By Cost Engineering

www.costengineering.eu
 07:30 – Arrival

07:45 – Introduction & TCM

08:00 – AACE International Certification

08:15 – Introduction to Cost Engineering

10:00 – Role of the Cost Engineer

10:15 – Essence of Total Cost Management (TCM) Solutions

12:15 – End

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 Arrival

Introduction & TCM

AACE International Certification

Introduction to Cost Engineering

Role of the Cost Engineer

Essence of Total Cost Management (TCM) Solutions

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•

•
•

•
•
•

•
•
•
Expertise
• Operating in Capex, Opex and Turn Arounds & Maintenance Projects
• Estimate Preparation, Review & Validation throughout project life cycle
• Cost Management / Project Control
• Organizational Development
• Risk & Escalation Analysis
Cost Data Development
• Industry Standards & Custom Database Development
• Historical Project Database Development
Education
• Approved AACE International Education Provider (AEP)
Professional Services
Cleopatra Enterprise
• Cost Estimating and Cost Management software for Cost Engineers, by Cost
Engineers

www.costengineering.eu
• Bulk storage
• Mining & Minerals
• Construction Industry (Civil)
• EPC(M)
• Food and Nutrition
• Government
• Offshore & Marine
• Shipbuilding
• Oil & Gas industry
• Heavy industry
• Pharmaceutical industry
• Petro-/chemical industry
• Power & Energy

www.costengineering.eu
 “…the effective application of professional and
technical expertise to plan and control resources,
AACE International’s Constitution

costs, profitability and risks. Simply stated, it is

a systematic approach to managing
cost throughout the life cycle of any enterprise,
program, facility, project, product, or service.
This is accomplished through the application of
cost engineering and cost management
principles, proven methodologies and the latest
technology in support of the management
process.”

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 “It costs time”
“It costs resources”
“ It costs money”

EVERYTHING
invested in assets and projects is a
COST
That is why it is called
TOTAL COST Management
(TCM)
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For Business, TCM is An Integrated Recipe for Managing Portfolios,
Programs, and Projects in Alignment with Business Strategy!

Better
Control

9
 M
CCC CCE PSP EVP…

Skills and Knowledge (S&K)

TC
Recommended Practices (RPs)
Professional Practice Guides (PPGs)
Cost Engineer’s Notebook

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 Presentation Outline

TCM Benefits

Understanding TCM

Applying TCM

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 Top-to-Bottom
Business Benefits
• Profitable Asset Portfolios
– Makes sure your resources go where they’ll get the best
• ROI (Return On Investment)
• IRR (Internal Rate of Return)
• RONA (Return on Net Assets)

• Integrated/Aligned Programs
– Makes sure your projects are all integrated, aligned and
coordinated
• Controlled Projects
– Makes sure each project gives business the results that were
planned for

…and, makes sure everything is

aligned with Business Strategy!
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Return on Assets is largely driven by practices used
before projects begin
• With TCM, owners understand and manage the
costs of their asset base over the entire asset life
cycle
Successful Projects are required if the planned return
is to be achieved
• With TCM, owners and contractors control the
costs of their projects over the entire project life
cycle

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 Presentation Outline

TCM Benefits

Understanding TCM

Applying TCM

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Plan-Do-Check-Assess (PDCA)
PLAN
(plan activities)

ASSESS
DO
(evaluate PDCA
(perform
measures, act Cycle activities)
upon variances)

CHECK
(measure
performance
of activities)

Based on the time-tested Deming or Shewhart cycle.

In essence, TCM is a quality management
15 process.
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 Continuous Improvement
PLAN
(plan activities)
Every TCM process
employs feedback and
ASSESS
improvement!
DO
(evaluate PDCA
(perform
measures, act
upon variances)
Cycle activities) Integrated

CHECK
Every TCM process has
(measure
performance
P,D,C & A steps that are
of activities)
All linked back to
business strategy!
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17 www.costengineering.eu
 Presentation Outline

TCM Benefits

Understanding TCM

Applying TCM

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Use it as a guide for process development or re-
engineering
• A “go-by” that can be modified to suit each company's’
processes, phasing, org., lexicon, etc.
• Can be applied in parts, but take care that the
resulting process is integrated
Use it as a business reference

