Ss 04 cost engineering management training- nov 2017 - moustafa part ii- ch 9

AACE-AGS CCP Cost Engineering Training 1011 BTA - Dr. Moustafa Ismail 2017 LEC- 4 1
Cost Engineering Management
Training Course:
Association for the Advancement
of Cost Engineering
2017
LECTURE 4
‫وبركاته‬ ‫هللا‬ ‫ورحمة‬ ‫عليكن‬ ‫السالم‬

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2017

2017AACE-AGS CCP Cost Engineering Training 1011 BTA - Dr. Moustafa Ismail 2017 LEC- 4 3
Primary
Characteristic
Maturity level of project definition
deliverables expressed as % of
complete definition
Class 5
0-2 %
Class 4
1-15 %
Class 3
10-40 %
Class 2
30-75 %
Class 1
65-100 % Most detailed
Leastdetailed
CCP Certificate Section 2 Cost Estimating Ch. 9

AACE-AGS CCP Cost Engineering Training 1011 BTA - Dr. Moustafa Ismail 2017 LEC- 4
42017
Estimating
• Cost estimating framework includes:
 A system for the classification of cost estimating.
 The methodologies used in the preparation of cost estimates.
 Establishing estimating accuracy as it relates to the scope definition.
 he application of risk analysis to contingency.
• Introduction
 Predictive process used to quantify, & price resources for A scope.
 The output of the process is the cost estimate, used for:
 Determining the economic feasibility of a project.
 Evaluating between project alternatives.
 Establishing the project budget.
 Providing a basis for project cost and schedule control.

5
2017
Estimating
• Estimating steps:
 Understand the scope of activity to quantify the resources required;
 apply costs to the resources;
 apply pricing adjustments; and
 organize output in a structured way that supports decision-making.
Additional steps involve the assessment of risk associated with the estimate, and
review and validation of the estimate.
HINT
 Cost estimate accuracy is crucial in deciding go-not to go or
continue with a project.( increased accuracy is necessary)
 Estimating is iterative process applied (increased) through the project
life cycle as the project scope is defined, modified, and refined.

6
2017
Estimating
• Estimate Characteristics:
AACE identifies five classes of estimates, 1-5. Class 5 lowest level of
project definition (or project maturity).
For each class, 5 characteristic are used to distinguish one from another.
The 5 used in the AACE Recommended Practice are:
1. degree of project definition
2. end usage of the estimate
3. estimating methodology
4. estimating accuracy
5. effort required to produce the estimate.

7
2017
Estimate Classifications
SK6 p92Figure 9.1―Generic Cost Estimate Classification Matrix [1]

8
2017
Estimate Methodologies
Estimating Methodologies
1. Conceptual estimate( LL of project definition)
2. Deterministic estimate ( H L of project estimate)
1. Conceptual estimate:
 The estimate progress from conceptual (stochastic or factored)
to deterministic methods.
 It involves simple or complex modeling (or factoring), based
on inferred or statistical relationships between costs and other,
typically design related, parameters. Often, subject to
conjecture .(guess)

9
2017
1. Conceptual estimate:– continue
 typically used for Class 5 and Class 4 (sometimes 3) estimates.
 Referred to as ―order-of-magnitude‖ (OOM) in reference to their
typically wide range of estimate accuracy
 Provides a relatively quick method of determining the approximate
probable cost of a project without the benefit of detailed scope
definition.
 These estimates may be used for:
o Establishing an early screening estimate for a project.
o Evaluating the general feasibility of a project.
o Screening project alternatives (such as different locations,
technologies, capacities, etc.).
o Evaluating the cost impacts of design alternatives.
o Establishing a preliminary budget for control purposes during
the design phase of a project.

