CCP Material - Mr. M-Elsadany PDF

Section 1 : Cost Chapter 1 : Cost Elements
Sec 1
Cost
1
Chapter 1
Cost Elements
2
C t St
Cost Structuring
t i
Sort the cost elements into direct costs, indirect costs, fixed costs, and variable costs.
Cost element structure “CES” will help to understand how they influence activity cost
Cost element structure “CES” will help to understand how they influence activity cost
and to get a better understanding of how they can be controlled.
Cost Structuring
Costs expended solely
Costs expended solely to complete the asset.
to complete the asset
Direct Costs
Ex: concrete, labors, non reusable forms, and permit fees.
Costs support the work but associated with others, hence allocated
Indirect Costs
Indirect Costs with some percent. Ex: Head office costs and gasoline.
Must be provided independent of the volume of work, either
Fixed Costs
direct or indirect Ex Permit fees and head office costs
direct or indirect. Ex: Permit fees and head office costs.
Must be provided dependent of the volume of work, either direct
Variable Costs
g
or indirect. Ex: Labors and gasoline.
3
C tA
Cost Accounting
ti
• The historical reporting of disbursements and costs and expenditures on a project.
• Basic Steps: (1)Recording, (2)Classifying, and (3)Summarizing.
Basic Steps (1)Recording (2)Classifying and (3)Summarizing
• Classification can be done using the code of accounts, ABC, or WBS
• Code of Accounts: Used to classify all recorded cost elements and also known as
Code of Accounts: Used to classify all recorded cost elements and also known as “
chart of accounts”. It’s configured to support the recording of cost data in the
general ledger
general ledger.
4
Cost Management
1. Estimating: Predicts the quantity and cost of resources needed to

accomplish an activity or create an asset.
2. Cost Trending: Howexpenditures are trending relative to physical
accomplishments.
3. Cost Forecasting: Predictions of the cost at completion for cost elements
in progress
4. Life‐Cycle Costing (LCC): Once the asset is created, it enters the
operations and maintenance (O&M). The CES for this phase will be
around maintenance and disposal
5
Section 1 : Cost Chapter 2 : Pricing
Chapter 2
Pricing
6
P i
Price
Price is the cost at which something is bought or Sold. In real world price and
cost can be used interchangeably.
interchangeably
Pricing Strategies
• Type I is to win the project and execute it profitably. Bid price is determined
according to the actual project cost.
• Type II refers to a new industry that a company is trying to get a foothold into.
In this “must‐win” situation, price is determined by the market forces.
7
B i
Business and
d Economic
E i Ratios
R ti
1. Simple ROI “Return on Investment” :
ROI = (Gains – Investment Costs)/Investment Cost
Ex: gains = 11’000, Cost= 9’500
ROI = (11,000 – 9,500)/9,500 = 15.8 %
/
2. Complex ROI:
ROI = Average yearly profit / (Original investment + Working Capital)
ROI = Average yearly profit / (Original investment + Working Capital)
3. RAI “ Return on Average Investment“ :
RAI = Average yearly profit / (average outstanding investmentl)
4. ROS “Return on Sales” :
“ l ”
ROS = Net Profit after taxes / Sales
5. ROA “Return on Assets” :
ROA = Earnings before interest and taxes / Net operating Assets
6. Gross Profit Margin Ratio
GPMR = Gross Profit / Total Sales
GPMR Gross Profit / Total Sales
8
B
Break
k Even
E A l i
Analysis
Definition: Level of sales At the point where total costs equal total revenue
Terms:
• Selling Price (SP): The price of each unit.
• Variable Costs (VC): Costs that vary in proportion to sales levels.
Variable Costs (VC): Costs that vary in proportion to sales levels.
• Contribution Margin (CM): Sales revenues less variable costs (SP – VC).
• Fixed Costs (FC): Costs remain constant.
• Units (X): Number of items sold or produced.
Equation: SP(X) = VC(X) + FC i.e X = FC / (SP‐VC) = FC / CM
Example: Each unit selling price is $4, unit cost is $2, and the fixed costs for the
period are $600. What is the break‐even point in units and in sales revenue?
4(X) = 2(X) + 600  X = 300 units
Or: X = 600 / (4‐2) = 300 units
Break even sales revenu = $4 x 300 = $1’200
Break‐even sales revenu = $4 x 300 = $1 200
9
Section 1 : Cost Chapter 3 : Materials
Chapter 3
Materials
10
Materials Competition
Materials compete on cost, availability, service life, weight, corrosion/wear resistance,
machinability weldability and other ease‐of‐fabrication criteria
machinability, weldability, and other ease‐of‐fabrication criteria.
Materials Handling Principles

• Movement over the shortest distance.
• Terminal time should be in the shortest time (containers / pallets).
• Eliminate manual handling when mechanized is feasible.
Eliminate manual handling when mechanized
• Avoid partial transport loads since full loads are more economical.
• Materials should be identifiable and retrievable.
Materials Handling Decisions

1. Material to be handled: Clay in loaders, structural steel by crane, liquids in pipelines.
2. Production system type: Job shop or batch process and continuous process .
3. Facility type: Low ceiling height, rectangular area, open area.
4 Materials handling system costs: Initial Cost, lifecycle costs, disposal costs.
4. Materials handling system costs: Initial Cost lifecycle costs disposal costs
11
Types of Materials
1. Raw Materials:
Materials utilized in a production or fabrication process The most basic.
Ex: Raw materials such as coal, limestone, and iron ore.
2 Bulk
2. Bulk Materials:
Materials:
Materials readily available with minimal lead times for order and delivery.
EX: Sheet steel, steel bars, steel pipe, and structural steel members.
3. Fabricated Materials:
Bulk materials transformed into custom‐fit items for a particular product or project.
p p p j
Ex: Steel pipe transformed by fabrication into custom dimensions for particular use.
4 EEngineered/Designed Materials:
4. i d/D i dM t i l
Materials require substantial work in order to attain their final form.
EX: Pumps, motors, boilers, chillers, fans, compressors, transformers, and
motor control centers.
12
Materials Purchase and Management
• Materials Quality:
Poor quality materials can result in product defects leading to increased costs.
Higher‐quality
g q y materials in excess of requirements
q will lead to excessive costs.
• Materials Traceability & Vendor Surveillance:

Vendor surveillance may require periodic inspection at the vendors’ location.
Materials traceability is accomplished by means of mill.
• Materials Quantity:
Materials storage is a further burden that can exceed the value of the materials.
Insufficient inventories may create dangers of “stock‐outs” interrupting process.
To balance these demands, determine economic order quantity (EOQ) number.
13
Materials Purchase and Management

• Economic Order Quantity EOQ:
EOQ
EOQ = (2 x D x P) / S
(2 x D x P) / S
Where: EOQ is the optimal order quantity (not function of item cost) , D is annual
demand, S is storage costs, and P is purchase order costs which is setup cost
(ordering, shipping, handling) not the cost of goods. It’s a fixed cost and not per unit.
Ex: If your company has a requirement for 20’000 units per year, where the unit cost
is $130,
$ order cost for a purchase order is $200,
$ and storage cost is $8
$
EOQ = 2 x 20’000 x 200 / 8 = 1000 units

• Reorder
R d point
i RP:
RP
RP = (O x R) + I
Where: RP is reorder point, O is order time, R is production rate, and I is minimum
inventory level
l l or safety
f stock. k
Ex: Assume that you need 40 units per day, the lead time for an order is 5 days, and
the safety stock level is 100 units.
RP = (5 x 40) + 100 = 300 units.
14
Plant Material Management
• Definition: Materials that are not incorporated into product or project.

project Instead assist
in production operations. Ex: Oils, greases, solvents, and spare parts.
• Specialized Plant Materials: Such as replacement parts may be available only from the
original equipment manufacturer (OEM) and require significant lead time. Try to
maintain
i i an inventory
i & networking
ki with
i h others
h willing
illi to lend
l d in
i case off emergency.
• MSDS & Hazard Communication: MSDS must be readily available and accessible to
those dealing with hazardous materials as required by (OSHA).
• Waste Materials: ((1)Original

) g materials cost, ((2)Handling
) g costs, ((3)Disposal
) p costs.
• Surplus materials: This is usually due to (1)Excessive order, (2)Change in material

requirements (3)Incorrect quantity information.
requirements, information
15
Section 1 : Cost Chapter 4 : Labor
Chapter 4
Labor
16
Labor Classifications
• Direct Labor: Involved in the work activities that directly produce the product
• Indirect Labor: Needed for activities that do not become part of the final installation,
product, or goods produced, but that are required to complete the project.
• O
Overhead
h d Labor:
L b Labor
L b portion
ti off costs
t inherent
i h t in
i the
th performing
f i off a task
t k that
th t is
i nott
a part of the work, and therefore must be allocated as a business expense
independent of the volume of production.
17
Developing Labor Rates

• Time Units: Year = 12 months, Week = 5 days, Day = 8 Hours, Year = 52 Weeks
• Base Wages: Amount that will go directly to the employee (usually per hour).
• Fringe Benefits: Paid time off PTO (Sick time, vacation, holidays) + Medical/Life Insurance.
• Example:
Base wage = $60’000/year = 60’000 /(52x5x8) = $28.8 / hour
PTO: Considering yearly (5 days sick, 10 vacation, 10 holidays)

Sick time = 28.8 x 5 x 8 = $1’154 / year
Vacation = 28.8 x 10 x 8 = $2’308 / year
Holidays = 28.8 x 10 x 8 = $2’308 / year
PTO = $5
$5’770
770 / year
Working hours / Year = (52x5x8) – (5x8 + 10x8 + 10x8) = 1880 hrs
PTO = $5’770 / 1880 = $3.07 / hr
18

Medical Insurance / Government Benefits
Considering
d the
h following:
f ll
• Medical insurance= 400/month = 400 x 12 / 1880 = $2.55/hr
• Retirement contribution ((> 401K) = 300/month = 300 x 12 / 1880 = $1.91/hr
• Government mandated benefits (US Only) are
 6.2% retirement = 6.2% x 28.85 = $1.79/hr
 1.35% retirement medical = 1.35% x 28.85 = $0.39/hr
 1 % state unemployment = 1% x 28.85 = $ 0.29/hr
Total medical insurance = 2.55
2 55 + 1.91
1 91 + 1.79
1 79 + 0.39
0 39 + 0.29
0 29 = $6.93/hr
$6 93/hr
Total Benefits = 3.07 + 6.93 = $10/hr

T t l wage = 28.85
Total 28 85 + 10 = $38.85/hr
$38 85/h
Benefits adder = 10 / 28.85 = 34.7 %
19
• Fully Loaded Rate (Billing Rate):

It’s the base salary + adders + overhead + profit. On time & material basis, owner
pays
p y for worker jjob onlyy and doesn’t p
payy for sick leaves,, vacations,, holidays.
y
• Indirect Labor:
1. Direct estimate of the indirect staff required.
2. Using historical data (ex: 25% or 30% of direct labor cost).
• Overtime:
When calculating Overtime, (PTO, insurance, and some governmental programs) are
not added to overtime. Some other governmental retirements such as social security
and Medicare are usually added to overtime.
20
Weighted average Rates (Crew Composition)
Example: If working 10 hrs/day for two weeks, 10 hours for two Saturdays.
Normal time: 40 hrs x 2 weeks x $23.83 x 9 workers = $17’158
Overtime : $18.33 x 1.5 = $27.5/hr with benefits adder (say) 7.5% = $29.56/hr
(5 days x 2 hrs + 8 hrs Saturday ) x 2 weeks x $29.56 x 9 workers = $9’577
Double Time: $18.33 x 2 = $36.66/hr with benefits adder (say) 7.5% = $39.41/hr
(2 hrs Saturday ) x 2 weeks x $39.41 x 9 workers = $1’418
21
Factors Affecting Productivity

• Will union or non‐union craft labor be used?
• Is sufficient labor available locally?
Is sufficient labor available locally?
• If the area is remote, do workers have to be bused in?
• What will the weather conditions be like (hot, cold, rainy, etc.)?
• Are there any local holidays?
• Are temporary living quarters needed?
• Is overtime necessary to attract workers?
Is overtime necessary to attract workers?
• What are the standard work hours and work days?
22
Section 1 : Cost Chapter 5 : Engineering
Chapter 5
Engineering
23
Product, Project, and Process Development (1/2)
• Pure / Basic Research: Work without a specific particular end product such as
examining the interactions of different chemical compounds.
• Applied Research: The attempt to develop usable products or add new feature‐sets
to existing products. It’s carried out by the organization producing the product.
• Computer‐Aided Design/Engineering CAD/CAE: Utilization of computerized work

stations and software to develop and analyze a product,
product project,
project or process design.
design
• Computer‐Aided Manufacturing CAM: CAD/CAE ported directly into CAM software.

Design is directly sent to machines like CNC Computer‐numerically controlled.
24
Product, Project, and Process Development (2/2)
• Prototypes: Developed prior to large‐scale production to (1)test designs and also to

(2)test customer reaction. Prototype development is expensive, but is less expensive
than discovered after numerous units are in customer hands.
• Patents & Trade Secrets: Organizations wishing to emulate patent’s provisions will
develop different approach different or pay to the patent holder. (In USA 17 Years).
• Product Liability: Those injured by a product can seek compensation for their
damage. The tort law in this area has evolved over decades from a concept of
“buyer
buyer beware
beware” to a concept of “seller
seller beware
beware”.
25
Product, Project, and Process Design (1/2)
• Standardization: The attempt to base product designs. The advantages are lower
costs, shorter time, and maintenance personnel are more familiar. The disadvantage
that If there is a flaw, it will be spread over a wide variety of products.
• Process Selection: Relates to production methods, continuous and discrete.

1. Continuous production methods such as petrochemical plants, power plants and
manufacturers with assembly‐line methods. It’s less expensive in the long run.
2. Discrete production such as pre‐cast concrete plant, or structural steel fabrication
shop. It has a higher labor factor. Favored where labor costs are less expensive.
Some products will envelope both methods sometimes by the same firm.
26
Product, Project, and Process Design (2/2)
• Manufacturability: Slight modifications in a design that promote ease of product

assembly without affecting the product. Designs should be:
1.. Forgiving
o g go of minor
o inaccuracies
accu ac es
2. Easy to fabricate,
3. Based on efficient utilization of labor, materials, and equipment
• Constructability: The Counterpart of manufacturability applied to constructed

projects to pinpoint problems before designs are developed to the point where
changes create significant delays and associated costs.
costs
• Make‐or‐Buy Decision: Which items should be subcontracted out and which should
be made inin‐house
house. Do organization
organization’ss quality and cost on an item can compete with
outside suppliers. If trade secrets are involved, the decision will typically be to make
the item, The goal is to enhance overall quality at a lower cost.
27
Engineering Production / Construction (1/2)
• Production Health & Safety: An accident results in the loss of a trained worker and
an interruption in the process. Systems must be selected that reduce/eliminate the
potential of accidents.
• Facility Layout: Decisions as to arrangement, including equipment location, labor

location, and services location. Layout decisions should always consider the
potential impact of additional demand therefore considering future expansion.
• Assembly And Flow Process Charts: Assist in planning the facility layout. They help
to analyze production operations in terms of operations sequences performed,
distances between operations, and operation time requirements.
28
Engineering Production / Construction (2/2)
• Quantitative Analysis In Facility Layout.

1. Linear programming is a mathematical technique that is widely used in finding
optimal solutions to problems.
problems
2. Monte Carlo techniques can be used to simulate wait time for a crane in a
plant and its cost impact. Data can be generated via computer programs with
random number generators.
• Reengineering: Redesign of process to achieve improvements such as cost, quality,

service, and speed. Ex: Let your supplier monitor your inventory of their supplied
items. Reengineering focuses on the optimization of the total organization, rather
than
h sub‐optimization
b off individual
d d l departments.
d Moreover, reengineering focuses
f
on the “whys” of an action or process as opposed to the “hows”.
29
Section 1 : Cost Chapter 6 : Equipment
C
Chapter 6
Equipment, Parts, and Tools
30
Equipment Value Categories
1. Replacement Cost New

• Reproduction Cost: The cost new of an identical item.
• Replacement Cost: The cost new of an item having the same or similar utility.
• Fair Value: Cost new of an item considering similar items cost, and taking into
account utility
ili and
d allll standard
d d adjustments
dj and
d discounts
di to list
li price.
i
• Sources of Data:
• Manufacturers price lists
• Sales representatives
• Manufacturers or dealers quotations
• Past transactions invoices and purchase orders
• Journals and trade shows literature
31
2. Market Value
• Fair Market Value‐in‐Place: Value expected between a willing buyer and a willing
seller both not under any compulsion and taking into account installation and
seller,
the contribution of the item to the operating facility.
• Fair Market Value‐in‐Exchange: Value expected to be exchanged in a third‐party
transaction between a willing buyer and a willing seller, both not under any
compulsion, also referred to as retail value
• Orderly Liquidation Value: Probable price for all assets from an orderly
liquidation, given a maximum six months to conduct sale and adequate funds
available for the remarketing campaign, also referred to as wholesale value.
• Forced Liquidation Value: Value of equipment that can be derived from a
properly advertised and conducted auction where time is of the essence, also
referred to as “under the hammer” or “blow‐out” value.
32
2. Market Value
• Salvage Value/Part‐Out Value: Value of equipment that a buyer will pay to a
seller recognizing the component value of parts of the equipment that can be
seller,
used or resold to end‐users, usually for repair or replacement purposes.
• Scrap Value: Value of equipment that relates to the equipment’s basic
commodity value. For example, dollars per ton of steel or pound of copper.
• Sources of Data:
• Sales advertisements for used equipment
• Used equipment dealers
• Used equipment quotations in previous transactions
• Market data publications
• Auction “sales catalogs” available from auction companies
• Past sales results from one’s own firm.
33
Market Value Example:
Orderly Liquidation Sale = Purchase price at auction = $5,500

De‐installation, rigging, shipping, and delivery to warehouse = $600
Cost of money (90 days to sell, 10% rate ) = 3 x $6,100 x 10% = $154
O erhead (20%) = $5,500
Overhead $5 500 x 20% = $1,100
$1 100
Profit (20% of purchase price plus de‐installation ) = $6,100 x 20% = $1,220
Min. desired sellingg p
price = $
$5,500
, +$
$600 + $
$154 + $
$1,100
, +$
$1,220
, =$
$8,574
,
Retail Asking = Ask advertise for sale = $9,800
Fair Market Value‐in‐Exchange = Take (sale to end user) $8,600
Buyer (end user) pays sales tax (6%) $516, Delivery $600, Installation and
debugging $1,400
F i Market
Fair M k t Value‐in‐Place
V l i Pl = $8,600
$8 600 + $516 + $600 + $1,400
$1 400 = $11,116
$11 116
34
Cost Adjustments : To normalize data, the following considerations should be addressed

• Different years of manufacture
• Utilization (amount of wear/use)
• Condition
• Different attachments, drive motors, etc.
• Location of the sale (market area vs. a remote area)
Condition Terms and Definitions Example:

• Excellent (E): New condition, no defects, and may still be under warranty.
• Good (G): Good appearance, may recently overhauled but no repairs required.
• Average (A): Operating 100 %, but may need repair or replacement in the future.
• Fair (F): High utilization, defects are obvious and will require repair soon.
• Poor (P): Not operational, requires repair, or overhaul before it can be used
35
Data Filing Systems : Most firms file data using one of four methods
1. Standard Industrial Classification (SIC) code where data is stored in broad

industry category codes, such as #34‐machine tools, #44‐marine, etc. This
method is quite effective when utilizing an electronic database.
2. List data by equipment class and type, such as crane, trailers, or bulldozer.
3 Lists
3. Li t equipment
i t by
b industry
i d t category,
t such
h as construction,
t ti mining,
i i or aircraft.
i ft
4. Manufacturer’s name, such as Caterpillar construction equipments, Boeing

commercial aircraft, and IBM‐computers, etc.
36
Equipment Residual Values:
Residual Value Curve:

1. Normal Curve: long‐lived equipment, usually L‐Shape.
2 Disrupted‐Market:
2. Di dM k U ll U‐Shape,
Usually U Sh results
l from
f equipment
i
shortage or regulatory pressures causing suddenly deviation.
3 Regulatory
3. Reg lator Change Curve:
C r e Illustrates
Ill t t sudden
dd impact
i t on market
k t
value that regulation can cause
4 High Obsolescence Curve: Illustrates impact of technological
4.
obsolescence such as computers and high‐tech equipment.
5. New Tax Law / High

h Inflation
fl Curve: Tax laws
l
and inflation can cause a normal residual curve
t rise
to i ini a short
h t time.
ti
37
Variables That Affect Residual Value (1/4)
1. Initial Cost: For residual purposes, the estimator should consider hard costs only.
Hard cost includes the cost new + items necessary to make it operate such as
motors,
oto s, eelectricals,
ect ca s, aand
d co
controls.
t o s. So
Softt costs sshould
ou d not
ot be included
c uded suc
such as
foundations, freight, debugging, taxes, and installation.
Example: A transaction valued at $2.1 million. Subsequent investigation found that

basic cost of the machine was $1.5 million, the soft cost was $600’000.
Residual curve indicated 30 percent of the new cost.
Total Cost: $2.1
$2 1 million x 30% = $630,000
$630 000
Hard Cost: $1.5 million x 30% = $450,000
Difference = $180,000
This difference could present a future shortfall.
In some instances, such as a lease or financing or life‐cycle costing, soft costs should
be considered in determining residual values.
38
2. Maintenance: It can affect the useful life of equipment. In calculating a residual

value, estimators must consider how the equipment will be maintained and/or the
maintenance
a te a ce pprovisions
o s o s in tthee lease.
ease.
3. Use, Wear, and Tear: Equipment in harsh service versus mild service can be
substantial. Ex: hopper used in grain service lives 40 to 50 years. However, if used in
salt service, their useful lives can be as short as 15 years.
Some types of equipment, such as aircraft, define use in hours of utilization and
cycles (takeoffs and landings); other transportation equipment defines use in miles
per year. Most mechanical equipments tend to wear out at around 10,000 to 20,000
hours. At these milestones, usuallyy some form of rebuild is required.
q
4. Population: This gives statistical significance to the residual value, because the value
will be based on a large sample.
39
5. Age: Equipment presented as new in January 2003 could have a 2001 or 2002 build
date. Both are new with the same condition but the price is different.
6. Economy: A used truck in a robust economy may be sold for lower price and longer
time in a recession. Cost of money should also be calculated in the overall cost.
7. Changes in Technology: An analysis of technological changes occurring over the past

20 years shows that future advances in technology were generally known at the time
of lease origination.
origination time necessary to “fix”
fix an image from minutes to seconds.
seconds
8. Foreign Exchange: Changes in foreign exchange value could affect selling / residual
value causing them to suddenly drop or increase.
value, increase Strong foreign currency may rise
the price of foreign equipment, which in turn, may pull residuals up, and vice versa.
40
9. Tax Law: Sometimes tax laws can affect new equipments price, hence affecting used
equipment price.
10. Legislation/Regulation: Regulations may impact values in positive ways, however,

the impact is often negative.
11. Equipment Location: Does the equipment required to be delivered to a prime

market location or will it have to be sold in a remote area?
12. Method of Sale: Price of cash sales will not be like installment sales.
41
Section 1 : Cost Chapter 7 : Economic Costs
C
Chapter 7
Economic Costs
42
Types of Costs
1. Opportunity Cost: Foregone benefit by choosing one alternative over another. A

company has 3 investments options with ROI = 1.37, 1.34, 1.32. The opportunity cost
of choosing the 1.34
1 34 is 0.33
0 33 loss for not exploiting the higher ROI investment.
investment
2. Sunk Costs: Funds already spent by past decisions. Since these expenditures are in
the past,
past they should not influence current decisions.
decisions
3. Book Costs: Original cost less any depreciation. They do not represent cash flow and
thus are not taken into account for economic decisions.
decisions If market price is lower than
the original price, price will be carried at the lower of cost or market value.
4 Incremental Costs: When comparing between many alternatives,