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 Start

Introduction

AACE International Certifications

Introduction to Cost Engineering

Role of the Cost Engineer

Essence of Total Cost Management (TCM) Solutions

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 Day 1: The role of the Cost Engineer
Day 2: Basics of Cost Estimating
Day 3: Introduction to Statistics, Economics & Finance
Day 4: Basics of Planning & Cost Control
Day 5: Introduction to Project Management
Day 6: Other Cost Engineering Related Topics
Day 7: Other Cost Engineering Related Topics & Practical Case
Day 8: Continuation Practical Case by Professional
Day 9: Preparation Exam
Day 10: Recap of basic statistics and economics, Advanced
Statistics, Economics and Finance (optional for CCP)
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 1) AACE International, Certified Cost Technician, Primer, First Edition

2) AACE International Education Board, Skills & Knowledge of Cost Engineering,

5th Edition Revised

3) AACE International, Total Cost Management Framework, TCM Framework

4) AACE International Recommended Practice, 11R-88, Required Skills and

Knowledge of a Cost Engineer

5) AACE International Recommended Practice, 10S-90, Cost Engineering

Terminology
6) AACE International Recommended Practice, 34R-05, Basis of Estimate

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 Structure of AACEI courses
Certification
Approved Education Provider (AEP)
Type of courses

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 AEP:
Approved Education Provider

What does it offer:

A provider approval system whose standards ensure quality
continuing education programming
Continuous quality improvement through course review and on-
going support from AACE staff
Ability to award AACE Professional Development Hours (PDHS)
Course promotion and organizational recognition on AACE
Internationals website

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 Education: Function overview
(According AACEI)

CCP:
Certified Cost Professional
(formerly known as CCC/CCE)
(also recognized by ICEC)

EVP: PSP: CFCC: CEP: CST: DRMP:

Earned Planning & Certified Certified Certified Decision and Risk
Value Scheduling Forensic Claims Estimating Scheduling Management
Professional Professional Consultant Professional Technician Professional

CCT:
Certified Cost Technician

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 Requirements:
4 Full years of experience in a cost/schedule related field, of which up to 4 years may be
substituted by a college/university.
Submit application and fees (done by Cost Engineering Consultancy)
Pass the exam (3 hours exam, 70% must be achieved)

Exam structure:
100 multiple choice questions on Supporting skills and Knowledge (open book)
Allowing each candidate to bring the AACE International Certified Cost Technician Primer and the S&K of Cost
Engineering textbooks with them to testing center
Downloaded reference books should be printed and bound in a notebook; no loose paper, iPads, Kindles, etc.
will be permitted for resource materials.
Candidates are also permitted to bring any style of calculator, including programmable calculators, to use
during the exam
Once the exam is launched there is no break (however, the candidate may take a bio
break if needed, but the timer will continue to advance).
Study Materials:
1) Skills and Knowledge of Cost Engineering, 5th edition Revised
2) AACE International Certified Cost Technician Primer
3) The main questions in the CCT exam are about definitions
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 Requirements:
8 Full years of professional experience, of which up to 4 years may be substituted
by a college/university.
Submit Technical paper (2500 words)
Submit application and fees (done by Cost Engineering Consultancy)
Pass the exam (5 hours exam, 70% must be achieved on both parts)
Exam structure:
The exam is delivered through computer based testing (CBT)
Part 1 is 120 continuous simple and complex multiple choice questions (closed
book), BUT onscreen formula sheet is accessible during the exam
Basic Cost Engineering Skills & Knowledge, Economic Analysis, Project Management, and Cost
Estimating and Control
Part 2 Technical paper
The topic should be something with which you are already familiar, such as a project you have done
at work or something in which you have acquired a great deal of expertise in your professional
career.
The chosen topic is not as important as your ability to communicate through your paper.
Be sure to follow the recommendations described in the Certification Paper Requirements (How to
Write a Technical Paper) guide

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 Start

Introduction

AACE International Certification

Introduction to Cost Engineering

Role of the Cost Engineer

Essence of Total Cost Management (TCM) Solutions

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 AACE International defines Cost Engineering as:
“That area of engineering practice where engineering
judgment and experience are utilized in the
application of scientific principles and techniques to
the problems of cost estimating, cost control and
profitability”.