10
2017
1. Conceptual estimate:– continue
Many of conceptual or OOM estimating methodologies are used, the
more commonly used methods are:
i. end product units ii. physical dimensions iii. capacity factor,
iv. ratio or factor methods v. parametric modeling.
1.1 End-Product Units Method
• It is used when data is available from similar projects to relate the
end-product units (capacity units) of a project to its construction
costs. ( plant capacity in KW- Deep well depth- hotel rooms-
hospital rooms- garage no. of parking.

11
2017
1.1 End-Product Units Method- continue
 Ex. 1
• A hospital (A) was constructed in Riyadh for a no. of beds equals
200 in 2010 with total cost SAR 80,000,000.00 M. A hospital B
with similar design criteria will be constructed in Makkah in 2017
with no of beds 300. Estimate the expected cost for the hospital B.
• Hospital A SAR 80 M , 200 bed = 80 M/300
• Hospital B 80/200 x 300 = 120 M
• The estimate doesn’t account for location, time, scale- cost indices
may be applied for adjustment. It is used for FEASIBILITY studies

12
2017
1.2 Physical Dimensions Method
It uses item physical dimensions (length, area, volume, etc.) as the
driving factor. For example, a building estimate may be based on
m2/m3 ; water tanks/ gas tanks by m3, pipelines, roadways, or
railroad based on LM. ( ignoring quality factors or specific criteria).
Ex. 2:
Building A 5000 m2 10 M SAR
Building B 1000 m2 = 10 M/5000 X 1000 = SAR 1.0 M
1.3 Capacity Factor Method
Cost of a new facility is derived from the cost of a similar facility of a
known capacity. It relies on the (typical) non-linear relationship
between capacity and cost.
$B/$A=(CapB/CapA)
e

13
2017
1.3 Capacity Factor Method- continue
B= Facility being estimated , e = exponent (proportion) factor 0.5-0.85
Cap & Cap are the capacities of the two facilities.
With e < 1, if capacity increases (say, 20 %), the costs to build the
larger facility increase by less than 20 %.
• It is referred to as the ―scale of operations‖ method, or the ―six
tenth’s factor‖ method.
• If e = 0.6, doubling the capacity increases costs by approximately
50 % - and tripling capacity increases costs approximately 100 %
• In reality, as e increase, it became economical to construct 2 small
buildings than one large buildings.
A B

142017
Ex3 :
100,000 BBL/Day Hydrogen Peroxide unit, to be built in Philadelphia (2004).
A unite 150,000 BBL/Day plant recently completed in Malaysia, with a final
cost of $50 Million in 2002. Our recent history shows a capacity factor (e) of
0.75 is appropriate.
SOLUTION:$B = ($A)(Cap /Cap ) $B = $50MX(100/150) = $36.89 M
We ignored differences in quality (or scope), location, and time.
Ex 3-1:In Malasia (location adjustment)=1.25 - Escalation (timing) 1.06
from 2002 / 2004 - Difference in scope ( Piling) add (-10M)- For pollution
additional cost = 5M
AB
e .75

Ex 3-1 – Solution:
150,000 BBL/Day Plant in Malaysia $50M Sequence
Deduct Piling. Tankage, Owner Costs - $10M Less/ add costs N/A
Adjusted Cost for Scope $40M Adjust for
location, scope,
escalate (timing)
Malaysia to Philadelphia Adjustment (X
1.25)
$50M
Escalate to 2002 (X 1.06) $53M
Factor = $53M X (100/150).75 $39M Add capacity factor
Add Pollution Requirements (+$5M) $44M Add any additional
cost specific for
new plant- i.e.
pollution

1.3 Ratio or Factor Methods
X- Used where total cost of an item or facility can be estimated from
cost of a primary component, called ―Equipment Factor‖ estimating.
X- Estimate is class 3 (feasibility), it can be used to show the required
funding for a budget estimate preparation.
X- It counts on on the belief that a ratio or factor exists between an
equipment item costs and costs for the associated non-equipment items
(foundations, piping, electrical, etc.) required for installation.
X-Factors may be used for TIC, total installed cost or direct filed cost
DFC in side the battery limit ISBL.

