Dr.

Farrukh Arif, Assistant Professor, NED UET

CE-591- Cost Engineering

and Control
INTRODUCTION TO COST
CONTROL

Lecture 6-1

CE-591 Cost Engineering and Control

Dr. Farrukh Arif, Assistant Professor, NED UET

OUTLINE

Basic Responsibilities of Project Management

Objectives of Cost Control Program
Cost Reporting vs. Cost Control
Elements of Cost Control System
The Control Estimate
Project Change Orders
The Need for Written Procedures
Types of Contracts
Who Controls Costs?
What the CE does?
Role of Owners vs. Contractors CE
Cost Control in Project Phases
Interface between Cost Control and Other Engineering Functions.
Example of Cost Control
What is needed for Effective Cost Control?
Summary

CE-591 Cost Engineering and Control

Lecture 6-2

Dr. Farrukh Arif, Assistant Professor, NED UET

Basic Responsibilities of Project Management

Quality Control
Adhering to the owners quality standards.
constructed facility should work safely for specified years.
Schedule Control
Complete in specified time.
Cost Control
Completed within budget.
Owner can realize his expected profits.
and Keep financial requirements within anticipated limits.
Safety
Construct Safely.
Good safety record can yield cost benefits (reduced insurance, improved
productivity).
Minimize Disruptions to Existing Operations
In case of addition or modification of existing facility, special arrangements required
for minimizing disruptions.
Can impact cost and schedule.
Lecture 6-3

CE-591 Cost Engineering and Control

Dr. Farrukh Arif, Assistant Professor, NED UET

Objectives of Cost Control Program

To focus management attention on potential cost trouble

spots in time.
To keep project supervisors informed.
regarding budget available for their area of
responsibility.
comparison of expenditure performance to available
budget.
Create cost-conscious atmosphere.
Minimize project cost.
Through cost reduction.
Value engineering (may be).
Lecture 6-4

CE-591 Cost Engineering and Control

Dr. Farrukh Arif, Assistant Professor, NED UET

Cost Reporting vs. Cost Control

Cost

Reporting

Monthly cost reports

expenditures vs. initial estimate
comparison

Cost

Control

Forecasting cost trouble spots

determine corrective action
CE-591 Cost Engineering and Control

Lecture 6-5

Dr. Farrukh Arif, Assistant Professor, NED UET

Elements of Cost Control System

Know what has to be done?

Have good financial and time yard sticks to measure performance
and progress.
Know what has been done?
Knowing and keeping all project and schedule commitments
updated.
Know what remains to be done?
Forecasting.
Know what is wrong early and why?
Compare analyze and identify cost or schedule deviations.
Compare the forecast to this.
Take corrective action.
Isolate points of overruns and take corrective actions.
Lecture 6-6

CE-591 Cost Engineering and Control

Dr. Farrukh Arif, Assistant Professor, NED UET

The Control Estimate

Detailed

prediction of the project

execution plan.

Schedule details.

Economic and Physical conditions.

Must be detailed enough to be able to
measure performance on item-by-item
basis.
Lecture 6-7

CE-591 Cost Engineering and Control

Dr. Farrukh Arif, Assistant Professor, NED UET

Project Change Orders

Changes during engineering/construction projects

are necessary.
Control estimate should be modified according to
changes through formal change order system
Proper documentation on special forms
Formal approvals

Change order system and control estimates

should be linked.

CE-591 Cost Engineering and Control

Lecture 6-8

Dr. Farrukh Arif, Assistant Professor, NED UET

The Need for Written Procedures

Objectives:
To establish clear-cut cost responsibilities
To establish proper/formal lines of communication

The procedures should cover all aspects of cost control

including methods of preparing or handling following:
Tabulations of fabricators bids and comparison with budget.
Approval of commitments.
Project change orders.
Forecasts of cost to project Completion.
Disseminating cost information to all concerned.
Format for tabulating, forecasting, and reporting project
commitments.
Lecture 6-9

CE-591 Cost Engineering and Control

Dr. Farrukh Arif, Assistant Professor, NED UET

Types of Contracts

Lump Sum
Guaranteed Maximum Price
Unit Price
Cost Plus
Cost-Reimbursable Alternative
Fully reimbursable with fixed fee.
Fully reimbursable with a fixed target cost and mutual
sharing of any under run to the target cost.
cost-reimbursable plus performance-based incentives
direct cost-reimbursable plus fixed construction
management costs.
Lecture 6-10

CE-591 Cost Engineering and Control

Dr. Farrukh Arif, Assistant Professor, NED UET

Who Controls Costs?

