Cost Engineering

Cost Engineering

Contents

TOC o “1-3” h z u Abstract PAGEREF _Toc380621165 h 1Methods of estimating cost PAGEREF _Toc380621166 h 3Grass root or bottom up approach PAGEREF _Toc380621167 h 4Parametric estimation PAGEREF _Toc380621168 h 6Competitive supplier proposals. PAGEREF _Toc380621169 h 6Benefits of cost engineering PAGEREF _Toc380621170 h 7Invitations to tender preparations PAGEREF _Toc380621171 h 7Participation in tender evaluation boards PAGEREF _Toc380621172 h 8Participation in concurrent design facility activities PAGEREF _Toc380621173 h 9

AbstractAny individual at a position that encompasses managing programs and projects that are involving and generally, complex in nature will appreciate the importance of managing the financial aspects and costs for the project. The managers are tasked with an enormous responsibility with conflicting requirements in the job. Projects need to be completed at the minimum cost possible. However, the result must be of high quality, within the required time and the result must be as specified by the contractors. Costs are often the most source of concern in the management of projects. Aspects of cost are portrayed through the cycle of the project from the very beginning. Selection of technical options and in establishing budgets and submission of price proposals and preparation of contract talks and negotiations all involve costs. It also encompasses checking and analyzing the effects of changing existing designs. With these questions in mind, managers of the projects have the problem to asses’ costs and minimize risks and impact of not acting within the budget. At the same time the managers have to balance the technical aspects and related costs. Cost engineering comes into picture attempting to develop systematically tools and models that can be applied within different circumstances to predict the likely costs and risk and general assessment progress and costs. These paper looks into cost engineering giving an introduction of the topic. The paper also looks into the different methods of cost engineering and the benefits of cost engineering. It also checks on the developments on cost engineering especially by the space organizations with enormous future projects.

Introduction

Cost engineering as a discipline encompasses a wide array of cost aspects of program management and cost engineering. However, cost engineering is particular with cost analysis or cost management schedule or planning and risk assessment and importantly design to cost analysis. Such tasks are fundamental to the success of the project and although different groups in the organizations carry them out, they are undertaken all through the projects life cycle by professionals. One key objective of cost engineering is arriving at accurate, reasonable cost estimates and avoiding schedule mishaps and cost overruns. Cost engineers do this by utilizing the different techniques and methods available with considerations to circumstances and nature of the project. Cost models and cost tools together with databases available are expeditiously applied professionally with expatriate judgment to arrive at best result for a project in terms of cost. Some of the models developed in cost engineering have shown great capabilities. For example, European aerospace working group that deals with cost engineering has developed a cost engineering capability improvement model (CECIM). The model identifies twenty domains and over one hundred and twenty processes that can fall within the wide scope of cost engineering. However, cost engineering goes way beyond estimating costs since the capabilities of cost engineering are applicable in giving support to the objective of achieving cost effective results. Cost engineering offers a solution to project managers to have cost information in place when making critical design choices so that decisions will be made in knowledge of the risks associated with the decision and the returns too.

The discipline of cost engineering allows for costs of a project to be estimated and determined either as a whole or according to the stage of the project. Management of costs in respect to projects is important to ensure success of the project in question.

Methods of estimating costMany methods exist in the process of estimating cost in project management. Each of the methods has its own merits and demerits if chosen as the method in a project. In determining the method to use in the analysis of costs, the engineer or the program management team has to consider some factors. Such factors include the type of activities that the project entails and information available on the cost being assessed. Availability of information on an activity means that reference can be made on different stages of the project that reduces risk and time spent on preparing the estimates.These factors determine the type of costs to be assessed and their nature. Another important factor for consideration is the stage of the project in which estimates are being prepared. The unique customer requirements are also considered in choosing the type of cost estimation method to be partaken especially specifications in regards to the presentations of the said costs. However, not only one method in cost engineering is applied but also one or more methods that act as sanity check for the method being used. This is to verity that the method of choice is cost reducing effective, accurate, and valid and was the best option to go for in the case or scenario in question. Commonly used approaches in estimation of cost include;

Vendor bid analysis

This method of estimation applies in the initial phase of a project. The project is first selected and the question of cost engineering comes in raising the required funds ensuring agreement with the vendors. When vendors cost engineers provide services or products recommended issuance of request for proposal. This describes the service or products and work provided by the vendor and the standards of quality required. The request for proposal is sent to potential vendors with the capability to perform this work. The project management team or the cost engineer reviews the replies from the vendors and using a set criterion according to professional standards or clients unique specifications picks the correct vendor. Cost engineers also consider the vendor whose cost estimation of the project is near the estimation calculated during the selection period.