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 Applying methods and techniques for:
Estimating
Planning
Cost Control / Cost Management
Contracting / Tendering
Quantity Survey
Risk Assessment
Value Engineering

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 The Letter Scale
What is the price of this
letter scale?

New price € 50,-

Case
• What is the function of this letter scale?
• Design a new one for half the price!

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 Solution

Estimated value:
+/- € 0,20

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 As long there is money involved in the
world of supply and demand, at least that
long the question will be asked:

‘ How much does it cost

and what is my ROI?

’
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 Cost Estimate:
• A cost estimate is the prediction of the probable
costs of a project, of a given and documented
scope, to be completed at a defined location and
point of time in the future.

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 Cost Estimate
• Involves assumptions and uncertainty
• and therefore some level of error
• Involves probabilities
• and therefore ranges of costs
• Involves a given scope
• contingency covers variability within the defined
scope - not changes in scope

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 What’s in a name?

Name of the estimating types:

Scouting Estimate / Conceptual Estimate
Target Estimate / Approximate Estimate
Order of Magnitude Estimate
Budget Estimate / Check Estimate
Always ask:
What is the purpose of this estimate?
What should be the basis?
What should be the accuracy?
What………..?
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 OPEX CAPEX
Operational Expenditure Capital Expenditure
(Maintenance costs) (Investments costs)

Such as: Such as:

Operators Design costs
Inspection Purchase costs
Maintenance Equipment & Materials
Repairs Fabrication
Modifications Installation
Materials Commissioning
Start-up
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 An estimate has no value if one does not know
the basis for the data, the ‘estimating basis’.

Basis of Estimate:
Used estimating method
Description of the battery limits
Scope description & Design package
Price level and currency with exchange rates
Location
What is NOT included!

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 To maintain order it is necessary to divide costs into categories e.g.:
• Material vs. labour vs. subcontracts
• Direct costs vs. indirect costs vs. home office costs
The control structure should be established as early as possible in
the project
The process of the project’s control structure is an on-going
process requiring updates
Large projects will often use:
• Work breakdown structures (WBS)
• Resource breakdown structures (RBS)

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 Cost elements are divided in three different cost categories, the basic
resources, to provide insight in what makes up cost:

Material: The physical composition of the asset.

Labour: The work needed to complete the activity or asset.
Other: Resources needed to support the activity and/or asset. For
example the facilities needed to produce an activity or asset, which
would include the tooling, electricity, taxes, and maintenance,
necessary to keep the facility available for use.

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 Further structuring the resources is important in order to understand
how they influence the total cost and how they can be controlled:

Direct Costs: Resources that are expended solely to complete the

activity or asset.
Indirect Costs: Resources that need to be expended to support the
activity or asset but that are also associated with other activities and
assets.
Fixed Costs: Cost elements that must be provided independent of
the volume or production that they support.
Variable Costs: Cost elements that must be provided and are
dependent on the volume production that they support.

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 Another of way of classifying costs is using a work breakdown
structure (WBS) (to group cost elements)
The WBS is generally a required project management tool
on most contracts
WBS provides a framework for planning and controlling
the resources needed to perform the technical objectives
WBS facilitates a summary of project data regarding the
cost and schedule performance.

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 ‘
Discrete part or product manufacturing refers to the
production of separate, individual products, whereas
continuous manufacturing is concerned with large units
to be futher processed, such as a roll of sheet steel, or

’
units in fluid form with no distinct shape.

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 Ratio of costs between two similar facilities of different capacities equals the
ratio of the capacities multiplied by an exponent:

$B CapB e
=( )
$A CapA

Rewrite to:
CapB e
$B= $A ( )
CapA

Where:
$B = Cost facility being estimated
$A = Known cost similar facility
CapB = Capacity facility being estimated
CapA = Capacity similar facility
e = Exponent or proration factor

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 ‘
Sometimes called Top-Down estimate is based on
limited Project scope – uses rules of thumb or
parametric models or Historical data bases to provide

’
relevant cost data – to develop cost per square foot /
m2 for a building or cost for a similar piece of
equipment.