i. Hans Lang 1947:
Total Plant $ = Total Equipment $ X Equipment Factor
Lang factors based on the type of process plant (see Table below).
Lang’s factors cover (ISBL Costs) and all Offsite Units (OSBL Costs).
Ex. 4:
Total Equipment Cost = $1.5 M
Total Plant Cost =$1.5x 4.74 = $7.11M

ii. W.E. Hand elaborated (1958). (Hands factors- HF))
X- Proposing different factors for each type of equipment (columns,
vessels, heat exchangers, etc.) excluding
X- Hands factors 2.0 –3.5, if include instrumentation correlate 2.4 - 4.3
X- HF excluded Indirect Field Costs (IFC), Home Office Costs (HOC),
and the costs for Offsite or Outside Battery Limit (OSBL) facilities.

ii- W.E. Hand (1958)
x
=
x
7,753x 0.3= 2.326
7,753x 0.03= 233
+
.15(9,982+2326+ 233)= 1881 +
1881+233+12308=14,422.0

Inside Battery Limits (ISBL) —
• FOR: process plant, it refers to the process units of plant or facility.
• FOR: single piece of equipment, it refers to the piece of equipment
and the associated bulk materials (foundation, piping, electrical,
controls, etc.) directly associated with the piece of equipment. (Dysert)
Outside Battery Limits (OSBL)—
• FOR process plant, it refers to the non‐process facilities of the plant
(i.e., the utility generation facilities, storage facilities, office buildings,
etc.), and are sometimes also referred to as off sites. (Dysert)

Arthur Miller 1965:
• Miller recognized impact of 3 variables affect the equipment material
cost to a greater degree than they affect the cost of the associated
bulk materials and installation.
1- the size of the major equipment, 2- materials of construction
(metallurgy) of the equipment, 3- operating pressure.
• Miller noted, as the size of a piece of major equipment gets larger, the
amount the amount of bulk materials (foundation, support steel, piping,
instruments, etc.) required for installation does not increase at the same
rate. Thus, as the equipment increases in size, the value of the
equipment factor decreases- same tendency for other 2 variables

1.3 Factor Method- continue
Arthur Miller 1965:
• Miller suggested 3 variables could be summarized into a single
attribute ―average unit cost‖ of equipment.
= Total Cost of Process Equipment / Number of Equipment Items
IF the ―average unit cost‖ of equipment increases, then the equipment
factor is scaled smaller. (statistically validated by Rodl and Nushimura .

1.4 Parametric method:
o Is an extremely useful tool for preparing early conceptual estimates
when there is little technical data or engineering deliverables.
o Is a mathematical representation of cost relationships that provide a
logical and predictable correlation between the physical or functional
characteristics of a plant (or process system) and its resultant cost.
o is comprised of cost estimating relationships and other parametric
estimating functions that provide logical and repeatable relationships
between independent variables, such as design parameters and the
dependent variable, cost.

1.4 Parametric method: continue
• Capacity factor & equipment factors estimates are simple examples of
parametric estimates; however, sophisticated parametric involve
several independent variables or cost drivers.
• Developing a parametric model should generally involve the following
steps [10, 11]:
 Cost Model Scope- Determination- intended usage, characteristics
 Data Collection – Model quality will not exceed data quality
 Data Normalization- Timing(escalation) – location- differences
 Data Analysis- linear/nonlinear analysis to get the best model
 Data Application- Spread sheets are sufficient
 Testing- validation of out puts and its accuracy
 Documentation- user manual

2. Deterministic
• Detailed – high level of project definition
 Detailed estimate, scope definition is quantitatively surveyed and priced
using the most realistic unit prices available.
 Support final budget, bid tenders, project cost control, CO. Class 1-3
 Require a substantial amount of time and costs to prepare weeks/ months
 Minimum Engineering data includes: drawings data sheets, diagrams,
specifications, technical requirements, layouts, plot plans.
 It includes all costs( direct and indirect, and HOC).
 Pricing needs: 1. Vendor and Sub-con quotations 2. updated PO’s and
labor rates 3. Project schedule and project plan
• Semi detailed: FOR ISBL detailed costs and for OSBL it is factored
• Forced detailed: Preliminary design is used for detailed quantities.

