Chapter 1 Introduction To Cost Engineering

Construction Management Chair
COST ENGINEERING (COTM 5202)

Chapter 1
Fundamental Principles of Cost Engineering
Geremew T.
Tuesday, July 27, 2021
Outline
1. Fundamental Principles of Cost Engineering
 Introduction
 Definitions and Terminology for Cost
Engineers
 Cost Engineering Traits
 Functions of Cost Engineering in Construction
 Considerations in Costing
2
AAU-EiABC Cost Engineering, Lecture notes By Geremew T.
1. Introduction
1. 1 Cost Engineering
 Cost engineering is concerned with problems of cost estimation,
cost control, and business planning and management science,
including problems of project management, planning, scheduling,
and profitability analysis of engineering projects and processes.
 It needs understanding of
 Construction Technology
 Quantity surveying including understanding of contract
documents and forms of contract
 Management Theory and technique: pre contract planning,
tendering policy and the organization of resources
 Construction economics
AAU-EiABC Cost Engineering, Lecture notes By Geremew T. 3

1. Introduction
 The broad array of cost engineering topics represent the
intersection of the fields of project management, business
management, and engineering.
 Cost Engineering recognizes and focuses on the relationships
between the physical and cost dimensions of whatever is
being “engineered.”

1. Introduction
1.2 Cost Engineers
 Cost Engineer: is a qualified professional dedicated to TCM over the
life cycle of a project, facility or manufacturing operation.
 Cost Engineers are responsible for carefully managing and
maintaining the integrity of all project capitalizable, and related
non-capitalizable, cost data.
 A Cost Engineer determines how much money, resources, and time
a project will require prior to its launch.
 Cost Engineers may have different titles such as: cost estimator,
quantity surveyor, parametric analyst, strategic planner,
planner/scheduler, value engineer, cost/schedule engineer, claims
consultant, project manager, or project control lead.

1. Introduction
Required skills and Knowledge to a Cost Engineer
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AAU-EiABC Cost Engineering, Lecture notes By Geremew T. Tuesday, July 27, 2021
Construction Project Life Cycle
Cost estimating techniques and accuracy vary along life cycle
Conceptual/ Design/ Execution/

Definition/ Development Implementation Closing
Feasibility
Cost date/information
Process of the project
AAU-EiABC Cost Engineering, Lecture notes By Geremew T. Tuesday, July 27, 2021 7
Cost Estimation
 Cost Estimating is the process of determining quantities and
predicting or forecasting, within a defined scope, the costs
required to construct and equip a facility.
 Cost Estimates are performed at a certain point in time,
based on information available at the time with given
resources and time constraints.
 Estimates are based on:
 Previously recorded data (historical data)
 The estimators own past experience.
 Previous experience of others.
 Hunches (Intuition).
There are many costs associated with construction projects
Land acquisition, including assembly, holding and

improvement
Planning and feasibility studies
Architectural and engineering design
Construction, including materials, equipment and labor
Field supervision of construction
Construction financing including overhead costs
Insurance and taxes during construction
Owner's general office overhead
Equipment and furnishings not included in construction
Inspection and testing
Subsequent Operation and Maintenance Costs
Land rent, if applicable

Operating staff
Labor and material for maintenance and repairs
Periodic renovations
Insurance and taxes
Financing costs
Utilities
Owner's other expenses
Building Costs, Non Building Costs, & Life cycle costs
2. Definition and Terminology to Cost Engineers
 Construction Cost
 Valued consumption of goods /material/ and performance /labor work/ of
different kind and amount for the purpose of the production.
 Depreciation/ Depletion Costs
 Costs of goods/equipment/ or plant distributed for the whole useful life to
compensate its deterioration to the work.
 Interest Value/ Cost of capital
 Value of goods foregone by not using resources at their best allocation.
Opportunity cost.
 All-in Material Rate
 A rate which includes the cost of material delivered to site, waste, unloading,
handling, storage and preparing for use.
 All-in Labor Rate
 A compounded rate which includes payment to operatives and the costs
which arise directly from the employment of labor.
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AAU-EiABC Cost Engineering, Lecture notes By Geremew T.
 Direct costs, which include the direct cost of materials,

labor as well as equipment; and
 Indirect costs, which include but not limited to head
office and site overhead costs.
 General Overhead Costs: The cost of administering a
company & providing off-site services.
 Site Overhead Costs: The cost of administering a
project and providing general plant, site staff, facilities
and site based services and other items not included in
all-in rates.