4. alternatives cost differences
between them are called incremental costs. Ex: If two units have annual costs of
$1,500, $1,800, then incremental cost difference is $300.
43
Changes In Costs (1/2)
1. Inflation: A rise in the price level that does not occur by itself but must have a
driving force behind it. There are four effects that can result in inflation:
I
I. Money supply: Influenced by central bank operations.
operations A loosening of monetary
policy will increase the flow of money, which means increased money is
chasing the same amount of goods. This bids up price resulting in inflation.
II. Exchange rates: They influence price of imported goods. If the import is a basic
industrial commodity, utilized in several products, this will lead to inflation.
III Demand‐pull
III. D d ll inflation:
i fl i Wh
When excessive
i quantities
i i off money are chasing
h i a
limited amount of goods resulting in what is essentially a “seller’s market” as
sellers
se e s receive
ece e ppremium
e u p prices
ces
IV. Cost‐push inflation: It takes place when product producers encounter higher
costs and then push these costs along to others in the production chain
through higher prices.
44
Changes In Costs (2/2)
2. Deflation: A fall in the general price level for goods. The same factors of money
supply, exchange rates, demand‐pull, and cost‐push factors operate but in the
opposite direction with a resultant decrease in prices.
prices
3. Escalation: A technique to accommodate price increases or decreases during
contract life. A clause is incorporated into the contract so that the purchaser will
compensate the supplier in the event of price changes. Without such clauses,
suppliers would include contingency amounts that might not used. The supplier
would
ld gain
i from
f this
hi windfall
i df ll while
hil the
h purchaser
h would
ld be
b the
h loser.
l
4. Currency Variation: A significant cost impact both on those inside the country as
e as tthose
well ose outs
outside
de tthee cou
country.
t y. Protection
otect o ca
can be acco
accomplished
p s ed tthrough:
oug :
1. Currency futures hedging or
2. Valuing contracts against very stable currencies.
45
Governmental Cost Impacts (1/2)
1. Taxes: Ex: Income taxes, property taxes, inventory taxes, employment taxes, and
sales taxes. In the case sales taxes, the firm acts as the tax collector for the
government adding the sales tax and collecting it from customers.
customers Some countries
have a value‐added tax (VAT) applied to the added value. Therefore, if a firm took
$100 worth of raw materials and produced a product valued at $250, the (VAT)
would be applied to the $150 difference or value added by the firm.
2. Effective & Marginal Tax Rates:
• Eff i tax rate (Average
Effective (A tax rate)) = (Tax
(T Liability
Li bili / Total
T l Taxable
T bl Income).
I )
• Marginal tax rate is the tax rate on the next dollar of taxable income. For
a c a dec
financial decision‐making,
so a g, marginal
a g a ta
tax rate
ate iss a key
ey eelement
e e t because tthee firm iss
concerned with the tax impact of additional income.
46
Governmental Cost Impacts (2/2)
3. Investment Tax Credits : To encourage economic activity, governments may give

firms tax credits ‫ اعفاء ضريبي‬based on location, equipment type, or certain public goals
such as equipment that reduces energy consumption.
consumption
4. Depreciation and Depletion:
• Depreciation: Governmental entities allow depreciation to encourage investment
in equipment. Depreciation is a non‐cash expense that reduces taxable income. It
provides an incentive for firms to invest in new plant and equipment based on
original
i i l equipment
i costs (inflation
(i fl i cannot be
b taken
k i
into account for
f these
h
purposes). The rationale underlying depreciation is that physical assets lose value
over
o e ttimee due to suc
such factors
acto s as dete
deterioration,
o at o , wear,
ea , aand
d obso
obsolescence.
esce ce.
• Depletion : Analogous to depreciation but for natural resources. Thus, owners of
a stone quarry or an oil well can take depletion allowances based on the
percentage of the resource used up in a given time period.
47
Depreciation Techniques (1/2)
1. Straight‐Line Depreciation : D = (C ‐ S) / N
Where: D = depreciation charge, C = asset original cost, S = salvage value, and
N=asset
asset dep
depreciable
ec ab e lifee (yea
(years).
s).
Ex: Asset with a $8’000 original cost, 5‐years life, and $400 salvage value.
D = ($8’000 – $2’000) / 5 = $6’000 / 5 = $1’200
2. Double‐Declining Balance Depreciation (DDM): D = ( 2 / N ) (BVt‐1)
Where: D = depreciation charge, C = asset original cost, BV = Book value at given
year and N = asset depreciable life (years).
year, (years)
Ex: For the previous example,
Year Calculation Dep. Amount Allowable Dep. Book Value
1 (2/5) x (8000) $3’200 $3’200 $4’800
2 (2/5) x (4800) $1’920 $1’920 $2’880
3 (2/5) x (2880) $1’152 $880 $2’000
Total ‐ $6’272 $6’000 ‐
48
Depreciation Techniques (2/2)
3. Sum‐of‐Years Digits Depreciation (SOYD): Dr = (C ‐ S) x [ (N‐r+1) / ((N(N + 1) /2 )]

Where: Dr = Depreciation charge for the rth year, C = asset original cost, S = salvage
value,
a ue, N = remaining
e a g asset dep
depreciable
ec ab e lifee (yea s), r = rth yea
(years), year..
Ex: For the previous example, Year Calculation Dep. Amount
1 (8000 – 2000) x (5/15) $2’000
2 (8000 2000) x (4/15)
(8000 – 2000) (4/15) $1’600
3 (8000 – 2000) x (3/15) $1200
4 (8000 – 2000) x (2/15) $800
5 (8000 2000) x (1/15)
(8000 – 2000) (1/15) $400
4. Modified Accelerated Cost Recovery System Depreciation (MACRS):

• Unique to the United States Tax Code.
• Based on original asset cost, asset type, asset recovery period.
5. Units of Production Depreciation:

• Utilized when depreciation is more accurately based on usage instead of time.
49
Economic Analysis Techniques
Time Value of Money:

In order to compare different alternatives on the same basis, these cash
aamounts
ou ts o
of income
co e aand
d eexpenditures
pe d tu es must
ust be set to equ
equivalent
a e t te
terms.
s.
50
1. Net Present Worth Method (NPW):

Ex: Unit A price=$10’000, life=4years, salvage=0, Annual maintenance = $500/year.
Unitt B p
U price=$20’000,
ce $ 0 000, life=12year,
e yea , sa
salvage=$5’000,
age $5 000, maintenance
a te a ce costs aaree Year1=0,
ea 0,
Year2=$100 and increase by $100/year. The firm’s cost of capital is 8 percent.
Solution:
• Life
Lif is
i different
diff t and
d the
th common multiple
lti l is
i 12 years
• NPW(A)= 10’000 + 10’000/1.084 + 10’000/1.088 + 500 x [(1.0812‐1)/(0.08x1.0812)]

= 10’000 + 7350.3 + 5402.7 + 3768 = 26’521
• NPW(B)=20’000+ (1 0812 ‐0.08x12‐1)/(0.08

NPW(B)=20 000+ 100 x [ (1.08 ‐0 08x12‐1)/(0 0812 x 1.08
1 0812)] – 5000/1.08
5000/1 0812
= 20’000 + 3463 ‐ 1985.6 = 21’277.82
Decision: Select unit B that has the least cost.
51
2. Capitalized Cost Method: A = PxI

Capitalized cost (CC) represents the present sum of money that needs to be set
aside now,
now at some interest rate,
rate to yield the funds required to provide the
service.
Example:
A bridge is built for $5,000,000 and will have maintenance costs of $100,000
per year. At 6 percent interest, what is the capitalized cost of service?
Solution:
Maintenance Capitalized Cost = ($100,000) / 0.06 = $1’666’667
52
3. Equivalent Uniform Annual Cost or Benefit (EUAC/EUAB): (P‐S)(A/P,I,n) + SI

The comparison may be made on the basis of equivalent uniform annual cost
((EUAC),
U C), equ
equivalent
ae tu uniform
o aannual
ua be
benefit
e t ((EUAB)
U )o or o
on tthee EUAB‐EUAC
U U Cddifference.
e e ce.
Example : Unit A has an initial cost of $20,000 and $3,000 salvage value, while Unit
B has an initial cost of $15,000 and $2,000 salvage value. Unit A has a life of 10
years, whereas Unit B has a 5‐year life. Cost of capital is 10 percent.
Solution:
EUACA = P (A/P,I,n)
/ – S (A/F,I,n)
/ or you can use the formula above
= 20’000 x0.1 x 1.110 / (1.110 ‐ 1) ‐ 3’000 x0.1 / (1.110 ‐1 )

= 3254.9 – 188.24 = $3066.67
EUACB = 15’000 x0.1 x 1.15 / (1.15 ‐ 1) ‐ 2’000 x0.1 / (1.15 ‐1 )
= 3429.37 – 327.59 = $3629.37
Decision: Select unit A that has the least annuity.

53
4. Rate of Return Analysis (ROR):

Many organizations often set hurdle rates (benchmark rate of return) that a capital
investment
est e t dec
decision
s o mustust ac
achieve
e e to be acceptab
acceptable.
e. In tthee case where
e e investment
est e t
funds are limited, projects with the highest ROR values can be selected.
Example : Unit A cost of $20,000 and Unit B of $10,000 and each 1‐year life.
Incremental benefit of $15,000 for A compared to B. Organization hurdle rate is 20%.
Solution:
NPW (A vs B) = 20’000 – 10’000 = $10’000
$
P = F / (1+i)n  (1+i)n = F/P
(1+i)1 = 15’000 / 10’000 = 1.5  1+i = 1.5
i= 0.5  ROR = 50%
Decision: As long as ROR > 20%, investment is OK.
54
5. Benefit‐Cost Ratio Analysis Method:

If B/C > 1 then project is viable. If comparing projects, take the highest B/C ratio.
Examplel : A Benefits=
f $ ’
$1’500’000
’ and
d Cost= $1’200’000.
$ ’ ’ B Benefits=
f $ ’
$2’000’000
’ and
d
cost= $1’700’000
Solution: B/CA = 1.25 B/CB = 1.17
Decision: Take the highest B/C which is for A
6 Payback Period Method:

6.
• Period of time necessary for the benefits to pay back the associated costs.
• Differences in the timing of cash flows are not considered nor are benefits and
costs beyond the payback period.
• Example: Investment of $4,000 with benefits of $800 per year would have a
payback period of 5 years ($4,000/$800 = 5 years).
55
Section 1 : Cost Chapter 8 : ABC Management
C
Chapter 8
Activity-Based
Cost Management
56
Overhead Expenses Are Displacing Direct Costs

• Over the last few decades,
decades overhead expenses
have been displacing the recurring costs.
• Organizations have visibility of direct costs,

costs but not have any insights into overhead
or its reasons. ABC/M can help provide for insights.
• Most of people believe that overhead expenses are displacing direct costs because
of technology, equipment, automation, or computers.
• The primary cause for the shift is the increasingly offering of variety of products,
products
using more types of sales channels, and servicing different types of customers. This
creates complexity which results in more overhead expenses to manage it.
• ABC/M does not fix or simplify complexity, but points out where the complexity is
and where it comes from.
57
Expressing Activities And Tracing Expenses
General Ledger ABC/M
Transaction‐centric Work‐centric
Uses chart of accounts Uses chart of activities
What was spent

What was spent What it was spent for
What it was spent for
Calculates the costs of
Records the expenses
activities and unit cost
Organized around cost Describes activities using
centres to accumulate an “action verb‐ adjective‐
transactions into their
transactions into their noun” format such as
noun” format, such as
accounts. But this inspect defective
format is deficient for products, open new
decision support
decision support customer accounts
customer accounts
58
Drivers triggers
• It’ss what would make activity cost increase or decrease
It
• Ex of activity is “Analyze claims”, Ex of Driver is “Number of claims analyzed”.
Cost Re
Re-Assignment
Assignment Network
ABC re‐assigns 100 % of the costs into the final products, service lines, and customers. In
short,, ABC connects customers to the unique
q resources theyy consume. ABC cost re‐
assignment network consists of the three modules connected by cost assignment paths.
1. Resources: The capacity to perform work. Ex: salaries and materials. They are traced
to work activities to convey resource expenses into the activity costs.
2. Activity Module: It’s where work is performed. It contains the structure to assign
activity costs to cost objects
3. Cost objects: At the bottom of the cost assignment network, represent outputs and
services where costs accumulate. Ex: Products, service lines, and customers. The
customers are the final‐final cost objects.
59
Using Attributes of ABC

• One role for calculating costs is to identify which activities are :
1. Not required and can be eliminated (Ex: Duplication of effort)
2. Ineffectively accomplished and can be reduced
3. Required to sustain the organization (not be possible to reduce or eliminate).
4. Discretionary and can potentially be eliminated (Ex: Annual employees’ picnic).
• T di i
Traditional
l methods
h d do
d not provide
id any way to tag/highlight
/hi hli h individual
i di id l costs. ABC/M
allow managers to differentiate activities from one another.
• Example
p of tags
g are:
 very important / required / postponable.
 High‐value‐adding / low‐value‐adding.
 Exceeds / meets / below customer expectation.
• Multiple attributes can be applied.
Ex: performance (vertical axis) and importance (horizontal axis).
axis)
60
Local vs. Enterprise-Wide ABC/M
• A common misconception is that ABC/M system must be enterprise‐wide. However
In practice, the majority of ABC/M is applied to subsets of the organization for
process improvement rather than revenue enhancement.
• The local model is used for tactical purposes, often to improve productivity. In
contrast, the enterprise‐wide model is often used for strategic purposes because it
helps focus on where to look for problems and opportunities.

opportunities
• Also, enterprise‐wide models are popular for calculating profit margin at all levels.
• Commercial ABC/M software now enables consolidating some, and usually all, of the
local, children ABC/M models into the enterprise‐wide, parent ABC/M model.
61
Applications
A li ti Of Local
L l ABC/M
• The objective of local ABC/M models is not to calculate the profit margins; it is to
compute the diverse costs of outputs to better understand how they create the
organization’s cost structure.
• An interesting application is when marketing department is trying multiple tools,
such as newspapers,
newspapers radio,
radio television,
television tradeshows,
tradeshows Websites,
Websites ...etc.
etc
ABC/M calculation determine the costs versus benefits of all the channel
combinations to rank in order which are the least to best return on spending.
Why ABC/M ?
• In the past, most organizations were reasonably profitable. They could make
q
mistakes, and their adequate profitabilityy would mask the impact
p p of their wrongg or
poor decisions. However, error margin today is slimmer. Businesses cannot make
many mistakes as in the past and remain competitive or effective.
• Mature users try to integrates ABC/M output data with their decision support
systems, such as their cost estimating, predictive planning, budgeting, activity‐based
planning (ABP) systems, customer relationship management (CRM), and balanced
scorecard performance measurement systems.
62
Section 2 : Cost Estimating Chapter 9 : Estimating
Sec 2
Cost Estimating
1
Chapter 9
Estimating
2
I t d ti
Introduction
• Why Estimating:
1 Determining the economic feasibility of a project,
1. project
2. Evaluating between project alternatives
3. Establishing the project budget
4. Providing a basis for project cost and schedule control
• Estimating Steps:
1 Understand scope of the activity to quantify the resources required,
1. required
2. Apply costs to the resources
3. Apply pricing adjustments
4. Organize the output in a way that supports decision‐making.
• Estimate Accuracy:
• Each subsequent decision
decision‐making
making point (whether project should be
continued) requires cost estimates of increasing accuracy.
• Estimating is an iterative process that is applied in each phase of the
project life cycle as the project scope is defined, modified, and refined.
3
Estimate Classifications
4
Estimating Methodologies
A. Conceptual B. Deterministic
Project High level of Project
Low level of Project Definition
Definition Level Definition
Independent
Direct measure
Variable used in Not direct measure of units
Item x unit cost
Item x unit cost
estimating algorithm
Significant effort in data
gathering and cost analysis
gathering and cost analysis. Large effort,
Large effort sometimes
sometimes
Effort
Preparing estimate itself takes weeks or even months.
little time sometimes an hour.
5
A. Conceptual Estimating Methodologies
• Used for class 4 or 5 (sometime for class 3)
• Referred to as order of magnitude (OOM) in reference to the wide range of
accuracy.
• May be used for project screening, feasibility evaluation, initial budget.
• Common used methods are:
Common used methods are:
1. End‐Product Units Method
2 Physical Dimensions Method
2. Physical Dimensions Method
3. Capacity Factor Method
4 Ratio / Factor Method
4. Ratio / Factor Method
5. Parametric Method
6

1. End‐Product Units Method:
• Used when enough historical data available from similar projects such as
electric plant and its capacity in kilowatts, a hotel and the number of guest
rooms, or a hospital and the number of patient beds.
• Ex: A 1’000 guest rooms hotel was completed for $67,500,000. Therefore,
the cost of the 1,500 room hotel is $101,250,000 ($67,500/1,000 x 1,500).
• This meets the needs of the feasibility study,
study however it has ignored several
factors like scale, location, or timing. Cost indices can be used for adjustment.
2 Physical
2. Ph i l Dimension
Di i Method:
M h d
• Use length, area, volume, … etc as the driving factor such as building area in
m2 or p
pipeline
p length
g in m.
• Ex: 2900 m2 warehouse was built for $623’500. A new ware house of 3’600
m2. The expected cost will be $623’500 / 2900 x 3600 = $774’000
• We have
h ignoredd quality
l specifications
f b
between the
h two warehouses.
h
7

3. Capacity Factor Method:
• It relies on the nonlinear relationship between capacity and cost.
cost
• $B = $A (CapB / CapA)e. Where B is the facility being estimated, “e” is the

exponent or proration factor,
factor typically lies between 0.5
0 5 and 0.85
0 85
• If e is less than 1, capacity increases by a percentage (say, 20 percent), the

costs to build the larger facility increase by less than 20 percent.
percent
• Capacity factor also referred to as the “scale of operations” method or the

six tenth
“six tenth’ss factor
factor” method due to the common reliance on e = 0.6
06
• With e = 0.6, doubling the capacity increases costs by approximately 50 %

and tripling the capacity increases costs by approximately 100 %.
%
• As e tends towards a value of 1, it becomes more economical to build two

facilities of a smaller size than one large facility.
8

3. Capacity Factor Method:
• Example: 100’000 BBL/day hydrogen peroxide unit to be built in Philadelphia
and completed in 2004. We have recently completed a 150,000 BBL/day
plant in Malaysia with a final cost of $50 million in 2002. Our recent history
shows a capacity factor of 0.75 is appropriate.
• Solution: $B = $50 x (100/150)0.75 = $36.89 M
• Example: Assume adjustment for scope(‐10M) for piling, location(1.25)

higher cost, timing(1.06) multiplier, and additional cost for pollution(5M).
• Solution:
$50 ‐ $10 piling not required = $40 M Steps
$40 x 1.25 location = $
$ $50 M 1. Deduct costs N/A in new plant
2. Adjust location and escalation
$50 x 1.06 timing = $53 M
3. Apply capacity factor
0.75
$B = $53 x (100/150) = $39 M 4. Add additional costs required
$ + $5
$39 $ Pollution Cost = $44
$ M for the new plant
9

4. Ratio Factor Method:
• Used when cost can be estimated from a primary component cost, cost This is
often referred to as “equipment factor” estimating.
• Estimate is often a feasibility estimate (Class 3). Then may be used to justify the
funding required to produce a budget estimate (Class 3).
• Factors may estimate Total Installed Costs (TIC) or Direct Field Cost (DFC) for
the Inside Battery Limits (ISBL) facilities,
facilities however sometimes appropriate
factors are used to estimate the costs of the complete facilities.
• Hans Langg ((1947):

)
Total plant $ = total equipment $ x equipment factor.
Factors based on process type (Solid Process Plant 3.1 , Solid‐Fluid Process
Plant 3.63, Fluid Process Plant 4.74 ). Lang’s factors cover ISBL & OSBL costs.
Ex: A fluid process plant with estimated equipment cost = $1.5M
Total plant cost = $1.5M
$1 5M X 4.74
4 74 = $7.11M
$7 11M
10
• W. E. Hand(1958):
• Elaboration for Lang

Lang’ss method proposing factors for type of equipment
such as vessels or heat exchangers. Hand’s factors for equipment
excludingg instrumentation range
g from 2.0 to 3.5 and if includingg
instrumentation they range from 2.4 to 4.3 . Hand’s factors estimated
DFCs and excluded indirect field costs (IFC), home office costs (HOC), and
the costs for outside battery limit (OSBL).
11

• W. E. Hand(1958):
1. Equipment cost x factor
2. Sum to calculate DFC
3. DFL (labor) = 25% x DFC
4. IFC = 115% x DFL
5. HOC = 30% x DFC
6. Commissioning = 3% x DFC
7 Sum
7.
8. Contingency = 15% x Sum
9. Total
12

• Arthur Miller (1965):
 Miller recognized impact of (1)Size, (2)metallurgy, (3)operating pressure).
 When size gets larger, amount of corresponding materials (foundation,
support steel, piping, instruments) does not increase at the same rate. Thus,
as equipment size increases, value of the equipment factor decreases.
 A similar tendency exists for metallurgy and operating pressure.
 Miller suggested that these three variables could be summarized into a single
attribute known as the “average unit cost” of equipment.
 Average unit cost = Total cost of equipment/number of equipment items
 There’s a statistical correlation between increasing average unit cost of
equipment and decreasing equipment factors that if the average unit cost of
equipment increases, then the equipment factor is scaled smaller.
13

4. Parametric Method
• A correlation
l ti b t
between physical
h i l or functional
f ti l characteristics
h t i ti off a plant
l t (or
(
process system) and its resultant cost [NASA].
• Capacity
p y factor & equipment
q p factor are simple
p examples
p of p
parametric
estimates; however sophisticated parametric models involve several variables .
• Developing a parametric model involves the following steps :
1. Cost model scope determination: End use, physical characteristics.
2. Data collection: Quality of model can be no better than quality of data.
3
3. Data normalization: Escalation,
Escalation location,
location site conditions.
conditions
4. Data analysis: Series of linear and non‐linear regression analysis will be
run to determine the best algorithm (model).
5. Data application: User interface that accept user inputs then calculate
costs and display results. Spread sheets is an excellent tool.
6. Testing:
g Test the result validityy and accuracy.
y
7. Documentation: User manual.
14
B. Deterministic (Detailed) Estimating Methodologies

• Strategy: Each component of scope is quantitatively surveyed and priced.
• Class: Support final budget authorization,
authorization contractor bid tenders,
tenders cost control
during project execution, and change orders (Class 3 : Class 1 estimates).
• Minimum required engineering data: Drawings, diagrams, data sheets, layouts,
plot plans, and specifications.
• Pricing data should include:
1. Vendor quotations 2. Recent purchase orders 3. Current labor rates
4. Subcontract quotations 5. Project schedule 6. Construction plan
• C
Completely
l t l detailed
d t il d estimate:
ti t All costs
t are detailed
d t il d including
i l di DFC,
DFC IFC,
IFC HOC,
HOC
other costs for both ISBL and OSBL facilities.
• Semi‐detailed estimate: Costs for the ISBL p
process facilities are detailed,, and the
costs for the OSBL facilities are factored.
• Forced‐detailed estimate: Detailed takeoff quantities are generated from
preliminary drawings (incomplete design ).
15

• Detailed Estimate Steps:
1 Estimate basis and schedule: Review organization procedures and formats,
1. formats
identify estimating resources and techniques, prepare estimate schedule.
2. Direct field cost (DFC) estimate: Review scope, perform takeoff including
material and labors, then summarize estimates.
3. Indirect field cost (IFC) estimate: Apply in‐direct wages and allowances,
apply indirect factors (if applicable).
applicable)
4. Home office cost (HOC) estimate: Detailed work‐hours estimate for
administration / Engineering disciplines then applying wages , factors if any.
5. Sales tax/duty estimates
6. Escalation estimates: Based on project schedule.
7. Project fee estimate (for contractors): Depending contracting strategy.
8. Risk analysis/contingency
9. Review/validate estimate
16