2. Deterministic
 Steps and activities:
1. Prepare project estimate basis and schedule
2. Prepare Direct Field Cost (DFC) estimate
3. Prepare Indirect Field Cost (IFC) estimate
4. Prepare Home Office Cost (HOC) estimate
5. Prepare sales tax/duty estimates
6. Prepare escalation estimates
7. Prepare project fee estimate (for contractors)
8. Prepare cost risk analysis/contingency determination
9. Preview/validate estimate.

2. Deterministic
1. Formal vs. informal prices and quotation( preferable is formal)
2. Implied costs for non BOQ items, tests, soil reports, coting, spare parts,
equipment unloading, equipment accessories., installation, and etc.
3. Consider freight cost, transport, customs, vendors excluded activities,
HINT

 Take-off
 The term take-off is used to refer to the quantities (often known as a
Bill of Quantities).
 Take-off involves a detailed examination of the engineering
drawings and deliverables to count the number of each item
appearing on the drawings.
 The quantities of like items are then summarized according to the
control structure (WBS/RBS) of the project.
 Once the take-off is complete, and total quantities for each like item
summarized, the items can be priced, and the results added together
resulting in the estimated direct field costs for the project.

 Guidelines for preparing an efficient take-off include:
1. Use pre-printed forms for the orderly sequence of item descriptions,
dimensions, quantities, pricing information, etc.
2. Abbreviate (consistently) whenever possible.
3. Be consistent when listing dimensions (i.e., length X width X height).
4. Use printed dimensions from drawings when available.
5. When possible, add up the printed dimensions for a given item.
6. Measure all dimensions carefully.
7. Use each set of dimensions to calculate multiple quantities where
possible. (Cable length- pipe length)
8. Take advantage of design symmetry or repetition.

 Guidelines for preparing an efficient take-off continue:
9. List all gross dimensions that can be used again to rough check other
quantities for approximate verifications.
10. Convert imperial dimensions (feet/inch) to decimal equivalents.
11. Do not round until the final summary of quantities.
12. Multiply the large numbers first to reduce rounding errors.
13. Do not convert the units until the final quantities are obtained.
14. Items should be measured/converted to the same units consistently
throughout the take-off.
12. Mark the drawings as quantities are taken off. Use different colors to
identify various types of components or items, as well as to identify items
on hold, etc.

 Guidelines for preparing an efficient take-off continue:
13. Use approved drawing list to be used with the estimate. Check off
drawings on the drawing list as take-off is completed.
14. Keep similar items together, different items separate.
15. Organize take-off to match the control structure & format of estimate.
16. Identify drawing numbers, section numbers, etc. on the take-off forms
to aid in future checking for completeness, and for incorporating late
changes later on.
17. Consider notes shown on drawings, changes in scale used on different
drawings, zoomed from original size, discrepancies between drawings
and specifications, changes in elevation that may not be obvious, etc.
18. Be careful to quantify all labor operations that may not have a material
component

 Costing Vs. Pricing
 Costing is the process of applying unit costs to the individual
quantities of items associated with the estimate. (labor hours, wage
rates, material costs, and perhaps subcontract costs) which come
from estimating database (either in-house or commercial), vendor
quotes, the procurement department, estimating experience, etc.
 Pricing, is adjusting the costs that have been applied for specific
project conditions, and commercial terms. It includes adjustments to
cost to allow for overhead and profit, to improve cash flow, or
otherwise serve the business interests of the party preparing the
estimate. Thus, the pricing strategy depends on the particular party
preparing the estimate.(contractor/ investor/ developer)