Contractor
One of prime responsibility.
doing the spending.

Owner
Direct responsibility for basic design specifications.
Changes made during execution.
Monitor and appraise contractors cost control efforts.

Lecture 6-11

CE-591 Cost Engineering and Control

Dr. Farrukh Arif, Assistant Professor, NED UET

What the CE Does?

Provides information.
Points out areas of cost overruns.
Investigate and recommend corrective action.
Forecast and prepare complete project monthly cost
outlook.
Monitors costs between outlooks.
Keeps complete record.
Quick cost estimates for alternatives.
Sends information back to main office for record keeping
for future.

CE-591 Cost Engineering and Control

Lecture 6-12

Dr. Farrukh Arif, Assistant Professor, NED UET

Role of Owners CE

Appraise contractors cost control performance.

Report/Analyze trends of costs outside
contractors Scope.
Respond to managements cost related requests.
Interpret owners estimate
Review contractors change orders.
Administer cost incentive plan (if any).

Lecture 6-13

CE-591 Cost Engineering and Control

Dr. Farrukh Arif, Assistant Professor, NED UET

Role of Contractors CE

Implementation and execution of cost control

plan.
Follow written guidelines or subsequent
agreements.
Maintain close, but, formal working relationship
with owners CE.
Avoid conflicts between contractor and owner by
resolving confusions and misunderstandings.

CE-591 Cost Engineering and Control

Lecture 6-14

Dr. Farrukh Arif, Assistant Professor, NED UET

Cost Control in Project Phases

Although Cost engineers and estimators have a

key role in the early planning phases, formal cost
control programs is considered in the final three
phases.
Cost control during conceptual engineering.
Cost control during detailed engineering.
Cost control during construction.

CE-591 Cost Engineering and Control

Lecture 6-15

Dr. Farrukh Arif, Assistant Professor, NED UET

Interface between Cost Control

and Other Engineering Functions

CE-591 Cost Engineering and Control

Lecture 6-16

Dr. Farrukh Arif, Assistant Professor, NED UET

Example of Cost Control

The technique used includes following five steps:

1.
2.
3.
4.
5.

Comparison: Locates the problem.

Forecast: Predicts magnitude of the problem.
Analysis: Determines reason for the problem.
Corrective action: Selects a lower cost alternative.
Revised forecast: Reflects impact of the corrective
action on project costs.

Lecture 6-17

CE-591 Cost Engineering and Control

Dr. Farrukh Arif, Assistant Professor, NED UET

What is needed for Effective

Cost Control?
Management attitude that emphasizes cost
control.

Cost-conscious design/construction team.

Capable cost control organization.

Full-time cost follow-up.

Good cost tools.

Comprehensive written procedures that
formalize the approach to cost control.

CE-591 Cost Engineering and Control

Lecture 6-18

Dr. Farrukh Arif, Assistant Professor, NED UET

3Ds of Good Cost Control

Definition
Well-defined project.
Definition must be reflected in control estimate and schedule.

Documentation
Decisions, change orders, commitments, contracts, procedures.

Discipline
Explicit project procedures must be followed.
Project must not fall in Tomorrow Syndrome
Eg.: Change drawings now, we will work out costs tomorrow.

Lecture 6-19

CE-591 Cost Engineering and Control

Dr. Farrukh Arif, Assistant Professor, NED UET

Summary
Focal point of cost control program: CE

Main tool: control estimate

Main approach: analyze existing trends and
forecast total cost.

Pay attention to 3 Ds.

All costs are controllable.

CE-591 Cost Engineering and Control

Lecture 6-20

Dr. Farrukh Arif, Assistant Professor, NED UET

CE-591-Cost Engineering and

Control
COST CONTROL DURING
CONCEPTUAL
ENGINEERING
Lecture 6-21

CE-591 Cost Engineering and Control

Dr. Farrukh Arif, Assistant Professor, NED UET

Outline

Introduction
Types of Cost Estimates
Blackout Periods
Cost Monitoring
Changes to Estimate Basis
Yardsticks
Cost Monitoring during Conceptual Phase
Cost-Monitoring Committee
Flow of Information
Committee Reports Outline

Controlling the Cost of Conceptual Engineering

Summary

CE-591 Cost Engineering and Control

Lecture 6-22

Dr. Farrukh Arif, Assistant Professor, NED UET

Introduction

Cost control begins in the owners office during

planning and conceptual phases.

Theoretical minimum cost of project is set.

Greatest opportunity for cost savings.

Design basis are set.

