Project Cost Control
4.2 Cost Types
For the owner, there are different types of costs for construction projects, including the cost of assets and the capital cost, which include the cost of the initial composition of the facilities of the project. That cost is described as follows:
• Cost of land and property registration procedures
• Planning and feasibility studies
• Engineering activities and studies
• Construction materials, equipment, and supervision on site
• Insurance and taxes during the project
• The cost of the owner’s office
• The cost of other equipment that is not used in construction, such as private cars to transport owner engineers
• Inspections and tests
The cost of maintenance and operation in each year of the life of the project includes the following:
• Leasing land
• Employment and labor wage
• Materials required for maintenance, repairs, and annual renewal
• Taxes and insurance
• Other costs of the owner
The cost values of each of the preceding items vary according to the type, size, and location of the project and the structure of the organization presence for other considerations.
We should not forget that the owner’s goal is to reduce the total cost of the project to be consistent with the objective of the investments.
The highest value in the project cost is the cost of construction in the case of real estate and building structure. But, in the case of industrial building and the petrochemical industry, the cost of civil and structure work is almost small relative to other mechanical and electrical equipment.
For example, the cost of a concrete foundation for a power turbine may cost 30,000 USD and the power turbine may cost more than five million USD. The other example is for nuclear plant or power generation projects.
When we calculate the cost from the viewpoint of the owner, it is very important to calculate the cost of operations and maintenance in each year of the life of the project for each of the alternatives available in the design and the cost of the life cycle of the project as a whole.
In calculating the estimated cost of the project to develop its own budget, we must point out the limits of deviation and the cost of risk or an unex- pected event during the execution of the project. The percentage of risk has to be calculated for each item or in proportion of the total final cost. The calculation of the cost of risks depends on past experience and anticipated problems during the implementation of the project and increased costs of emergency often occur as a result of each of the following:
• Change in design
• Difference in the schedule and an increase in the time of the project
• Administrative changes such as increased salaries
• Special circumstances at the site, such as some unexpected obstacles or defects in the soil in some locations
• Special permits to work during the construction 4.2.1 Cost Estimate
A cost estimate is a prediction of the likely cost of the resources that will be required to complete all of the work of the project.
Cost estimating is done throughout the project. In the beginning of the project, proof of concept estimates must be done to allow the project to go on. An ‘‘order of magnitude’’ estimate is performed at this stage of the project. Order of magnitude estimates can have an accuracy of 50 to 100 percent. As the project progresses, more accurate estimates are required.
From company to company, the specified range of values for a given esti- mate may vary as well as the name that is used to describe it. For example, conceptual estimates are those that have an accuracy of 30 to 50 percent.
Preliminary estimates are those that have an accuracy of 20 to 30 percent.
Definitive estimates are those that have an accuracy of 15 to 20 percent.
Finally, the control estimate of ten to fifteen percent is done. Early in the project, there is much uncertainty about what work is actually to be done in the project. There is no point in expending the effort to make a more accurate estimate than the accuracy needed at the particular stage that the project is in.
Types of estimates are described by Michel N.W. (2005). Several types of estimates are in common use. Depending on the accuracy required for the estimate and the cost and effort that can be expended, there are several choices.
4.2.1.1 Top-Down Estimates
Top-down estimates are used to estimate cost early in the project when information about the project is very limited. The term top-down comes from the idea that the estimate is made at the top level of the project. That is, the project itself is estimated with one single estimate. The advantage of this type of estimate is that it requires little effort and time to produce. The disadvantage is that the accuracy of the estimate is not high as it would be with a more detailed effort.
4.2.1.2 Bottom-Up Estimates
Bottom-up estimates are used when the project baselines are required or a control type of estimate is needed. These types of estimates are called ‘‘bot- tom-up’’ because they begin by estimating the details of the project and then summarizing the details into summary levels. The WBS can be used for this ‘‘roll up.’’ The advantage of this kind of estimate is that it will pro- duce accurate results. The accuracy of the bottom-up estimate depends on the level of detail that is considered. Statistically, convergence takes place as more and more detail is added. The disadvantage of this type of estimate is that the cost of doing detailed estimating is higher and the time to produce the estimate is considerably longer.