• Notes for estimating
• FFormall vendor
d quotes
t are preferred;
f d however
h sometimes
ti ti
time constraints
t i t ini
do not permit. In this case, pricing may depend on informal quotes from
vendors like phone discussions, recent purchase orders, capacity factored
estimates from similar equipment, or from parametric pricing models.
• Check equipment list against flow diagrams to ensure all items are identified.
• Ensure that cost of equipment accessories (trays, baffles, ladders) included.
• Freight costs for equipment can be significant. Identified them explicitly.
• Identify required vendor assistance / support costs
• Major spare parts need to be accounted for and included.
• Prepare equipment installation costs.
• Consider costs for calibration, soil settlement, special internal coatings,
h d
hydrotesting
i and
d other
h testing.
i
17
T k Off
Take-Off:
• It’s quantifying project material & labor. The term take‐off is also used to refer to
BOQ. This involves examination of drawings to count each item then quantities
are summarized then costed resulting in project direct field costs.
• Guidelines for preparing an efficient take‐off include the following:
• Use pre‐printed forms, abbreviate consistently, measure carefully.
• Convert imperial (feet/inch) to decimal.
• Do not round or convert units until final summary.
summary
• Identify drawing/section numbers on take‐off forms for future checking.
• Be alert for notes shown on drawings, changes in drawings scale.
• Care to quantify labor operations that may not have material component.
Costing Vs. Pricing:

• Costing is applying unit costs to quantities, usually in the form of labor hours,
wage rates, material costs, and perhaps subcontract costs.
• Pricing,
Pricing on the other hand,
hand is adjusting costs to allow for overhead and profit.
profit
18
E ti
Estimating
ti All
Allowances
• Included in an estimate to account for the predictable but un‐definable costs like:
1. Design allowances: To account for continuing design that occurs after
placement of a purchase order. From 2 to 5 % of engineered equipment cost.
2. Material take
take‐off
off allowances: To cover the cost of undefined materials while
estimating. For example, concrete accessories not included in drawings. From
2 to 15 % of discipline costs.
3. Overbuy allowances: For inventory losses due to damage, cutting waste,
misuse of materials, theft, etc. From 2 to 10 % of discipline material costs.
4 Shipping damage: Usually covered by insurance if detected upon arrival at
4.
site. This allowances are to cover losses that are not covered by insurance.
5. Undefined major items: A particular area of scope may not have progressed
in design but its cost must be included in the estimate.
6. Miscellaneous allowances: Like hand/machine excavation, formwork
accessories, steell connections (bolts
(b l & gaskets),
k ) piping hangers
h and
d guides.
d
19
F t
Factors Aff ti
Affecting E ti
Estimate
t Accuracy
A
• Level of project definition (Better definition is superior than detailed estimate).
• State o
of new
e tec
technology
o ogy in tthee p
project
oject
• Quality of used cost information
• Estimator experience and skill
• Estimating techniques employed
• Level of effort budgeted to prepare the estimate
• Desired end use of the estimate.
estimate
Contingency Reserve
• Definition:
fi i i Amount added
dd d to the
h estimate
i to achieve
hi a certain
i probability
b bili
• Contingency Includes: Estimating errors, Incomplete design, Conceptual estimating
for some items, wages variability, labor availability, lower productivity & skills, and
inflation of material and equipments costs.
• Contingency doesn’t Include: Scope changes, disasters & force majeure, strikes,
excessive unexpected inflation, and excessive unexpected currency fluctuations.
20
Risk
Ri k Analysis
A l i
• Risk Analysis Types:
g Risk Analysis
1. Strategic y Models: Evaluate the level of p project
j definition and
project technical complexity in determining the overall risk to project cost.
2. Detailed Risk Analysis Models: Evaluate the accuracy range for individual or
groups off estimate
i components in i determining
d i i the
h overallll risk
i k to project
j cost.
Both generate probability distributions for the expected final cost outcomes
which are used to determine amount of contingency g y ((difference between
selected funding value and original point estimate).
• Example: Original estimate = $23.3. Probability of not exceeding this value is 20 %
• Iff We need d to achieve
hi 50 % probability,
b bili
we would fund project at $25.4M,
Contingency
g y added = $ $2.1M = 9 %
• If we wanted 70 % probability ,
Fund at $26.6M, contingency = $3.3M
• Note: Contingency
i d
does not increase
i accuracy, however,
h reduce
d the
h level
l l off risk
ik
21
St
Structuring
t i Th Estimate
The E ti t
• Project Breakdown System (PBS):

• A numbering
b i system t usedd to
t identify
id tif eachh costt center
t
• It must reflect the project execution and the way costs can be collected.
• The matrix of the WBS and RBS forms the project breakdown system (PBS) and
the intersection points are called cost centers.
• Cost code of the labor to pour concrete in the main building: 01‐02‐C‐2‐003‐1
Area Building Function Discipline Resource Project
01 01 A 01 001
Onsite Admin Engineering Earthwork Labor Onsite Offsite
02 02 B 02 002
Offsite Workshop Construction Concrete Material Admin Workshop
Building Building
Labor
Concrete
Construction Material
Project Earth Work
E i
Engineering
i
22
Costt / Schedule
C S h d l Integrating
I t ti (1/2)
1. One‐to‐one approach: Breakdown the estimate to the level of schedule activities.
Problems of this approach:
pp
• Not feasible.
• Activities are subject to more change than cost codes.
• Tracking
ki bulk
b lk material
i l costs by
b activity
i i isi difficult
diffi l and
d costly.
l
• Costs are often not incurred at the same time as activities.
2. Integrating
g g at a sufficient level of detail: Keeping
p g both structures identical to a
certain level of WBS then diverge to meet each structure’s control needs.
23
C t / Schedule
Cost S h d l Integrating
I t ti (2/2)
• Schedule provide dates that are essential to calculate escalation, cash flow, … etc.
• E ti t provides
Estimate id labor
l b hours
h essential
ti l to
t determine
d t i durations
d ti & resource loading.
l di
• Cost reporting system needs to be correlated with schedule progress.
• Cost / schedule breakdown not necessarily compatible, however, aligned at a level.
• Estimate is very sensitive to schedule. Changes to plan may significantly affect cost:
1. Unit material costs are schedule dependent for impacts of inflation and
seasonall variations.
i ti
2. Unit labor hours are schedule dependent for seasonal labor availability,
climate, and schedule impacts due to execution plan changes.
3. Wage rates are also sensitive for impacts of inflation, seasonal variation, and
execution plan changes (affecting overtime and/or shift premiums).
• Some costs are dependent on when they occur in the calendar year. Labor
productivity can be adversely affected by weather.
• Shortening project duration may cause overtime,
overtime shift premiums,
premiums … etc.
etc
24
Estimate
E ti t Review
R i
• Review Types:
1. Team Review:
• Check the math of estimate
• Check basis of estimate (BOE)
1 Design: scope,
1. scope assumptions,
assumptions equipment list,
list drawing list,
list and specs.
specs
2. Planning: Milestones, resources, calendar, and overtime/shifts use.
3. Cost: Pricing sources, quotes, purchases, allowances, and escalation.
4. Risk: How contingency was determined.
• Check following “Estimating Department” guidelines:
Methods, techniques, procedures, formats, factors, and allowances.
2. Engineering Department Review:
• Check completeness of engineering deliverables (Drawings, specs, lists)
• Check
Ch k basis
b i off estimate
i (BOE) Design,
(BOE): D i cost and d risk.
ik
3. Project Manager Review
4. Management Review
5. Review By Others
25
Section 2 : Cost Estimating Chapter 10 : Process Production
Chap ter 10
Process Product Manufacturing
26
O
Operating
ti C t Estimates
Cost E ti t
• Can be performed on (1) a daily, (2) unit of production, or (3) annual basis.
• Annual is preferred because:

1. It considers seasonal variations.
2. It is readily adapted to less‐than‐full capacity operation.
3. It readily includes the effect of periodic large costs (scheduled maintenance,
vacation shutdowns, catalyst changes, etc).
4. It is directly usable in profitability analysis.
5. It is convertible to the other bases, daily cost and unit‐of‐production.
• A basic flow‐sheet of the process is vital to preparation of an estimate. To properly

prepare an operating or manufacturing cost estimate, a prepared estimating form
should be used to assure that the estimate is performed in a consistent manner
and to avoid omitting major items. The estimating form acts as a checklist and as a
device for cost recording and control.
control
27
P d ti
Production C t Estimating
Cost E ti ti F
Form
28
P d ti
Production C t Estimating
Cost E ti ti F
Form
29
Costt off Operations

C O ti At Less
L Th
Than F ll Capacity
Full C it
• It’s necessary to perform estimates at full plant capacity and at conditions other
than full capacity. Performing an estimate only at full design capacity does not
consider unscheduled downtime, market fluctuations in product demand, time
required to develop markets for a new product, ... etc.
• When you consider cost effects of operation at less than full capacity, you take into
account the fixed, variable, and semi‐variable costs:
1 Fixed Costs: Such as depreciation,
1. depreciation property taxes,
taxes insurance.
insurance
2. Variable Costs: Such as raw materials, utilities, chemicals, and catalysts.
3. Semi‐Variable Costs: Such as direct labor, supervision, general expense, and
plant overhead.
• Royalties may be variable, semi‐variable, fixed, or even a capital expense. If paid in

a lump
l sum should
h ld beb capitalized.
it li d If paid
id in
i equall annually
ll are fixed
fi d costs.
t If paid
id
as a fee per unit of production or sales are variable costs. If paid at a rate per unit
of production that declines as production increases are semi‐variable.
• Packaging may be variable or semi‐variable depending on the situation.
30
Costt off Operations

C O ti At Less
L Th
Than F ll Capacity
Full C it
• F : Fixed expense
• V : variable expense
• R : Semi‐variable
S i i bl expense
• C : Total operating cost
• S : sales income
• N : income to achieve
minimum ROI
• n : Semi‐variable fraction
at zero capacity
• Variable expense declines to 0 at zero‐capacity, fixed expense is constant, and semi‐

variable expense at zero‐capacity is (20 to 40) % of its value at full capacity.
• (A) Shutdown point (shut down rather than operating at lower rates)
• (B) Breakeven point (Income = total operating cost )
• ((C)) Minimum return Point.
31
Raw Material
R M t i l Costs
C t
• It can constitute a major portion of operating costs. Hence , a complete list of all
raw materials must be developed p consideringg the following:g
1. Unit cost rates and units of purchase (tons, m3, item, etc.)
2. Quantity required per unit of time and/or unit of production
3. Quality
li off raw materials
i l (concentration,
( i acceptable
bl impurity
i i levels,
l l etc.))
4. Availability in markets.
• Raw materials obtained in‐house are not p purchased,, however,, don’t neglect
g their
cost because they represent a cost to the company. In addition, internal company
freight, handling, and transfer costs must be added.
By-Product Credits & Debits

• By
By‐products,
products, including wastes and pollutants, must be considered in the estimate.
• These costs may be credits (if salable or usable) or debits (if wastes or unsalable).
• Cost of treating these products (including equipments) must be included in the
estimate.
32
Utilit Costs
Utility C t
• It’s necessary to determine the requirements of utility costs such as plant lighting,
sanitary water,
water etc.
etc
• Electric rates in the past were stable for many years, this is no longer true, and the
estimator must obtain current rates from the utility companies.
• Natural gas prices depend on quantity required.
• For steam costs, it depends on fuel cost, boiler water treatment, operating labor,
maintenance, etc. Black suggested that steam costs is 2 to 3 times the cost of fuel.
• Water costs are highly variable depending upon the water quality and quantity
required Purification costs,
required. costs if contamination occurs before disposal,
disposal must also be
included, as must cooling costs if the process results in heating of process water.
• Fuel costs vary with the type of fuel used and the source of supply. Also, consider
the type of firing equipment required and to required fuel storage facilities.
• Utility consumption generally is not proportional to production due to economies
off scale
l and
d reduced
d d energy losses
l on larger
l process units.
33
L b C
Labor Costs
t
• A detailed staffing must be established which indicates: (1) Skill or craft required,
(2) labor rates,
rates (3)supervision required,
required (4) overhead personnel required.
required
• Labor costs can be estimated from company records, union wage scales, salary
surveys of various crafts and professions, or other published sources.
• Further, when estimating around‐the‐clock, 168‐hr/wk operations, allowance must
be made for the fact that a week includes 4.2 standard 40‐hr weeks.
• An alternate method of calculating labor requirements, if sufficient data are not
available, is to consider a correlation of labor in work hours per ton of product per
processingg step.
p p This relationship,
p, which was developed
p byy Wessel :
34
S
Supervision
i i A d Maintenance
And M i t C t
Cost
• Supervision costs established in details. If not possible, 15:20 % of direct labor cost.
• Maintenance labor costs are often estimated as a percentage of depreciable capital

investment per year. For complex plants and severe corrosive conditions 10 : 12 %
or higher.
higher For simple plants with noncorrosive conditions 3 : 5 %.
%
• Maintenance costs are semi‐variable (35 : 40 % direct labor, 7 : 8 % direct

supervision, 35 : 40 % materials, 18 : 20 % contract maintenance.
• As the project evolves toward a final staffing plan, factors can be replaced with
numbers ggenerated from the staffingg table.
• When operating at less than 100 % of capacity, Percent of Maintenance cost as %

capacity of cost at full capacity
maintenance costs increase per unit of production as 100 %
100 % 100 %
100 %
shown in table: 75 % 85 %
50 % 75 %
• Maintenance ggenerallyy increases with age
g of equipment.
q p 0 30 %
30 %
35
Operating Supplies And overhead Costs

• Operating supplies: They are a relatively minor cost of operations. It Includes
miscellaneous items, such as lubricating oil and wiping cloths. Ranges from a few
percent to 20 % of payroll depending upon plant complexity, for example, 6 % in a
coal preparation plant, 20 % in an oil refinery. Better to use past projects records.
• Overhead (burden costs):

• Such as workers’ compensation, pensions, insurance, paid vacations and
h ld
holidays, sociall security, unemployment
l taxes and
d benefits,
b f profit‐sharing
f h
programs, and a host of others.
• These costs varies from industryy to industry,
y and company
p y records are the best
measure of their magnitude. However, in the absence of company data, payroll
overheads may be roughly estimated at 25 : 40 % of ( direct labor + supervision
+ maintenance
i t l b costs).
labor t)
• Operating company testing and research laboratories is another overhead
expense which must be included in the estimate. It’s best estimated based upon
company experience or as a percentage 3 : 20 % of direct labor costs.
36
Royalties And Rentals:

• Royalties may be variable, semi‐variable, fixed, or capital costs (or a combination of
these), and the same is true of rental costs.
• Royalty expenses, in the absence of data, are treated as a direct expense and may
be estimated at 1 : 5 % of the product sales price.
Contingencies:
• Cost estimate should include contingency
g y to account for undetermined costs.
• Contingency allowance applies both to direct and indirect costs.
• It ranges from 1 : 5 % depending upon uncertainty in data used.
• Hackney
k h suggested
has d the
h following
f ll i guidelines:
id li
1. Installations similar to those currently used by the company for which standard
costs are available: 1 %
2. Installations common to the industry, for which reliable data are available: 2%
3. New installations that have been completely developed and tested: 3 %
4. New installations
i ll i that
h are ini the
h development
d l stage: 5 %
37
General Works Expense (Factory Overhead)

• It represents the factory indirect cost and depends on investment and labor.
• It does not include general expense (marketing/sales cost, administrative expense).
• Black’s suggested that :
Factory overhead = (Investment x investment factor)+ (Labor x labor factor).
In this case, labor is total annual cost of labor, including direct operating labor,
repair/maintenance, supervision, and labor for (loading, packaging, shipping).
• Black
Black’ss suggested factors as in the table:
• For preliminary estimates, indirect

overhead
h d costs may be b 40 0 : 60 % off labor
l b
costs or 15 : 30 % of direct costs.
• Humphreys
p y suggested
gg 55 % of ( operating
p g
labor, supervision, maintenance labor) for
the mineral industries.
38
Depreciation
• Not a true operating cost, but considered to be an operating cost for tax purposes.
• Depreciable portion = Initial investment – (working capital + salvage value). In
theory, working capital, salvage value can be recovered after plant shut down.
• Taxing authorities permit the use of any generally accepted method of depreciation
calculation provided that it is applied in a consistent manner to all investments
• In 1981 in the U.S., accelerated cost recovery system (ACRS) was mandated by law.
• In 1986, ACRS was replaced by modified accelerated cost recovery system (MACRS).
• Most industrial firms utilize accelerated depreciation. This deferring ‫ يؤجل‬taxes to
the latest possible date. However, for preliminary estimates, straight‐line is used.
• Straight‐line depreciation: D = C / Y , where D is annual depreciation, C is
depreciable portion, Y is asset life in years.
• Double
Double‐declining
declining balance method: D = 2 (F (F‐CD)
CD) / n , where F is initial asset value,
CD is cumulative depreciation charged in prior years, n is asset life in years.
• Sum‐Of‐Years‐Digits Depreciation: D = C x [ 2(n‐Y+1) ] / [ n(n+1) ] , where C is
depreciable portion, n is asset life in years.
39
Section 2 : Cost Estimating Chapter 11 : Discrete Production
Chap ter 11
Discrete Product Manufacturing
40
O
Operations
ti i Discrete
in Di t Manufacturing
M f t i
• Six major groups of component operations are presented in the following table.
41
Discrete Manufacturing Philosophies (1/2)

• Computer‐aided process planning (CAPP):
• Automatically generate process plan to produce the component from drawings.
• It includes operation parameters/sequence & optimize time, costs, and quality.
• Approaches: (1)Variant approach (searches a database for similar parts and
modifies the closest similar),
), ((2)Generative
) approach
pp ((startingg from scratch).
)
• Concurrent Engineering: Approach to the concurrent design of products and their
manufacture. This cause designers to consider all elements of product life cycle.
• Group Technology:
• Identify and exploit sameness of component parts and manufacturing process.
• Approaches: (1)Similar design features, (2) Similar processing operations.
• Just‐in‐Time: Raw materials are delivered when required, thus, inventory costs are
theoretically zero. It’s related to “pull” system (parts are not produced until ordered).
• Lean Manufacturing: Shorten lead times, reduce costs/waste. (continuous improvement )
1. Reducing waste (scrap), improving yields, new products from waste materials.
p g employee
2. Improving p y p performance, skills, and satisfaction via trainingg / recognition
g
3. Improve processes, process rates, and capabilities.
42
Discrete Manufacturing Philosophies (2/2)

• Material Requirements Planning (MRP):
• It uses bills of material, inventory and open order data, and master production
schedule information to calculate requirements for materials.
• Supply Chain Management:
• Complex products require different components from a variety of suppliers.
• Supply chain management involves the assurance that the parts will arrive
from the suppliers when required to avoid production stoppages.
• It also
l requires
i the
h involvement
i l off suppliers
li in i the
h design
d i process to eliminate
li i
inefficient / unnecessary operations and components.
• It involves information on delivery status, financial flow of credit, and payment
schedules as the materials move through the various stages of supply chain.
• The goals are to reduce inventory, time‐to‐market, costs, and improve quality.
• Total Quality Management:
A leadership philosophy, organizational structure, and working environment
that fosters ‫ تعزز‬a personal accountability and responsibility for the quality and
a quest ‫ السعي‬for continuous improvement in products, services, and processes.
43
Basic Cost Relationships

• Prime cost = direct cost of (material, labor, engineering) + direct expense
• Manufacturing
M f i cost = prime
i cost + factory
f expense
• Production cost = manufacturing cost + administrative expense
• Total cost = p
production cost + marketing,
g, selling,
g, and distribution expense
p
• Selling price = total cost + mark‐up (profit and taxes)
• Prime cost is also called direct cost, manufacturing cost is also called factory cost.
44
Cost Estimating
i i For Discrete
i Manufacturing
f i
• Direct and Indirect Costs:
• Ex: Copying of a report on a copy machine

• Costs: paper cost, toner cost, machine rate costs, operator cost, and staple cost.
• Direct labor cost is operator cost (Wage + benefits).
• Direct material costs is paper and toner.
• Staple Costs are so small, so it’s included as part of the indirect burden costs.
• Machine
M hi costt (capital
( it l & operating)
ti ) indirect
i di t cost,
t applied
li d directly
di tl to t the
th product.
d t
• Energy consumed, purchasing costs, and installing costs are direct costs, but
considered as indirect costs as the machine is used for not only one report.
• Other indirect costs are those which cannot be directly tied to the product such as
supervision, administrative salaries, maintenance, material handling, and legal, etc.
• In large companies, indirect costs also include items such as basic and applied
research and development, however, it must be recovered on the current products
being produced and so it’s considered indirect burden costs for current products.
45
Cost Estimating
i i For Discrete
i Manufacturing
f i
• Cost Estimating Example: (1/2)
46
Cost Estimating
i i For Discrete
i Manufacturing
f i
• Cost Estimating Example: (2/2)
Note that 20% of selling price = [20/(100‐20)] % of Total Cost = 25% of Total Cost.
47
Break-Even Analysis
Introduction
• Two critical issues must be considered: (1)Cost base, (2)Various break‐even points.
• Cost bases are:
1. Time base: Determines production time at specific break‐even point, and this is
what can be controlled at the plant level.
2. Quantity‐based: Determines production quantity at specific break‐even point for
marketing, sales, and top management to forecast yearly sales. It provides little
assistance at plant management level where quantity is specified by customer.
customer
• Variable cost in quantity‐based system is fixed in time‐based system, and vice‐versa.
• Increased quantities are desired in the quantity
quantity‐based
based system.
system
• Decreased times are desired in the time‐based system.
48
Break-Even Analysis
Cost Basis:
A. Quantity‐based system: (Fixed Time)
• Fixed Costs: Costs not vary with production quantity such as property taxes,
administrative salaries, research and development expenses, and insurance.
• Variable costs: Costs that vary with production quantity, such as direct material
costs
t and
d direct
di t labor
l b costs.
t
• Semi‐Variable Costs: Costs that are not fixed or variable like maintenance cost.
B Time‐based
B. Ti b d system:
t (Fi d Quantity)
(Fixed Q tit )
• Fixed costs: Costs that do not vary with time such as the direct material costs.
• variable
i bl Costs:
C t Costs
C t that
th t vary over time
ti such
h as property
t taxes,
t administrative
d i i t ti
salaries, research and development expenses, and insurance.
• Direct labor may be fixed or variable costs depending upon policies used.
used
49
Break-Even Analysis
Break‐Even Points:
A. Shutdown Point (SD): Quantity/time where manufacturing costs equals revenues.
B. Cost Point (C): Quantity/time where total costs equals revenues.
C. Required Return Point (RR): Quantity/time where revenues equals total costs plus
required return.
D. Required Return after Taxes Point (RRAT): Quantity/time where revenues equals
total costs + required return and the taxes on the required return.
Notes:
In the production quantity‐based system : Breakeven points increase in quantity as one
proceeds from the shutdown point to the required return after taxes point, which
implies higher production quantities are desired.
desired
In the time‐based system: Breakeven points decrease in time as one proceeds from the
shutdown point to the required return after taxes point, which indicates the
importance of decreasing production time to increase profitability.
50
Break-Even Analysis
Example:
Anew job is being considered in the foundry ‫المسبك‬. The order is for 40,000 castings,
and the tentative price is $ 3.00/casting. The pattern will be designed for 4 castings
per mold, and the pattern cost has been quoted at $ 10,000. The molding line is the
rate controlling step in the production process in this particular foundry, and the
production
d i rate is
i 125
2 molds/hr.
ld /h
S l ti
Solution:
Estimated time for the production of the 40,000 castings would be determined by:
(40 000 castings)/(4 castings/mold x 125 molds/hr) = 80 hr
(40,000 castings)/(4 castings/mold x 125 molds/hr) = 80 hr
51
Break-Even Analysis
Solution :
52
Break-Even Analysis
Solution: A . Production Quantity‐Based Calculations
1. Shutdown Point
Revenues = Production Costs
3X = Material Costs + Labor Costs + Toolingg Costs + Plant Overhead Costs
3X = 1.50X + 0.33X + 10,000 + 8,800  3X = 1.83X + 18,800  X = 16,068 units
2. Cost Point
Revenues = Total Costs
3X = Production Costs + Overhead Costs
3X = 1.83X + 18,800 + 12,000  3X = 1.83X + 30,800  X = 26,324 units
3. Required Return Point
Revenues = Total Costs + Required Return
3X = 1.83X + 30,800 + 9,600  3X = 1.83X + 40,400  X = 34,530 units
4. Required Return After Taxes
Revenues = Total Costs + Required Return + Taxes for Required Return
3X = 1.83X + 40,000 + 9,600 x (TR/(1
(TR/(1‐TR))
TR))
3X = 1.83X + 40,400 + 6,400  X = 40,000 units
53
Break-Even Analysis
Solution: A . Production Quantity‐Based Calculations
Conclusion:
1. If Q < 16,068 , don’t accept order as manufacturing costs not recovered.
2. If 16,068 < Q < 26,324, manufacturingg costs recovered, but not all overhead costs.
3. If 26,324 < Q < 34,530, all costs recovered, but not all required return recovered.
4. If 34,530 < Q < 40,000, costs & RR recovered, but not all of taxes recovered.
5. If Q > 40,000, required return will exceed the desired required return after taxes.
54
Break-Even Analysis
Solution: B . Time‐Based Calculations
1. Shutdown Point
Revenues = Production Costs
120,000 = Material Costs + Labor Costs + Toolingg Costs + Plant Overhead Costs
120,000 = 60,000+165Y+10,000+110Y  120,000 = 70,000 + 275Y  Y = 181.8 hrs
2. Cost Point
Revenues = Total Costs
120,000 = Production Costs + Overhead Costs
120,000 = 70,000 + 275Y + 150Y  120,000 = 70,000 + 425Y  Y = 117.6 hrs
3. Required Return Point
Revenues = Total Costs + Required Return
120,000 = 70,000 + 425Y + 120Y  120,000 = 70,000 + 545Y  Y = 91.7 hrs
4. Required Return After Taxes
Revenues = Total Costs + Required Return + Taxes for Required Return
120,000 = 70,000 + 545Y + 120Y + [ 120Y x (TR/(1
(TR/(1‐TR))
TR)) ]
120,000 = 70,000 + 425Y + 120Y + 80Y  Y = 80.0 hrs
55
Break-Even Analysis
Solution: B . Time‐Based Calculations
Conclusion:
1. If Time > 181.8 , don’t accept order as manufacturing costs not recovered.
2. If 181.8 > Time > 117.6, manufacturing costs recovered, but not all overhead costs.
3. If 117.6 > Time > 91.7, all costs recovered, but not all required return recovered.
4. If 91.7 > Time > 80, costs & RR recovered, but not all of taxes recovered.
5. If Time < 80, required return will exceed the desired required return after taxes.
Ti
Time‐based
b d method th d can answer questions
ti
such as what is the effect of a 4 hour delay.
@ 80 Hrs
Profit = Revenues – Costs
Profit = $120,000 ‐ $70,000 ‐ 425$/hr x 80hr
Profit = $16,000
Profit after taxes = 0.6
0 6 x $16,000
$16 000 = $9,600
$9 600
@84 Hrs
Profit = $120,000 ‐ $70,000 ‐ 425$/hr x 84hr
Profit = $14,300
Profit after taxes = 0.6 x $14,300 = $8,580
56
Section 3 : Planning & Scheduling Chapter 12 : Planning
Sec 3
Planning & Scheduling
1
Chapter 12
Planning
2
Planning Definition
Influencing the future by making decisions based on missions, needs, and
objectives. It is the process of stating goals and determining the most effective
way of reaching them.
Planning steps
1. Setting objectives
2. Gathering information
3. Determining feasible alternative plans
4. Choosing the best alternative
5. Communicating the plan
6. Implementing the plan
7. Adjusting the plan to meet new conditions as they arise
8. Reviewing the effectiveness of the plan
3
Importance of Planning
1. Superior growth in productivity rates
2. Activities are monitored and controlled using the plan as a reference baseline
3. Experience feedback increases company knowledge base and lessons learned
4 Without commitment,
4. commitment company is continually wasting time and money
Planning Tools
1. Gained Experience
2. Handbooks and software programs
3. Company policies, standards, and procedures
4. Model plans and templates
5. Checklists
6. Historical databases
7. WBS, RBS, and cost Accounts
4
Major Elements of Planning (1/2)

