Dr.
Farrukh Arif, Assistant Professor, NED UET
CE-591- Cost Engineering
and Control
COST CONTROL DURING
DETAILED ENGINEERING
Engineering Costs
Lecture 7-1
CE-591 Cost Engineering and Control
Dr. Farrukh Arif, Assistant Professor, NED UET
OUTLINE
Introduction
First Step: The engineering Work-hour Estimate
Second Step: A Method for Measuring Progress
Third Step: Forecast Work-hours Required to Complete
the Remaining Work
Total Engineering Cost
Salaries and Direct Payroll Burden
Fixed Overheads
Engineering Expenses
What to do about Work-hour Overruns
Summary
CE-591 Cost Engineering and Control
Lecture 7-2
Dr. Farrukh Arif, Assistant Professor, NED UET
Introduction
Control during detailed engineering falls into five categories.
Contractor engineering work-hours and other office costs.
Equipment.
Detailed design of bulk materials.
Procurement of bulk materials and awarding installation subcontracts.
Project changes.
Our focus will be the first category i.e., cost of engineering.
Major contributor to this cost is work-hours.
Cost Engineer (CE) must take following steps before any control can be exercised over
engineering work-hours.
Develop measuring stick (i.e., realistic engineering work-hour estimate).
Establish method of measuring progress (i.e., scale for evaluating percentage
completion at any point in time).
Forecast work-hours needed for completion (i.e. develop productivity relative to
the estimate and use it to predict the work-hours required from any point in time to
completion of the remaining work).
Lecture 7-3
CE-591 Cost Engineering and Control
Dr. Farrukh Arif, Assistant Professor, NED UET
First Step: The Engineering Work-hour
Estimate (1/3)
Estimate is the CEs primary control tool.
Engineering is broken down into number of special
activities, such as;
Design engineering and drafting
Material procurement
Scheduling
Specification writing
Cost engineering
Separate work-hours estimates should be established for
each of the above.
Total estimated engineering cost = (work-hour estimate X
average wage) + engineering expenses
CE-591 Cost Engineering and Control
Lecture 7-4
Dr. Farrukh Arif, Assistant Professor, NED UET
First Step: The Engineering Work-hour
Estimate (2/3)
Supervisor estimates the work-hours required for his area of
responsibility.
Supervisors estimate must be compared with historical records
of similar projects and other in-house data before acceptance.
After contractor has completed his estimates, the owners
should check it or compare it to his own independent
assessment.
Points of variance should be discussed between owner and
contractor and a realistic estimate representing an achievable
goal should be agreed upon.
The agreed estimate becomes the engineering control budget.
Lecture 7-5
CE-591 Cost Engineering and Control
Dr. Farrukh Arif, Assistant Professor, NED UET
First Step: The Engineering Work-hour
Estimate (3/3)
Owners have temptation to accept or push contractor in
accepting low engineering work-hour estimate. Its unrealistic
and disaster.
This can result in high cost of cost control.
The engineering budget must be prepared early in order to be
useful.
On large projects, it is a good idea to aim at completing the
budget within two months after start of engineering.
This provides supervisors more control over any probable
corrective actions required in troublesome areas.
CE-591 Cost Engineering and Control
Lecture 7-6
Dr. Farrukh Arif, Assistant Professor, NED UET
Second Step: A Method for Measuring
Progress (1/5)
For effective control over engineering work-hours, manager must
know following four things.
1. Physical progress made to date.
2. Number of work-hours used.
3. Calendar time used.
4. Work-power levels employed.
By knowing these four things,
one can forecast work-hours and calendar time required to
accomplish uncompleted work.
Whether an increase in work-power (labor) is required.
Points 2,3,4 above can be obtained directly from accounting records.
Lecture 7-7
CE-591 Cost Engineering and Control
Dr. Farrukh Arif, Assistant Professor, NED UET
Second Step: A Method for Measuring
Progress (2/5)
Point 1 requires special method of measurement.
The measuring method normally employed is physical percentage of
completion.
This includes; progress on preparation of drawings, purchasing,
inspection, specialist design, and all other engineering activities.
Generally used approach
Engineering work broken down into major categories.
Contribution to each of the categories toward total percent completion
is proportional to the percentage that the estimated work-hours for the
category bears to the total estimated work-hours of the project.
The percentage completion for each individual major activities is
based on physical progress measurement.
