Cost management is the process of planning and controlling the budget of a business. Cost management is a form of management accounting that allows a business to predict impending expenditures to help reduce the chance of going over budget.

1. Profit From Performance | AMIT KUMAR SENAPATI PMP®
CONSTRUCTION COST ENGINEERING AT PROJECT SITES

2. 2 | P a g e
COST ENGINEERING AT CONSTRUCTION SITES
AMIT KUMAR SENAPATI, PMP®
INDEX
Sl. No. CONTENT Pg. No.
1.0 What is Cost Engineering 03
2.0 Total Cost Management 03
3.0 Cost Structuring 06
4.0 Cost Accounting 07
5.0 Economic Cost 12
6.0 Scheduling Levels and Reporting 13
7.0 Various methods to measure work
progress
14
8.0 Earned value for Fixed Budgets 16
9.0 Productivity 17
10.0 Conclusion 18
11.0 Reference 18

3. 3 | P a g e
COST ENGINEERING AT CONSTRUCTION SITES
AMIT KUMAR SENAPATI, PMP®
1.0 What is Cost Engineering?
Cost Engineering is the practice that an enterprise uses to manage the total life cycle cost investment in
its portfolio of strategic assets.
1.1 Defining Integration
Integration is the combination of process plus competency plus resources as brought together in
projects to create competitive strategic assets.
Effective integration is the dynamic combination of process, competency and resources with an eye on
process and asset objectives. By ‘Dynamic’ it means that people in an enterprise know when to modify
their processes, renew their skills and leverage shared resources in a way that yields projects, programs
and assets that collectively meet the owners changing needs and expectations and give the enterprise a
competitive advantage.
2.0 Total Cost Management (TCM)
Total Cost Management is effective application of professional and technical expertise to plan and
control resources, costs, profitability and risk.
The two levels of TCM processes are:-
i) Strategic Asset Management
ii) Project Control Processes
Project Control is a process nested within the project implementation step of strategic asset
management.
TOTAL COST MANAGEMENT PROCESS MAP

4. 4 | P a g e
COST ENGINEERING AT CONSTRUCTION SITES
AMIT KUMAR SENAPATI, PMP®
TCM STRATEGIC ASSET MANAGEMENT PROCESS
TCM PROJECT CONTROL PROCESS

5. 5 | P a g e
COST ENGINEERING AT CONSTRUCTION SITES
AMIT KUMAR SENAPATI, PMP®
SKILL AND KNOWLEDGE IMPORTANCE IS ASSET LIFE CYCLE
SKILL AND KNOWLEDGE IMPORTANCE IN PROJECT LIFE CYCLE

6. 6 | P a g e
COST ENGINEERING AT CONSTRUCTION SITES
AMIT KUMAR SENAPATI, PMP®
3.0 Cost Structuring
Cost can be structured into the following:-
i) Direct Costs.
Direct costs are those resources that are expended solely to complete the activity or asset.
ii) Indirect Costs.
Indirect costs are those resources that need to be expended to support the activity or asset
but that are also associated with other activities and assets.
iii) Fixed Costs.
Fixed costs are those cost elements that must be provided independent of the volume of
work activity or asset production that they support.
iv) Variable Costs.
Variable costs are those cost elements that must be provided and are dependent on the
volume of work activity or asset production that they support.
Examples of various cost association:-

7. 7 | P a g e
COST ENGINEERING AT CONSTRUCTION SITES
AMIT KUMAR SENAPATI, PMP®
4.0 Cost Accounting
Cost accounting is defined as the historical reporting of disbursements and costs and
expenditures on a project.
All accounting system should include the three basic steps:-
i) Recording
Recording is the mechanical gathering of data in a routine manner
ii) Classifying
Here all the recorded elements are classified in various categories such as
engineering, procurement, fabrication, construction and associated project costs for
accounting purposes. This approach is called a “Code of accounts”.
An alternative method of cost element classification is called activity based costing
(ABC). In the ABC approach, resources that are used are assigned to activities that
are required to accomplish a cost objective. This method of collecting and
summarizing cost elements reveals which resources and activities are most
significant contributors (drivers) to the cost of the cost objective.
Another approach is by the use of work breakdown structure(WBS) to group cost
elements.
Typical Code of Accounts

8. 8 | P a g e
COST ENGINEERING AT CONSTRUCTION SITES
AMIT KUMAR SENAPATI, PMP®
Typical WBS Format
iii) Summarizing
Here all the costs are summarized.
Cost Management
The common methods of application of cost information to cost management are as
follows:-
i) Cost Estimating
Cost estimating predicts the quantity and cost of resources needed to
accomplish an activity or create an asset.