Grass root or bottom up approachIn this approach,cost engineers make estimations with details at relatively lower levels breakdown of the work structure. Normally the estimates are done at task level. Each task at a particular stage of the project are analyzed and estimated. The method requires a good pool of information about the activity and extensive knowledge of the activity in question. Reasonable levels of the activities definition are also required for this process to be fruitful and meaningful. This approach has great relation to planning, scheduling and allocation of resources.

Due to the nature of this approach, the method is time consuming. Gathering data for each stage and activity is an enormous task and requires a lot of time. In the case of tendering actions, the approach requires a follow up by binders for the purpose of presenting detailed cost information. Apart from high effort involvement and time consumption this method poses, another disadvantage is in relation to accuracy. Since the method as said involves estimation of cost at each level, there is a high possibility of over estimation of the costs thus reducing accuracy.

The rule of the thumb approach

The application of this approach is specific and limited to specific activities. It is often applied in cases of rough and rapid sizing of activities particular cost wise. The method requires sound and expatriate judgment while carrying out the procedures for estimating cost in this method. A high level of familiarity is also required in this approach. In this approach, three levels of activities are identified and have a substantial difference in some calculations. A sample case in housing project or any project that involves designing would have.

High-level estimates- these estimates are simply those performed prior to any design work. The method is also commonly known as planning or programming level estimate.

Mid-level estimates- these estimates are normally performed as design work continues

Low-level estimates- these are estimates performed during the construction period.

Each of this levels differ slightly in the calculations to get the estimation of costs .The method is not very complicated but fast availability of cost approximation can sometimes be sufficiently accurate under certain circumstances.

Analogy

Analogy method is commonly applied in the field of cost engineering. It relies on historical costs of similar projects. It involves great referencing on past information as it ascertains the cost of similar previous projects. The cost of a new proposed item or activity is estimated in respect to a similar activity carried out in the past. The accuracy of the estimates depends on the accuracy of the available data. However, very few projects are similar so most estimates have to be adjusted upwards or downwards to cater for the difference. The process of selecting projects is similar and the adjustment needed is left to the judgment of the estimating professional. In this method, trend in the field of cost engineering and changes in the economy that affect or have a bearing on the direction of costs are highly considered.

Parametric estimationThis method of estimating cost involves activities common to many projects and variable costs. An example would be if a construction company was approached with a proposal to build an office, the enquiries would be such as the size of the office. From such a scenario size comes out as a parameter. Also, location is a parameter that can be used to estimate the cost of a project. Parameters in cost engineering are the measurable factor usable in an equation to do calculation of results.

The estimator knows the current costs per parameter in the market and thus can estimate the cost of completing a project. Other parameters that are used in cost engineering in a construction scenario would be the quality of material and finishes. The cost estimates are determined by multiplying the measured parameters of the project by cost per unit of to give parametric estimates. Any organization may develop its own parametric models from the analysis of the data it deals with. Parametric models are also available on commercial basis. Such models fairly increase the ease and speed with which costs are estimated and at a little cost.

Competitive supplier proposals.This method is applicable in cases with the intention of subcontracting proposals submitted on competitive basis. This is likely to be the reliable estimates comparing with the other methods. However, the customers have the right to give estimates on the products and not only relying the estimates from the suppliers.