1. Summarizing Goals and Scope of Work:
Goal should be clearly understood and agreed upon. The most effective tool
in ensuring all work scope is planned is work breakdown structure (WBS).
2. Time Planning:
A. Develop Summary Schedule
B. Dividing into component parts
C. Sequence activities (CPM is one of best methods to use)
D. Assign activity durations
E Determine total time
E.
F. If total time exceed available time, reevaluate and take actions to meet
3. Cost Planning:
• Total cost must be partitioned using cost breakdown structure CBS.
• It’s not possible that costs be parallel to activity breakdown, however, it
could be done to a certain level which is the control account.
account
5
Major Elements of Planning (2/2)

4. Resource Planning:
Includes personnel, equipments, tools, and materials.
5. Quality Planning:
A Undertaking
A. Undertaking’ss requirements (goals)
B. How to communicate requirements to responsible for achieving them0
C. Plan for training responsible persons
D. Find a way of measuring successful achievements
6. Review:
Making early assessments of required reports,
reports meetings,
meetings presentations,
presentations and
project documents.
7. Planning for Change:
Plans must be flexible to allow for changes at any point.
Effective plan is still function even when extreme changes occur.
6
Planning in Construction Industry

• Manyy of construction cost overruns can be attributed to p
poor p
planningg
• Reasonable planning can save up to 40%
• Why construction seems to be lagged ‫ متباطئ‬in planning?
A. Planning time is often limited
B. Staff resources are spread over several projects
C. Lessons learned cannot be applied directly to new projects
Contingency Plan Forms:

1. Develop alternative plan to be implemented when adverse situation arises
2. Address budget
g and schedule reserve for unfavorable variances
7
Section 3 : Planning & Scheduling Chapter 13 : Scheduling
Chapter 13
Scheduling
8
Scheduling Definition
Scheduling is the process that converts the project work plan into a road map, that if
followed, will assure timely project completion.
Scheduling Benefits
1. Provide basis for management
2. Improve communications
3. Facilitate coordination
4. Effectively use resources
5. Develop baseline to monitor and control the work
6 Integration of budget,
6. budget costs,
costs and resources
7. May be used as basis for payments application
9
Schedule Development
1. Bar Chart Method:
• Preparation steps:
(1)Specify execution approach, (2)Segment into activities, (3)Estimate time for
each activity, (4)place activities in time order, (5)Satisfy completion date.
• Advantages of bar chart: simple to read
• Disadvantages of bar chart: manual procedure and cannot show relationships
2 Critical Path Method (CPM):
2.
• Using arrow diagramming methods or precedence diagramming method
• Advantages: (1)Determine short time of project, (2)Identify critical activities,
(3)Sh available
(3)Show il bl float
fl f each
for h activity
i i
3. Program e Evaluation and Review Technique (PERT):
• Computerized Probability analysis for calculating most likely durations for each
activity and for overall project.
• Pert is indeterminate process for activity and project duration (output is range),
while CPM is a deterministic process.
p
10
Arrow Diagramming
A Di i M th d (ADM)
Method
• Arrow tail is activity beginning (i‐node), arrow head is activity end (j‐node)
• Activity ID consists of tail and head (i‐j) Activity (i‐j)
y ( j)
• Sequencing rules: i j
1. No activity can start before completion of its predecessor. If it has to occur,
this activityy must be divided into two activities.
2. Neither arrow length nor its direction has meaning.
3. Duplication of activity ID is not permitted.
4 Dummy activities are zero duration,
4. duration however,
however used to show relationships.
relationships
Precedence Diagramming Method (PDM)

• Activities are represented
p byy nodes and relationships
p are represented
p byy lines.
• Most benefit is the ease off applying overlapping techniques such as lag values,
constraints, and relationships (SS, FS, FF, SF).
Work Breakdown Structure (WBS)
• Definition: A tree structure of further breakdowns of work scope into component
parts for planning, assigning responsibility, managing, controlling, and reporting .
• It allows project details to be summarized in certain levels for analysis and control.
11
Scheduling
h d li Techniques
h i ( / )
(1/3)
• Activities begin on the morning of the scheduled start date, and end in the evening
of the scheduled finish date.
• Milestones occurs in the evening of day that its predecessor finish on.
• Forward Pass (calculation of ES,
ES EF):
• ES of first activity = 1
• EFA= ESA+ DA ‐1 1 5 5
• ESsucc = EFPred + 1 Activity A
(where EFpred is the largest when several predecessors).

• Backward Pass (calculation of LS,
LS LF):
• LF of terminal activity = LF of this activity (or as per contract)
• LSA = LFA – DA + 1
75 3 77
• LFPred = LSsuc ‐1 Activity A
(where LSsucc is the smallest when several successors). 79 81
12
S h d li
Scheduling T h i
Techniques (2/3)
• Overlapping Relationships (Forward Pass ):

• SS:
SS ESsuc = ESpred + N
• FS: ESsuc = EFpred + N + 1
• FF: EFsuc = EFpred + N  Then, ESsuc = EFsuc – D + 1
• Overlapping Relationships (backward Pass ):

• FF: LFpred = LFsuc ‐ N
• FS: LFpred = LSsuc ‐ 1
• SS: LSpred = LSsuc – N  Then, LFpred = LSpred + D ‐1
• Float
Fl
• Free Float (FF) = Essuc ‐ EFpred ‐ 1
Where ESsuc is the smallest ES when several successors
• Total Float (TF) = LS – ES = LF – EF
• TF is shared by activities in a chain, however, FF belongs solely to the activity.
• If TF=15 in a chain,
chain and the first activity used all of them , then TF = Zero.
Zero
13
S h d li
Scheduling T h i
Techniques (3/3)
• Critical Path:
• Longest chain or chains with smallest TF
• There will be at least one continuous chain through the network.
• Constraints:
1. Start On
2. Finish On
3. No Earlier Than (NET): (Start / Finish No Earlier Than )
4. No Later Than (NLT) : (Start / Finish No Later Than )
14
S h d li
Scheduling L
Levels
l
1. Level (1) – Milestones Level Schedule:
• Mayy include begin g p project,
j , designg complete,
p , p
purchase major
j equipment,
q p ,
mobilization, … etc.
• Top management is usually interested in milestone level schedule.
2 Level (2) – Project Summary Level Schedule:
2.
• Include summary of engineering, procurement, major equipment fabrication
and delivery, major structures, installation, start‐up, and commissioning.
• As
A the h detailed
d il d schedule
h d l is i developed,
d l d it
i must be
b summarized
i d to replace
l the
h
independently developed project summary and milestone schedules.
3. Level (3) – Project Detailed Schedule:
• Display the lowest level of detail necessary to control the project
• It supports determining and assigning resources
4. Level ((4)) – Short Interval Schedule:
• Also known as short‐cycle schedule. From 2 to 6 weeks look‐ahead schedule
for planning, reporting, review assignments of current week work plan.
• Best use for communicating planning requirements to those performing work. work
15
S h d l reporting
Schedule ti
1. Early Start Dates Report:
A listing of activities sorted by early start dates.
dates
2. Total Float Report:
Activities are sorted by total float in ascending beginning with values of TF = 0.
The report first lists all activities that are on the critical path (TF = 0).
3. Precedence Report:
A listing by activity early start dates.
dates However,
However it identifies all predecessor and
successor for each activity. This report is used by planners for debugging .
Schedule Plots
1. Logic Diagrams: Network diagram that shows activity relationships .
2. Time‐scaled Logic Diagram: It shows activity relationships and displays the
activities in their scheduled place in time.
3. Early Start Date Schedule (Bar Chart): Bar charts without logic relationships shown.
It’ used
It’s d more frequently
f tl by
b supervision
i i andd managementt to
t track
t k work. k
16
Managing
i Changes
h In Schedule
h d l
• Schedule Updating:
Through updating you can forecast any schedule slippage or delay, and hence,
bring the project back on schedule and correct the changes.
• Reasons for Schedule Updating:

1. Reflect current project status
2 Keep the schedule as an effective management tool
2.
3. Document performance
4. Documentation to plan for changes and support delay analysis
5. Let both contractor and owner aware of changes / delays as they occur and
how this affect completion date to allow them take corrective actions.
• Updating Intervals For Managing Changes:

It coincides reporting periods. At least monthly, and may be weekly.
17
Managing
i Changes
h In Schedule
h d l
• Updating Procedures:
1. Gather info
2. Identify and plan for changes affect duration, logic, scope, … etc.,
3 Recalculate project schedule
3.
4. Perform analysis and prepare reports for management review.
5. Evaluate and adjust the updated schedule according to management’s and
supervision’s review and direction.
6. Issue updated schedule to all interested parties.
18
Sec 4 : Progress & Cost Control Ch14 : EV (Fixed Budget)
Section 4
Progress & Cost Control
1
Chapter 14
Progress Measurement
A n d E a r n e d Va l u e
2
M
Measuring
i W k progress (1/2)
Work
1. Units completed Method (Production):
• Applicable to tasks that involve repeated production of easily measured work.
work
• Ex: Wire pulling in linear meters. of wire pulled.
2. Incremental Milestones (Rules of Credit):
• For control account that includes subtasks and must be handled in sequence.
• Segmenting into subtasks and assigning each a “credit” increment of progress.
• Ex: Installing a major equipment (15% supply,
supply 50% installation,
installation 15% test,
test .. etc)
• Percentage chosen is normally based on No. of work hours required.
3. Start / Finish Method:
• Applicable to tasks that lack definable intermediate milestones or those for
which the effort/time required is very difficult to estimate.
• (50‐100):
(50 100): 50% at start,
start 100% at completion.
completion It It’ss reasonable for short duration
and lower value tasks.
• (20‐100): Reasonable for long duration and higher value tasks.
• (0‐100): Reasonable for very short tasks.
3
Measuring
M i W k progress (2/2)
Work
4. Supervisor Opinion:
• Supervisor makes a judgment of percent complete.
• It’s a subjective approach and should be used only for minor tasks.
5. Cost Ratio Method:
• Applicable for long period/continuous tasks which are estimated and budgeted
on allocation of dollars$ and work hours rather than on basis of production.
• Ex: Project management work, quality assurance, and contract administration.
• Percent Complete = (Actual work hours to date) / (Forecast at completion).
completion)
6. Weighted or Equivalent Units:
• Applicable for a long period task that is composed of two or more overlapping
subtasks, and each with a different unit of work measurement.
• Ex: Structural steel erection (in table)
Earned TonsBeam = 0.11x520x(45/859)= 3
% complete = 82.5 / 520 = 16.1 %
Beams Equivalent ton = 0.11x520= 57.2 ton
One Beam equivalent tons = 57.2
57 2 / 859
= 0.666 tons / beam
4
Earned
E d Value
V l F Fixed
For Fi d Budgets
B d t
• Introduction:
• It’s not allowable for total budget to be changed. Hence, when quantity is
changed, the unit price will be adjusted to maintain the price fixed.
• Earned Value EV = Percent complete % x control account budget
Or can be calculated as EV = Units completed x Unit Rate new
• Earned Value System
• BCWS : Budgeted work hours or $
• BCWP : Earned work hours or $
• ACWP : Actual work hours or $
• Variance
V i :
• SV = BCWP ‐ BCWS
• CV = BCWP ‐ ACWSP
• Performance Indices:
• SPI = BCWP / BCWS (If SPI > 1, the project is ahead of schedule)
• CPI = BCWP / ACWSP (If CPI > 1,1 the
th project
j t isi under
d budget)
b d t)
5
E
Earned
d Value
V l F Fixed
For Fi d Budgets
B d t
• Productivity:
• Comparing actual productivity (work‐hours/unit) with the figures used in

planning and budgeting the work.
• A comparison off earnedd to actuall work‐hours

kh evaluates
l productivity
d iff actuall
quantities of work exactly equal those budgeted. Since this is rarely, another
mechanism is needed to evaluate productivity which is Credit work hours.
• Credit work‐hours (CWH) = Budgeted productivity work‐hour unit rate

(WH/unit) x number of units completed.
• Since actual units may vary from the budgeted (estimated) units, CWH may be
either greater or less than the EWH, and the CWH equals EWH only if
budgeted and actual quantities of work are equal.
equal
• A Productivity Index (PI) may be calculated as

PI = ((sum of credit work‐hours)) / ((sum of actual work‐hours))
6
E
Example
l
Budgeted New
Quantity (Tons) 800 1’000
Unit Rate: ($/Ton) or (WH/Ton) 20 16
Total Budget
Total Budget $ 16’000
$ 16 000 $ 16’000
$ 16 000
If actual quantity was 250 tons, and actual work hours = 4’500
EV Calculations: CWH Calculations:
EV = Q
EV Q act x Budget unit rate
x Budget unit rate new CWH = Q
CWH Q act x Budget unit rate
x Budget unit rate Budgeted
B d d
= 250 x 16 = 4’000 = 250 x 20 = 5’000
OR:
EV
EV = %
% complete x Total Budget PI = 5’000 / 4’500 = 1.11
PI 5 000 / 4 500 1.11
= (250/1000) x 16’000 = 4’000
Note that maximum CWH will be equals
CPI= 4’000/4’500 = 0.89 (over budget) to 1000 x 20 = 20’000
7
S
Summary
PI CPI
CWH EWH
Q
Actual
U it R t
Unit Rate U it R t
Unit Rate
(Budgeted) (new)
Q Budgeted Q new
WH Budgeted WH Allocated
WH new
8
Sec 4 : Progress & Cost Control Ch15 : EV (Variable Budget)
Chapter 15
E a r n e d Va l u e
For Variable Budgets
9
E
Earned
d Value
V l – Variable
V i bl Budgets
B d t
• Introduction:
• It s allowable for total budget to be changed.
It’s changed Hence,
Hence when quantity is
changed, the total price will be adjusted to maintain the unit price fixed.
• Quantity adjusted budget (QAB) is calculated as :
QAB = Budgeted unit rate x Actual quantity
• Earned Value (EV ) = Percent complete % x QAB
Or can be calculated as EV = Units completed x Budgeted unit rate
• Productivity under variable system has the same equations for earned value
because the unit rate is fixed.
• Cautionary Notes:
• When calculating % complete, it’s incorrect to include reworked portions.
However, it should be transferred to a separate account to show rework cost.
• When using QAB system, percent complete changes with every change in the
forecasted quantities.
10
E
Example
l
Budgeted New
Quantity (Tons) 800 1’000
Unit Rate: ($/Ton) or (WH/Ton) 20 20
Total Budget
Total Budget $ 16’000
$ 16 000 $ 20’000
$ 20 000
If actual quantity was 250 tons, and actual work hours = 4’500
EV Calculations: CWH Calculations:
EV = Q
EV Q act x Budget unit rate
x Budget unit rate CWH = Q
CWH Q act x Budget unit rate
x Budget unit rate
= 250 x 20 = 5’000 = 250 x 20 = 5’000
OR:
EV
EV = %
% complete x Total Budget new PI = 5’000 / 4’500 = 1.11
PI 5 000 / 4 500 1.11
= (250/1000) x 20’000 = 5’000
CPI= 5’000/4’500 = 1.11 (on budget)
11
S
Summary
PI CPI
CWH EWH
Q
Q
Actual
Q Budgeted
Q Q (new)
Q
Unit Rate
WH Budgeted WH new
12
Example
E l
• A project with the following estimate:
• Initial schedule was revised due to change in two work packages quantities as
follow:
13
Example
1. Case1 : Fixed Budget Approach
Quantityy
Q Rate WH Q new
Q WH new WH Allocated Req. Rate
q
A 10 15 150 12 180 164 13.6
B 15 10 150 15 150 136 9.1
C 20 5 100 22 110 100 4.5
Totall 400 440
Allocation Factor 0.909
A B C
QTY WH QTY WH QTY WH
Week
Act. Act. Act.
Plan Act. Plan Act. EV CWH Plan Act. Plan Act. EV CWH Plan Act. Plan Act. EV CWH
% % %
1 2 1 8% 28 16 14 15 0
2 3 2 17% 41 31 27 30 0
3 3 3 25% 41 40 41 45 0 2 13% 0 22 18 20
4 2 3 25% 27 38 41 45 5 4 27% 46 40 36 40
5 2 2 17% 27 24 27 30 5 4 27% 45 42 36 40
6 0 1 8% 0 15 14 15 5 4 27% 45 36 36 40
7 0 1 7% 0 12 9 10 5 3 14% 23 18 14 15
8 6 5 23% 27 30 23 25
9 6 6 27% 27 33 26 30
10 5 5 23% 23 28 23 25
11 0 3 14% 0 14 14 15
14
Example
Weekly Performance Measures
Total WH Indices
Week Plan Act. EV
CWH SPI CPI PI
BCWS ACWP BCWP
1 28 16 14 15 0.50 0.88 0.94

2 41 31 27 30 0.66 0.87 0.97
3 41 62 59 65 1.44 0.95 1.05
4 73 78 77 85 1.05 0.99 1.09
5 72 66 64
6 70
0 0.89 0.97 1.06
6 45 51 50 55 1.11 0.98 1.08
7 23 30 23 25 1.00 0.77 0.83
8 27 30 23 25 0 85
0.85 0 77
0.77 0 83
0.83
9 27 33 26 30 0.96 0.79 0.91
10 23 28 23 25 1.00 0.82 0.89
11 0 14 14 15 N/A 1.00 1.07
15
Example
Cumulative Performance Measures
Total WH Indices
Week Cum. Cum. Cum. Cum.
BCWS ACWP BCWP CWH SPI CPI PI
BCWS ACWP BCWP CWH
1 28 28 16 16 14 14 15 15 0.5 0.88 0.94

2 41 69 31 47 27 41 30 45 0.59 0.87 0.96
3 41 110 62 109 59 100 65 110 0.91 0.92 1.01
4 73 183 78 187 77 177 85 195 0.97 0.95 1.04
5 72 55
255 66 253
53 64
6 241 70
0 265
65 0 95
0.95 0 95
0.95 1 05
1.05
6 45 300 51 304 50 291 55 320 0.97 0.96 1.05
7 23 323 30 334 23 314 25 345 0.97 0.94 1.03
8 27 350 30 364 23 337 25 370 0.96 0.93 1.02
9 27 377 33 397 26 363 30 400 0.96 0.91 1.01
10 23 400 28 425 23 386 25 425 0.97 0.91 1
11 0 400 14 439 14 400 15 440 1 0.91 1
16
Example
2. Case2 : Variable Budget Approach
Deficit
Quantityy
Q Rate WH Q new
Q WH new Actual WH
(WH Act.)
(WH – A t)
A 10 15 150 12 180 164 ‐14
B 15 10 150 15 150 152 ‐2
C 20 5 100 22 110 123 ‐23
Totall 400 440
A B C
QTY WH QTY WH QTY WH
Week
Act. Act. Act.
Plan Act. Plan Act. EV Plan Act. Plan Act. EV Plan Act. Plan Act. EV
% % %
1 2 1 8% 30 16 15 0
2 3 2 17% 45 31 30 0
3 3 3 25% 45 40 45 0 2 13% 0 22 20
4 2 3 25% 30 38 45 5 4 27% 50 40 40
5 2 2 17% 30 24 30 5 4 27% 50 42 40
6 0 1 8% 0 15 15 5 4 27% 50 36 40
7 0 1 7% 0 12 10 5 3 14% 25 18 15
8 6 5 23% 30 30 25
9 6 6 27% 30 33 30
10 5 5 23% 25 28 25
11 0 3 14% 0 14 15
17
Example
Weekly Performance Measures
Total WH Indices
Week Plan Act. EV
SPI CPI
BCWS ACWP BCWP
1 30 16 15 0.50 0.94
2 45 31 30 0.67 0.97
3 45 62 65 1.44 1.05
4 80 78 85 1.06 1.09
5 80 66 70 0.88 1.06
6 50 51 55 1.10 1.08
7 25 30 25 1.00 0.83
8 30 30 25 0 83
0.83 0 83
0.83
9 30 33 30 1.00 0.91
10 25 28 25 1.00 0.89
11 0 14 15 1.07
18
Example
Cumulative Performance Measures
Total WH Indices
Week Cum. Cum. Cum.
BCWS ACWP BCWP SPI CPI
BCWS ACWP BCWP
1 30 30 16 16 15 15 0.5 0.94
2 45 75 31 47 30 45 0.6 0.96
3 45 120 62 109 65 110 0.92 1.01
4 80 200 78 187 85 195 0.98 1.04
5 80 280
80 66 253
53 70 265
65 0 95
0.95 1 05
1.05
6 50 330 51 304 55 320 0.97 1.05
7 25 355 30 334 25 345 0.97 1.03
8 30 385 30 364 25 370 0.96 1.02
9 30 415 33 397 30 400 0.96 1.01
10 25 440 28 425 25 425 0.97 1
11 0 440 14 439 15 440 1 1
19
Sec 4 : Progress & Cost Control Ch16: Tracking Performance
Chapter 16
Tr acking
Cost & Schedule Performance
20
Control
C t l Account
A t
• Baseline
Hours /month = 180 hrs