9. 9 | P a g e
COST ENGINEERING AT CONSTRUCTION SITES
AMIT KUMAR SENAPATI, PMP®
In addition to the degree of project definition, estimate accuracy is also
driven by other systematic risks such as:-
 Level of non-familiar technology in the project.
 Complexity of the project.
 Quality of reference cost estimating data.
 Quality of assumptions used in preparing the estimate.
 Experience and skill level of the estimator.
 Estimating techniques employed.
 Time and level of effort budgeted to prepare the estimate.
The cost estimator makes the determination of the estimate class based
on the maturity level of the project definition based on the status of
specific key planning and design deliverables.
Input Checklist and Maturity Matrix
The below table maps the extent and maturity of estimate input
information (deliverables) against the five estimate classification levels.
The following indication is used for the completion status:-
None (Blank), Started(S), Preliminary (P) and Complete(C).

10. 10 | P a g e
COST ENGINEERING AT CONSTRUCTION SITES
AMIT KUMAR SENAPATI, PMP®

11. 11 | P a g e
COST ENGINEERING AT CONSTRUCTION SITES
AMIT KUMAR SENAPATI, PMP®
Cost Trending:
Cost trends are established from historical cost accounting information.
Cost Forecasting:
Forecast is similar to estimate. Whereas an estimate is always for future
activities and assets, forecasts are predictions of the cost at completion
of cost elements in progress.
Life Cycle Costing
Life Cycle costs(LCC) are associated with an asset and extend the cost
management information beyond the acquisition of the asset to the use
and disposal of the asset.
E.g. of life cycle cost

12. 12 | P a g e
COST ENGINEERING AT CONSTRUCTION SITES
AMIT KUMAR SENAPATI, PMP®
5.0 Economic Cost
Types of cost:-
i) Opportunity Costs:
An opportunity cost represents the foregone benefit by choosing one alternative
over another.
ii) Sunk Cost:-
Sunk cost represent funds already spent by virtue of past decisions. The past
expenditure, however is considered to be a sunk cost and is ignored in current and
future decision making.
iii) Book Costs
Book costs represent the value of an item as reflected in the firm’s books. Assets are
carried on the firm’s books at original cost less any depreciation.
iv) Incremental Costs
Incremental costs are the cost differences between alternatives.
v) Inflation
Inflation is a rise in the price level of a good or service or market basket of goods
and/or services.
vi) Deflation
Deflation is the opposite of inflation with a fall in the general price level for goods
and services or a representative market basket of goods and services.
vii) Escalation
Escalation is a technique to accommodate price increases or decreases during the
life of a contract.
viii) Currency Variation
Currency changes can have a significant cost impact both on those inside the
country as well as those outside the country.

13. 13 | P a g e
COST ENGINEERING AT CONSTRUCTION SITES
AMIT KUMAR SENAPATI, PMP®
6.0 Scheduling Levels and Reporting
Scheduling levels are schedules used by various management echelons to manage the project.
i) Level 1- Milestone Level Schedule
Level 1 schedule comprise key events or major milestones selected as a result of
coordination between the client and contractor management.
These events are generally critical accomplishments planned at time intervals throughout
the project and used as a basis to monitor overall project performance.
The format may be a list, summary network or bar chart and may contain detail at a highly
summarized level.
Company management is is usually apprised of the project’s implementation progress with
milestone level schedules.
ii) Level 2-Project Summary Level Schedule
Level 2 Schedules are composed of summary project activities depicting critical work and
other management selected activities generally indicating the activities ES and EF dates.
Typical summary level activities include engineering and design, procurement, major
equipment fabrication and delivery, major structures, installation, start-up and
commissioning.
iii) Level 3-Project Detailed Schedule
Level 3 schedules display the lowest level of detail necessary to control the project through
job completion. This level of planning also provides better networking capabilities, it also
supports the planning effort for determining and assigning resources.
iv) Level 4-Short Interval Schedule
A level 4 schedule is a two to six week look ahead schedule that shows resource assigned,
details and work activities. It is used for the purpose of planning and progress reporting,
review and assignment of current week work plans and advance planning for near term
future week work.
This level is sometimes referred to as short cycle schedule since the process for its use is a
weekly cycle of collecting progress, working the current week and planning future work
assignments.

