computer tools Lesson learned

Figure 4.3 Cost Control process

Planning Manpower Costs

✓ requires planning the manpower need in type and

number first.

✓ “how to do?”

✓ project direct and indirect manpower need can be

decided on the bases of the work and organization
breakdown structures of the project.

✓ Completing the challenging task of determining the

productivities of individuals and crews corresponding
to production the type and number can be decided.
✓ Once the number is know the planned manpower
cost can be obtained using the prevailing estimated
daily or monthly pay.

✓ The manpower of the support function can be

decided from the organization structure and
staffing plan of the project.

✓ These structure based approaches have to be used

to classify the costs in to direct and indirect.
Direct manpower Cost

✓ Basic wages/salaries

✓ Overtime, transportation, accommodation,

✓ employment expenses: recruitment, selection,

induction, training

✓ benefits, bonus (incentive), entertainment,

✓ Statutory payments: insurance, social security,

annual leave, medical, social leaves (mourning and
others), severance pay
Indirect Manpower Costs:

✓ all remunerations of project supervisory staffs

above foreman level: salaries, allowances, benefits,
and other payments,

✓ expenses made for all support staff members of

the projects: Administration and personnel, Finance
and accounting, purchasing, supplies and warehouse;
Equipment Management.

✓ any individual or group not considered under direct

are to be included here.
Planning Equipment Costs

✓ The type and number of equipment required is

decided while planning the works considering quality
assurance, quantity, and project duration.

✓ Once the type, number and the duration of each is

known the cost involved can be determined using
the applicable rate.

✓ Whether for own or rental there are two

approaches used in calculating the cost of a given
equipment
Unit Rate Method- considers an equipment to be
actually operational every working hours of a day for
the whole duration that it remains on site and
calculates the cost accordingly.

e.g. equipment such as Dozer, grader and dump

trucks assigned on embankment construction
can be considered

Operational- considers an equipment as operation like

in the first while actually it can’t be used for the
whole hours of every working day for the period that
it remains under the possession of the project.

e.g. equipment such as roller/compactor, water truck

and others working on embankment may not be
used for full hours that a grader may be used.
Planning Materials Costs

✓ What to include under material using the policy of the

organization through discussion with its accounting unit.

✓ Knowledge of ----helps project managers (in fact head office

as well) where to spend effort and time during planning and
control of material costs.

✓ Determining types and quantities, including allowance for

wastage, of material for the major and critical works and
multiplying by the applicable purchase prices gives the cost of
material to be anticipated in total and ,of course, periodically
according to their schedules
Planning Costs of Subcontract

✓ If due to contractual requirement or preference of

the contracting company itself subcontractor(s) is
(are) to be involved for part of the project work
the costs to be anticipated should be calculated
and included in the plan.

Planning Overhead Costs

✓ Project Overhead-Any overhead expenditure not

included with any of the above input resources has
to be identified valued and planned.

- site establishment and management; health and

safety; community participation, and any other
project specific costs identified.
✓ Head Office Overhead- Depending on the number and
value of projects the company has or using any other
rational estimate approach a portion of the overhead of
the head office is anticipated to be loaded on to a project
or projects the company is managing at the time under
consideration

Out put of Cost estimating

✓ Cost estimates- are quantitative assessments of the likely

cost of the resources required to complete project
activities.

- labor, material, supplies, and special categories such as an inflation allowance or cost reserve.
Supporting detail; supporting detail for the cost
estimates should include:

✓ A description of the scope of work estimated

(provided by referring to WBS)
✓ Documentation of any assumptions made.
✓ Documentation of the range of possible results.

Cost management plan;

-it describes how cost variances will be managed by
different responses.
-maybe formal or informal highly detailed or
broadly based.
-It is a subsidiary element of the overall project
plan.
To calculate for each activity cost estimate uses

✓ the resource requirements

✓ resources cost rates
✓ the activity duration estimate

To determine which strategies and methods would

yield the most accurate estimates.