 Estimating allowances:
 Included in an estimate to account for the predictable but indefinable
costs associated with project scope in detailed estimates.
 It is simply not cost effective to quantify and cost every small item
included with the project, so to account for these situations, allowance
for costs associated with these items may be included in the estimate.
 Included in the estimate as a percentage of some detailed cost
component. Typical examples are:
• design allowance for engineered equipment
• material take-off allowance
• overbuy allowance
• unrecoverable shipping damage allowance
• allowance for undefined major items

 Estimating allowances:
Category % Description
design allowance for
engineered equipment
2-5% equ.
cost
Accounts for continue design
after PO.
material take-off allowance 2-15 % cost
of discipline
undefined material such as
concrete accessories
overbuy allowance 2-10 % Incomplete utilization of
material waste, theft, misuse.
unrecoverable shipping
damage allowance
Case
dependent
covers the uncovered part by
insurance
undefined major items Case
depende
Design does not cover/
complte some parts but shall
be estimated.

 Estimating accuracy:
Accuracy is affected by the following:
 Project definition
 Information and data used quality
 Technology level
 Estimator competency and used techniques.
 Purpose of the estimate
 Available time and recourses

Contingency and Risk Analysis
• Corporate management think of requests for contingency as
―padding‖ the estimate.
• Is an amount used in the estimate to deal with the uncertainties
inherent in the estimating process.
• The estimator regards contingency as the funds added to the
originally derived point estimate to achieve a given probability of
not overrunning the estimate.
• Contingency includes: difference in wages, errors, design shortage,
inflation in material price, labor productivity variances, skills.

Contingency and Risk Analysis
 Contingency specifically excludes:
• Significant changes in scope.
• Major unexpected work stoppages (strikes, etc.).
• Disasters (hurricanes, tornadoes, etc.).
• Excessive, unexpected inflation.
• Excessive, unexpected currency fluctuations.
Contingency reduces level of risk but
doesn’t increase accuracy.

 Risk Analysis
 Is a process used to understand the probability of over/under running
 It provides a level of certainty to complete a project for the specified
estimate value.
 Two types of risk analysis are commonly used:
1. Strategic risk analysis models that evaluate the level of project
definition and project technical complexity in determining the overall
risk to project cost. And,
2. Detailed risk analysis models that evaluate the accuracy range for
individual or groups of estimate components in determining the
overall risk to project cost.

 Risk Analysis- example
To achieve a 50 % probability
of u/overrun – fund project at
$25.4 million. - meaning
contingency $2.1 million.
, equivalent to nine % of the
original point value of the
estimate.
If we wanted to provide a 70%
probability of not exceeding
our project funding, -
Fund project at $26.6 million,
meaning cont. of $3.3 million.
equivalent to 14.2%.

 Structuring the Estimate
• WBS- RBS. the structure will vary with the size and complexity of
the project.
• To maintain some kind of order in the estimate, segregate costs into
various these categories:
1. Material vs. Labor vs. Subcontracts
2. Direct Costs vs. Indirect Costs vs. Home Office Costs
3. Concrete vs. Structural Steel vs. Piping vs. Other Construction
Disciplines
Ch: 9 Estimating

 Structuring the Estimate- Project Breakdown System
X- The matrix of the WBS and RBS forms the full Project Control
Structure or Project Breakdown System (PBS). The intersection points of
the WBS and RBS structures is called a ―cost center‖ which is identified
through a numbering system. (Fig 9.15 SK6)
X- It must reveal project execution &how costs summarized & reporting.
Ch: 9 - Estimating
(Fig 9.15 SK6)
(Fig 9.16 SK6)
Ex: the labor to pour concrete in the
hydrocracker unit, the cost code would
be: 01-02-C-2-003-1 (Onsite-
Hydrocracker-Construction-Concrete-
Pour-Labor).

