engineering economics lecture

1. ENGINEERING ECONOMICS
Lectures 8-9-10
Assist Prof : Abeer K M
2023

2. CONTENTS
• Project Cost Management
• 1. Cost Management Plan
Set-Up
• 2. Cost Estimation and
Project Budgeting
• 3. Cost Control
• 4. Cost Reporting
• Entrepreneurship
• Questions and Answers
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What are Project Costs?
Overall, project costs are the total funds
needed to monetarily cover and complete a
business transaction or work project. Project
costs involve: Direct costs — Direct costs are
those directly involved with the project and
necessary in order to complete said project.

4. INTRO
The organizations which accepted project
management concept among the first, gained
a lot of advantages compared to others, such
as: faster and easier adjustment to the
environment, shorter accomplishment time,
structured decision making, responsibility
specification, customer needs focus, etc. One
of the basic factors of project management is
costs because they demand fund allocation
for its realization. Project management is a
complex process, with business environment
complexity in mind. Therefore, the issues of
selection, realization and evaluation of the
project deserve significant attention. The aim
of this paper is to indicate project
management concept advantages, the
importance of project cost estimate and
control, as well as evaluation method and
project selection with the aim of efficiency
increase for the entire process.
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THE 4 STEPS OF THE COST
MANAGEMENT PROCESS ARE:
• Cost Management Plan
Set-Up
• Cost Estimation and
Budgeting
• Cost Control
• Cost Reporting
The Cost Management Process

6. 1. Cost Management Plan Set-Up
6
The cost management plan is part of the project management
plan, which is defined before the project work begins. It is a
complete guide which defines how the project, and therefore
its costs, should be managed. Having the cost management
plan defined provides us with the processes and organization
needed to manage project costs.
What is included in the cost management plan? There is no
exhaustive list of what should be found in each cost
management plan, however the main axes are often identical
amongst various projects. For example, we typically

7. CONT. .
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• the different types of costs in the project,
• the tools used to manage them,
• the data structure required to track them,
• the different stakeholders impacted, and
• the reports used with a cadence for sending them to each
stakeholder group.

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2. COST ESTIMATION AND PROJECT
BUDGETING
• Now with the cost management plan defined, the next step is to establish the initial cost
estimation and project budget. Although, the final budget of a project is never the one
provided during project initiation. A first estimate will be made at the start of a project, but
the budget will always evolve during the life of the project. Think of your personal life, for
example. Haven’t you ever budgeted for a vacation and had to reconsider it when something
unexpected happened? If your car breaks down, you’d likely change your spending plans for
vacation.
• The cost estimate is derived from several elements:
• Cost Breakdown Structure – CBS (see definition below)
• Resource Planning, which takes into consideration:
• The need for resources for the project (labor or material),
• The cost of each resource, and
• The duration of the activities.

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COST BREAKDOWN STRUCTURE (CBS)
• The Cost Breakdown Structure (CBS) is a representation of
all the project costs broken down into a hierarchy based on
work. It is derived from the Work Breakdown Structure
(WBS) which is part of the schedule management activities.
(See graphic below.)

11. MEET OUR TEAM
11
• President

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13. RESOURCE PLANNING
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Project Resources are the people and the materials needed to complete
a project. Resource planning is necessary to determine how much
material, how many workers, and for how long both will be needed. The
workforce on a project are often the most costly resources, so it is
important they are well planned for. Large projects usually have a
designated resource manager for this.
Typically, these estimates are handled inside of a fully-costed
schedule. Each resource is assigned tasks with specific durations. Since
each worker also has a set pay rate, these assignments allow resource
managers to build out the resource-based costs into the schedule.

14. How to
Estimate
Project
Costs for
Budgeting
14
After completing the CBS and Resource Planning, you know where each cost is
coming from. Now you can estimate the total cost of your project, although
there are many ways to do so. Let’s take a look at the three most common
ways:
Matrix Method: All project tasks are defined and referred to on a task/cost
matrix to obtain the overall cost.
Bottom-up estimate: Each team estimates how long their tasks will take, and
these are rolled up to the project managers. Then, knowing how long the
overall project will take, the cost manager can estimate the total cost.
Top-down estimate: The overall project duration is determined by the
management team and then broken into tasks to be completed. These tasks
will then have an allocated budget to be passed on to the project taskforce.
Analogous estimation: This involves comparing a project with similar ones of
the same size to determine the cost of a project that would come close to it.