4.2.1.3 Analogous Estimates
Analogous estimates are a form of top-down estimates. This process uses the actual cost of previously completed projects to predict the cost of the
project that is being estimated. Thus, there is an analogy between one proj- ect and another. If the project being used in the analogy and the project being estimated are very similar, the estimates could be quite accurate. If the projects are not very similar, then the estimates might not be very accu- rate at all. For example, a new technology in enhanced oil recovery is like a low salinity project, multiphase pumps, or subsea projects. The modules to be designed are very similar to modules that were used on another project, but they require more lines of code. The difficulty of the project is quite similar to the previous project. If the new project is 30 percent larger than the previous project, the analogy might predict a project cost 30 percent greater than that of the previous project.
4.2.1.4 Parametric Estimates
Parametric estimates are similar to analogous estimates in that they are also top-down estimates. Their inherent accuracy is no better or worse than analogous estimates.
The process of parametric estimating is accomplished by finding a parameter of the project being estimated that changes proportionately with project cost. Mathematically, a model is built based on one or more param- eters. When the values of the parameters are entered into the model, the cost of the project results can be obtained.
Resource cost rates must be known for most types of estimates. This is the amount that things cost per unit. For example, gasoline has a unit cost of $1.95 per gallon, labor of a certain type has a cost of $200.00 per hour, and concrete has a cost of $100.00 per cubic meter. With these figures known, adjustments in the parameter will allow revising of the estimate.
If there is a close relationship between the parameters and cost and if the parameters are easy to quantify, the accuracy can be improved. If there are historical projects that are both more costly and less costly than the project being estimated and the parametric relationship is true for both of those historical projects, the estimating accuracy and the reliability of the parameter for this project will be better.
Multiple parameter estimates can be produced as well. In multiple parameter estimates, various weights are given to each parameter to allow for the calculation of cost by several parameters simultaneously.
For example, houses cost 150 dollars per square foot, software develop- ment cost is two dollars per line of code produced, an office building costs 260 dollars per square foot plus 55 dollars per cubic foot plus 2,000 dollars per acre of land, and so on.
The cost of the construction and installation is the biggest part of the total cost of the project and it is the largest share of the cost of the project.
This cost is under control by the project manager and the project construc- tion manager on site. The accuracy of calculating the estimated cost of con- struction is different from one stage to another. The more accurate the data is, the more accurate the calculation of the cost is.
The estimated cost of construction is calculated from more than one point of view, as from the owner perspective the cost estimated will be calculated based on the design and construction drawings. On the other Table 4.1 Cost estimate procedure.
What The function of the estimate is to forecast a cost for a specified scope of work to allow an accurate budget to be assembled for the business.
Cost estimating in its definition is uncertain and the different classes of estimates give improved levels of accuracy as more project scope detail is defined.
A work breakdown structure (WBS) should be built from which estimates, schedules, and cost control can be derived.
Formal documents are produced for all levels of estimate.
Appraise: Order of Magnitude (OOM) accuracy range of +/ 50%
Select: Class 3 accuracy range of +/ 30%
Define: Class 2 accuracy range of +/ 15–20%
Class 1 is +/ 10% (rarely used).
Why This is done to indicate to the business the predicted cost of the project, so that the project is financially viable and can be established.
How The project leader and the asset development engineer develop a WBS from the SOR. This is then discussed with the project team to allow the relevant discipline engineers to have input in the estimate. An OOM estimate will normally be factored with estimates based on the known high-level scope and equipment definition. Class 3 esti- mates will be factored based on a developed scope and equipment definition, including indirect costs. Class 2 estimates will be built up from the developed scope of the project and will be fit for purpose to give the accuracy range.