Lecture 6-23

CE-591 Cost Engineering and Control

Dr. Farrukh Arif, Assistant Professor, NED UET

Types of Cost Estimates

w.r.t. project phases

Screening Studies
Early estimates to compare competitive processes/alternatives

Preliminary Estimates
Used as preliminary economics

Semi-detailed Estimates
Prepared near end of conceptual engineering
Owners use to allocate funds for projects

Definitive Estimates
Prepared as early as possible during detailed engineering
Used as basis for cost control.

CE-591 Cost Engineering and Control

Lecture 6-24

Dr. Farrukh Arif, Assistant Professor, NED UET

Blackout Periods

Lecture 6-25

CE-591 Cost Engineering and Control

Dr. Farrukh Arif, Assistant Professor, NED UET

Cost Monitoring

Eliminate

cost blackout periods.

Provide a continuous evaluation of
total project costs

Take corrective action to minimize cost
increases.

Provide economic yardstick.
CE-591 Cost Engineering and Control

Lecture 6-26

Dr. Farrukh Arif, Assistant Professor, NED UET

Changes to Estimate Basis

Many changes to the basis of the preliminary estimate are made during
conceptual engineering.
Operational

Safety

Intangible Benefits

All changes that are absolutely necessary for the operation of end product.
Changes necessary from safety aspect (structural design changes, user related safety etc.)
Changes that are desirable but have intangible benefits only (elaborate landscaping,
impressive entrance gate.)

Uncontrollable Changes

Economic

Changes outside of management control (changes in law, increased taxes.)

Majority of changes fall in this group.
Justification for such changes should be in form of tangible payout.
Increase quantity or improved quality.
Reduce maintenance cost of labor or materials.
Reduce operating costs.
CE-591 Cost Engineering and Control

Lecture 6-27

Dr. Farrukh Arif, Assistant Professor, NED UET

Yardstick for Justifying Economic Changes

Recognized method of calculating profitability that

tales time value of money into account.
One common yardstick is discounted cash flow.
For small changes payout time in years
Payout time in years = investment
annual savings
Acceptable = 2 years (generally) i.e. any change
that did not return investment will be rejected.

CE-591 Cost Engineering and Control

Lecture 6-28

Dr. Farrukh Arif, Assistant Professor, NED UET

Cost Monitoring during

Conceptual Phase
Project Personal
Planner/designer

Responsibility
identifies changes w.r.t. basis of original
estimates and advises CE.

Project Manager (PM)

Advises the CE of changes in project timing

or execution plans.

Cost Engineering group

Keeps track on changes in material or wage

rates.

Cost Engineer (CE)

Develops cost and schedule impact of each

change.
advises cost control committee.

Lecture 6-29

CE-591 Cost Engineering and Control

Dr. Farrukh Arif, Assistant Professor, NED UET

Cost-Monitoring Committee

Members
The Lead Planner/Designer
Technical Specialists
Project Manager
Project CE

Duties
Review Plans
Question any client requirements that appear to cost an
exorbitant amount.
Define economic yardsticks.
Put out periodic reports.

CE-591 Cost Engineering and Control

Lecture 6-30

Dr. Farrukh Arif, Assistant Professor, NED UET

Cost-Monitoring Committee

CE-591 Cost Engineering and Control

Flow of information

Lecture 6-31

Dr. Farrukh Arif, Assistant Professor, NED UET

Cost-Monitoring Committee

Committee Report Sections

Narrative Section Covering
Schedule outlook.
Highlights of progress made.
Brief resume of activities.

Project Cost summary

List of approved changes
Cost history of project

CE-591 Cost Engineering and Control

Lecture 6-32

Dr. Farrukh Arif, Assistant Professor, NED UET

Project Cost Summary

Lecture 6-33

CE-591 Cost Engineering and Control

Dr. Farrukh Arif, Assistant Professor, NED UET

Approved Changes

CE-591 Cost Engineering and Control

Lecture 6-34

Dr. Farrukh Arif, Assistant Professor, NED UET

Project Cost Outlook History

Lecture 6-35

CE-591 Cost Engineering and Control

Dr. Farrukh Arif, Assistant Professor, NED UET

Controlling the Cost of

Conceptual Engineering

Direct Project costs

Material
Labor

Cost of Conceptual engineering

Salaries of specialists and managers
Overheads
50,000 to 150,000 work hours are required in
general.

CE-591 Cost Engineering and Control

Lecture 6-36

Dr. Farrukh Arif, Assistant Professor, NED UET

Summary

Keep

cost outlook current.

Prevent blackout periods.

Focus on items having potential for
large cost impacts.

Economic Yardsticks.

Cost Control Committee and report.
CE-591 Cost Engineering and Control

Lecture 6-37