January work hours = 180 + 0.5 x 180 + 0.5 x 180 = 360
February work hours = 180 + 180 + 180 + 0.67 x 180 = 660
21
Control
C t l Account
A t
• Statusing
• Status will be done using the “units completed” method

• Use main item to be the control item (Large Pipes) then calculate actual quantity
• Actuall Quantity (1/3
( / ) = (5/100)
( / ) x 2000 x 0.25 = 25  % comp = 25 / 2000 = 1.25%
• Actual Quantity (1/10 ) = (15/100) x 2000 x 0.25 = 75  % comp = 100 / 2000= 5 %
• Actual Quantity (1/24 ) = [ (15/100) x 2000 x 0.25 ] + [ (50/2000) x 2000 x 0.30 ]
= 75 + 15 = 90  % complete = 265 / 2000 = 13.25
22
Control
C t l Account
A t
• Summarizing Status
Using earned work hours, accounts can be rolled up to show overall percent complete.
Weight = WH account / Total WH
Earned = Weight x % complete
Earned potable water =0.80 x 0.74= 0.6 %
Total Earned =  Earned accounts
= 0.6 + 9.8 + 2 + 6.9 + 1.6 + 18.1+ 3.5 = 42.5 %
23
Analysis,
A l i Trending,
T di A d Forecasting
And F ti
• Cost and Schedule Performance Curves
Cosst
Time
24
Analysis
A l i And
A d Forecasting
F ti
• Anaysis
25
Analysis
l i And
d Forecasting
i
• Forecasting
1. Using the same rate of planning
EAC = ACWP + ( BAC – BCWP )
Where EAC: Estimate at completion,
completion BAC: Budget at completion
2. Adjusting the same rate to consider cost variance

EAC = ACWP + [ ( BAC – BCWP) / CPI ]
= ACWP + BAC/CPI ‐ BCWP/CPI
= BCWP/CPI + BAC/CPI ‐ BCWP/CPI
= BAC / CPI
3. Extrapolation using the curves
26
Sec 4 : Progress & Cost Control Ch17: Performance & Productivity
Chapter 17
Performance & Productivity

Management
27
Success Index
d
• Success index (SI) relates output (value or profit) to input (Cost), hence, it’s an
expression of productivity and sometimes called performance index.
index
• For profit oriented business, SI = net profit / total cost including waste cost
• F service
For i organization
i ti like
lik government,
t
SI = value of service rendered / total cost of providing service including waste cost
• W t categories
Waste t i include
i l d inefficiency,
i ffi i waste
t off material,
t i l waste
t off equipment,
i t and
d
functions that are no longer add value.
• For some resources,
resources productivity is not the basis for their selection like managers,
managers
design architects and some equipments like tower crane which is selected by its
capacity .
• Applying productivity measurements on those categories will create stress and
cause quality to be lower.
28
Overall
ll Performance
f Issues (1/3)
( / )
1. Inefficiencies Losses
A Organizational: Like shortage of material / equipment and lack of procedures
A.
B. Individual: Like failure to plan, refusing to use labor‐saving equipment (such as
a word processor), and poor filing.
2. Waste Through Interruptions
• Ex: Phone calls and visitors
• Tryy to avoid interruption
p usingg e‐mails and visitor screeningg
3. Other time wasters
A. Events that are accepted parts of life:
“Eli i ti
“Elimination potential is not significant”
t ti l i t i ifi t”
EX: Official meetings, telephone calls, lunch breaks, official visitors, send a
fax, hazard alarms, adverse weather, power outages, equipment
breakdowns, holds for quality checks, absentees, turnover of key personnel,
reviews, secretaries delivering mail, noise and conversations from adjacent
work areas,
areas running out of paper or staples,
staples forgetting something.
something
29
Overall
ll Performance
f Issues (2/3)
( / )
3. Other time wasters
B. Events in office that create time loss:
“significant potential for elimination /reduction by better planning”
Ex: Unnecessary and unarranged meetings, people late for meetings, social
visits/greetings from passing employees,
employees sales calls without appointments,
appointments
errors on drawings, too many people or organizations involved in getting an
answer/approval/decision, excessive time taken to make decisions, too few
supportt personnell available
il bl so professional
f i l staff
t ff mustt perform
f own support.
t
C. Events in construction site:
“controllable time wasters”
Ex: contractual disputes, late delivery, materials/equipment don’t meet
specs, materials/equipment listed on inventory cannot be found, long
distance between work areas and warehouses, waiting for an approval/
instructions, issuing instructions after work has started, waiting for other
crews to get out of way, individuals don't understand their roles and always
ask questions, late starts and early quits, absentees
30
Overall
ll Performance
f Issues (3/3)
( / )
4. Waste Through Rework
Ex: Excessive levels of supervision
p that higher
g level repeats
p the work of the lower
level, double handling of materials before use, receiving data in hard copy and
reentering it into another computer, computer Illiteracy (manager / clerk ),
excessive
i reviews/approvals,
i / l failure
f il t provide
to id managementt guidance,
id reinventing
i ti
the Wheel and failing to develop lessons learned, out‐of‐Date or incorrect specs
results in rework.
• The Solution
• Plan! Plan! Plan! • Recognize employee achievements
• Control changes • Involve employees in planning
• Be selective in hiring • Take advantage of modern technology
• Employ team building
E l t b ildi • Train managers, supervisors,
T i i and workers
d k
• Written policies / procedures • Make your work place a good place to work
p y y q y
• Give priority to safety and quality • Involve users and constructors in design decisions
g
31
Productivity
d i i Variation
i i Reasons (1/2)
1. Sociological (Area) Factors:
• Local population,
population local work ethic,
ethic level of mechanization,
mechanization the education and
training levels of workers, the climate, and urban vs. rural factors.
• Most major contractors select one area as the base (index of 1.00), then other
areas are given
i i di
indices that
h relate
l their
h i productivity
d i i to the h base
b area.
2. Location Factors:
Weather, access, availability of skills, availability of logistical support, attitude of
nearby communities, transportation network, and local economy.
3. Project & Contract Characteristics:
project size,
size schedule constraints,
constraints adequacy of scope definition,
definition constructability of
design, environmental requirements, height or depth of work, type of contract,
budget constraints, and quality of engineering.
4 Human
4. H F
Factors:
Management / supervisor competence, individual worker skills, work rules,
overtime, experience, learning curve, crew stability, key personnel turnover,
owner/contractor relationships, value system, and personalities.
32
Productivity
d i i Variation
i i Reasons (2/2)
5. Field Organization And Management:
Site layout,
layout support equipment availability,
availability project controls system,
system quality
program, technology/methodology used, subcontractor performance, materials /
tools availability, safety program, and quality degree of planning.
6 Accounting
6. i And d Estimates:
i
• Standard chart of accounts for crew tasks must be used for all projects so that
data from one project can be compared to data from another.
• Breakdown of crew tasks for estimating must be the same as that used for
reporting so that estimated and actual performance can be truly compared.
• When numerical data collected,
collected the conditions under which work was performed
should be described (e.g., weather, congestion, materials shortages). Hence, when
preparing bids for a new project, estimators will be able to research historical
productivity
d i i data d on similar
i il workk and d adapt
d these
h d
data to the
h new project
j
conditions.
33
I
Incentives
ti
• Why Incentives :
1 Increase productivity and reduce waste
1.
2. Improve employee morale and promote teamwork
3. Identify more cost‐effective work procedures
4. Improve quality
5. Reduce absenteeism
• The Stimuli:
1. Possibility of winning:
Personal satisfaction in achieving a goal, financial gain, career enhancement,
pride of being in winning team, a chance to do something different.
2. Fear of losing:
Potential loss of jjob, p
potential loss of p
promotion, .. etc.
• Rewards:
1. Intrinsic value ‫ جوائز مادية‬such as cash rewards
2. Extrinsic value ‫معنوية‬
‫ة‬ ‫ جوائز‬such as medals, badges, .. etc.
34
I
Incentives
ti
• Incentive Programs (Intrinsic):
1 Open
1. Open‐Book
Book Management:
Employees will perform better if they know how the company operates and
what contributes profits and losses. Incentive involved is a sharing of annual
profits among employees, typically 25 percent.
2. The Green Stamp Program:
Employees earn credits (or green stamps) for achievement of various
objectives such as: zero defects, no accidents, no late starts/early quits, no
absenteeism during a given period, achievement of a productivity goal, .. etc.
Each credit is usually worth $1.
$
Program advantages:
a. Employee
p y can p pick the reward
b. Credits accumulation stimulates continuing achievement
c. It influences employee's family
d It is open to all employees
d.
35
I
Incentives
ti
• Incentive Programs (Intrinsic):
3 Suggestion Program:
3.
Employees make suggestions that are reviewed then adopted suggestions
result in a cash award based on anticipated savings. If a suggestion is not
adopted, or benefits are not cash savings, the reward is appreciation letter.
4. Sharing Savings :
Field
ld personnell willll share
h in any savings realized
l d based
b d on salaries
l or wages
paid during the life of the contract.
5 Service Award :
5.
Increases with length of service. Often distributed in special luncheon/dinner.
6. Merit Raises :
Salary increases in a certain year that tied to performance evaluations.
7. Special Training :
Number of individuals are selected each year for some special training.
36
I
Incentives
ti
• Incentive Programs (Extrinsic):
1. The simple “Atta
Atta Boy
Boy” :
The careless pronunciation of ”That's the boy!”. A pat on the back or word of
appreciation, particularly when given in front of everyone can do wonders.
2. Honoraria : ‫شرفية‬
‫مكافآت ر ي‬
Given for specific achievements relating to professional development such as
certification, publishing paper, representing company in a professional forum.
3. Management
g byy Walkingg Around :
Maintain visibility with employees through frequent visits to work areas
during which they chat with employees.
4. Letter Off Appreciation
i i
5. Certificates of Training Completion
6. Decals ‫الشـارات‬
‫ر‬
7. Token Awards ‫ تذكارية‬/ ‫جوائز رمزية‬
8. Employee or Crew of Month
9. Exclusive Clubs Membership
37
I
Incentives
ti
• Incentive Programs (Extrinsic):
10. Team Builders :
1. Sharing in creating a project logo and use it for helmets, stickers, .. etc.
2. Publish a newsletter and have a discussion to name the newsletter
3 Occasionally put out coffee for workers or cool drinks
3.
4. Take pictures of employees on the job and display them on bulletin board
5. During lunch, show videos that review project status / crews at work, etc.
6 Sponsor
6. S charity
h i workk for
f the
h needy
d workers
k (food,
(f d repairing
i i homes)
h )
7. A lunch for the workers when a major project milestone is reached
8. Sponsor “family day” with a picnic lunch, and games
9. Issue press releases on project and employee accomplishments
10. Do whatever you can to provide job security for employees
11. If the p
project
j receives cash award for safetyy or other achievement,, divide
the award up into $50 packages and give them away in a raffle. ‫بالقرعة‬
• Incentive Guidelines: Avoid discrimination, awards criteria must be specific and
understandable, balance between employer and employees.
38
Sec 5 : Project Management Ch18 : Fundamentals
Section 5
Project Management
1
Chapter 18
Project Management
F u n d a m e n ta l s
2
Project
P j t
An item of work that requires planning, organizing, dedication of resources, and
expenditure of funds in order to produce a concept, a product, or a plant.
Project Management Function

• Cost Management
• Time Management
• Human Resources
• Communications
Project Life Cycle:

g g Request:
1. Engineering q
Solve Problems – Upgrade Quality – Addition Quantity – Environmental – Stay In Business
2. Project Development :
Technical – Project Conditions – Regulatory – Conceptual Cost estimate – Economics
3. budgeting and Management:
Phases – Funding – Estimate Quality – Execution Strategy – Project Resources
4. Project Execution
3
Sec 5 : Project Management Ch19 : Organization Structure
Chapter 19
Project Organization
Structure
4
The M
Th Matrix
t i Structure
St t
• Over the past 30 years, the most widely used organization structure
• Multiple projects are executed by many departments making the work at the same
time, with the same staff (more efficiently use resources).
• Effective information exchange and efficient coordination of project workload.
• Working personnel simultaneously accountable to both project manager and
departmental manager. Hence, project manager having inadequate authority
• Departmental manager is responsible for the technical content and working
resources, and the project manager decides on the cost and time baselines.
• Individual who is doing the work reports to two bosses.
bosses This leads to divisions of
responsibility, problems of loyalty, differences over priorities, and lack of authority.
• It requires the project execution plan to be clearly defined, so that all working
groups would then accept, commit to, and work to the agreed execution plan.
• Initially matrix failed. The solution was a new approach called Quality Management
that
h was introduced
d d by b Dr. Edward
d d Deming,
i working
k in Japan, in 1960s andd 1970s.
5
Demingism & TQM

Deming developed 14‐key sets of criteria for developing quality management program:
1. Create constancy of purpose for improving products and services
‫انشاء اھداف ثابتة‬
2. Adopt the new philosophy
‫جديدة‬
‫لجي‬ ‫ى فلسفة عمل‬‫بتبنى‬
3. Cease dependence on inspection to achieve quality
‫تجنب االعتماد على الفحص كوسيلة وحيدة‬
4 End
4. E d the
h practice
i off awarding
di business
b i on price
i alone;
l i
instead,d minimize
i i i totall
cost by working with a single supplier
‫التوقف عن تقييم االعمال على اساس السعر فقط‬
5. Improve constantly & forever every process for planning/production
‫التحسين المستمر للعمليات‬
6 Institute training on the job
6.
‫أسس للتدريب في العمل‬
7. Adopt and institute leadership
‫أسس لمفھوم القيادة من ھم القادة والمدراء‬
6
Demingism & TQM

8. Drive out fear
‫إطرد الخوف لكي يستطيع الجميع العمل بكفاءة داخل المؤسسة‬
9. Break down barriers between staff areas
‫أزل الموانع بين األقسام‬
10 Eliminate slogans asking for zero defects
10.
‫أزل شعارات الصفر عيب والمطالبة بمستويات جديدة لالنتاج‬
11. Eliminate numerical quotas for workforce & numerical goals for management
‫أزل نظام الكوته واالھداف العددية من اسلوب قيادتك او غير القيادات التي تعتمد ھذا االسلوب‬
12. Remove barriers that rob people of pride of workmanship, and eliminate the
annual rating or merit system
‫أزل الحواجز التي تحرم العمال واالدارة والمھندسين من الشعور بالفخر مما انجزوه‬
13. Institute program of education and self‐improvement
‫اعداد برنامج فعال للتثقيف والتطوير الذاتي‬
14. Put everybody in the company to work accomplishing the transformation
(‫اجعل الجميع شركاء ففي انجاز عملية التغيير )المؤسسة ملك الجميع وعليھم جميعا مھمة التغيير‬
7
I O
Is Owner Q
Qualified
lifi d T
To B
Be P
Project
j tM Manager
• A very fundamental consideration in company reengineering is the question of the
owner
o e functioning
u ct o g as its
ts o
own p
project
oject manager.
a age .
• It is a matter of previous experience of the specific project and skills.
• Many companies confuse having competent engineering personnel the project
management responsibility, but without adequate project experience.
• Engineering competence does not necessarily translate into project capability.
Project Manager Qualifications:

• Technical expertise, project experience, business capability, leadership ability, and
people skills.
skills
Project Manager Authorities:

• Full authority to make both design and cost decisions,
decisions with appropriate limits of
authority and management reporting requirements
8
Sec 5 : Project Management Ch20 : Project Planning
C
Chapter 20
Project Planning
9
Establishing Objectives
General:
• The key to successful acceptance, by all, is a set of well‐defined objectives.
• Objectives guide development of goals, procedures, criteria, cost/time targets.
• Objectives always will be a compromise between quality, cost, and schedule.
• Developing objectives assists in building team commitment and understanding.
Client Satisfaction:
• It’s the most important objective.
• Reports concerning this objective, should receive top management attention and
immediate resolution.
Scope Objective: Brief scope definition and well‐written,
Cost and Schedule Baselines:
• Quality required, formats, constraints, software, code of accounts, WBS, level of
detailing, milestones, and risk analysis.
Quality:
• Clear/ measurable criteria developed and fully acceptable to all project parties.
Documentation:
• Project objectives are prioritized, documented, and communicated to team.
10
Scope Definition Control

General:
• Poor scope definition and loss of control of the project scope is the most
frequent contributing factors to cost overruns.
Scope Approval :
• Achieving a proper input for the design from all parties is the responsibility of the
project engineering manager, and strongly supported by the project manager
• There must be consensus and full understanding, as well as approval, of all
parties to the design basis
• Design basis must be shared openly and with all participating parties.
• In addition to design, project execution plan and financial program must be part
of the approval process.
process
• Scope is well defined before start of detailed engineering
Statement of Requirements (SOR):
• The major deliverable of the feasibility study is the basic design package—
statement of requirements (SOR).
• It should be well‐written that properly define technical requirements and have
sufficient depth to provide clear direction for all major design issues.
11
Scope Definition Control

Scope Document Contents:
• Project description (project justification, project objectives, economic
justification, and if pertinent, facilities description)
• Design basis and specs
• Process definition (flow diagrams, startup and shutdown requirements)
• Mechanical definition (Drawings, plot plans, equipment list)
• Instrument definition (control points, set points, low level alarms, etc.)
• Safety system (hazards analysis, safety devices list)
• Project location (productivity factors, delivery, infrastructure requirements)
• Project conditions (offshore installations, site and access problems)
• Estimate—definition
Estimate definition
• Work quantities, takeoffs, labor/ staff hours
• contingency and budget limitations
• risk analysis and identification
• Schedule—definition
• Difficulty of proposed completion
• all constraints and critical relationships
12
Information Utilization
General:
• Software systems make gathering of data a simple task.
• Effective communication channels transmit information to the correct recipient.
Execution Plan:
• A dynamic document, being revised and updated as conditions/scope change.
• Commitment to the plan must then be achieved with all project parties.
Execution Plan Categories:
• What is the scope of work? How to be executed? When to be carried out?
Internal Project Charter Program :
• A document lists all major parties and their responsibility and project objectives.
• All parties sign the charter,
charter thus demonstrating their commitment to project plan.
plan
Project Coordination Procedure (PCP):
• Clearly defines communication channels to all
• This would include: limits of authority; responsibilities of parties; correspondence
procedures; filing and reporting codes; document and action schedule (for all
drawings, documents, reports); public relations procedures; security and safety
procedures; and project close‐out report.
13
Constructability Planning
• Constructability and construction pre‐planning are often used,

interchangeabl to describe the function
interchangeably, f nction (value
( al e Engineering).
Engineering)
• Constructability is concerned with the technology, methods of installation,
and the associated cost.
• Preplanning is concerned with the scheduling of resources, organization, site
access, and infrastructure.
• The purpose of constructability is to reduce costs by considering alternative
design and/or installation methods.
• Typical example would be steel or concrete for a building.
building
• It is essential that experienced personnel are assigned to the project at early
stage to evaluate constructability and preplanning as a part of project
development.
14
Sec 5 : Project Management Ch21 : Labor Cost Control
Chapter 21
Project Labor
Cost Control
15
Factors Affecting Productivity

• Crew sizes and composition
• Site layout
• Density (area per worker)
• Interference with other crews
• Availability of material
• Availability of equipment
• Availability of tools
• Availability of and Information
• Rework due to design
• Rework due to fabrication
• Rework due to field errors
• Weather
• Scheduling
• Constructability
16
Measuring Inputs & Outputs

• Inputs:
• Labor input is measured by workhours expended or by labor dollars spent.
• Workhours are measured directly using cost codes and time cards.
• Dollars are calculated by multiplying workhour expended by the wage rate.
• Outputs:
• Output (Quantity) cannot be measured with a common unit of measure.
• Ex: m3 of excavation, m2 of formwork, tons of steel, lineal meters of pipe, ... etc.
• Measurement:
• Each category of output requires a separate cost account.
• Input is separated into the appropriate cost account in order to match each unit
of output to the resources (inputs) that produced the output.
output
• Quantities installed in one step (installed or not) are the easiest to measure.
• When quantities installed in steps, use equivalent unit method.
• Ex: Installation steps of 700 m of pipes can be assigned a weight based on its
workhours or dollars (60% install, 30% connect, 10% clean and test)
If 400 m installed, 300 m connected, 100 m cleaned and tested
Actual quantity = 400 x 0.6 + 300 x 0.3 + 100 x 0.1 = 280 m
17
Earned Value Control System

Percent Complete (single account) = Actual Quantity / Forecasted Total Quantity
%Complete
EV, PV,
BCWP (EV) = Percent Complete x Budget
Percent Complete (multiple accounts) = EV (all accounts) / Budget Cost (all accounts)
Control SSystem
BCWS (PV) = Scheduled Percent Complete x Budget
Variance
& Index
Cost Variance CV = EV – AC Cost Performance Index CPI = EV / AC
Schedule Variance SV = EV – PV Schedule Performance Index SPI = EV / PV
Earrned Value Cost C
EAC = AC + (Budget – EV)
EAC
EAC = Budget / CPI
Using historical curve for CPI (extrapolation)
Credit Dollars (C$) = Actual Quantity x Budget Unit Cost
Credit Vallue
Credit Workhours (CWH) = Actual Quantity x Budget Unit Cost
Unit Cost Index (UCI) = Credit Dollars / Actual Dollars
C
Productivity Index (PI) Credit Workhours / Actual Workhours

Productivity Index (PI) = Credit Workhours / Actual Workhours
18
Earned
d Value
l C
Controll S
System
• Example:
• Total
T t l Budget
B d t = $1’440 , Duration
D ti = 20 days
d , Elapsed
El d Duration
D ti = 5 days
d
 BCWS = (5/20) x $1’440 = $360
• If budget quantity = 2880 , forecasted quantity = 2880 , actual quantity = 608 ,
actual cost = $288 (from time cards)
 BCWP = (608/2880) x $1
$1’440
440 = $304
C$ = 608 x (1440 / 2880) = $304 (same as EV because no change in quantity)
CV = 304 – 288 = 16
CPI = 304 / 288 = 1.056 (Under Budget)
SPI = 304 / 360 = 0.84 ((Behind Schedule))
EAC = 1’440 / 1.056 = $1’364
VAC = 1440 – 1364 = 76
19
Unit Rates Method

• Methodology:
• Calculate budget unit rate and actual unit rate. Then calculate EAC as follow:
1. EAC = Actual dollars + (To go quantity x budget unit rate)
2. EAC = Total quantity x actual unit rate
3 EAC : from historical curves
3.
• Variance(VAC) = Variance from quantity change + Variance from rate change
• Quantity Variance = Quantity Change (CQ) x Budgeted Production Rate (PB)
• Production Rate Variance = Rate Change (CP) x Forecasted Quantity(QF)
• Where: CQ = QB – QF , CP = PB – PF
• Example:
p
• Budget Unit Rate (PB) = $1’440 / 2880 = 0.5 $/L.F
• Actual Unit Rate (PF) = $288 / 608 = 0.4737 $/L.F
• EAC = 2880 x 0.4737
0 4737 = $1’364
• CQ = QB – QF = 2880 – 2800 = 0 , CP = PB – PF = 0.5 – 0.4737 = 0.0263
• Variance (VAC) = CQ x PB + CP x QF
= ( 0 .00 x 0.5) + (0.0263 x 2880) = 76
20
Unit Rates Method

• Another Example:
• Budget quantity = 365 , forecasted quantity = 395 , actual quantity = 221
• Total Budget = 256 WH , and actual cost = 140 WH
• Solution Usingg EV Method:

• EV = (221 / 395) x 256 = 143.23 , CPI = 143.23 / 140 = 1.023
• EAC = BAC/CPI = 256 / 1.023 = 250.2
• VAC = BAC – EAC = 256 – 250.2 = 5.8
• Solution Using Unit Rate Method:

• PB = 256 / 365 = 0.701 $/L.F
• PF = 140 / 221 = 0.633 $/L.F
• CQ = QB – QF = 365 – 395 = ‐30
30 L.F
LF
• CP = PB – PF = 0.701 – 0.633 = 0.068 $/L.F
• Variance (VAC) = (– 30 x 0.701 ) + (0.068 x 395)
= – 21 + 26.8 = 5.8
21
Original Estimate
T. Budgeted Total
Quantity Budget
2548 $3’822
22
Daily Production Report