CE-591 Cost Engineering and Control
Lecture 7-8
Dr. Farrukh Arif, Assistant Professor, NED UET
Second Step: A Method for Measuring
Progress (3/5)
Example: Table 1 illustrates a method of calculating percent progress.
Lecture 7-9
CE-591 Cost Engineering and Control
Dr. Farrukh Arif, Assistant Professor, NED UET
Second Step: A Method for Measuring
Progress (4/5)
In practice, determining the engineering percent completion is a
complicated procedure.
Some organizations only measure production engineering.
i.e., activities leading to specific products/tangible results.
Approved-for-construction drawings.
Material takeoffs.
Progress is not measured on support activities.
For e.g., Supervision, clerical work, scheduling cost control, procurement,
expediting, inspection and engineering support during construction.
These are considered as over-heads, time related activities.
The approach is analogous to construction, where direct labor is supported by
indirect labor included in field labor overheads.
CE-591 Cost Engineering and Control
Lecture 7-10
Dr. Farrukh Arif, Assistant Professor, NED UET
Second Step: A Method for Measuring
Progress (5/5)
If owner is to place reliance in a contractors method, owners CE must
verify that the method includes the following points.
1.
Progress of individual activities based on realistic physical measure
independent of the work-hours consumed.
All engineering activities including supervision accounted for as
production engineering or as a support function.
Activities should be broken down into sufficient detail to provide
realistic physical progress rather then global assessments.
Those using the developed methods should understand those clearly.
Provision should be available for reweighing the activities in case
initial estimates were not realistic.
2.
3.
4.
5.
Lecture 7-11
CE-591 Cost Engineering and Control
Dr. Farrukh Arif, Assistant Professor, NED UET
Third Step: Forecast Work-hours Required to
Complete the Remaining Work (1/5)
Accounting record can tell us work-hours expended to date.
Those are history and can not be controlled anymore.
If a manager is to exercise control by focusing on unexpended hours.
i.e. where the trouble spots are and what is the magnitude of the
trouble.
This information is provided by the CE is cooperation with other
members of PM team by:
1.
2.
3.
4.
Forecasting the work-hours required to complete the work in each category.
Comparing forecasts category by category with the budget.
Analyzing the underlying reasons in categories that show budget overruns.
Comparing the forecasted work-hours with workers available to determine if
calendar schedule can be met or if additional personnel are required.
CE-591 Cost Engineering and Control
Lecture 7-12
Dr. Farrukh Arif, Assistant Professor, NED UET
Third Step: Forecast Work-hours Required to
Complete the Remaining Work (2/5)
The forecast of engineering work-hours required to complete the work
is built up from detailed forecasts made by supervisors of each major
engineering function.
CE must check the forecast for consistency and reasonableness.
Accounting record can tell us work-hours expended to date.
One such check is to determine work-hours required for 1% progress.
Example from Table 1:
Lecture 7-13
CE-591 Cost Engineering and Control
Dr. Farrukh Arif, Assistant Professor, NED UET
Third Step: Forecast Work-hours Required to
Complete the Remaining Work (3/5)
The technique just described can be applied to engineering works as a
whole.
The composite percent completion combined with total work-hours
used will give the number of work-hours consumed to date to
accomplish 1% completion.
By plotting 1% completion curves for number of projects, it has been
found that they will fall into a pattern similar to following Figure 1,
taken from an actual project.
CE-591 Cost Engineering and Control
Lecture 7-14
Dr. Farrukh Arif, Assistant Professor, NED UET
Third Step: Forecast Work-hours Required to
Complete the Remaining Work (4/5)
Figure 1:
CE-591 Cost Engineering and Control
Lecture 7-15
Dr. Farrukh Arif, Assistant Professor, NED UET
Third Step: Forecast Work-hours Required to
Complete the Remaining Work (5/5)
Takeaways from Figure 1
The budget line slopes upward reflects change orders.
Detailed engineering estimate was not available until 30% point in
engineering completion, which is late.
The high work-hours actually used at the 10% and 20% complete
points gave early warning of a serious deficiency in the preliminary
budget.
The actual line has a typical shape, and by comparing with the curves
from past projects, an early forecast, as shown by dotted line, could
have been made at the 20% completion point.
Large discrepancy between the preliminary budget and actual results
show that reporting supervisor had a good concept of physical work to
be accomplished that was not reflected in the preliminary budget but
was belatedly recognized in the detailed estimate.