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‘ Parametric estimating entails the analysis of cost,
programmatic and technical data to identify cost drivers
and develop cost models. The approach essentially
correlates cost and manpower information with
parameters describing the item to be costed. This
process results in sets of formulae known as “Cost
Estimation Relationships”(CERS), which are applied to
produce cost outputs for different elements of an

’
estimate.

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 ‘
Sometimes called bottom-up. With this method,
detailed estimates are made at relatively low levels in
the work breakdown structure (WBS), typically at work-
package or task level. This approach is closely related to
scheduling, planning and resource allocation and is
both time-consuming and costly. It requires a good
knowledge of the activity and there also needs to be a
reasonable level of definition for the exercise to be

’
meaningful.

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 Estimating is a mix of:
• Technical terminology
• Tricks
• Common sense
• Experience

Particularly for estimating the experience

component is very important!

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 Operational Abandon
Identification phase Definition phase Execution phase
phase phase

Project Feasibility Development Commission.

Basis for Project Detailed Materials
initiation study plan Construction start-up
design specification design procurement
note handover
± 40% ± 25% ± 25%
Screening Study Budget
± 10%
estimate estimate estimate
Control Step 6 Step 7
estimate Commit. &
Economics Economics Economics Operations
commit.
cost control reference
Step 3
Step 1 Step 2 plan
± 5% plan Identical Identical
Change
Initial control Counter to to
Economics
commit. estimate Execution Execution
plan Step 4 phase phase
Step 5
Close out
Approval Approval Project
initial execution
execution plan
plan Abandon
project
Operations Contract
reference control Project
plan debrief
Purchase
Review order control

Review Reporting

Approval

Approval

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 AACE Cost Estimate Classification System - Process Industries
Primary Secondary Characteristic
Characteristic

ESTIMATE LEVEL OF END METHODOLOGY EXPECTED PREPARATION

CLASS PROJECT USAGE ACCURACY EFFORT
DEFINITION RANGE

5 0% to 2% concept capacity factored, L: -20% to -50% 1

screening parametric
models, judgment, H: +30% to + 100%
or analogy

4 1% to 15% study or equipment L: -15% to -30% 2 to 4

feasibility factored or
parametric models H: +20% to + 50%

3 10% to 40% budget, semi-detailed unit L: -10% to -20% 3 to 10

authorization or cost with
control assembly level line H: +10% to + 30%
items

2 30% to 70% control or bid / detailed unit cost L: -5% to -15% 4 to 20

tender with forced
detailed take-off H: +5% to + 20%

1 50% to 100% check estimate or detailed unit cost L: -3% to -10% 5 to 100
bid / tender with detailed take-
off H: +3% to + 15%

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 The following terms are used within estimating:
• Allowance
• Indirect Cost
• Accuracy
• Contingency
• Escalation
• MOD - Money of the Day
• RT/CVM - Real Term / Constant Value money
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 Allowances are often included in an estimate to account for
the predictable but undefinable costs associated with project
scope. Allowances are most often used when preparing
deterministic or detailed estimates.

Some typical examples of allowances :

Design allowance for engineered equipment
Material take-off allowance
Overbuy allowance
Unrecoverable shipping damage allowance
Allowance for undefined major items

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 Costs not directly attributable to the completion of an activity.
Indirect costs are typically allocated or spread across all activities
on a predetermined basis.
In construction, all costs which do not become a final part of the
installation, but which are required for the orderly completion of
the installation and may include, but are not limited to, field
administration, direct supervision, capital tools, start-up costs,
contractor's fees, insurance, taxes, etc.
In manufacturing, costs not directly assignable to the end
product or process, such as overhead and general purpose labor,
or costs of outside operations, such as transportation and
distribution. Indirect manufacturing cost sometimes includes
insurance, property taxes, maintenance, depreciation, packaging,
warehousing and loading.
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 Accuracy is the degree to which a measurement or
calculation varies to its actual value

Precision is the degree to which a series of

calculated values show similar results

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 Estimate accuracy is an indication of the degree to which
the final actual cost outcome for a given project varies
from its estimated cost
Every estimate is a “prediction” of the expected final cost
of a project for a given scope of work
Every estimate is associated with uncertainty, and
therefore is also associated with a probability of
overrunning or underrunning the predicted cost

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 Available information/Scope:
Construction site data
Design information
Detail information
etc.