Actual
Quantity
1922
23
Schedule Report
PV
$3’333
24
Labor Cost Report Using Earned Value

Budget Q = 2548 , Total Budget = $3’822 , Act Q = 1922 , PV = $3’333
EV = % comp. x Total Budget = (1922/2602) x 3’822 = $2’823
Credit Dollars = Actual Q x Budgeted Unit Price = 1922 x 1.5 = $2’883
EAC = BAC / CPI = 3822 / 0.882 = $4’332
CPI = EV/AC , SPI = EV/PV , UCI = C$/AC
25
Sec 5 : Project Management Ch22 : Project People
Chapter 22
Leadership & Management

of Project People
26
Leadership Styles
• Douglas McGregor (X and Y)
• Theory X includes the following assumptions
• Average persons dislike work and will avoid it if possible.
• Average person must controlled, directed, or threatened with punishment.
• Average person wishes to avoid responsibility and wants security.
security
• Theory Y includes the following assumptions
• People are self‐motivated and will exercise self‐direction and self‐control.
• Average people learn to not only accept but also seek responsibility.
• People are capable of a high degree of imagination, creativity in solving
organizational problems.
problems
• Frederick Herzberg (Hygiene Factors)
• Real motivation resulted from the worker’s involvement in accomplishing an
interesting task, not from the working conditions or environmental factors.
• Hygiene factors, though, must be adequately provided. (Ex: work conditions,
security good relationships at work,
security, work and convenient salary.
salary
27
Leadership Styles
• Chris Argyris
• Organization may be the source and cause of human problems.
• Individual / organizational needs were not met effectively in most organizations.
• Part of the problem was due to bureaucratic and hierarchical structures.
• Organization should offer challenges and opportunities for responsibilities.
responsibilities
• Rensis Likert
• He developed the concept of the linking pin—a person who belongs to two
groups in the organization.
• He advocated open communication within groups, mutual trust, consensus
decision‐making,
g, ggroup
p ggoal setting,
g, definition of roles,, and shared responsibility.
p y
• Real authority is not just official or formal authority, but is dependent on how
much authority a manager’s subordinates allow the manager to make over them.
• Likert developed four styles of leadership :
exploitive‐authoritative ‫استثماري رسمي‬, benevolent‐authoritative ‫خيري رسمي‬
consultative ‫ استشاري‬, participative ‫تشاركي‬
• He directed his attention toward the participative group, which he felt was ideal.
28
Cross-Cultural
Cross Cultural
• Leader working with multicultural team needs to be aware of cultural differences
and take special care to avoid the potential risks associated with them.
• Birth culture has a greater effect on a worker’s than does organizational culture.
• Ex: language barriers and time differences to religious diversity and differences in
food preferences.
preferences
• In some cultures open discussion and resolution of conflict is viewed as negative,
and a direct approach to conflict resolution, such as a confrontational style, is
considered threatening. Here, conflict is best handled behind the scenes, using a
smoothing or compromising method.
• As another example,p , some cultures view risks as onlyy the responsibility
p y of the
executives in the organization, while others view it as the team’s responsibility.
• Cultural differences should not be ignored or minimized, and if a cultural
difference does cause a problem,
problem it should be addressed.
addressed
• Awareness of cultural differences among team members may even make the
difference between success and failure.
29
Challenges And Skills

• Manager Challenges:
• Uncertain organizational resource support for the project
• Extreme time pressures
• First‐time to solve complicated problems
• Personnel and other resource interdependencies
• Required Skills:
• Apply technical and managerial skills
• Motivate the team toward the project objectives
• Create group cohesion
• Think under pressure
• Resolving conflicting priorities of other stakeholders
• Drive the team toward excellence
• Think in terms of 3D : Timely delivery, Cost compliance, and Task performance
• create mechanisms within the team that encourage the discussion of conflict and
balance the process
30
Leading, Managing
Leading Managing, Facilitating
Facilitating, And Mentoring
1. Leadership:
• Ability to conceptualize the vision, direct the project, and communicate / sell this
vision to the team members and other stakeholders.
stakeholders
• Encouraged to ask questions about project purpose and to offer opinions.
• Gain credibility and must demonstrate managerial actions and behaviours.
• Being
B i theth team’s
t ’ voice
i tot the
th outside
t id world.
ld
• Communicate actively to address stakeholders in terms of supporting and buying
into the project goals.
2. Management:
• Manager role ensures the project is completed on time, within budget, and at
acceptable levels of performance.
• Create the administrative procedures and structure to complete the project
3. Facilitation:
• Help others get their work done.
• It involves communication, conflict resolution, procure necessary resources,
motivate both individual team members and the team as a unit.
• The goal is to provide team members with choices, options, and then trust that
the team members will create the desired outcome.
31
Leading, Managing
Leading Managing, Facilitating
Facilitating, And Mentoring
4. Mentor or Coach:
• Being a role model who demonstrates desired skills, behaviour, and attitudes.
• Demonstrating personal interest in professional growth of team members.
• Think‐out‐loud with team (suggestions, possibilities, problem solving approaches)
• Assisting
A i ti t
team members
b i identifying
in id tif i and
d achieving
hi i l
long‐term
t professional
f i l
goals.
Motivation Mistakes
• What motivates me will probably motivate others
• People
P l are primarily
i il motivated
ti t d by
b money
• Everyone wants to receive a formal award
• Team members are motivated by quotas
• Professionals people do not need motivating
• People only need to be motivated if there is a problem
• Everyone
E should
h ld be
b treated
t t d the
th same
32
Theories of Motivation
1. Biological Perspective:
• Actions contribute in preservation and expansion of the species ‫ الجنس البشري‬will
produce motivation.
• It is appropriate when confined to the more basic aspects of human behaviour,
such as hunger and thirst,
thirst reproduction.
reproduction
2. Drive Theories:
• Drives are complex combinations of internal stages of tension that cause the
individual to take action to reduce the level of tension.
• The goal of reducing tension is to achieve an internal state of equilibrium or
balance Motivation is done by maintaining this balance.
balance. balance Similar to evolutionary
3. Incentive Theories:
• It can work when the manager and team member have the ability and the
resources to identify a desired behaviour that can be awarded.
• The incentives must be valued by the group.
• The incentives also need to be appropriate to the culture of the organization.
organization
33
4. Theory Of Needs (David McClelland) :
• people who value the need for achievement are often those people who are
the leaders in the areas of creativity and economic growth.
• The need to achieve within one’s discipline can self‐motivate many individuals.
5 Fear Of Failure :
5.
• A strong motivator in situations when the consequences for failure are
especially catastrophic ‫فاجع‬.
• It should be employed only in unusual circumstances.
6. Hierarchical Theory :
• Level 1—physiological
p y g needs ((food,, thirst))
• Level 2—security and safety needs (stability, survival)
• Level 3—belonging needs (affiliation, love)
• Level 4—esteem
4 esteem needs (achievement and the acquisition of recognition)
• Level 5—cognitive needs ‫(االحتياجات االدراكية‬knowledge)
• Level 6—aesthetic ‫جمالي‬needs (beauty, order)
• Level 7—self‐actualization needs (the realization of one’s personal potential)
34
7. Career Stages :
• Understanding of individual’s current career stage by the leader can be used in
developing tangible approaches to individual motivation.
• This model has 10 career stages.
1 Stage 1,2:
1. 1 2 Occur in the person’s life before entering the world of work.
work
2. Stage 3: The first formal entry into the workplace
3. Stage 4: Training in the application of skills and
4. Stage 5: Occurs when individual gained full admission into the profession
5. Stage 6: Gain a more permanent membership in the profession.
6 Stage 7:
6. 7 Mid‐career
Mid career assessment or period during which questions are
asked as to what has been accomplished.
7. Stage 8: Challenge of maintaining momentum as the career starts to move
into its final chapters.
8. Stage 9: Individual beginning to disengage from the profession and work.
9 Stage 10:
9. 10 Retirement stage
35
8. Empowerment : ‫التمكين‬
• Team members experience a strong sense of empowerment through the use of
participatory management methods.
• The team is then motivated by the opportunity to be self‐determinative in
creating the structure and methods to achieve its goals.
goals
36
Sec 5 : Project Management Ch23 : Quality Management
Chapter 23
Quality Management
Q
37
Introduction
• Success of Japanese manufacturers during 1960s and 1970s changed the emphasis
from a quality control approach to a quality assurance.
• A variety of systems began to emerge.
 Balanced scorecards for aligning organizational execution with strategy.
 Information systems such as ERP and advanced planning and scheduling (APS)
 Improved execution
 Compressed lead times
 Reduced unused capacity.
 Customer relationship management (CRM) systems connected the sales force to
customer needs,, value,, and satisfaction.
 Activity‐based cost management (ABC/M) systems improved the visibility and
understanding for management to understand their profit margins, draw
conclusions and make better decisions.
conclusions, decisions
• The strong force of recognizing customer satisfaction moved organizations from
hierarchical structures toward process‐based thinking. The reengineering message
was to worry about the outputs, not the functions.
38
What is Quality?
• For some, quality = durability. It’s “fitness for use” definition relates to customers.
• In 1980s, quality defined as conformance to buyer’s requirements (Specs). This
limits the definition to “doing
doing things right
right” & can miss the customers
customers’ real needs.
needs
• Recently, quality considered to meet/exceed customer requirement & expectations.
• The universally accepted goals of quality management are lower costs, higher
revenues, delighted customers, and empowered employees.
Traditional Accounting & Quality Management
1. Financial accounting systems make the way in which data is captured not in a
convenient format to take decisions.
2. Traditional general ledger format is not suitable to report cost of quality COQ).
Juran Trilogy (3 Steps)
1. Quality Planning: Translate customer needs into product characteristics
2. Quality Control: Measure quality level and compare against required levels
3. Quality Management: Incremental Improvement to attain better level of control
Notes:
• Quality control removes sporadic deficiencies ‫المتقطعة‬
‫ط‬
• Quality improvement removes chronic deficiencies ‫المزمنة‬
• Companies concentrate on sporadic because they have adverse consequences such
as customer complaint
l i and d elimination
li i i off chronic
h i problems
bl requires
i greater effort.
ff
39
COQ C
Categories:
i
A. Error‐free Costs:
• Costs
C t that
th t are nott related
l t d to
t quality
lit planning,
l i control,
t l improvement,
i t or
correcting. It’s called the did‐it‐right‐first‐time costs.
B Cost of quality (COQ):
B.
1. Cost of conformance:
• Prevention: Ex: Quality planning and training.
training
• Appraisal: Ex: Material Inspection and Testing Products
2. Cost of non
non‐conformance:
conformance:
• Interior Failure: Detected prior customer receipt / shipment
• External Failure: Results from discoveringg byy a customer.
COQ is the costs associated with avoiding, finding, making, and repairing defects.
40
Categorizing Quality Costs

C. Supply Chain Related Costs:
1. Postponed Profits (Current)
Profits that couldn
couldn’tt be formally recognized during financial period because
goods / services didn’t satisfy all customer requirements.
2. Lost Profits (Permanent)
Lost when customer no longer purchase due to bad experience.
experience
3. Customer Incurred Cost
All customer’s COQ + (postponed and lost profits from Customer’s customers).
D. Socio
Socio‐Economic
Economic Costs
Where the public & community are affected such as oil spill or pollution.
Example:
• If revenue = $$200’000 , pprofit = 5% , p
purchase = $
$90’000
• Profit = 5/100 x 200’000 = $10’000
• Expenses = 200’000 – 10’000 = 190’000
• Costs = Expenses – Purchases = 190’000 – 90’000 = $100’000
• If COQ 20%  COQ = 20/100 x 100’000 = $20’000
• If external failure = 60% = 60/100 x 20’000 = $12’000
• By eliminating half of external failure ($6’000) , it will be added to profit
• Profit = 10’000 + 6’000 = $16’000
41
Deconstructing COQ
42
COQ Implementation
l i Logic
i
1. For any failure, there’s a root cause
2 Causes
2. C f failure
for f il are preventable
t bl
3. Prevention is cheaper than fixing after occurring
COQ Implementation Steps
1. Directly attack failure costs with target driving them to zero
2 Invest in appropriate prevention activities
2.
3. Reduce appraisal costs according to results achieving
4 Continuously evaluate and redirect prevention efforts to gain further improvement
4.
Quantifying COQ
• When startingg Q
QM p
program,
g , usuallyy failure costs are 65:70%
% appraisal
pp costs are
20:25 %, and prevention costs are 5% of corporation’s quality costs.
• Hence, investment in eliminatingg failure costs should be a long‐term
g investment.
43
Sec 5 : Project Management Ch24 : Value Analysis
Chapter 24
Value Analysis
44
Introduction
1. Pre‐design Stage:
• Perform VA to:
1. Define the project’s functions
2. Achieve consensus on the project’s approach by the project team.
• By participating in this early VA exercise, members of the project team
communicate their needs & minimizes miscommunication and redesign
2 Design stage:
2.
• Schematic design (up to 15 %), design development (up to 45 %), and
completion documents (up to 100 % design completion).
• Perform VA to:
1. Confirm project functions,
2. Verify technical and management approaches
3. Analyze selection of equipment and materials
4 Assess the project
4. project’ss economics and technical feasibility.
feasibility
45
Introduction
3. Prior to Bidding:
• Concentrates on buildability, economics and technical feasibility.
• Consider methods of construction, phasing of construction, and procurement.
• Perform VA To:
1 Minimize costs and maximize value
1.
2. Reduce the potential for claims
3. Analyze management and administration
4. Review the design, equipment and materials used.
4. During Construction:
• Analyzey value analysis
y changeg pproposals
p ((VACPs)) of the contractor.
• It reduces the cost or duration of construction or present alternative methods
of construction, without reducing performance, acceptance, or quality.
• To encourage the contractor to propose,
propose the owner and the contractor share
the resultant savings when permitted by contract.
• Numbering / timing of VA studies varies for every project. A minimum of 2 VA
studies performed at the pre‐design and design development stages.
46
Value Methodology Standard

• Value Methodology (VM) includes the processes known as:
1. Value analysis (value control)
2. Value engineering (value improvement)
3. Value management (value assurance)
• VM standard defines common terminology,
terminology offers a standardized job plan
Value Methodology Job Plan

• Analyze
y a p product or service in order to develop p the maximum number of
alternatives to achieve the product’s or service’s required functions.
Pre Study Value Study Post Study
47

A. Pre‐Study:
1. Collect User / Customer Attitude
• Objectives:
1. Determine the prime buying influence
p
2. Define and rate the importance of features and characteristics
3. Determine & rate seriousness of user complaints of product /project
4. Compare product / project with similar products / projects
2 Gather a Complete Data File:
2.
i. Primary Information Sources:
1. People include user, original designer, architect, cost estimator,
maintenance,
i t manufacturers,
f t constructors,
t t andd consultants
lt t
2. Documentation sources include drawings, specs, bid docs and plans
ii. Secondary Information Sources:
1. Suppliers of similar products
2. literature such as standards, regulations, test results, and journals
3. Similar projects Data
4. Site visitation by the value study team
48

A. Pre‐Study:
3 Determine Evaluation Factors
3.
Criteria for evaluation of ideas and the relative importance of each criteria.
4. Scope the Study
Defines the limits of the study (starting point and the completion point).
5. Build Models
Based on the agreement of the scope statement. These include such models
as cost, time, energy, flow charts, and distribution
6. Determine Team Composition
Study schedule, location and need for any support personnel.
49

B. Value Study:
1 Information Phase:
1.
• Objectives:
Complete data package ( if not done during pre
pre‐study
study phase )
• Steps:
1. Team agrees
g to the most appropriate
pp p targets
g for improvement
p such
as value, cost, performance, and schedule factors.
2. Review targets with management (PM, value study sponsor, designer)
3. Review scope statement for any adjustments due to additional
information gathered during the Information Phase.
50

B. Value Study:
2. Function Analysis Phase :
• Objectives: Develop the most beneficial areas for continuing study
• Steps:
1. Define both work and sell functions of the product/project/process
using
i active
ti verbs
b + measurable
bl nouns. (Random
(R d f ti definition)
function d fi iti )
2. Classify the functions as basic or secondary
3. Expand the functions identified in step 1 (optional).
4. Build
ld a function
f model
d l (function
(f h
hierarchy
h / logic).
l )
5. Assign cost and/or other measurement criteria to functions.
6. Establish worth of functions by assigning the previously established
user/customer attitudes to the functions.
7. Compare cost to worth of functions to establish the best
opportunities for improvement.
8. Assess functions for performance / schedule considerations.
9. Select functions for continued analysis
10. Refine study scope
• Note : Function Model is a graphical depiction of functions’ relationships.
51

B. Value Study:
3. Creative Phase (Speculation Phase ‫)مرحلة التأمل‬:
• Objectives:
Develop a large quantity of ideas for performing each function
selected
l t d for
f study.
t d
• Steps:
1. No judgment or discussion occurs during this activity.
2. Quality of each idea will be developed in the next phase
3. There are two keys to successful speculation:
I Develop
I. D l ways to t perform
f th functions,
the f ti nott to
t design
d i a product
d t
or service
II. Creativity is a mental process in which past experience is
combined and recombined to form new combinations.
4. The guiding principle is that judgment/ evaluation is suspended. Free
fl off thoughts
flow th ht and
d ideas
id iti i ‫بدون نقد‬
( ith t criticism
(without ‫ ) د ن‬is
i required.
i d
52

B. Value Study:
4. Evaluation Phase:
• Objectives:
Select, sort, and rate feasible ideas for development using the
evaluation criteria established during the pre
pre‐study
study effort
• Steps:
1. Eliminate nonsense ideas.
2. Group similar ideas by category within long‐term and short‐term
implications. Ex: electrical, mechanical, structural, special processes.
3. Have one team member agree g to each idea duringg further discussions
and evaluations. If no team member, the idea or concept is dropped.
4. List the advantages and disadvantages of each idea.
5 Rank the ideas within each category according to evaluation criteria
5.
using techniques like indexing, numerical evaluation, and consensus.
6. If competing combinations still exist, use matrix analysis.
7. Select ideas for development of value improvement.
53

B. Value Study:
5. Development Phase:
• Objectives:
Select and prepare the best alternative(s) for improving value
• Steps:
1 Begin with highest ranked alternatives,
1. alternatives develop a benefit analysis and
implementation requirements, including estimated initial costs, life
cycle costs, implementation cost, take into account risk / uncertainty.
2 Conduct performance benefit analysis.
2. analysis
3. Compile technical data package for each proposed alternative.
4. Write descriptions of original design and proposed alternative(s).
5 Include sketches of original design and proposed alternative(s).
5. alternative(s)
6. Calculate cost and performance, showing the differences between
the original design and proposed alternative(s).
7 Provide
7. P id technical
t h i l back‐up
b k d t such
data, h as info
i f sources&& calculations.
l l ti
8. Assess Schedule impact.
9. Prepare an implementation plan, including a proposed schedule.
10 Complete
10. C l t recommendations.
d ti
54
Val e Methodology
Value Methodolog Job Plan
B. Value Study:
6. Presentation Phase:
• Objectives: Obtain commitment from designer, sponsor, and other
management to proceed with implementation of recommendations. This
involves an initial oral presentation followed by a complete written report.
• The written report documents the alternatives proposed with supporting
data and confirms the implementation plan accepted by management.
management
C. Post Study:
• Objectives: Assure the implementation of approved changes
• VM team leader may track the progress of implementation
• In all cases, design professional is responsible for implementation
• Further,
F th it is
i recommended
d d that
th t financial
fi i l departments
d t t (accounting,
( ti auditing,
diti
etc.) conduct a post audit to verify to management the full benefits resulting
gy study.
from the value methodology y
55
Sec 5 : Project Management Ch25 : Contracting
Chapter 25
Contr acting For

Capital Projects
56
Definition Of Contract
• Agreement between two or more persons that is enforceable at law. ً ‫واجبة النفاذ قانونا‬
• A business agreement whereby one party agrees to perform work or services for
the other party for some consideration.
• May be written or oral depending upon business nature and the jurisdiction. ‫القضاء‬
Contract Requirements
1. Offer: ‫عرض‬
To be enforceable, there must be a clear, unequivocal ‫غير مائع او ملتبس المعنى‬offer to
perform the work or services by one party. The offer to perform must be definite,
seriously intended and communicated clearly to the other party.
2 Acceptance:
2. A t ‫الق ل‬
‫القبول‬
• Offer + Acceptance  A contract can be formed
• Acceptance must be communicated to the party making the offer.
• Counteroffers do not constitute acceptance.
• Acceptance with condition (not in original offer) is a rejection & counteroffer.
• The
Th party t receiving
i i the
th counteroffer
t ff may acceptt and d thus
th form
f a contract.
t t
57
C t
Contract
t Requirements
R i t
3. Legality of Purpose: ‫مشروعية الغرض‬
• To be enforceable,
enforceable contract work must involve legal activities.
activities Ex: A contract to
construct a laboratory to manufacture illegal drugs is unenforceable.
4. Competent
p Parties: ‫أطراف العقد مؤھلين‬
• Parties must be competent (possess legal & mental capacity to form a contract)
• Contracts with minors ‫القصر‬, insane individuals ‫المجانين‬, intoxicated persons ‫الثمل‬,
convicts ‫( المحكوم عليه بحكم‬in some states in the U.S.) and enemy aliens ‫العدو األجنبي‬
are not legally binding.
5. Consideration:
• Courts will enforce contracts only when there is consideration.
• Consideration,
Consideration under the law,
law is whatever one party demands and receives in
exchange for the work or services performed.
• Consideration for most contracts is monetary,
y, however,, it mayy be anything.
y g
58
Mistakes
i k Make
k Contract
C Defective
f i
1. Mistakes as to The Nature of The Transaction: ‫لطبيعة العملية‬
• It will
ill render
d a contract id ‫فارغ‬
t t void ‫ فا غ‬if the
th mistake
i t k was brought
b ht about
b t by
b fraud
f d byb
one of the contracting parties such as express misrepresentation ‫التحريف الواضح‬
or concealment ‫إخفاء‬
‫ إخفا‬of material facts.
facts
• Ex: If the parties agree for construction of a facility at a specific location, and it
turns out that the property is not zoned for such a facility.
facility
2. Mistakes as to The Identity of A Party: ‫ھوية أحد األطراف‬
If one party is mistaken as to the identity of the party they are contracting with,
with
then the contract is unenforceable. It is, however, incumbent upon ‫يتعين على‬
contractingg p
parties to p
perform some due diligence
g ‫االجتھاد المناسب‬
‫ب‬ ‫ ج ھ‬duringg the
contract formation stage to determine who they are dealing with.
59
Mistakes
i k Make
k Contract
C Defective
f i
3. Mutual Mistakes as to The Identity of A Subject Matter: ‫اخطاء متبادلة عن ھوية الموضوع‬
• It mustt be
b mutual
t l (made
( d by
b both
b th parties).
ti )
• Ex: Drawings for facility A may be inadvertently ‫ بدون تعمد‬substituted for those of
facility B,
B a location at which facility A cannot be constructed.
constructed
• Any contract arising under these circumstances will be unenforceable.
4. Mutual Mistakes as to The Existence of Subject Matter: ‫اخطاء متبادلة عن وجود الموضوع‬
• Ex: If two parties contract for the re‐modeling of an existing facility but,
unknown to either party, the facility is destroyed by fire, the contract is
unenforceable.
60
Mistakes
i k Don’t
’ Make
k Contract
C Defective
f i
1. Mistakes as to Value, Quality, or Price
• For this mistakes,
mistakes a contract is not rendered unenforceable.
unenforceable
• Ex: Compliance with a particular building code.
2. Mistakes as to The terms of The Contract
• Mistakes result from a failure to read the terms and conditions of the contract
or a failure to understand the meaning of the provisions of the contract.
• Ex: A party discovered that they are required to provide weekly project
schedules. Failure to understand the requirement will not excuse them from
compliance nor render the contract unenforceable.
unenforceable
Other Factors Affecting Contract Enforceability