 Mark-up Cost
 The sum added to an estimate in respect of the general
overhead costs including profit and risk.
 Production Cost
 Costs representing the sum of direct costs (all-in costs) and
site overhead costs.
 Costs required for production of the works on site.
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AAU-EiABC Cost Engineering, Lecture notes By Geremew T. Tuesday, July 27, 2021
Total Cost = Fixed Cost +Variable Cost
b
i
r
TC=FC+VC
r
FC
Output
 Fixed cost is a short-run concept.
 All costs are variable in the long run.
Cost Categories
i. Fixed Cost,
Do not vary with respect to output (over the
period being considered)
ii. Variable Cost,
Vary with respect to output
b b
i i
r r
r
r VC
FC
0
Output/ Output/
volume volume
3. Cost Engineering Traits
 Cost Engineering shares common traits of the following:
 Conflicting Issues of quality, size, performance and cost
o As projects develop, there is continual competition
among issues of quality, size, performance and cost.
o Owners want to have the biggest facility with the best
finishes and systems that will perform over time with least
possible amount of money. With these criteria, it is likely
that conflicts are bound to arise.
 Cost Engineering combines both science and art:
o Cost estimates are a product of information supplied by the
designer, the owner & the suppliers.
o Experienced Cost Engineers use much judgment in interpreting and
configuring this information.
 Cost Engineering does not offer guarantees of costs:
Used properly, however, can be important tool in
bringing a project under or at budget.
 The costs developed during design and even at the
bidding stage are almost never the final and complete
costs of the project.
 Costing can only be as accurate as the information upon
which it is based:
o Cost accuracy depends on document
many factors:
completeness, data base accuracy, the skill and judgment of
the cost engineer.
 Cost estimate accuracy increases as the design becomes more
precisely defined:
o A normal feature of the design process is that earlier stages of
design are less precise than later stages.
o Cost information provided at schematic and preliminary
design will by nature be less accurate than the ones provided
at design developments.
 Cost estimate is based on previous estimates:
o A good, accurate estimate does not stand alone.
o It is the product of lessons learned from previous
estimates.
o Costing requires standard computing methodology &
procedures:
o As the design proceeds, the level of details increases.
o Costing as a consequence becomes more complex
reflecting the many different factors that go into each unit
of work.
4. Functions of Cost Engineering in Construction
 Arranging finance, administrative approval & fund
allotment
 Guide decision making among alternatives
 Provides guidelines to the designer (on material, size
 Prepare engineering estimate
 Negotiation tool between contracting parties
 Help in fixing completion periods
 To justify investment : Cost benefit analysis
 To invite tenders
 For Valuation purposes
5. Considerations in Costing
 Project price is affected by
i. Size of the project,
ii. Quality of the project,
iii. Location of the project,
iv. Construction time, and
v. Other general market conditions.

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Construction Management Chair

COST ENGINEERING (COTM 5202)

AAU-EiABC Cost Engineering, Lecture notes By Geremew T. 3

AAU-EiABC Cost Engineering, Lecture notes By Geremew T. 4

AAU-EiABC Cost Engineering, Lecture notes By Geremew T. 5

Conceptual/ Design/ Execution/

Process of the project

Land acquisition, including assembly, holding and

Land rent, if applicable

Tuesday, July 27, 2021 12

 Direct costs, which include the direct cost of materials,

AAU-EiABC Cost Engineering, Lecture notes By Geremew T. 13

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