 Estimate/Cost/Schedule Integration
 One to One approach
• Effective project M.& control integrate cost estimate+schedule + c cont
• Estimate to the level of schedule activities to achieve detailed and efficient
cost and schedule control, but it may face some difficulties:
 Costing detailed schedule activities is generally not feasible.
 Activities are subject to frequent change within the project than cost codes.
 Tracking bulk material costs by activity is tough task.
 Determine an appropriate level of detail to correlate cost and schedule,
balanced between C estimate and schedule by keeping the estimate and
schedule structures the identical to a certain level of WBS
Ch: 9 - Estimating

Fig. 9.17 cost estimate WBS
the cost and schedule WBS
structures will diverge to meet each structure’s
particular control needs.
Estimate provides L. hours, to evaluate durations
and resources.
Ch: 9 - Estimating
Fig. 9.18 Schedule WBS
Schedule provides dates needed for escalation,
cash flow
SK6
SK6
diverge
diverge

• The estimator and scheduler should determine the levels at which cost items and schedule
activities can be correlated. ( high level of WBS).
• The cost and schedule breakdown can be aligned at some level as it is not essential compatible
• Estimation is sensitive to the schedule and correlated to it.
• Changes to the plan that have time impact significantly affect project cost considering the
basis estimating algorithm: Total $ = (Qty. X Unit Material $) +(Qty. X Unit Labor Hours X Wage Rate)
• Unit Material $ ( inflation), Unit Labor Hours (seasonal availability, and Wage Rate (
inflation, seasonal, plan changes) dependent on the schedule.
• Weather can affect productivity, seasonal variation, and execution plan changes (affecting
overtime and/or shift premiums).
• Many costs in a project are dependent on the duration and when executed in the calendar year
( inflation- cost of time- over head- indirect cost).
Ch: 9 - Estimating

 Estimate Review
• estimate should contain all the required information and is understandable
to all interested .
• The estimate review process is usually comprised of a series of estimate
reviews, internal estimating department reviews, engineering reviews,
project team reviews, and by various levels of management, depending on
the importance of the project.
1. Estimating Team/Estimating Department Review
• Check the Math((extensions of pricing are correct, summaries add up,..)
2. Basis of Estimate- BOE
• Design Basis: Overall scope, details for each area/unit/work
package, specific inclusions, and even more importantly, specific
exclusions of items or facilities should be documented. Scope
assumptions, equipment lists, drawings lists& specification
Ch: 9 - Estimating

BOE - continue
• Planning Basis: project plan, mile stones resources, labor rotation,
shifts, calendar
 Cost of major equipment (referencing quotes or PO’s), labor rates,
Basis: source of all pricing used, source of all bulk material pricing,
pricing all labor work-hours should be documented, assumptions for
productivities. Identify allowances the estimate , basis for cost
escalation included in the estimate.
• Risk Basis: estimate is a prediction of probable costs so it involves
Uncertainty & risk then Contingency is included and to be documented.
 Estimating Department Guidelines, review with check list,
procedures, codes, techniques, formats, allowances, factors.
Ch.: 9 - Estimating

BOE - continue
• Engineering/Design Review
 Completeness of Engineering Deliverables - review the listing of all
drawings, sketches, specifications, and other engineering deliverables
 check bases of the estimate.- Design risk, design cost,
• Project Manager/Project Team Review- to gain the entire project
team’s support of the estimate.
• Management Reviews- by various levels of corporate management.
• Presenting the Estimate- Present to customer, not just a list of
numbers, describe as:
Basis of Estimate (BOE) Estimate Summaries
Estimate Detail Estimate Benchmarking Report
Estimate Reconciliation Report Estimate Backup
Ch.: 9 - Estimating

Cost Engineering Management
2017

Ss 04 cost engineering management training- nov 2017 - moustafa part ii- ch 9

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