• N t
Nature and
d type
t off contract
t t
• Jurisdiction location (applicable statutory or regulatory provisions)
61
C
Contract Parties
i
• There must be a minimum of two parties in a contractual arrangement.
• The first,
first for the purposes of this chapter,
chapter will be referred to as the owner.
owner
• Owner is the party who wants a capital project completed(plant, airport, etc.)
• Owner is the party issuing the invitation to bid (ITB) or request for proposal (RFP)
• The second party will be referred to in this chapter as the contractor.
• Contractor is the party offering to perform the work or service the owner is seeking.
• Owner may be a consortium of individual companies
• Owner may be a subsidiary or special purpose entity established by a parent
company for the purposes of accomplishing this project.
project
• Contractors may also act in consortiums, joint ventures, prime contract
arrangements
g with multiple
p subcontractors, etc.
• Contracting parties have an obligation to perform some due diligence ‫ اجتھاد مناسب‬to
determine everyone involved.
• Failure to perform some level of due diligence may put one party at risk.
62
Why
h Have Written
i Contracts
C ?
• In some cases, It’s a legal requirement of the jurisdiction in order to be enforceable.
• To
T record
d the
th conditions
diti off the
th contract,
t t commercial
i l terms
t and
d pricing
i i
arrangements, scope of work and other necessary project execution provisions.
• Contract sets forth the duties,
duties obligations,
obligations and responsibilities of the parties.
parties
• In the event of a disagreement, the parties must be able to look to a written
document to determine what is,
is and what is not,
not required of each party.
party
• If the disagreement grows into a legal dispute ‫نزاع قانوني‬, then the trier of fact (an
arbitrator ‫االمحكمم‬, judge ‫ي‬
‫ االقاضي‬or jury ‫ون‬
‫)المحلفون‬
‫ )ا‬should have a written document
framing the original agreement in order to render a decision on the dispute.
63
C t
Contract
t Contents
C t t
• Invitation to bid or request for proposal, Instructions to bidders
• Addenda issued during the bid period,
period bid or proposal,
proposal contract,
contract bonds
• General conditions, special or supplemental conditions
• Scope
p of work (p
(plans,, drawings,
g , specifications,
p , special
p provisions,, etc.))
p
• Change orders or contract modifications
• permits, environmental agreements, geotechnical reports, technical requirements
Scope Of Work
• Often referred to as the “technical requirements” of the contract.
• It should define what work is to be accomplished by which party, when, and to what
level of quality.
• Disagreement over what in/out scope is one of most frequent causes of disputes.
disputes
• Number of disputes is in inverse proportion to the amount of time spent defining,
the scope
p of work.
64
Types Of Contracts
1. Fixed‐Price/Lump‐Sum Contracts:
A. Definition:
• Scope of work is well defined, price and time are fixed, contractor is free to
select construction methods because the risk is allocated to the contractor.
• Fixed Price with Economic Adjustment: Ex: If material price changes more
than 15 % from bid price, payment will be adjusted.
• Fixed Price with Incentives: Related to time, cost savings, performance, etc.
x: Additional payment for every day the project is completed earlier.
Ex:
B. Requirements: Good scope definition, long time for bidding, minimum changes
C. Advantages:
• Final Cost are known and the selection of contractor is fairly easy
• Lowest risk and minima supervision (mostly quality / schedule)
• Contractor quickly solve his problem
D. Disadvantages:
i d
• Changes are difficult and costly  Contractor chooses cheapest solutions
• Bidding time and design time make early start not possible
• Contractor include high contingencies in price
65
Types Of Contracts
2. Fixed‐Price/Unit‐Price Contracts:
A. Definition:
• Price is fixed for each unit of work and final cost is subject to adjustment.
• It may contains a clause that if any quantity vary by +/‐ 15 % , say, then unit
price is subject to adjustment on that portion. It may also be incentivized.
B. Requirements:
• Adequate breakdown of work and adequate drawings / BOQ.
• Payment terms properly tied to measured work & partial completion of work.
• Owner‐supplied drawings and materials must arrive on time.
C. Advantages:
• Flexibility (scope and quantity can be varied).
varied)
• good design definition is not essential.
• Very suitable for competitive bidding
D. Disadvantages:
i d
• Final cost is not known since BOQ estimated on incomplete engineering.
• Staff needed to measure, control, and report on the cost / status of the work.
• Biased bidding and front end loading may not be detected.
66
Types Of Contracts
3. Cost Reimbursable Contract:
A. Definition:
• Contractor is paid for actual cost incurred in performing the work plus a profit.
• Often referred to as a cost plus fixed fee (CPFF) or time and material (T&M).
• It may be incentivized & referred to as cost plus incentive fee (CPIF) contracts.
B. Requirements:
• Competent and trustworthy contractor.
• Close quality supervision and direction by the owner.
• Detailed definition of work and payment terms.
C. Advantages:
• Early start can be made.
made  Flexibility in dealing with changes.
changes
• Owner control all work aspects.
D. Disadvantages:
• Final
i l cost is
i unknown.
k  Difficulties
iffi l i in i evaluating
l i proposals.l
• Contractor has little incentive for early completion or cost economy.
• Contractor may assign its “second division” personnel to the job.
• Owner carries most of the risks and faces the difficult decisions.
67
Types Of Contracts
4. Target Contract:
A. Definition:
• Contractor perform early work (planning and design) on reimbursable basis. basis
• At some point, contractor will prepare and negotiate with the owner, a
detailed estimate with not‐to‐exceed cost and time of performance.
• ItIt’ss also referred to as guaranteed maximum price [GMP] contracts.
• At the end of work costs are compared to target and underruns, if any, are
shared. Overruns, unless caused by owner, are assessed to the contractor.
• Similarly, y, earlyy completion
p bonuses are often p
paid to the contractor.
B. Requirements:
• Competent and trustworthy contractor.
• Quality / financial supervision by the owner.
C. Advantages:
• Early start can be made.  Flexibility in dealing with changes.
• encourages economic and speedy completion
D. Disadvantages:
• Final cost initially unknown
• No opportunity to competitively bid the targets.
• Variations
V i i are difficult
diffi l and
d costly
l once the
h target has
h been
b established
bli h d
68
Project Delivery Method

1. Design‐Bid‐Build Method:
• (Planning)  (Select Designer)  (Design)  (Bid & Award)  (Construct)
• Project is fully designed before contractor is employed.
• Owners who employ fixed price contract (LS or Unit price) choose this type to
know the cost before construction.
construction
2. Design‐Build Method:
• (Planning)  (Select Design/Build Team)  (Design Approval)  (Construct)
• Also referred to by many other names, includingas Engineering‐Procurement‐
Construction contract (EPC), fast track, flash track, or turnkey methods.
• Construction can start p prior to the completion
p of the design.
g
3. Indefinite Quantity Contract Method:
• (Select Contractor)  (Issue Work Order)  (Contractor Perform Work)
• Also referred to as Task Order Contracting,
Contracting or Job Order Contracting.
Contracting
• Utilized on repetitive work such as routine repair and maintenance projects.
• Owner and contractor establish set prices for labor, equipment, markups, etc.
• As a result, scope does not need to be fully known prior to commencing work.
69
Cont acting A
Contracting Arrangements
angements
1. Single Prime Contractor:
Owner
• g
Most often used with the design‐bid‐build.
• owner contracts with a design professional.
when design complete, owner contracts with Designer Contractor
a single contractor Sub Subcontractors

• limited extent from claims or disputes arising Consultant & Vendors
from vendors,
vendors suppliers,
suppliers and subcontractors.
subcontractors
2. Multiple Prime or Independent Prime:

• Series of contracts to several contractors.
contractors
• It allows construction more quickly.
• Risk for coordination between contractors.
• Conflicts, delays or coordination problems
between the multiple prime contractors may
b
become claims
l i tot the
th owner.
70
Cont acting A
angements
3. Design‐Build:
• j
Objectives are to shorten deliveryy time and to have a
single point of responsibility for both design & execution.
4. Agency Construction management:
• Known as project management / program management.
• Owner contracts directly with designer & contractor.
• He retains independent construction manager.
manager
• Construction manager has limited authorities.
5. Construction Manager at Risk:
• Employs construction manager as a general contractor.
• All trade contracts are issued by the construction
manager.
71
Cont acting A
angements
3. Design‐Build:
• j
Objectives are to shorten deliveryy time and to have a
single point of responsibility for both design & execution.
4. Agency Construction management:
• Known as project management / program management.
• Owner contracts directly with designer & contractor.
• He retains independent construction manager.
manager
• Construction manager has limited authorities.
5. Construction Manager at Risk:
• Employs construction manager as a general contractor.
• All trade contracts are issued by the construction
manager.
72
Contractor Prequalification
• Owner benefits when bidders are qualified and capable of successfully performing.
• Prequalified bidders can be assured that they are bidding against relatively equal
competitors understand the work and will estimate rationally.
• Unqualified bidders may be disappointed however, it saves the cost of bidding.
• An objective,
objective rational system should be established that measures the following:
• Past experience on similar projects (size, complexity, technical requirements)
• Current financial capability
• Safety ratings on past projects
• Experienced project team
Contractor’s Decision To Bid
1. Expertise
• Review of past projects. If no similar projects, some thought should be given to
whether they are truly capable of performing the work.
work
• Alternative is a joint venture, to assure sufficient expertise and to spread risk.
2. Financial Capability
Insurance/bonding requirements, Payment provisions, & cash flow scenarios.
73
Contractor s Decision To Bid

Contractor’s
3. Bonding Capacity
• Performance/payment bonds to protect owner in the event of contractor
failure to complete work or failure to pay subcontractors and vendors.
vendors
• If a contractor has bonding capacity $100M and already has $85 M in running
projects, the contractor may not be able to bid a new $50 M capital project .
4 Personnel:
4. P l
• If his own staff has sufficient experienced personnel to perform the work .
5. Equipment:
• Iff a project requires specialized
l d equipment to performf the
h work.k
6. Specialized Knowledge
• If he has requisite skills and knowledge to successfully perform the work.
7. Risk Analysis:
• Determine how project risk is allocated under the contract. Ex: A damage for
delay clause, or if no differing site condition clause in the contract
8. Workload and Other Potential Projects:
• How this contract may impact equipment, key personnel, logistics, bonding
and financial capabilities.
• What other projects are likely to be bid in the same timeframe ?
74
Key Contract Clauses

1. Audit:
• It outlines an owner’s right to perform reviews (audits) of contractor costs or
records. Such clauses outline what costs are subject to audit, when, ..etc.
2. Changes:
• It allows
ll th owner to
the t direct
di t changes
h t the
to th work.
k
• Absent a change clause, owner will not be able to make changes to the work.
• If owner to unilaterallyy ‫احادية‬
‫ي‬ ‫بصورة‬
‫ ور‬direct changes
g ((that if contractor refuses to
comply, they are in a breach of the contract).
• It may require the owner and the contractor to mutually agree on the change.
3. Contractor Responsibilities:
• It lays out, in general form, the duties, obligations and responsibilities of the
contractor in performance of the work.
work
• It assigns specific risks to the contractor
76

4. Delays:
• A risk allocation clause with respect to delays in the work.
• Excusable delay: Results in time extensions but no time related damages.
• Compensable delay: Results in both time extension & time related damages.
5
5. Differing Site Conditions or Changed Conditions:
• Another risk allocation clause, provides adjustment to the contract in the
event the contractor encounters a materially different condition at the site .
6
6. Disp te Resolution:
Dispute Resol tion
• It sets forth ‫ ينص على‬the mechanism to resolve disputes.
• Ex: Negotiation between Project managers, then project executives, followed
b 3 days
by d di ti ‫الوساطة‬,
off mediation ‫ ال اطة‬followed
f ll d by
b binding
bi di arbitration.
bit ti
7. Force Majeure:
• Delays to the work caused by unforeseeable ‫غير متوقع‬events such as civil
d d acts off war, adverse
disorder, d weather,
h fires,
f fl d strikes,
floods, k etc.
8. Governing Law—Many
• Contracts often specify which law applies to a dispute, regardless of where the
dispute is handled to consider parties from different locations.
76

9. Indemnification: ‫تعويض‬
• It requires a contractor to indemnify the owner against all loss resulting from
contractor errors, omissions ‫اھمال‬, accidents, third party property damage, etc.
10. Insurance:
• R
Requiring
i i owners and
d contractors
t t t furnish
to f i h multiple
lti l insurance
i policies
li i prior
i
to commencing work. Ex: workman’s; automobile, aircraft, , marine liability;
ggeneral liability;
y; p
personal injury;
j y; etc.
11. Late Completion Damages:
a. Actual damages: Damages that owner actually suffers when a contract is
completed late and may include loss of revenue, increased engineering,
architectural or inspection services, increased financing costs, etc.
b Liquidated damages: ‫ غرامة التأخير‬A pre‐agreed upon amount the contractor
b.
will pay the owner in the event the project is completed late due to no
excusable delay causes (due solely to the contractor’s fault). Such damages
need not be proven as actually incurred if the project is completed late.
77

12. Limitation of Liability: ‫حدود المسئولية‬
• To cap (limit) a contractor’s risk exposure from late completion damages,
performance penalties,
penalties etc.
etc Ex: Maximum liability as a % of contract value.
value
13. No Damage for Delay:
• Limiting a contractor’s recovery for delays to a time extension only, no costs.
14 Order of Precedence
14.
• Provide guidance in event of conflicting provisions. Typically, specs precede
drawings, details precede general, special precede general provisions .
15 Owner Responsibilities:
15.
• It sets forth the obligations of the project owner, including adequate project
financing, all required and necessary permits, appropriate site access, etc.
16 Payments:
16.
• It sets forth how often the contractor is to be paid, in what manner, ..etc.
17. Quantity Variations:
• InI the
th eventt as‐bid
bid quantity tit estimates
ti t vary substantially
b t ti ll (+/‐
(+/ 10 percentt or
more) many contracts (both unit price and lump sum) contain a quantity
variation clause which allows either owner or contractor to request a
redetermination
d t i ti off the th as‐bidbid unit
it price
i on affected
ff t d portions
ti off the
th work.
k
78

18. Schedules :
• Contractor scheduling requirements, including format, level of detail, submittal
requirements, frequency of updating, damages for failure to submit, time
extension analysis requirements, actions to be taken for late schedule, etc.
19 Suspension of Work:
19.
• Allows owner to suspend / stop all or some of the work, with or without cause.
20. Termination:
a. Termination for Convenience: Owner decides not to complete the project , for
their own reasons. Owner pay off the contractor in accordance with the terms.
b. Termination for Default: When a contractor is in material breach of the
contract ‫ خرق كبير للعقد‬, has been provided with a cure notice ‫ انذار لالصالح‬from
the owner outlining the material breach, and has failed to remedy the breach
in a timely manner.
manner
c. Some contracts also provide a contractor the right to terminate under certain
circumstances such as, failure to make payments, bankruptcy ‫ افالس‬of the
owner, suspension of work for more than a defined period of time, etc.
79

21. Time of the Essence/Time of Performance
• If completion time is important to an owner, they must say so in the contract.
• Absent
Ab such
h a clause,
l project
j completion
l i timei i considered
is id d unenforceable.
f bl
• This clause, typically expressed either in work or calendar days after issuance
of the notice to proceed, sets forth ‫ ينص على‬when the work must be completed
and the consequences of failure to meet these dates.
22. Warranty:
• It continues in existence for some specified period of time after project
completion, guarantees the contractor’s work after project acceptance.
• It is common to require a warranty for 1 year after project completion, during
which time,, if anyy p
portion of the p project
j fails,, the contractor is obligated
g to
return to the project and make it right or agree to some commercial
settlement of the issue.
Changes
• Owner & contractor establish formal systems to identify change as soon as it arises.
• The negotiate the full time, cost, and impact of the change as quickly as possible.
• Projects
P j t dod nott deal
d l adequately
d t l with
ith change
h as it occurs are tot endd with
ith disputes.
di t
80
Claims
• Definition:
A written demand by one of contracting parties seeking, as a matter of legal
right, payment of additional money / adjustment to time of performance, or
change to the terms of the contract.
• TTypes off claims:
l i
1. Directed Changes: Directed change from the owner requires time and/or cost.
2. Constructive Changes: Unintended change caused by owner action that
require the contractor to do more than is required by the contract and results
in additional cost or time being incurred. Ex: Owner comments on a submittal.
3 Different Site Conditions: Described as encounters with latent (hidden)
3.
physical conditions at the site differing materially from the conditions
indicated in the contract documents.
4. Suspension of Work: An owner directive to stop some or all of the work of the
project for a limited period of time.
81
Claims
• Types of claims:
5. Constructive Suspension of Work: Accidental/unintended work stoppage
caused by owner. Ex: Failure to act on a submittal concerning a piece of
equipment that affected delivery in a timely manner and delayed the project.
6. Force Majeure: Such as strikes, earthquakes, …etc.
7. Delays: Causes of delay: Owner, contractor, third‐party and concurrent delay.
8. Acceleration: Owner direct the contractor to complete earlier.
9 Constructive
9. C t ti Acceleration:
A l ti I d t t ‫مقصود‬
Inadvertent ‫غير ق د‬ ‫غ‬owner action
ti or failure
f il t act,
to t
which results in a contractor being required to complete earlier than required.
10. Termination for Convenience: Owner action to end work in whole or in part.
11. Termination for Default: End work due to a material breach of the contract.
• Claim Elements:
It’s the responsibility of claimant to proof claim elements which are:
1. Liability: Occurrence during project performance ‫الحدوث اثناء تنفيذ المشروع‬
2. Causability: What causes something which otherwise would not occur.
3. Damages: The work costs more and/or takes longer than planned.
82
Claims
• Dispute Resolution Methods:
1. Negotiation: ‫ التفاوض‬Between project teams or elevated in both the owner’s
and the contractor’s organizations. The concept is to discuss the disputed issue
face‐to face and mutually arrive at an acceptable solution.
2 Mediation: ‫ الوساطة‬A structured negotiation between the parties utilizing the
2.
services of an outside, voluntary, neutral facilitator (the mediator). The
mediator’s only power is the power of persuasion ‫ االقناع‬.
3. Arbitration: ‫التحكيم‬
‫ ال ك‬More formalized procedure by an outside organization
operating under a national/international set of rules. There may be a single
arbitrator or a p panel appointed
pp byy one of these organizations.
g Arbitrator’s
ruling is enforceable at law in a court of competent jurisdiction.
4. Litigation: ‫ المقاضاة‬A formal lawsuit ‫ دعوى قضائية‬in federal court according to
contract terms and under the rules of the jurisdiction ‫القضاء‬.
‫ القضا‬Lawsuits are time
consuming, lengthy, and very expensive. And, the outcome may rest more on
legal technicalities than on fact or circumstance. A party submitting a dispute
to litigation retains no control over process or outcome.
83
Sec 5 : Project Management Ch26 : Asset Management
Chapter 26
Strategic Asset
Management
84
Introduction
• Total Cost Management (TCM):
The sum of the practices and processes that an enterprise uses to manage the
total life‐cycle‐cost investment in its portfolio of strategic assets.
• Strategic Asset:
Physical / intellectual property that is of long‐term or ongoing value to an
enterprise. (enterprise makes significant investments in)
Ex: Industrial plants to transportation systems to software programs.
• Project System:
A subset of the strategic asset management process that includes the steps for
planning asset investments, implementing investment decisions, and then
measuring project system and asset performance
• Process Steps:
1. Performance Measurement
2 Performance
2. f Assessment
3. Planning
4. Implementation
85
A Performance Measurement
A.
• Asset owner measures the performance of (1)existing assets and operations as well
as the performance of (2)projects that have been implemented.
1 Measures
1. M f project
for j t may include:
i l d safety,f t quality,
lit cost,
t and
d schedule.
h d l
2. Measures for assets in use may include: safety, operations efficiency, and
resource consumption (e.g., materials, labor, energy, etc.)
• Existing
i i assets & ongoing
i projects
j d
demand d / return resources to owner(money).
( )
• Information about resources flow is captured in the accounting system that have
expanded to enterprise resource planning (ERP) systems.
• TCM requires that ERP implementations measure both:
1. Asset costs: (Ex: Depreciation calculations and profitability assessment)
2. Project costs: (Ex: Costs by activity to support earned value assessment).
• Unfortunately, many ERP system account for project costs as a type of asset ledger
“work‐in‐progress” holding account.
• Now, some ERP systems offer “project modules” to manage projects.
• Cost engineers and accountants need to ensure that their ERP systems address both
(1)asset and (2)project information needs.
• Asset owner evaluates the asset and p project
j system
y performance measures in
p
comparison to performance plans.
86
B Performance
B. P f A
Assessmentt
• Asset owner investigates variances between measurements and plans to determine
if they are caused by isolated events or systematic problems.
problems
• In many cases, immediate user of the asset, or the project manager identifies the
cause of the variance and fixes it through
g an immediate corrective action.
• In other cases, the problem requires further assessment.
• Owners assess the long‐term economic return or financial profit from asset
investments and project system performance.
• The enterprise’s objectives are inputs to the strategic asset management
requirements
• Benchmarking is an assessment tool that compares the enterprise’s asset and
project system performance measures to external peer enterprise measures.
measures
87
C Asset Planning
C.
• Owner identifies asset investment and project system options, defines and
evaluates them, and decides upon which option(s) to pursue.
• Every investment decision is made in consideration of strategic objectives.
• Once a decision is made, owner communicates the decision to the asset operator
and/or the project team,
team making sure that scope are clearly understood.
understood
• Larger enterprises often have centralized asset planning departments include
strategic planning, capital planning, or product planning.
• Asset planning is business‐driven (led by business managers, not technical
personnel) because of the need to keep a close eye on enterprise business
objectives
j and strategies
g at this p phase.
• Analysis is an iterative process, if an idea is still feasible after initial analysis, it is
refined and evaluated again and again until it is either discarded or selected.
• Cost engineers initiate and improve on ideas rather than just analyze them. them They
also analyze the options using risk analysis, value engineering, and economic
analysis including profitability. These practices all provide quantitative measures
upon which owner business management can base its go/no‐go decisions.
88
D. Implementation
D
• Once owner makes a decision to implement an asset or project system
improvement idea, a project team is formed to implement it.
• Project responsibility is handed off to project team manager.
• Planning focus is now on developing the technical scope and execution plans.
• At the handhand‐off
off, management conveys formal documentation of business
objectives, conceptual scope, and performance requirements to the project team.
• During implementation, project team further defines scope and execution plan.
• The project definition phase is often called the front‐end loading (FEL) phase.
• At the completion of FEL, the project has a detailed budget and schedule.
• Some systems
y call asset p
planningg “business FEL,”
, and implementation
p “project
p j FEL”.
• Potential to influence the value of an asset diminishes
as asset planning and implementation progress
89
Sec 6 : Economic Analysis Ch27 : Basic Economics
Section 6
Economic Analysis
1
Chapter 27
Basic Engineering
Economics
2
S
Symbols
b l
P Present value
Present value r Nominal annual interest rate
Nominal annual interest rate
No. of compounding periods
F Future value K
per year
A Annuity (uniform series)  Effective interest rate = (r/K)
Interest rate
G Uniform gradient amount i
(effective annual rate)
Total no. of compounding
p g
Sn Salvage value at end of year (n)
Salvage value at end of year (n) n
periods (Life of Asset)
B Benefit EOY End of Year
Minimum attractive rate of
C Cost MARR
return
3
E i l
Equivalence
• Equivalence is based on the time value of money, and the rule is that two cash
fl
flows only
l can be
b compared d at a common interest
i rate.
• Because of the time value of money, the sums of money at different times cannot
b added
be dd d up directly.
di tl
• Using equivalence calculations, cash flows can be converted to either lump‐sum