✓ Estimating publications
✓ historical information
✓ risk information

A chart of accounts -to assign costs to different

accounting categories.
✓ Input to estimation – WBS

✓ Carefully comparing activity estimating to the

activities listed in work breakdown structure will
serve as a reality check and discover tasks which
may have been overlooked or forgotten.

✓ Output- Project cost estimates.

✓ Details- usually define the tasks by making

references to the work breakdown structure.

-a description as to how cost was derived, any

assumptions made, and a range for estimation.
✓ Cost management plan -how cost variances will be
managed.
Information considered for inclusion in the plan:

✓ Cost and cost related data

✓ Frequency of data collection and analysis
✓ Sources of cost related data
✓ Methods of analysis
✓ Entities involved in the process, along with their
responsibilities and duties
✓ Limits of acceptable variance between actual
cost control process with the change process
✓ Procedures and responsibilities for dealing with
unacceptable cost variances
Cost Budgeting
✓ Budget is a monetary expression of plan.

✓ project budget represents financial plan of the

works of a project.

✓ the summations of the estimated costs of

individual activities or work packages to establish
a cost base line.

✓ is a spending plan; detailing how and at what rate

the project’s funding will be spent.

✓ It embodies a comprehensive plan and schedule of

resources which are determined based on the plans
and schedules of the works of a project in
question.
✓ Once costs have been estimated for the work
breakdown structure (WBS) and all this has been
put together for an overall project cost, a project
budget or a cost baseline is prepared.

Purpose
For Project Owner
✓ It refers to an investment/capital budget/

For Contractor
✓ It indicates cost plus profit.

If properly done and adhered to; owners can use

budget to guide their timing for settlement of
contractors’ partial payments timely which in a way
enhances progress.
✓ For a contractor preparing appropriate budget and
respecting it helps him/her to supply project
required inputs timely thereby avoiding delay and
motivating project workforce towards better
performance.

In order to prepare a budget plan these realities

must be understood.
✓ All project activities are not performed at once.
✓ Resources are finite.
✓ Funding will probably be spread out over time
Project Budgeting Process

✓ it is recommended that budgeting process to be

participatory.

✓ active participation of the implementers themselves

will be more successful.

✓ It is part of a project’s cost planning process which

in some way or the other should involve both
project and head office functional units,
particularly materials, equipment, and finance
besides of course engineering and construction

✓ Budgeting is not a Bose’s allocation of money to

subordinates.
To make the process participatory and create
ownership at the implementation stage it is
recommended that a construction organization to
follow :

✓ The project manager with his team prepares work

execution plans and schedules; and determines
schedules of inputs based on the schedule of the
works. Convert the inputs to costs and show them
monthly.

✓ Simultaneous to the expenditure plans and

schedules show partial payment amounts and
schedules to indicate the values of works planned
and scheduled to meet contractual commitments.
✓ The head office planning and construction functions
(if organized separately) have to agree with the
project’s plans and schedules of works and
resources and may be get a first round go-ahead
from the General Manager. Since time is limited by
contract, resources requirement is what needs to
be defined at this stage.

✓ The resources type, quantity and desired delivery

schedules are given to the work units to provide
purchasing unit prices and also prepare its
respective budget need for the purchase and supply
as scheduled.
✓ The purchasing and supplies work unit places the
project’s input need to the Finance and Accounting
functional unit showing both the cash and credit
purchase possibilities.

✓ The finance and accounting work unit will evaluate

and try to sort out with the General Manager to
decide on the cash flow sources. If the finance
requirement is found acceptable by the top
management then implementation will be started by
the project and the functional support units at
head office.
Summary for the process

✓ Basic: set a budget that comprises direct cost plus

project overhead determined using current market
input rates not the price in the BOQ of the
contract in question.

✓ Head office overhead/ profit or loss

-at head office level.
-Team: planning engineer, the construction manager
and the project manager

-Functional Units- purchasing and supplies;

Equipment management, human resources
and Finance and Accounting
Project Cash Flow

✓ The life blood of a business.

✓ Outflow –everyday… inflow –periodic

✓ Plan and schedule of the work should be prepared

by considering the cash flow aspect as well.