15. CONT.
• Often a combination of these are used, and
determining which is best depends on the nature
of the project: Is the project repeatable? Is it a
new initiative? Each method is associated with risk
and opportunity management. For example, a very
detailed cost estimate is time consuming but will
likely have a lower risk of inaccuracy.
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OTHER WAYS TO ESTIMATE COST ARE AS
FOLLOWS:
• Expert Judgment (for those with experience)
• The proportional distribution method (percentage distribution over
the life cycle of the project)
• Estimate based on units of work: based on an estimate of the tasks
to be carried out
• Parametric Estimation: Uses an algorithm that combines historical
data and project-specific parameters
• 3-point estimate and calculation of PERT (program evaluation review
technology): Calculates an average of the optimistic, probable and
pessimistic estimates.

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CONT.
• Once you’ve estimated
your project costs,
you’re ready to set
your baseline. This
will be the reference
for what is planned for
and approved during
the entire project.

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3. COST CONTROL
• Now that you have set up
the Cost Management
Plan and successfully
estimated the project
budget, it’s time for the
bulk of the work –
monitoring and
controlling project costs.

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CONT. .
• Cost control allows you to understand how your project costs
may differ from your expected budget. Then, you are able to
take corrective action. How a team manages and controls
costs depends on what they had defined in the Cost
Management Plan. In most cases, cost control requires input
data provided by the project controls or purchasing teams.
• Generally, cost control is also done using a dashboard and
requires post-treatment. For a given activity, a dashboard
shows clearly the differences between the expenses made
(actual costs, actual expenses incurred, budget spent) and the
initially planned costs. This is called a deviation. The diagram
below shows both “completed” and “forecasted” data.

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CONT. .
• For each deviation identified, the cost manager must investigate
the cause. For example, why was a payment not made, or is
there a supplier delay? To answer these questions, you can rely
on the cost manager. Once the root cause is known and
addressed, the team can adjust the forecasted expenses.
• All deviations (overspend or underspend) must be justified.
Otherwise, you may see your target budget capped and no
longer able to ensure the timely delivery of certain work. If a
deviation is significant enough to impact your annual financial
goal, the cost manager must identify a corrective plan to reduce
the deviation and to realign with the project objectives.

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(EVM)
• Earned Value Management
(EVM) is another key method
organizations use to measure
project performance, and cost
is a crucial element of this.
Calculating and monitoring the
Cost Performance Index (CPI) is
one way to ensure the project
stays within budget. EVM is a
complex subject, so we
recommend diving into more

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25. 4. COST REPORTING
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Our final step in the Cost Management Process is reporting. The goal of
cost reporting is to provide data and insights so the project manager can
make the decisions necessary to keep the project on track.
There are many reports that can be edited based on the different cost
visualizations. This can be done by visualizing the work done with regard
to the budget spent (Earned value management): This makes it possible to
analyze the productivity of the project.
We can also run different analyzes depending on the desired time interval
or depending on the particular type of activity.
We can therefore summarize the different phases of cost management

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27. Entrepreneurship

28. What is ENTREPRENEURSHIP?
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Entrepreneurship is the ability and readiness to
develop, organize and run a business enterprise,
along with any of its uncertainties in order to
make a profit. The most prominent example of
entrepreneurship is the starting of new
businesses.
The entrepreneur is defined as someone who
has the ability and desire to establish,
administer and succeed in a start-up venture
along with risk entitled to it, to make profits.
The best example of entrepreneurship is the
starting of a new business venture.
The entrepreneurs are often known as a source

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Types of
ENTREPRENEURSHIP

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Characteristics of ENTREPRENEURSHIP

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Characteristics of ENTREPRENEURSHIP

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The Construction Industry’s
Image Challenge
Why aren’t construction contractors held in the same
regard as entrepreneurs in other industries? It might
stem in part from the decades-long “college for all” push
in our education system. For many years, students were
encouraged to attend four-year universities instead of
trade or vocational school as a viable career path. This
not only created a serious skilled labor shortage
problem, but it also caused generations of up-and-
coming young adults to discount construction as a
serious (and seriously successful) entrepreneurial
pursuit.