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 An estimate should never be regarded as a single point
number (or cost)
An estimate is a range of potential cost outcomes, and
associated probabilities of occurrence
Thus – the accuracy range of an estimate is a probabilistic
assessment of how far a project’s final actual cost can be
expected to vary from the estimate
• The range is driven by uncertainty

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 Estimate Accuracy is traditionally expressed as a +/-
percentage around the point or base estimate with a
stated confidence that the actual cost will fall within this
range
• +/- measures are merely a useful simplification given that
individual projects will have unique frequency distributions
of outcomes
Always ask whether the +/- % range is:
• applied to the point or base estimate (before contingency) ?
• total or reference estimate (including contingency)?

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 The funds which are added to the point estimate to
achieve a given probability of not overrunning the estimate
(given relative stability of the project scope and the
assumptions upon which the estimate is based)
In essence, contingency is an amount of funds to reduce
the chances of overrunning the point estimate to an
acceptable level of risk
• The difference between the selected funding value and
the point estimate is the amount of contingency
• Management must determine the “level”
Does not include Escalation
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 Most misunderstood element in an estimate
An amount used to deal with uncertainties
Required because estimating is not an exact science
Its purpose is to improve the accuracy of project
evaluations
Not to improve the accuracy of an estimate

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 Typically contingency does not include:
Significant changes in scope
Major unexpected work stoppages (strikes, etc.)
Disasters (hurricanes, tornadoes, etc.)
Excessive, unexpected inflation
Excessive, unexpected currency fluctuations

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Table shows a cumulative probability distribution table produced by a typical
risk analysis model. In this example, the original point estimate (before
contingency) is $23.3 million. The point estimate of $23.3M results in a 20
percent probability of not exceeding this value.

If we wanted to achieve a
50 percent probability of
underrun, we would need
to fund the project at $25.4M.
This would mean adding a
contingency amount of $2.1M
in the estimate.

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 Contingency does not increase the overall accuracy of the estimate
Contingency reduces the level of risk associated with the estimate
Risk analysis identifies specific project areas associated with risk and
opportunity

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 Point Estimate $23.3M
P50
50 % Chance of Underrun Low Range (80% Confidence) $18.5M
High Value (80% Confidence) $32.5M
Estimate Range (before Contingency)
C
O -20% to +40%
N
Relative T 50 % Chance of Overrun
Probability I
N
P10 G P90
E
N
C
Y

Minimum $18.5M $23.3M $32.5M Maximum

Cost Cost
(-20%) Point (+40%)
Estimate
Accuracy Range (@ 80% Confidence)

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 P50 Estimate w/Contingency $23.3M
Low Range (80% Confidence) $18.5M
High Value (80% Confidence) $32.5M

C
Estimate Range (on Estimate w/Contingency)
O -27% to +27%
N
Relative T
Probability I
N
P10 G P90
E
N
C
Y

Minimum $18.5M $25.4M $32.5M Maximum

Cost Cost
(-27%) Estimate (+27%)
w/Contingency

Accuracy Range (@ 80% Confidence)

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 • 10/90 estimate • 90% chance on overrun
• 50/50 estimate • Chance on over- and
underrun are equal
• 90/10 estimate • 10% Chance on overrun

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 90/10

90/10

+40%
90/10

90/10

+10%
50/50 50/50 Base
Base
~1-5%

-10%
~2-8% Base
Base
-25%

Base

Base
10/90

Order of Study Budget Control

magnitude Type Type Estimate
D C B Class1
Class5 Class4 Class3/2

Zero baseline

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 Profit
Add on as
• Taxes, productivity costs, overtime, and other
adjustments as defined by estimator

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83
 Money of the day:
The market value of the project at time of
estimate preparation. (No escalation)

Real Term / Constant Value money:

The project value in relation to chosen future
reference point. (M.O.D. + escalation)

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 Measure for changes in current or estimated
prices as a result of inflation.
Forecast of expected price increase.
Necessary in case of spread commitments.

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 Escalation – Provision for an increase in the cost
of equipment, material, labor, etc. over the costs
specified in the contract, due to continuing price-
level changes over time.
Escalation has the same effect on project costs as
interest does on the value of a savings account –
each year becomes a new base for calculating
escalation for the following year.
Escalation is compounded for multiple years.

