Ss ccp course cost engineering management training- 2017 - moustafa ch 1-4

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

Nov. 2017CCP Cost Engineering Training 1011 BTA - Dr. Moustafa Ismail 2017 LEC- I 2
CCP Certificate
Introduction
Documents
Prepare TP
Submit
application
Course/
Study
Site for the
Exam
Site for the
Exam
Pass the
Exam

Study material S1/C1
Training Course:
Association for the Advancement of Cost Engineering- AGS
100 Question and answers

Section/Chapter 1 S1/C1
COST
Cost Elements
Activity cost estimate is a conclusion of the influence for the different parts of the cost
structure
Cost structure
Direct
cost
Fixed
cost
Variable
cost
Indirect
cost

Cost Elements
Direct cost
Costs that are
assigned only
for the activity
/ asset ( Pipe-
Cable-asphalt-
concrete- fire
extinguisher
paint- steel
fixer-
carpenter-
electrician)
Indirect cost
Costs of the
elements
supporting the
activity
execution and
other
activities as
well (% of the
cost to be
allocated to
each applying
activity) –
Supervision-
head office
cost- fuel –
consumptions.
Fixed cost
The expenses
that are
mandatory for
the work,
regardless the
work load/
quantities
such as
authorities
charges,
licenses-
permits- It is
not related to
certain
activity, just
fixed amount
Variable cost
It may be
direct or
indirect
expenses
depending on
the work load/
volume/
quantities,
such as
material,
labor, fuel,
consumptions-
it needs
records for
justifications
in claims.
Semi variable costs- ( salaries+ production rewards)

CCP Cost Engineering Training 1011 BTA - Dr. Moustafa Ismail 2017 LEC- I
6Nov. 2017
Cost accounting
 It is the historical reporting of expenditures, costs, and disbursements
on a project. It provides the accurate cost status and of an on going
work to date.
 Historical costs provide a thorough basis for forecasting and
budgeting the future.
 Basic steps of cost accounting: Recording, classifying, & summarizing
 Every organization establishes an approach for classifying and
summarizing costs “Code of Account” ABC which may be called
chart of account.- or through WBS
 It is configured to support the recording cost data in general ledger.
As shown below:

CCP Cost Engineering Training 1011 BTA - Dr. Moustafa Ismail 2017 LEC- I
7Nov. 2017
Cost accounting

CCP Cost Engineering Training 1011 BTA - Dr. Moustafa Ismail 2017 LEC- I 8Nov. 2017
Cost accounting
Work Breakdown Structure
WBS

Cost management
Cost
information
Cost
trending
Cost
estimating
Cost
forecasting
Cost
Lifecycle
Four of the most common methods of how cost information is applied to cost
management. It is shown how they relate to cost elements and structure.
Predicts
quantity& cost
of resources
needed to
achieve an
activity or
create asset.
Predicts
estimate to
complete ETC
for progressing
work
From historical info. -
how expenditures are
trending relative to
actual work done
Asset cost:
Include design,
construction, maintenance
, and disposal

Section 1 Chapter 2: Pricing and Costing
 There is a very fine difference between price and cost which is
why it is used interchangeably, in economic, PM, and finance.
Pricing
 Price= selling an item= quoting for work ]analysis of inputs-
transform mechanism- ensuing output .[
Price=Direct Cost +Indirect Cost + Profit
⅀ Labor, material, equipment, sub-contractors ┼ H O overhead,
business taxes, transportation, contingency,... ┼ Profit
Costing
In the cost estimating process, costing follows scope determination
and quantification and precedes pricing and budgeting

The Costing-Pricing process
Pricing the work: WBS + H records(productivity- consume, vendors)
Cost &P strategies(win project for market share-or win for profit),
the strategies include: Cost estimating- Budgeting- Cost forecasting

Cost Estimating
 Translates quantities into financial and resource information.
 The outputs are used as primary inputs, for business planning, cost
and schedule control processes.
Budgeting
inputs to the budgeting process include:
• Activity Cost Estimates―the hours & dollar for each cost activity.
• Scope Baseline―WBS based on drawings, specifications, previous
documents and expert opinion.
• Project Schedule― Initial schedule provides indication cash flow.
• Contracts―Contract strategy information, indicating direct labor cost
versus contract costs planned for the project.
From these inputs, a budget is established broken down to activity level.