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Cont. .
Meanwhile, the construction industry can be a lucrative
industry in which to launch a career or a business, with a
manageable barrier to entry for those with the right
drive, experience and talent. In addition, construction
can offer enormous potential for workers to develop a
marketable skill, move up within a company and even
break away and start their own successful business.
But, even though construction entrepreneurs run some of
the most essential businesses today, they often aren’t
given their due.

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How Can Entrepreneurs Build a Future
in the Construction Industry?

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1. Contech
Construction technology — “contech” for short — has the most potential
to revolutionize the world’s building strategies. Construction has always
been among the slowest industries to adopt new technologies, but that
trend is finally starting to change. Contech saw an estimated $50 billion
in investments from 2020 to 2022 alone, 85% higher than the previous
three years.
The sudden demand for contech can be attributed to several factors. The
goal to build climate-resilient architecture requires more advanced
technologies, and companies also need more tools to compensate for
the global labor shortage that has persisted post-COVID. The industry

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2. Sustainability
The construction industry has had a negative reputation for
pollution for a long time, producing about 39% of global carbon
emissions every year. Once again this long-standing trend is finally
starting to change thanks to a widespread push to reduce waste,
transition to more sustainable materials and invest in renewable
energy sources.
Startups can make a huge difference in their communities by
providing these services to local projects. For example, emerging
environmental-focused companies are providing zero-emissions
energy storage systems, carbon capture technologies and new
organic materials to help builders minimize their resource
consumption.

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3. Employee Safety and Productivity
Construction is a dangerous profession by its nature, and there is
still a lot of room for improvement. Startups can help with these
improvements by providing new tools and insights to maximize
workplace safety and productivity. In fact, small-scale operations
can have a massive impact on construction safety because they can
focus on just a handful of projects at a time.
Artificial Intelligence has been the most useful safety and
productivity technology for start-ups, putting them on an equal
playing field with larger competitors. Many emerging companies
are developing their own software solutions that monitor worksites
and individual employees. Wearable devices like smart helmets will

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4. Landscaping
For startups who want a traditional pathway into the
construction industry, landscaping is an excellent choice. This
sector has always been in high demand, but the demand has
been steadily growing by about 5% in each of the last five years.
Residential and commercial projects alike are putting more
emphasis on pristine outdoor spaces.
You can quickly build a successful landscaping business in your
own community by investing in work tools and executing a
clever marketing campaign. For example, many landscaping
startups emphasize speed and sustainability to set themselves
apart from larger competitors. Landscaping has been the
starting point for many construction companies to build their
brand identities and reputations before expanding to other

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5. Building Design
The pre-construction design phase is another sector where startups
can make a huge impact. Improving collaboration and efficiency in the
design process will help projects become more safe, affordable and
sustainable. Startups can provide everything from basic workplace
communication tools to advanced site planning technologies like
building information modeling.
Building information modeling (BIM) is a new method of planning
buildings that turns blueprints into interactive three-dimensional
worlds where designers can immerse themselves in the project.
Emerging companies like Dusty Robotics, Buildstream and ARUtility
have led the way in popularizing this new technology, and your start-

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6. Project Management
Post-design project management is another world of opportunity for
entrepreneurs interested in construction. This phase of construction is
often the most hectic and disorganized due to the numerous moving
parts, but a capable startup company can simplify things by providing
new management apps, software and analysis tools.
For example, the startup company OpenSpace has made a huge impact
in just a few years. It started in 2017 with the invention of an automated
360-degree photo monitoring and mapping system, and in 2021 it
received a $55 million investing round to make its tracking technology
available to all customers.