The simplicity and presentation by cost engineering processes of methods and models that make it easier to estimate costs for projects has been of much importance in today’s projects cost estimates. Although there are no specialists and professional who really venture full time into cost engineering as a profession, it has transformed the process of cost estimation. However, there are cost-engineering groups such as eurospace working group on cost engineering to help in maintaining requirement levels and creating awareness of new tools together with new techniques to be used in cost engineering. The benefits of cost engineering to organizations vary depending on the nature of project in question and on the level of application of cost engineering. However, some benefits are common across the board and do include;

Benefits of cost engineeringProgram preparation

Planning is an essential ingredient to the success of a business and by extension the success of a project. In project management, the managers need proposals with numbers that can be used for decision-making process. Cost engineering presents the opportunity to create proposals with full financial elements for the programme to the programme boards. Thus, cost engineering enables one to come up with preliminary cost values even before no inputs have been supplied. An appropriate example would be cost engineering by NASA for future science missions into space.

Invitations to tender preparationsCost engineering presents a standard form of applying for a tender by potential contractors. These standardization by the process of cost engineering makes it easy to offer tenders and acquire the cheapest producers or suppliers in the market. Placing tenders in a competitive way ensures that the project results are of high quality and at the same minimizing cost. Cost engineering also assist project managers and investors in determining the best and appropriate projects to undertake that will minimize costs but at the same time giving back much higher returns.

Participation in tender evaluation boardsThe procurement process involves cost engineering through its systematic processes by tender evaluation boards or simply the cost panel board. The first task by the board after receiving industrial proposals is to interpret the cost stated in the financial proposals. The best understanding of the proposed prices for bids is interpreting them using the cost engineering processes. A cost analysis is prepared in addition to the cost engineering processes to support the estimation of the cost proposed. These processes allow the team short list bidders. The cost engineering department also closely works together with the cost audit departments while determining the acceptability of overheads and rates of payment for the proposed project.

General support to projects

For the better part of the early phases of a project, cost engineering has the ability to define and animate costs design exercises in cooperation with the design team and the contractor. Through cost engineering, it is also possible for the organization to carry out internal and independent cost estimating exercise done by the members of the project team. This is beneficial for the organization since it combines tools of cost engineering and its tools, experience and knowledge of the particular job. This may be used in the decision making as facts to support the decisions on costs that the project management decides to take. Thus by providing useful information at almost all stages of the project, cost engineering offers support to the project throughout its lifecycle.

Participation in reviews

Sometimes need arises to retrace the steps in a project and determine the way forward that is suitable for the success of a project. Cost engineering is invited in this process of redesigning a project. It applies in areas that involve cost estimation in the redesigning where cost implications means a lot to the track of the project. The process involves independent analysis and assessment of the concepts proposed by the contractor.

Participation in concurrent design facility activitiesThis is someway the most fulfilling role of cost engineering as it is proactive giving the cost engineer an opportunity to make real contribution towards getting a cost effective solution.

With such benefits, cost engineering offers the best platform to estimate costs of proposed projects. Cost engineering is commonly used by space organizations with great future projects. Bodies specializing in cost engineering have made great efforts in research and are working on improving cost estimation for projects. As seen, reference in this paper has mainly been on the eurospace working group on cost engineering (ESA). Other space bodies have used the most common models by ESA. The group is in constant communication with NASA cost engineering group under an agreement made between the two bodies to cooperate in the development of models and cost engineering techniques suitable in the changing trends and applicable over a vast array of projects. For example, cost engineering in ESA is a department by itself with huge capabilities. The organization has a centralized cost-engineeringdepartment that ensures research and continued development on cost engineering. This centralization ensures unified and controlled collection of data, systematic analysis of costs for all activities in line with a standard format. It also assists in the development of methodologies and techniques of cost estimation. The developed methodologies and models are then applied in other projects other than in space organizations.

Cost engineering is a vast process that involves the most important aspect of a project. That is estimation of cost. The estimation of cost determines the level of success of the project in that correct estimation means correct budgeting and this means that at no time will project stalls because of shortage of funds. It is also an objective of the customers to minimize cost but with best results, thus cost engineering comes into picture to facilitate the implementation of a project. Cost engineering is a continuous process that involves different stages completed by different groups in an organization but the result is a presentation of the estimated costs of a project that are synchronized depending on the method applied. Cost engineering is yet to be developed to suit small organizations, as it is mainly applicable in large organizations. However, there is effort as seen from space organizations that specialize in large volume projects to develop models that are applicable in all organizations. The technique of and process entails an expeditious process and presents options to choose from in determining the costs for a project. Thus, a method allows little margins of accuracy and is applicable over a large number of projects.