Project Cost Engineering

Cost Engineering It is that area of Engineering practice,

where Engineering Judgment & Experience are
utilized,
in the application of scientific principles and
techniques,
to the problem of:
Cost Estimation
Cost Control
Cost Forecasting
-Chris Hendricksion,
Approches to Cost Estimation in Project Management

Cost Engineering has connections with :

Tendering and Contracting
Project Management estimating, planning, scheduling,
controls
Claims Management
Risk Management
Business Management
Cost Management
Value Methodology VE and VA
Dispute Resolution &
Engineering . through and through
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Cost Engineering focuses on relationships between

Physical Dimensions and

Cost Dimensions
of.
whatever is being Engineered !!

Cost Engineering, a field of Engineering practice,

began in the year 1956 with founding of
AACE International --AACE Association for Advancement of Cost
Engineering (www.aacei.org)

The International Cost Engineering Council

(ICEC) (www.icoste.org)
was founded in 1976 ,
to promote co-operation between Cost Management
and
Project Management.
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Project Cost Estimation

What is Cost?
An amount paid or required in payment for a
purchase/for the production/upkeep of
something..measured in terms of effort/time
expended.
Resources sacrificed/foregone to achieve a
specific objective.
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Cost is the amount of expenditure (actual or

national), incurred on or attributable to, a specified
thing or activity.
Cost is generally measured in monitory terms.
The term cost will be meaningful only with a
suffix or a prefix, with reference to some object.
E.g. material, finance, BOP, Variable, indirect,
process et al.

Elements of Cost:

Basic elements: material, labour, expense

Material All materials required to be consumed,
upto specified point
Labour All remuneration paid to the staff and
workmen for conversion of raw materials into
finished products.
Expense Cost of utilities and services used for
the conversion process including notional cost for
the use of owned assets.
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Further sub-division :
Direct Costs can be identified with or related to
the product / services
Indirect Costs can not be identified/traced to a
given object in an economical way
Basic cost elements shall be sub-divided into
Direct and Indirect costs.
Prime cost sum of Direct Costs
Overhead cost sum of Indirect cost
Types of overhead cost:
Production O/H, Admin O/H, Selling &
Distribution O/H

Summary :

Direct (Matl. + labour + expenses) = Prime cost

Prime Cost + Factory O/H = Factory cost

Factory cost + Admin O/H = Cost of Production

Cost of Production + Selling & Dist. O/H = Cost of

Sales

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Cost Allocation and Apportionment :

Cost Allocation Allotment of the whole items of
costs to cost centers / cost units
Cost Apportionment Allotment of proportions of
item of cost to cost centers / cost units
Direct costs are allocated to the cost center
Indirect costs are apportioned expenses.

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Cost Classification :
It is a process of grouping costs according to
their common characteristics. E.g. Nature,
function, variability, controllability, normality
et al.
Essential for identifying costs with the cost
center for the purposes of determination,
control and decision making.
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Cost classification by variability :

Fixed costs tend to remain unaffected by the
change in volume of output. E.g. Supervisory
salary, T & D
Variable costs tend to vary directly with the
volume of output. E.g. direct material
Semi fixed/ Semi-variable cost tend to be partly
fixed an partly variable. E.g. tel. Exp., ele. bills
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Marginal Costing :
A principle of costing in which variable costs
are charged to the cost center/unit and the
fixed costs are written off in full, against the
contribution
Contribution = (Sales Variable cost of sales)
This contribution Margin (CM) is taken as
basis for decision making pertaining to
pricing, product-mix, Make Vs Buy et al.

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Estimation Process at a glance:

Determine Project Scope
Break the Scope in work Packages & detail it down
(WBS)
Work out quantities in each WBS element
Determine Unit Rates for each WBS element.
Synthesis all costs together.

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 Estimation Process at a glance:

continued

Work out what other costs will be incurred by

undertaking the project.
Carry out Risk Management Exercise for the
project.
Determine Contingencies , based on this Exercise.
Present the Estimate to Decision maker/s.

Project Cash Flow Management

What is cash-flow statement?
A statement of Money flowing IN and OUT, Over a
span of time.
A project with POOR cash flow can not keep project
EXECUTION and project PROGRESS, steady, as per
schedule.

Project Cash Flow Management

Continued

Project Profitability and Project cash flow will be

IDENTICAL, only at the end of project.
It is the variations en-route, throughout the project, that
can spell disaster, if not controlled !
It relates to Time Value of Money.

S.
No.

Project Cash Flow Statement

Period/ Type

INFLOW

Initial Advance

Interim Advance

Mile stone
billing

Retention

T0

T1

T2

T3

.Tn Tota
l

Remarks

Subtotal (A)
B

OUTFLOW

Pmt. to
suppliers

Pmt. to
constructors

Salaries at site

Site Expenses
Subtotal (B)

Direct
Expenses

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Project Schedule shall be superimposed on Cash Flow.

Project Cash Flow should be prepared for Direct and costs of the
Project Manager.

Check points
Total Inflow = Project Contract Price.
Total Outflow = Project Budget.
Cumulative Flow = Project Contribution Margin ( CM).
CM = (Contract Price Direct Expenses).

Cash Flow Management is a process, an on-going project activity. It

calls for close monitoring and corrective actions.

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Cash Flow Management

It is an on-going activity, through out the project and hence
is a process.
Cash Flow statement enables PM to control project on Time
and Finance Parameters.
Identify person / function / Dept. with each Line item and
Cell in the Statement and make the person Responsible to
achieve it.
Hit Payment Window understand payment process at
customers end.

Cash Flow Management

.Continued

Incorporate appropriate Payment terms and Modes of

Payment at contracting stage itself.
Co-relate WBS with Payment terms Earlier the better.
Attempt for, Pay when Paid for.
Minimize Retentions.
Use Securities in lieu of Cash Retentions.
Use Carrot and Hammer Principle effectively.

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