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7. Supply Chain Management
Supply chain disruptions have been a huge problem for the
construction industry, but startups are introducing new solutions
to coordinate the movement of tools, equipment and materials.
Companies like Infra.Market and Madaster provide online
marketplaces, registries and payment platforms that simplify
transactions between companies around the world.
While online transactions are becoming more efficient,
centralized platforms from companies like Terane and BuildSort
make it easier for industry professionals to track their orders
throughout the supply chain. Project managers now have greater
visibility over everything, from the order’s original source to

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QUESTION TIME
• These questions and answers
provide construction
students with a foundation
in engineering economics as
it pertains to construction
projects. If you have more
specific questions or need
further clarification, please
feel free to ask.

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ENG. ECONOMICS
• WHAT IS ENGINEERING ECONOMICS?
• The application of economic
principles to engineering problems,
for example in comparing the
comparative costs of two alternative
capital projects or in determining
the optimum engineering course
from the cost aspect.

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1
• Question 1: What is the time value of money, and why
is it important in construction economics?
• Answer: The time value of money (TVM) is the concept
that a sum of money today is worth more than the
same sum of money in the future due to the
opportunity to invest and earn interest. In construction
economics, it's crucial because it helps assess the
profitability and feasibility of construction projects by
accounting for the timing of cash flows and

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2
Question 2: How do you calculate the Net Present Value
(NPV) of a construction project, and what does a positive
NPV indicate?
• Answer: NPV is calculated by subtracting the initial
investment cost from the present value of expected
future cash flows. A positive NPV indicates that the
project is expected to generate more revenue than it
costs, making it financially viable. It suggests that the
project would add value to the organization or

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3
• Question 3: What role does sensitivity analysis play in
construction project evaluation, and why is it important?
• Answer: Sensitivity analysis in construction economics
involves assessing how changes in critical project variables,
such as construction costs or interest rates, impact the
project's financial outcomes. It's vital because it helps
construction professionals identify the most sensitive factors
and potential risks that may affect project profitability and
make informed decisions accordingly.

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4
• Question 4: Explain the concept of Payback Period in
construction economics. How is it calculated, and what
does it signify?
• Answer: The Payback Period is the time it takes for a
construction project to recover its initial investment from
its cash flows. It's calculated by dividing the initial
investment by the annual net cash flow. A shorter payback
period indicates a quicker return on investment and is
often considered more favorable in construction projects.

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5
• Question 5: How do construction students
differentiate between direct and indirect project
costs?
• Answer: Direct costs in construction are
expenses directly tied to the project, such as
materials, labor, equipment, and subcontractor
costs. Indirect costs, also known as overhead,
are expenses that cannot be traced directly to a
specific project but are necessary for the
overall operation of the construction company,
such as office rent, administrative salaries, and
utilities.

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6
• Question 6: What ethical considerations should
construction students keep in mind when working with
project finances?
• Answer: Construction students should uphold ethical
standards by ensuring honesty, transparency, and fairness
in financial dealings. This includes accurate cost
estimation, ethical bidding practices, responsible
budgeting, and the fair treatment of workers and
suppliers. It's essential to avoid conflicts of interest and
act in the best interests of the project and stakeholders.

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7
• Question 7: How can construction students use Life Cycle
Cost Analysis (LCCA) to make more informed project
decisions?
• Answer: LCCA involves evaluating the total cost of a
construction project over its entire life cycle, including
construction, operation, maintenance, and disposal.
Students can use LCCA to compare different construction
materials, technologies, or design options to determine
which one provides the best long-term value and
sustainability for the project.

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8
• Question 8: What does a positive Net
Present Value (NPV) for a construction
project indicate?
• A) The project is not financially viable
• B) The project is expected to generate
more revenue than it costs
• C) The project's costs will increase in the
future
• D) The project's revenue will decrease over

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9
• Question 9: Which of the following is a key
component of project cost estimation in
construction?
• A) Total profit margin
• B) Contingency for unforeseen expenses
• C) Marketing budget
• D) Research and development costs

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10
• Question 10 : What is the Internal Rate of Return (IRR) in
construction economics?
• A) The discount rate that makes the NPV of a project equal
to zero
• B) The rate at which construction materials increase in
value
• C) The rate at which construction costs decrease over time
• D) The rate at which construction revenues increase over
time

60. THANK YOU
Please don’t hesitate to
contact me if you have
any enquires .
Email:
abeerk7778@gmail.co
m.