Cost Forecasting
 To forecast final cost, a forecasting technique called the EV s
applied, on a periodic basis (monthly in most cases), using
Estimate at Completion (EAC), (CPI), Estimate to Complete (ETC).
Financial Management
A. Return on Investment
B. Return on Assets
C. Net Profit Margin
A. Return on Investment (ROI)
•It is applied to measure the profitability in dollars invested
•Investments resulting in higher ROI will be the best investment;
however, no any risk factor is considered.
Section 1 Chapter 2: Costing and Pricing
Price vs. cost
the seller provides a price
and the buyer receives a cost.

Price vs. cost
the seller provides a price
and the buyer receives a cost.

Section 1 Chapter 3: Material
Learning Objectives
• Identify types of project materials.
• Understand the issues involved in selecting and handling.
• Understand the principles of materials purchasing and
management, including the proper amount of stock.
• Understand possible safety hazards associated with
material and regulations for worker and materials safety.

Materials competition
Selection of materials always consider the competing
characteristics of materials, such as cost, cost, availability,
service life, weight, corrosion/wear resistance, machinability,
weldability, and other ease-of-fabrication criteria. “ no bad material”
MATERIALS HANDLING
 A requirement of the production process, Poor materials
handling can result in damage to either raw materials or the
finished product, can slow production operations, creating
other excessive costs as a result of production delays.

Materials Handling Principles
 Movement over the shortest distance possible;
 Terminal time should be in the shortest time
 Prioritize mechanized handling over manual
 Avoid partial transport loads since full loads more economical
 Materials should be readily identifiable and retrievable.
Materials Handling Decision Factors
There are four basic decision factors:
 Material to be handled conduits/pipes for liquid and cranes for
lengths or weights
 Production system type, divided into job shop or batch process, lean
production, and continuous process types
 Facility type, low height bars OH crane, dictate floor-based cranes
 M handling system costs: Initial Cost, lifecycle costs. These include
labor, maintenance, repair, energy, and disposal costs.

Raw Materials
M used in a
production
or
fabrication
process,
needs mini.
Process to
be useful, -
gravel-
sand- coal,
iron ore , &
limestone,
Bulk material
The steel
product are
considered
to be a bulk
material in
all of its
forms,//sheet
steel, steel
bars, steel
pipe, and
structural
steel shapes
Fabricated material
Types of material
Engineered M
Bulk
materials
transformed
into custom-
fit items. For
example, the
bulk
material of
steel pipe is =
custom
dimension for
particular use
Designed M –
requires
substantial
processes to
reach their final
form. consist of
diverse items as
pumps, motors,
boilers, chillers,,
compressors,
transformers,
motor control
centers. fans

Production Materials Purchase and Management
Material Quality:
Poor quality materials, increases cost for rework/product defects, the
same apply if higher quality than required material.
Materials Vendor Surveillance and Materials Traceability:
• Second party audit= Vendor /supplier surveillance.
• Materials traceability is done through mill certification.
Materials Quantity:
• Material are costs until selling it as part of the completed product.
• Storage cost (space& finance) can be more than its value. (obsolescence)
• Materials inventories are critical to the production process. (stock-out)

Materials Purchase and Management
Just-In-Time Inventory Techniques
• Implies that the exact material quantities needed are delivered at
the exact time needed, to reduce inventories and the related costs.
Individual Purchasing Orders and Systems Contracts
• Non-standard and costly items, procure these through a system of
plans/specifications requirements and competitive bidding.
• For items continually needed, a systems contract may be the best
, it would optimize cost and purchaser efforts.
Materials Inspection
• Inspect purchased materials to assure compliance specification, .
visual methods to machine-assisted inspections, as X-ray, ultrasonic
Global Materials Decisions
Materials fabrication decisions, as to locations and methods, are being
made on a global basis. Canopy, partial production in India/China.

Plant materials management
• Materials that are not associated with incorporation into any
particular product or project
• Contributes in completing materials fabrication and production
operations. oils, greases, solvents, and cutting bits, parts such as spare motors /
cylinders for production machine or specialized spare parts needed for the
production machine.
Material waste product and hazard issues
Users& producers of materials, deemed as hazardous to humans, are
required to comply with government regulations concerning
hazard communication. labels, warnings, safety data sheets,
information, training.

Safety Data Sheets and Hazard Communication
Materials safety is always an important issue in the safe
handling, fabrication, transport of materials. USA ., Occupational
Safety & Health Administration (OSHA)
Environmental Regulations: local and international
Waste Materials: Original materials cost,(2) Handling costs,(3)Disposal
costs.
Surplus materials: It is due to- Excessive order, -Change in requirements ,-
Incorrect quantity information.