values at any point in time or a series of uniform benefits/costs.
benefits/costs
• The conversion factors are called discount factors and are readily available in either
algebraic form or in tables.
tables
• Many hand‐held calculators have been programmed with these factors in addition
to most computer spreadsheet applications.
applications
4
IInterest
t t
1. Simple Interest:
Proportional to the length of time (No compounding)
EX: Principal ‫ = رأس المال‬$1’000, i = 10%
 Interest EOY1 = $100, Interest EOY2 = $100 Total = $1’200
2. Compounding Interest:
Each payment is calculated based on total principal plus accumulated interest.
EX: Principal = $1’000, i=10%,
 Interest EOY1 = $100, New principal = $1’100
 Interest EOY2 = $110, Total = $1’210
3 Nominal Interest Rate (r):
3.
• The annual interest rate regardless of the compounding period.
• If compounding is annually, then the nominal rate can be used directly for
interest calculations ( i = r).
• If compounding is in a period less than a year, the interest rate (i) must be
calculated based on the number of compounding periods.
5
I t
Interest
t
4. Effective interest Rate ():
1. The rate given in a problem is annual rate (r) unless stated otherwise.
1 otherwise
2. Calculate the effective rate per compounding period  = r / k
3. Calculate the effective rate per year (i) where i = (1+ )K ‐ 1
EX: If interest rate = 12%, find effective rates per period and per year for annual,
semi annual, and monthly compounding
• Annual
A l compounding
di (K=1)
(K 1)
 = r/k = 12/1 = 12%
i = (1+.012)1 – 1 = 12%
• Semi‐annual compounding (K=2)
 = r/k = 12/2 = 6%
(1+0 06)2 – 1 = 12.36%
i = (1+0.06) 12 36%
• Monthly compounding (K=12)
 = r/k = 12/12 = 1%
i = (1+0.01)12 – 1 = 12.68%
6
IInterest
t t
5. Continuous compounding:
If compounding duration becomes infinitely short, the number of compounding
periods per year becomes infinity and referred to as continuous compounding.
Interest rate i = er – 1
If r = 12%, (2 71828)0.12 – 1 = 12.75
12% then i = er – 1 = (2.71828) 12 75 %
6. Minimum Attractive Rate of Return (MARR):
The interest rate used in feasibility study. It represents the minimum attractive
rate of return at which owner is willing to invest.
It involves selection highest of :
1. Cost of borrowed money from banks, insurance companies, .. etc.
2. Cost of capital or the composite value for the capital structure of the firm
3. Opportunity cost or the rate‐of‐return of the best project that is rejected
E Cost
Ex: C off borrowed
b d money (loan
(l A 9%) investment
A=9%), i opportunity
i (project
( j B=16%)
B 16%)
and cost of capital = 20%.
Solution: The MARR should be equal to or greater than the highest of the three
values. Choose 20%
7
Di
Discount
t Factors
F t
Factors Equations
Tabulated Factors
E Factors
Ex: F @6%
8
Measure Of Equivalent
M E i l t Worth W th
1. Present Worth:
EX: If the (MARR) is 6 %
should the investment in the table be made?
Solution:
• Method 1
Calculate the present value
of the net profit for each year
• Method 2
P = P0 + P1 + P2 Where
P0 = ‐$38,000
P1 = ‐G (P/G,i,n)=‐$1,000 (P/G, 6 %, 4)=‐$1,000 (4.945)
= ‐$4,945
$4 945
P2 = A (P/A,i,n)=$11,000 (P/A, 6 %, 4)=$11,000 (3.465) =$38,115
P = ‐$38,000 ‐ $4,945 + $38,115 = ‐$4,830
9
2. Future Worth:
Solution:
• Method 1
Calculate the future value
of the net profit for each year
• Method 2
F = F0 + F1 + F2 Where
F0 = ‐P (F/P, i, n)= ‐ $38,000 (F/P, 6 %, 4)
= ‐$38,000 (1.262) = ‐$47,956
F1 = ‐G
G (P/G,
(P/G i,i n)) (F/P,
(F/P i,n)
i ) = ‐$1,000
$1 000 (P/G,
(P/G 6 %,
% 4) (F/P,
(F/P 6%,
6% 4)
= ‐$1,000 (4.945) (1.262) = ‐$6,241
F2 = A (F/A,i,n) = $11,000 (F/A, 6 %t, 4) = $11,000 (4.375) = $48,125
F = ‐$47,956 ‐ $6,241 + $48,125 = ‐$6,072
10
3. Annual Worth:
Solution:
• Method 1
A = A0 + A1 + A2 Where
A0 = P (AA/P, i, n) = ‐$38,000 (A/P, 6 %, 4)
= ‐ $38,000
$38 000 (.2886)
( 2886) = ‐$10
$10,967
967
A1 = G (A/G, i,n) = ‐$1,000 (A/G, 6 %, 4) = ‐$1,000 (1.427) = ‐$1,427
A2 = $11,000
A = ‐$10,967
$10 967 ‐ $1,427
$1 427 + $11,000
$11 000 = ‐$1,394
$1 394
• Method 2
Convert P or F as determined previously to annuity
1. (Using P): P = ‐ $4,830
A = P (A/P, i, n) = ‐$4,830 (A/P, 6%, 4) = ‐$4,830 (.2886) = ‐$1,394
2. (Using F): F = ‐ $6,075
A = F (A/F, i, n) = ‐$6,075 (A/F, 6 percent, 4) = ‐$6,075 (.2286) = ‐$1,389
11
Sec 6 : Economic Analysis Ch28 : Applied Economics
Chapter 28
Applied Engineering
Economics
12
C h Flow
Cash Fl A l i
Analysis
1. Equivalent Worth:
Explained in previous chapter
2. Rate of Return (ROR):
The interest rate at which benefits are equivalent
q to costs
EX: A $10,000 investment returned $2,342 per year over a 5‐year period.
What was the rate of return on this investment?
SSolution:
l i
$2,342 (P/A, i, 5) = $10,000
((P/A,
/ , i,, 5)) = $10,000
, / $2,342
, = 4.27
From 5 % table, (P/A, i, 5) = 4.379
From 6 % table, (P/A, i, 5) = 4.212
 i = 5.5
55%
13
M lti l Alternatives
Multiple Alt ti
1. Compute net present / annual / future worth of each alternative at “MARR”
2 select the alternative having the highest net present (or annual or future) worth.
2. worth
• EX:
For the following alternatives, which one
would be chosen, where MARR = 5%
• Solution:
PWA = ‐ $2,500
$2 500 + $3,100
$3 100 (P/F,
(P/F 5 %,
% 5)
= ‐ $2,500 + $3,100 (0.7835) = ‐$71
PWB = ‐ $2,700 + $650 (P/A, 5 %, 5) = ‐$2,700 + $650 (4.329) = $114
PWC = ‐ $3,000 + $350 (P/G, 5 %, 5) = ‐$3,000 + $350 (8.237) = ‐$117
 Choose Alternative B
Analysis Period:
In the event that alternatives do not have equal lives, select an analysis period
equal to tthee least
equa east co
common
o multiple
utpeo of tthee aalternative
te at e lives.
es.
14
I
Incremental
t l Analysis
A l i
• Procedure:
1.
1 Identify all alternatives. Be sure to consider the do nothing option
Identify all alternatives Be sure to consider the do nothing option
2. Compute ROR for each alternative and discard alternative with ROR < MARR
3. Arrange remaining alternatives in ascending order of initial cost
4. calculate ROR on the difference between the first two (lowest initial cost)
5. If ΔROR ≥ MARR, retain the higher cost alternative, otherwise retain the lower.
6. Compare the alternative (from previous step) to the next higher alternative
6 Compare the alternative (from previous step) to the next higher alternative
7. Repeat until all alternatives have been evaluated .
• Used Methods:
Used Methods:
1. Rate of Return Method
2. Benefit Cost Ratio
15
IIncremental
t l Analysis
A l i
1. Rate of Return Method:
• Example:
Given the following alternatives
MARR = 5 % , which one should be chosen?
• Solution:
• Compute the Rate‐Of‐Return for each alternative.
For alternative A : $2,500 = $3,191 (P/F, i, 5)  from table, i = 5%
For alternative B : $2,738
, / , i,, 5))  from table,, i = 6 %.
= $650 ((P/A,
For alternative C : $3,000 = $350 (P/G, i, 5)  from table, i < 5% (Rejected)
• Arrange in ascending order of initial cost
• Calculate rate of return for (B
(B‐A)
A)
$650 (P/A, i, 4) = $238 + $2,540 (P/F, i, 5)
Try the MARR (5 %)
Benefits = $2,305,
$2 305 Cost = $2,220
$2 220
Since benefits > costs,
ROR of the increment > 5%
 Accept
A t the
th increment
i t andd retain
t i the
th higher
hi h costt alternative,
lt ti B. B
16
IIncremental
t l Analysis
A l i
2. Benefit‐Cost Ratio Method:
• Example:
Given the following alternatives
MARR = 5 % , which one should be chosen?
• Solution:
• Compute the Benefit‐Cost Ratio for each alternative.
For alternative A: B/C = $3,191 (P/F, 5%, 5)/$2,500 = 1, acceptable
For alternative B: B/C/ = $650 ((P/A,
/ , 5%,, 5)/$2,738
)/ , = 1.03,, acceptable
p
For alternative C: B/C = $350 (P/G, 5%, 5)/$3,000 = 0.96, rejected
• Arrange in ascending order of initial cost
• Calculate Benefit‐Cost
Benefit Cost Ratio for (B‐A)
(B A)
B/C B‐A = [$650 (P/A, 5%, 4)] / [$238 + $2,541 (P/F, 5%, 5)] = 1.03
B/C > 1
Accept the increment and retain the higher cost alternative, B.
17
Sec 7 : Statistics & Probability Ch29 : Statistics & Probability
Section 7
Statistics, Probability,
and Risk
1
C
Chapter 29
Statistics And Probability
2
IIntroduction
t d ti
• Population:
The collection of all elements of interest, usually denoted by N
Population can not be examined entirely (so large / destructive / expensive ).
We draw inferences ‫ استدالل‬based upon a part of the population (called a sample).
• Sample:
A subset of data randomly selected from a population. the size of a sample is
usually denoted by n.
• Descriptive Statistics :
Summarization and description of data
• Inferential statistics :
Estimation of population based on sample
• Qualitative Data:
Can be categorized or summarized
Ex: U.S. members : 3,509 ‐ Canada members : 480 ‐ Asia members : 158
• Quantitative Data:
It can be described (1)graphically or (2)numerically.
3
Graphical Methods
1. Stem & Leaf :
• Data will first be divided into smaller
equal intervals (classes) from 5 to 20
• There may be open
open‐ended
ended intervals at
the start or at the end.
• In this example, the stem is formed by
the “tens” digit and the leaves are the
“ones” digit.
2. Histogram:
4
Numerical
i l Methods
h d
A. Measure of Location (Central Tendency)
1. Mean :
Sum of measurements divided by number of measurements.
For population,
population mean (μ) = sum of all numbers in population/N
For sample, mean (x) = sum of all numbers in sample/n
The mean of this example is 2,445/50 = 48.9 hours
2. Median:
The middle number when data are arranged in ascending or descending order.
If n is even, the median is the average of the two middle measurements.
The median of this example is 40 hours.
• If mean = median
di  Symmetry
S t
• If mean > median  Rightward Skewness
• If mean > median  Lefttward Skewness
5
N
Numerical
i l Methods
M th d
A. Measure of Location (Central Tendency)
3. Mode:
• Measurement that occurs most often (40 hours).
• If there two modes,, the data set has a bimodal distribution.
• If multi‐modal, the mode(s) is no longer a viable.
• For classes, the modal class is the class containing the largest frequency. The
simplest
l way to define
f theh mode willll beb the
h midpoint off the
h modall class.
l
Comparison
• Mean is the most commonly used. used However,
However it is affected by extreme
values. For example, the high incomes of a few employees
• Median is better to describe large data sets. It is often used in reporting
salaries, ages, sale prices, and test scores.
• Mode is frequently applied in marketing. For example, the modal men’s
shirt neck size and sleeve length,
length shoe size,
size etc.
etc
6
N
Numerical
i l Methods
M th d
B. Measure of Dispersion
1. Range:
The difference between the largest and the smallest values of the data set.
The range of this example is 160 ‐ 20 = 140 hours .
It only uses the two extreme values and ignores the rest of the data set.
2. Variance (σ2) or (s2):
Average of squared deviations from the mean
For population : σ2 = (x ‐ μ)2 / N
or : σ2 = ( x2 – N μ2) / N
For sample : s2 =  (x – x’)2 / (n‐1)
or : s2 = (x2 – n x’2) / (n‐1)
The variance of this example is: s2 = 162,825 – 50(48.9)2 / (50
(50‐1)
1) = 882.49
3. Standard Deviation (σ) or (s):
The positive square root of the variance.
For this example s = 882.49
 = 29.71 hours
7
Numerical
i l Methods
h d
C. Measurement of Relative Location
1 Percentile:
1.
• The number with p percent of measurements fall below it and (100‐p)
percent fall above it when data arranged in ascending or descending order.
• The first (lower) quartile is the 25th percentile
• The second (middle) quartile is the 50th percentile which is the median
• The third (upper) quartile: the 75th percentile
• For our example, the 80th percentile is 60 hours.
2. ZZ‐Score:
Score:
• The number of standard deviations a point is above or below the mean of a
set of data.
• The population z‐score for a measurement x is z = (x ‐ μ)/σ
• The sample z‐score for a measurement x is z = (x – x’)/s
8
Probability
b bili Distribution
i ib i
• Two coins are tossed , find the probability of heads, mean, variance, and
standard deviation.
deviation
Probable values are 0, 1, 2
Mean μ =  x . P(x) = 0 (1/4) + 1 (2/4) + 2 (1/4) = 1
Variance σ2 = (x ‐ μ)2 . P(x) = (0‐1)2 (1/4) + (1‐1)2 (2/4) + (2‐1)2 (1/4) = 0.5
Standard Deviation σ = 0.5 = 0.707
• Example:
Insurance company sell a 10‐year $100,000 life insurance coverage at an
annual premium of $240. Tables show that the probability of death during
the
h next year for
f customer’s ’ is
i 0.001.
0 001 What
Wh is i the
h company expected d gain?
i ?
• Solution
Mean μ =  x . P(x)
= 240 (0.999) + (240‐100’000) (0.001) = $140
For each policy sold, There’s a risk of either gaining $240 or losing $99,760.
The company would gain on the average net $140 per policy written. written
9
Random
d Variable
i bl
• Definition:
A variable that its numerical value is determined by the outcome of a random
experiment.
• Types:
1. Discrete Random Variables:
Which can be only countable number
Ex: No. of sales per day, No. of failed tests yesterday
2. Continuous Random Variables:
Which assume any value within an interval
Ex: Sample weight or volume
10
Random
d Variable
i bl
1. Discrete Random variable: (Ex: Binomial distribution )
• Binomial distribution is one of several discrete probability distributions.
distributions
• Many experiments (situations) have only two possible alternatives, such as
yes/no, pass/fail, or acceptable/ defective.
• Consider a series of experiments which have the following properties:
1. The experiment is performed n times under identical conditions.
2. Each experiment
p result can be for example,p , success ((S)) and failure ((F).
)
3. Probability of success (p) is the same for each experiment.
4. Probability of a failure (q) can be calculated as q = 1 – p .
5 Each
5. E h experiment
i t is
i independent
i d d t off allll the
th others.
th
6. The binomial random variable X is the number of successes in n
experiments.
7. Probability of x successes in n experiments:
Where the combination formula for n choose x is :
11
Random
d Variable
i bl
1. Discrete Random variable: (Ex: Binomial distribution )
• Example:
For fuses lots, each containing 10,000 fuses. QC randomly sample 25 fuses
from each lot and accept lot if number of defective fuses, x, is less than 2.
What is the probability of accepting a lot (x=0,1) if the actual defectives in
the lot is 10% and 1%
• Solution:
1. Case (1) defective = 10 %
P = 10% , q = 90% , n = 25 , x = 0 or 1 ( > 1 defective will be rejected)
P b bilit off accepting
Probability ti P(x≤1)
P( ≤1) = Pr(0)
P (0) + Pr(1)
P (1)
= (0.1)0 (0.9)25 + (0.1)1 (0.9)24 = 0.27121
2. Case (2) defective = 1 %
P = 1% , q = 99% , n = 25 , x = 0 or 1
Probability of accepting P(x≤1) = Pr(0) + Pr(1)
= (0 01)0 (0.99)
(0.01) (0 99)25 + (0 01)1 (0.99)
(0.01) (0 99)24 = 0.97424
0 97424
12
Random
d Variable
i bl
2. Continuous Random variable: (Ex: Normal distribution )
• Bell shaped curve that is symmetrical about the mean and the area of each
side is 50% of total area.
• In this curve, mean = mode = median
• Total area under curve = 100 %
• Area under curve between two points (a & b)
represents
p the p
probabilityy of ((a < x < b))
• Z is the number of standard deviations
that the value x is above or below the mean
Z (X μ)/σ
Z=(X‐ )/
• The standard normal distribution table gives the area under curve for a
certain value of z
13
Random
d Variable
i bl
2. Continuous Random variable: (Ex: Normal distribution )
• Example:
Filling coffee into 6‐ounce jars varies with standard deviation= 0.04 ounce.
If jar contains less than 6 ounces, it is considered unacceptable.
Determine the mean fill so that only 1 % of the jars will be unacceptable.
• Solution:
Probabilityy of unacceptable
p = Pr ((x < 6)) = 1%
From table, for area = 1%, Z = – 2.326
Z = (X – μ) / σ
– 2.326
2 326 = (6 – μ)) / 0.04
0 04
μ = 6.093
14
Sec 7 : Statistics & Probability Ch30 : Basic Concepts
Chapter 30
Basic Concepts in
Descriptive Statistics
15
Frequency Distributions
i ib i
• Data about similar forming techniques is collected from 20 projects as in table.
• Data were organized from higher productivity to lower.

• Frequency
q y of each rate have been counted and recorded.
• Cumulative frequency & percent calculated from bottom to top
to show the failure status (from top to bottom will show success).
• E For
Ex: F the th ratet 0.055,
0 055 30% off the
th resultlt failed
f il d to
t fulfill
f lfill this
thi rate.
t
i.e. for six of the twenty projects, the rate was not achieved.
16
i ib i
• Measure of Central Tendency:
1 Mean: Arithmetic average = 0.05375
1. 0 05375
2. Mode: Value occurs most often = 0.050
3. Median: Middle point when records are arranged in order
Mdn = L + [(N/2‐cfb)/fw]i = .0475 + [(20/2 ‐ 4)/7].005 = .05179
Where:
Mdn : Median
L : Lower limit (0.045 + 0.05) / 2 = 0.0475
N : Number of records
cfb
fb : Cumulative
C l ti frequency
f b l
below
fw : Frequency of cases
i : Interval duration (0.05 – 0.045) = 0.005
17
i ib i
• Measure of variability:
1 Range: Difference between the lowest and highest records=0.065‐0.04
1. records=0 065‐0 04 = 0.25
0 25
2. Quartile Deviation: QD = (Q3 – Q1) / 2
Where:
Q1 = L + [(N/4 ‐ cfb)/fw]i = 0.0475 + [(20/4 ‐ 4)7] x 0.005 = .0482
Q3 = L + [(.75N ‐ cfb)/fw]i = 0.0575 + [(0.75 x 20 ‐ 14)2]x 0.005 = .060
QD = (Q
Q (Q3 – QQ1)) / 2 = ((0.0482 + 0.060)) / 2 = .0118
QD is more accurate than range but less accurate than standard deviation
3. Standard Deviation:
s = [ fX2 ‐ ( fX)2/ N ] / (N ‐ 1)
= [.226875 ‐ (1.075)2/20](20‐1) = 0.0088996
18
Sec 7 : Statistics & Probability Ch31 : Risk Management
Chapter 31
Risk Management
19
Risk Management Steps

1. Risk Planning:
• Establish approach, form, contents, .. etc.
• Determine risk management scope including strategic, internal, external risks.
• Establish criteria for risk identification, assessment, analysis, and mitigation.
• Identify responsibilities for mitigation and follow up.
2. Risk Identification:
• Identify both negative and positive risks.
• Assemble list of risks.
• classify items into groups (Ex: Internal and External Risks).
1. Internal Risks: Company or project team can control (Ex: design error).
2. External Risks: Company/team cannot control (Ex: market price changes).
3. Risk Assessment:
• Assess probability of occurrence and probable impact (cost / delay).
• Threshold must be establish to determine limit at which impact are significant.
significant
• Ex: Criteria High Medium Low
Probability > 75 % 25 : 75 % < 25 %
Impact (cost) > 1% of project cost 0.1 : 1 % of project cost < 0.1% of project cost
20
Risk Management Steps

4. Risk Analysis:
• Review probabilities and impact
• Refine data where scope are defined
• Select items for mitigation
• A common method is occurrence / impact matrix
5. Risk Mitigation:
1. Avoidance: (Ex: project relocation or cancelation)
2. Prevention: Reduce risk factors so it doesn’t occur or even reduce its severityy
3. Reduction: Reduce occurrence
4. Transfer: Transfer risks to another organization (usually by contract)
5. Hedging ‫تحوط‬:
‫ و‬: Ex: Using future contracts where price fluctuations are expected
6. Insurance: Insurance company indemnifies ‫ يعوض‬against losses
• Hedging and Insurance techniques are parts of Transfer technique.
6 Follow Up:
6.
• Risk mgmt is effective if monitored, controlled, and adjusted as required.
• Time to establish risk plan is wasted if the work ignored without mitigation.
• Monitoring
M it i should
h ld be b partt off a regular
l cycle
l off project
j t activities.
ti iti
21
Quantitative Risk Analysis Techniques

1. Simulation:
• Development of a model for project uncertainties in terms of cost and time.
• Effect is usually expressed as a curve of the outcomes vs. probability.
• A common practice is using Monte Carlo technique.
2. Sensitivity Analysis:
• Also referred to as “What if Analysis”
y
3. Decision Tree Analysis:

• Values
AC = $4,000 (0.5) + $2,000 (0.6) = $3,200
AD = $4,000
$4 000 (0.5)
(0 5) + $1,600
$1 600 (0.4)
(0 4) = $2,640
$2 640
BE = $5,000 (0.5) + $1,200 (0.8) = $3,460
BF = $5,000 (0.5) + $1,000 (0.2) = $2,700
• The
Th lowest
l t path
th is
i AD
22

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Section 1 : Cost Chapter 1 : Cost Elements

1. Estimating: Predicts the quantity and cost of resources needed to

Materials Handling Principles

Materials Handling Decisions

Materials Purchase and Management

• Materials Traceability & Vendor Surveillance:

Materials Purchase and Management

EOQ = 2 x 20’000 x 200 / 8 = 1000 units

Plant Material Management

• Definition: Materials that are not incorporated into product or project.

• Waste Materials: ((1)Original

• Surplus materials: This is usually due to (1)Excessive order, (2)Change in material

Developing Labor Rates

PTO: Considering yearly (5 days sick, 10 vacation, 10 holidays)

Developing Labor Rates

Total Benefits = 3.07 + 6.93 = $10/hr

Developing Labor Rates

• Fully Loaded Rate (Billing Rate):

Weighted average Rates (Crew Composition)

Normal time: 40 hrs x 2 weeks x $23.83 x 9 workers = $17’158

Factors Affecting Productivity

Product, Project, and Process Development (1/2)

• Computer‐Aided Design/Engineering CAD/CAE: Utilization of computerized work

• Computer‐Aided Manufacturing CAM: CAD/CAE ported directly into CAM software.

Product, Project, and Process Development (2/2)

• Prototypes: Developed prior to large‐scale production to (1)test designs and also to

Product, Project, and Process Design (1/2)

• Process Selection: Relates to production methods, continuous and discrete.

Product, Project, and Process Design (2/2)

• Manufacturability: Slight modifications in a design that promote ease of product

• Constructability: The Counterpart of manufacturability applied to constructed

Engineering Production / Construction (1/2)

• Facility Layout: Decisions as to arrangement, including equipment location, labor

Engineering Production / Construction (2/2)

• Quantitative Analysis In Facility Layout.

• Reengineering: Redesign of process to achieve improvements such as cost, quality,

Equipment Value Categories

1. Replacement Cost New

Equipment Value Categories

Equipment Value Categories

Equipment Value Categories

Market Value Example:

Orderly Liquidation Sale = Purchase price at auction = $5,500

Equipment Value Categories

Cost Adjustments : To normalize data, the following considerations should be addressed

Condition Terms and Definitions Example:

Equipment Value Categories

1. Standard Industrial Classification (SIC) code where data is stored in broad

4. Manufacturer’s name, such as Caterpillar construction equipments, Boeing

Equipment Residual Values:

Residual Value Curve:

5. New Tax Law / High

Variables That Affect Residual Value (1/4)

Example: A transaction valued at $2.1 million. Subsequent investigation found that

Variables That Affect Residual Value (2/4)

2. Maintenance: It can affect the useful life of equipment. In calculating a residual

Variables That Affect Residual Value (3/4)

7. Changes in Technology: An analysis of technological changes occurring over the past

Variables That Affect Residual Value (4/4)