When All projects must have a Class 2 at the end of Define for business sanc- tion. An estimate will be produced at the end of each development stage. The accuracy of the estimate will reflect that particular stage.
Who The project leader is responsible and is supported by the estima- tor, discipline engineers, SPA, construction engineers, and the commissioning engineer.
side, the contractor will calculate the cost of construction in order to enter the tender and for this the contractor performs his calculation to qualify him to win the bidding. The third way is the control cost esti- mate, which is used by the owner to control costs, which will be dis- cussed later.
The initial cost estimate is made after the preliminary studies of the proj- ect with an initial identification of industrial facilities, such as the number of pumps, air pumps, and compressors and the size of pipes and lines in diameter, and so on.
The cost is determined at this stage on the basis of previous experience of similar projects. For example, calculating the cost is as follows:
The calculation of the concrete price is calculated after determining the type of concrete. The cost of reinforced concrete can be calculated by obtaining the following information:
• Quantity of steel per concrete cubic meter and the price of steel per ton
• Quantity of cement in concrete mix and the price of cement ton
Example:
Calculate the cost for a project consisting of 3 pumps with 1200 HP, with pipeline 10 inches in diameter and a length of 15 miles.
The pump cost estimate = 700 $/HP.
Pump cost = 3 (700) (1200) =2.52 M$.
Cost estimate for onshore pipeline = 14000 $/inch/mile.
Pipeline cost = 14000 (10) (15) =2.1 M$.
Total cost = 2.52 M$+2.1 M$ = 4.73 M$.
Example:
Calculate the cost of one floor for a building with an area of 300 m2 from reinforced concrete.
In this case, assume slab thickness is 250 mm for a slab beam and column as a practical estimate.
Approximate concrete quantity for slab and floor = 300 × 0.25=100 m3. Assume the cost of concrete = 200 $/m3.
The concrete cost for one floor = $20,000.
• Quantity of coarse and fine aggregate and the price per cubic meter
• For ready mix, the price of each cubic meter by knowing the concrete grade, which is always 30–25 N/mm2 in petro- chemical projects
• Cost of shattering, bending bars, pouring, and curing per cubic meter of concrete
For ready mix concrete, obtain the following information:
• Quantity of steel in the meter cube of concrete and the price of a ton of steel
• The price of concrete from the nearest ready mix location to the site and the concrete pump
• The cost of wooden form, which is usually a special strong form to the pump concrete
• The cost of steel fabrication
• The cost of the pouring process and curing
Note that in calculating the reinforced concrete cost estimate, the main item is the quantity of steel in concrete and it is different according to the Calculate the approximate price for one meter cubed of reinforced con- crete prepared onsite, noting that the approximate quantity of coarse aggregate is 0.8 m3 and fine aggregate is 0.4 m3 and this value is required to provide characteristic cube strength 25 N/mm2:
Steel cost = $1000/ton Cement cost = $80/ton Coarse aggregate cost = $5/m3 Sand cost = $1/m3
Steel quantity = 0.1 t/m3 as shown in Table (4.2) Steel cost = 0.1 × 1000 = $100
Cement cost = 7/20 × 80 = $28
Coarse aggregate cost = 0.8 × 5 = $4
Sand cost = 0.4 × 1 = $1
Material total cost = $133/m3 (as a material only) Cost of fabrication of wood and steel and pouring = $30/m3
Total cost = $163/m3
structure element. The following table is a guide for estimating the quantity of the steel reinforcement.
The data in Table (4.2) is considered a guideline and depends on the concrete characteristics, strength, and the member design, so it is an indi- cator for the quantity of steel reinforcement.
The percentage cost of the domestic and administration building will be a guide as shown in Table (4.3).
4.2.2 Steel Structure Cost Estimate
The cost estimate for the steel structure is significantly different than the calculation of the estimated cost of the reinforced concrete structure, as it needs a special design for the larger differences in the construction phase.