Section 1 Chapter 4: Labor
LABOR CLASSIFICATIONS
 Direct Labor―Those involved in the work that directly produce
the product.(Forman and down).
 Indirect Labor—Labor for activities which do not become part of
the final installation, product, or goods but that are required to
complete the project.
 Overhead Labor— Labor portion of costs inherent in the
performing of a task (such as: engineering, construction,
operating, or manufacturing), which cannot be charged to, a part
of the work, so it is allocated on some arbitrary basis believed to
be equitable, or handled as a business expense independent of
the volume of production.

Identifying labor in different industries
Note:
The labor category may shift between D-IND- OH based on the size of project, plant, office.

Developing labor rates
Base Wages: Amount that goes directly to the employee.(h-week- m)
Time Units: Year=12months = 52 weeks ,Week=5days, Day =8 H
Found in: data bases from previous projects, labor contracts, unit rates
supplied by contracting and engineering firms, local chamber of
commerce data, government labor statistics, published labor data base(
breakdown of all wages to hourly rate is used)
Fringe Benefits: Paid time-off PTO to be paid to the Employee for the
cases of holydays, annual vacation, sick time, it also covers the life
insurance and medical.( a factor added to the labor base wages)

•Example: ( calculate PTO/hr for a cost engineer))
If Base wage=$64,000/year - 5 WD/ week – 8 H per day
=64,000/(52x5x8)=$30.77/h
if: PTO 5d sick- 10 holidays- 10 vacation /Y
Sick time=30.77 x5x8 = $1,230.77/year
Vacation=30.77x10x8 = $2,461.54/year
Holidays=30.77x10x8 = $2,461.54/year
PTO= $ 6,153.85
Working hours= 52x5x8-(5x8+10*8+10*8)=1880hr
PTO= 6153.85/1880=$3.27/hr

Medical and life Insurance & Government Mandated
Benefits:
IF:
•Medical insurance=
$600/month= 600x12/1880 =$3.83 /hr
IF:
if the company also contributes $400 per month to a 401k plan (a
U.S. recognized company retirement plan)
•Retirement contribution = 400 x12/1880 =$2.55/hr

Developing labor rates- cont.
IF: Government Mandated Benefits:
government retirement funds, unemployment insurance,
retirement healthcare insurance, etc. In the U.S., these funds
include Social Security, Medicare, state unemployment insurance,
etc.
• retirement=6.2%x 30.77=$1. 91/hr
• Retirement medical=1.35%x30.77=$0.42/hr
• State unemployment=1%x30.77=$0.31/hr
Total medical insurance=3.83+2.55+1.91+0.42+0.31=$/9.02hr
Total Benefits=3.27+9.02=$12.29 /hr
Total wage(cost) per hour =30.77+12.29=$43.06/hr
Benefits Adder=12.29/30.77=40%

Developing labor rates cont.
When hiring contract employees, or estimating an engineer’s
or contractor’s costs, labor rates are usually broken down
differently. The breakdown includes the following:
• Base wages, including fringes;
• Worker’s compensation, (if applicable);
• Overhead; and,
• Profit, (if applicable for time and material situations).

Developing labor rates cont.
Fully Loaded Rate (Billing Rate):
It’s the base salary +adders + overhead+ profit.(T&M), The
Employer is charged only for actual W hours. ( rental M power).
•Indirect Labor:
a. May be estimated as actual contribution
b. Can be proportioned by direct labor, using H. data( 25-
30%........)
•Overtime:
In calculating over time;
a. (PTO, insurance ,and some governmental programs) not
added
b. Governmental retirements such as social security and
Medicare are usually added to overtime

WEIGHTED AVERAGE RATES/CREW COMPOSITE RATES
Due to availability of different salaries in the company/team, Since
estimators do not know who will be part of the actual team, they
must make some assumptions in order to develop a comparable
base wage rate to use. In most cases they will build a weighted
average team.

Section 1 ** Chapter 4: Labor
Example Calculation:
I case of acceleration, overtime: If the contractor works the concrete
crew, 10 hours per day, for two weeks including Saturday, how much
extra will it cost the contractor?

Section 1 ** Chapter 4: Labor
Example Calculation:
Overtime is paid for all hours over eight Monday through Friday, and
the first eight hours on Saturday.
Double-time is paid for hours greater than eight on Saturday and
all Sunday work.

Factors Affecting Labor Productivity
 Will union or non-union craft labor be used?
 Local market, if sufficient labor available locally?
 Work area, If remote, time to transport.
 Weather conditions be like (hot, cold, snow, rain, ..)
 Local holidays within project duration.
 Temporary facilities, health and safety, recreation.
 Work hours- working days5/6 week
 Paying overtime and other benefits.

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