✓ care should be taken not to plan in a way that

result in starving the project at later stage by
what is usually referred as frontloading with the
pretext of current constraint.

✓ The plan should consider the reality and interest of

the project not presumptive would-be desires.
✓ The level of liquidity or working capital required can
be measured using ratios as may be recommended
or based on the policy of the company.

✓ Cost baseline; is a time-phased budget that will be

used to measure and monitor cost performance on
the project. It is developed by summing the
estimated costs by period and usually displayed in
the form of an S- curve.

✓ The spending plan will form a cost base line which

is the primary measure of project health and
performance and deviation from the cost base line
is a major warning sign requiring management
intervention to bring project back on track.
Cost Control

✓ influencing the factors that cause cost variances

and controlling changes to the project budget.

✓ the final step of cost management process but it

continues through to the end of the project.

✓ It consists of efforts to track spending and ensure

it stays within the cost baseline.

✓ Planning is intimately linked with control. Planning

sets controls in advance, using past and present
data and information; while control feeds planning
back with varying or confirming inputs to that
considered during planning
✓ Project manager has to plan the costs of major
activities, implement the plan, check, i.e. monitor
whether implementation is consistent with the plans
and then Act!

✓ Direct cost-is a major component of a construction

project cost and since it is basically influenced by
the productivities and unit prices of resources in
use it is legitimate that the monitoring and
controlling activities focus on these two basic
factors.

✓ In order to properly follow up the prices and

productivities of resources during execution it
needs to first plan the monitoring and controlling
process itself.
✓ The process requires answering questions such as
what needs to be done, how it will be done and who
will be responsible for each process have to be
specified and prepared for with appropriate
commitment for implementing them.

✓ This is because the monitoring and controlling

processes themselves require committing time and
resource

✓ If they are not taken seriously and considered to

be done when convenient then there will be no
proper commitment to collect and collate data; and
generate up-to-date information to compare with
the ones used for planning. Using these information
the relevant responsible unit /individual can be able
to make timely decisions
✓ An appropriate prerequisite for this is to have
effective and efficient data collection and
information dissemination system to different
relevant responsibility units of the project

✓ Once this system is made in place depending on the

specific project situation the next task is collecting
data on the productivities of the various resources,
processing them to generate information and
disseminate to the concerned units and individual

✓ Monitoring the hourly outputs of labor and

equipment and comparing them with the
corresponding values anticipated at the start of the
production process enables to control direct costs
or costs for which payment is going to be received.
Direct Cost Method of Control
✓ estimates may be based on the estimator’s personal
experience, company practice records or customary
industry standards.

✓ During execution these have to be checked and

adjusted accordingly. The checking is done by
recoding the individual or crew output with the
corresponding time taken.

✓ If the method of execution is different from the

one considered at the planning phase then this too
should be recorded to compare with the merit or
demerit of the planned.
Equipment Productivity: expressed in terms of
output/hours spent

✓ comparing the actual output or productivity of

equipment with the planned is one method of direct
cost control following up the factors influencing
productivities

✓ Productivity may be affected by the capacity of

the machine itself, the skill and attitude of
operator; and working environment and other
factors.

✓ Planned productivity may be affected due to work

itself, say if changed from the anticipated,
availability and utilization efficiency of the
machine.
✓ Availability is compared with down time thereby
helping to evaluate how much of the time the
machine is expected to be functional. utilization
efficiency helps to compare the operational hours
of the machine against its idle time. Both require
project manager’s effective and efficient
management of his maintenance, construction and
other support units.

✓ Following up the operational, idle and down time on

one hand; and recoding the hourly/daily
performances including the working environment on
the other are the necessary inputs for making
analysis and decisions on cost related matters.
Changes in productivity affect planned costs
negatively or positively.
✓ Performances of excavating, hauling and placing
equipment may be considered as the common major
equipment components requiring follow up for
controlling costs.

✓ Quantities of material produced, transported or

spread and compacted against the time spent
determine the productivities of each work type.