The most important part of the design and construction of the steel structure is the connection and it is known that the connection cost is about 50 percent of the whole building.
The following table defines the cost percentage for each part in a steel structure project.
Table 4.2 Guide for estimating steel quantity in reinforced concrete.
Approximate Quantity of steel reinforcement in concrete, Kg/m3
Structure element type
90–100 Slab with beam
250 Flat slab
150–180 Hollow block slab
90–120 Columns
100–120 Isolated footing
200–300 Raft foundation
Table 4.3 Percentage of reinforced concrete building cost Percentage from the total cost, % Activity item
3 Design and site supervision
36 Concrete works
6 Masonry work
10 Sanitary and plumbing
45 Internal and external finishing
Design 13%
Materials 38%
Fabrication 27%
Coating 10%
Erection 12%
From Figure (4.1), one can determine the proportions of the cost of main elements for constructing a steel structure. Every item has a percent- age of the total cost.
We note from the above table that the connections, either through the use of welds or bolts, have the largest share in the process of preparing detailed drawings, where the most important and most dangerous phase is the accuracy of the details of the connection.
Table 4.4 Percentage of steel structure costs.
Item
Percentage from the total cost, %
Percentage of cost for connection, %
Percentage of the connection
cost, %
Preliminary design 2 33 0.7
Final design 3 55 1.7
Detail drawings 8 77 6.2
Total design cost 13 8.6
Material 38 40 15.2
Fabrication 27 63 17
Painting 10 35 3.5
Erection 12 45 5.4
Total percentage 100 49.7
Figure 4.1 Percentage of cost for steel structures.
Erection 12%
Design 13%
Material Fabrication 38%
27%
Painting 10%
There is no doubt, also, that they are important in the cost of manu- facturing and the installation phase, as the connection cost percentage is 63 percent and 45 percent, respectively. The connections are of great importance in the calculation of costs, as well as in the preparation of schedules.
4.2.3 Detailed Cost
The detailed cost estimate will be determined by the detailed construction drawings of the project and project specification.
The engineering office calculates the estimated cost through the expe- rience of the contractors who carry out the construction of those proj- ects with a cost estimate of others directly to the contractor as well as the expected profit. This depends on the engineering expertise of the office, in addition to the fact that the owner should add his cost for supervision.
The contractor will calculate the cost for the tender to be included in the bidding as the tendering cost estimate calculation is performed by the contractor and will be presented to the owner in the form of a bid or offer or as a start to negotiate the prices. Often, the contractor estimates the price with high accuracy in order to ensure that the work carried is out by the financial terms and he or she may use every method of calculating the estimated cost for construction.
Most of the construction companies have a procedure and scientific way to calculate the cost of construction of the project and to develop appropri- ate pricing of the tender.
There are some works and the facilities or equipment that will be deliv- ered by the subcontractors. The subcontractors put the price of work and then the general contractor studies the offers from the subcontractors and chooses the best price. After that, the general contractor will add his per- centage of indirect cost and profit.
It is included in the cost of supervision, non-profit, and expenses, in addition to the direct cost of others directly and it is conducted by subcontractors’ offers, expense amounts, and construction procedures and steps.
4.2.4 Cost Estimate to Project Control
The cost estimate will be calculated to follow up the project during execu- tion. The cost estimate can be obtained from the following information:
• Approximate budget
• The budget value after contract and before construction
• Estimated cost during construction
Both the owner and the contractor must have a baseline by which to control costs during project execution. The calculation of the detailed cost estimates is often used to determine an estimate of construction where the balance is sufficient to identify the elements of the entire project as a whole.
The contractor price, which was submitted by the tender with the time schedule, is determined by the estimated budget and is used to control costs during the implementation of the project.
The estimated cost of the budget will be updated periodically during the execution of the project to follow-up the cash flows along the project time period in an appropriate manner.