CE-591 Cost Engineering and Control
Lecture 7-16
Dr. Farrukh Arif, Assistant Professor, NED UET
Total Engineering Cost
Salaries and direct payroll burden.
Fixed Overheads.
Engineering Expenses.
Lecture 7-17
CE-591 Cost Engineering and Control
Dr. Farrukh Arif, Assistant Professor, NED UET
Salaries and Direct Payroll Burden (1/3)
Salaries are generally estimated and forecasted as averages.
Historical curves from past projects.
Figure 2:
CE-591 Cost Engineering and Control
Lecture 7-18
Dr. Farrukh Arif, Assistant Professor, NED UET
Salaries and Direct Payroll Burden (2/3)
Figure 2 shows typical pattern of variation in average engineering
salaries over the lifecycle of a project.
Highest at the start of the project when managers, highly paid
specialists and designers are at work.
Average reaches a low point at about 50% of completion reflecting
influx of large number of draftsmen, technicians and less experienced
designers.
Upward blip at the end of engineering, reflecting higher paid follow-up
personnel who are checking drawings, expediting vendors, and
trouble-shooting field erection problems.
Lecture 7-19
CE-591 Cost Engineering and Control
Dr. Farrukh Arif, Assistant Professor, NED UET
Salaries and Direct Payroll Burden (3/3)
Payroll burden is forecasted as % of salaries.
It covers employers cost items, such as;
Social security
Workers accident liability insurance.
Medical insurance.
Vacation pay.
Pension plans.
Any other legal requirement and company policy.
CE-591 Cost Engineering and Control
Lecture 7-20
Dr. Farrukh Arif, Assistant Professor, NED UET
Fixed Overheads
Fixed overheads are prorated.
Calculated in dollars per work-hours, calculated by accounting
methods and verified by auditors.
These fixed costs include;
Office rentals.
Utilities.
Janitorial services.
Corporate management.
Proration percentages are reexamined quarterly or semiannually.
These are normally not problematic for CE.
There is very little that a manager on an individual project can do
about these fixed costs.
Lecture 7-21
CE-591 Cost Engineering and Control
Dr. Farrukh Arif, Assistant Professor, NED UET
Engineering Expenses (1/3)
Engineering expenses are within the control of individual project
managers.
These expenses normally average about 25% of the salaries.
Without careful control these costs can increase.
There are number of minor subaccounts that fall into engineering
expenses, but the major ones are as follows.
Computer Charges.
Reproduction Cost.
Travel cost and Relocation Expense.
CE-591 Cost Engineering and Control
Lecture 7-22
Dr. Farrukh Arif, Assistant Professor, NED UET
Engineering Expenses (2/3)
The subaccounts can be best monitored by trend or tracking curves
(Figure 3).
Trend curves can be developed using following steps.
1.
2.
3.
4.
5.
6.
7.
Establish average calibration curve by plotting actual expenditures
from two or three past projects. On these curves, plot % of total costs
spent against % of engineering completion.
Translate the average calibration curve into the budget for your
particular project.
Plot actual cost and compare to the calibration curve.
If actual cost track close to the calibration curve, no action need to be
taken.
If actual cost begin to trend away from the calibration curve, either
plus or minus, investigate to determine the reason.
Look for possible corrective action.
Forecast the total final cost.
Lecture 7-23
CE-591 Cost Engineering and Control
Dr. Farrukh Arif, Assistant Professor, NED UET
Engineering Expenses (3/3)
Figure 3:
CE-591 Cost Engineering and Control
Lecture 7-24
Dr. Farrukh Arif, Assistant Professor, NED UET
What to do about Work-hour Overruns
1.
2.
3.
4.
5.
If there is an overrun in design/drafting work-hours, take following
actions.
Maximize the sue of standard drawings for typical items.
Control design alternate studies.
Investigate the flow of information between design sections,
management and procurement.
Ask the engineers and draftsmen.
Minimize change orders.
Frequently engineering overruns can translate into construction
savings, so dont be penny wise and pound foolish.
Lecture 7-25
CE-591 Cost Engineering and Control
Dr. Farrukh Arif, Assistant Professor, NED UET
Summary
Three critical steps that CE must take to control engineering costs.
Develop realistic engineering work-hour budget.
Set-up method to measure physical progress.
Forecast the work-hours required to complete remaining work on
monthly basis.
CE-591 Cost Engineering and Control
Lecture 7-26