✓ However since productivities can be affected by

various factors it requires to continuously work to
improve the skills and attitudes of operators and
the rest of the crew; and facilitate the physical
and other work environments the production, hauling
and placing operations.
✓ Thus for direct cost control of equipment and labor
it requires setting standards under the existing
work environment in terms of physical and monetary
values before or at the beginning of the production
process

✓ Standard prices of labor or equipment compared

with the current may result in negative or positive
outcomes. The net effect of output and price then
give labor or equipment direct cost variance.
Materials Productivity: expressed in terms of
output/consumption

✓ Factors- wastage and change in rate of

consumption resulting from various factors.

✓ handling of fuel and changes in the condition of

the machine

✓ Fuel consumption rates of machines depend on the

machine itself, type of work and working condition
and even operator’s skill. Thus the physical
situations have to be similar for comparing outputs
of the current with the one taken as standard.
Material usage = Standard rate – Actual quantity
rate may be favorable or unfavorable.

Negative direct cost variances may result from

✓ Changes in the prices of major inputs

✓ wrongly set standards or variance in the uses of
the inputs
✓ mismanagement of resources
✓ substandard input and performances
✓ unforeseen contractually non-compensable
expenditures
Ways of reducing costs
✓ developing options of value engineering through
questioning and analyzing previously set standards;
conducting continuous work studies, on major
operations,

✓ through building quality management practices, i.

e. no rework meaning every bit of work done the
first time complies to the specification

✓ assure satisfaction and enhance motivation of

employees at all levels of the whole supply chain
till the end customer
Earned Value Method of Control

✓ While the productivity based direct cost control is

done by comparing planned or “standard”
performance rates with the ones observed during
implementation the earned value compares budget
which is planned with earned value and actual costs.

✓ Unit prices of inputs against actual prices; and

types and quantities of works executed with
corresponding expenditures have to be tracked.

✓ Using these as input the actual cost can be

determined and compared with the planned or the
budgeted cost.
✓ The physical accomplishment of the works to that
of the planned gives the degree of execution in
physical terms using the applicable units of
measurements.

✓ When the budget of this same quantity of work is

compared with the actual spending it demonstrates
variation in cost.

✓ earned value method helps to:

- monetarily compare cost and time overruns or
under-runs to enable management take timely
appropriate actions, say adjusting cash flow, and
updating financial forecasts and project gain or
loss expectations.
❑ Earned Value Method of control

 Budgeted Cost of Works Scheduled (BCWS) or

Planned Value (PV)
 Budgeted Cost of Works Performed (BCWP) or
Earned Value(EV)
 Actual Cost of Works Performed (ACWP) or
Actual Cost (AC)
 EVM Performance Measures

Cost Variance (CV) = BCWP – ACWP

Schedule Variance (SV) = BCWP– BCWS

✓ The ration BCWP/ACWP gives the cost performance index of the reporting
period showing level of spending efficiency

✓ The ration (ACWP/BCWS) gives the schedule performance index of the

reporting period showing schedule efficiency.

✓ Budget at Completion (BAC) represents the total Planned Value for the
project.

✓ Challenge: getting actual cost data.

EVM and Basic Project Management Questions
EVM Performance Measures
Interpretations of Basic EVM Performance Measures
Generally, the following activities make up the cost
control process.
1. Monitor project spending to ensure it stays within
baseline plan for spending rate.

2. When spending varies from the plan determine the

cause of variance.

3. Prevent unapproved changes to the project and

cost baseline.

4. Manage the change in the baseline to allow for the

new realities of the project.

5. Accurately record authorized changes in cost base

line.
6. Inform stakeholders of changes
Out puts

A. Revised cost estimates; Revised cost

estimates are modifications to the cost
information used to manage the project.
B. Budget updates; These are a special
category of revised cost estimates. Budget
updates are changes to an approved cost baseline.
These numbers are generally revised only in
response to scope changes.

C. Corrective action; This is done to bring expected

future project performance in line with the
project plan.
Out puts

D. Estimates at completion (EAC); This is a

forecast of total project cost based on project
performance.

E. Lessons learned; The causes of variances, the

reasoning behind the corrective action and other
types of lessons learned from cost control should be
documented as a historical data source.
End of Chapter 4