14. 14 | P a g e
COST ENGINEERING AT CONSTRUCTION SITES
AMIT KUMAR SENAPATI, PMP®
6.1 Coding Techniques
The fundamental element of any WBS is the detailed work activity. What enables the EBS technique to
function is proper coding of detailed work activities.
Once the levels and their components have been defined, they are then numbered. The coding can be
done based on the requirement of the project. The code for each WBS can be input to one of many
activity code fields. It is also necessary that every activity has unique alpha numeric identifier.
It is better if project control personnel and project personnel who actually do the work reach an
agreement concerning the WBS.
7.0 Various methods to measure work progress.
i) Method 1- Units Completed
This method is applicable to that’s that involve repeated production of easily measured
pieces of work, where each piece requires approximately the same level of effort.

15. 15 | P a g e
COST ENGINEERING AT CONSTRUCTION SITES
AMIT KUMAR SENAPATI, PMP®
ii) Method 2- Incremental Milestone
This method is applicable to any control account that includes subtasks that must be
handled in sequence. Completing any subtask or operation is considered to be an
achievement of a milestone, and each incremental milestone completed represents a
certain percentage of total installation.
iii) Method 3- Start/Finish
This method is applicable to tasks that lack readily definable intermediate milestones.
In the start/finish approach, a percent complete is arbitrarily assigned to the start of a task,
and 100 percent is recorded when the task is finished. A starting percentage of 50 percent is
equivalent to a task completed at a constant rate over time.
iv) Method 4- Supervisor Opinion
In this method, the supervisor simply makes a judgment of percent complete. This is a
subjective approach and should be used only for relatively minor tasks and only where
developing a more discrete status is not feasible.
v) Method 5 – Cost Ratio
This method is applicable to tasks that involve a long period of time or that are continuous
during the life of a project and which are estimated and budgeted on bulk allocations of
dollars and work hours rather than on the basis of production.

16. 16 | P a g e
COST ENGINEERING AT CONSTRUCTION SITES
AMIT KUMAR SENAPATI, PMP®
vi) Method 6- Weighted or Equivalent Units
This method is applicable when the task being controlled involves a long period of time and
is composed of two or more overlapping subtasks, each with a different unit of work
measurement.
8.0 Earned Value for Fixed Budgets
Many projects are constrained by fixed budgets; others have floating, or variable budgets.
When developing a control system for any project, the project must be segmented into its controllable
parts. To control the work, a work breakdown structure(WBS) is developed, which includes all work
tasks that must be controlled for purposes of determining project progress.
Under earned value , a direct relationship is established between percent complete of an account and
the budget for that account.
The relationship is expressed by the following formula:-
Earned Value = % Complete * Budget for that Account.
Budgeted work hours to date represent what is planned to be done.
Earned work hours to date represent what was done.
Actual work hours to date represent the cost incurred.

17. 17 | P a g e
COST ENGINEERING AT CONSTRUCTION SITES
AMIT KUMAR SENAPATI, PMP®
Schedule performance is a comparison of what was planned to what was done.
Cost performance is measured by comparing what was done to the cost incurred.
9.0 Productivity
Productivity can be evaluated if actual quantities of work exactly equals those budgeted.
Since it is rarely possible to have actual and budgeted quantities to match, hence we use another
mechanics to evaluate productivity utilizing credit work hours.
9.1 Credit Work Hours :-
Credit Work Hours equals the budgeted productivity work hours unit rate for a given task
multiplied by the number of units completed.
A Productivity Index(PI) can be calculated for a single work package or a combination of work
package using the following formula:
Credit Work Hours = Budgeted Unit Rate * Actual Quantity
Productivity Index(PI) = Sum of Credit work hours / Sum of Actual work hours.
10.0 Earned Value for Variable Budget
The variable budget system is particularly suited for a project that is initiated on a basis of an incomplete
definition and that has a floating budget. Each identified work package is assigned a budget based on
the best available work quantity information at that point in time.

18. 18 | P a g e
COST ENGINEERING AT CONSTRUCTION SITES
AMIT KUMAR SENAPATI, PMP®
Quantity Adjusted Budget: A quantity adjusted budget (QAB) varies directly with the quantity of
work and is calculated by multiplying the budgeted work hour rate s by the actual work
quantities.
Here the forecast becomes the yardstick for measuring project achievement.
11.0 Conclusion
The purpose of this document is to enable the reader to get an basic overview of various aspects of cost
engineering and a common understanding on some of the important concept understanding like level of
estimation, productivity index, level of scheduling etc.
12.0 Reference:
1. ACCE International – The Association for the advancement of Cost Engineering.
2. Total Cost Management Framework – John K Hollmann.