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 Example: Item costs $1 today, inflation rate of
5%/year for next five years, what will item cost five
years from now?
$1 X 1.05 X 1.05 X 1.05 X 1.05 X 1.05 = 1.28
C1 X (1 + i)n = C2
$1 X (1 + .05)5 = 1.28

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 Example: Project estimated to cost $10M in 2012
dollars, inflation rate = 5% each year.
Cash flow is projected as:
• In 2014: $1,000,000 (2 years escalation)
• In 2015: $6,000,000 (3 years escalation)
• In 2016: $3,000,000 (4 years escalation)
Calculate escalation!

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 Calculation of Previous Example

2014 = $1M X ((1.05)2 – 1) = $102,500

2015 = $6M X ((1.05)3 – 1) = $945,750
2016 = $3M X ((1.05)4 – 1) = $646,519
Total escalation costs = $1,694,769

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 Allocation & Control of Budgets – Resources (Man-hours/
Materials) & Cost
Analysis & Forecasting
Scope Change Management
Preparation of Bid Packages & Evaluation
Ad-Hoc Cost Studies
Cash Flow and Currency Fluctuation Reporting

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 Commitment
= Order or
Contract
Requisition
Buyers

Supplier
Project

Goods or Services
then
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 Analysis
Physical Progress
Earned Value
Not just what is SPENT, what is actually ACHIEVED

Forecasting
Commitments & Expenditures
Updated Budgets (Review Scope Changes)
Updated Schedule
Review Process (Engineering Review – Communication)
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 What is our budget?
What have we committed?
What changes have happened?
What changes are likely to happen?
What did we spend?
What have we achieved?
What will we spend?
What is our contingency?
What is the out-turn likely to be?
What is our exposure if the project stops?
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 Start

Introduction

AACE International Certification

Introduction to Cost Engineering

Role of the Cost Engineer

Essence of Total Cost Management (TCM) Solutions

104 www.costengineering.eu
 Birth of the Cost Engineer
Merchants should seek advise from engineers
Engineers often see their designs too optimistic
The merchants protect themselves by cost experts, and
than it all went a bit wrong!
• medical disabled technicians became Cost Engineers
• technologists saw the Cost Engineers as spoilers
• Cost Engineers could shoot the technologists
• the Cost Engineer is the only engineer who knows that the
outcome of his calculations will be wrong
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 Don’t design a plant with golden valves!

Skip all luxury!

That is the job of Cost Engineers and Value

Engineers

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 The Weekend West
Newspaper Perth, Australia,

February 13-14, 2016

Biggest overrun I have ever

seen Chevron Gorgon:
Original Budget: $US37b
Last Cost Estimate: $US54b
Overrun: $US17b or 45%
 Complex projects with budgets greater than $500 million
have a much higher failure rate than their more
straightforward counterparts. In some sectors, up to 75% of
complex projects fail: that is, they exceed their original
budgeted cost or schedule by 25%. This represents a vastly
inadequate return on billions of dollars of investment for
both private enterprise and taxpayers.

Projects fail for many reasons. These include: lack of communication among
stakeholders and participants; critical skills and knowledge gaps for key
personnel; poor conceptual planning; insufficient implementation of project
controls and risk management; and the ineffective transfer of lessons learnt
between similar projects. To increase the success rate of complex projects,
these issues need to be addressed across the whole industry.
365 Mega Projects

(Capex > 1 bnUSD)

Percent That Achieve
Objective

As Reported by IPA, Inc.

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 The Cost Engineer is accountable for the quality
the consistency, and the timeliness of the
products resulting from the responsibilities.
These products are primarily the following:
Estimates, plans, schedules, budgets and project
status report.
The quality, consistency and timeliness are
usually formalised in work processes and
procedures

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 Government
Regulation
Engineering Process
Flow

Project Lead Permits

Money Contractors

Process Engineers Risk Assessment

Business Case
Data sheets
Safety
Discipline
Sub Contractors Engineers
Quality

Time / Environment
Health Cost Engineers
Schedule
 Feedback/Learning/Knowledge Engineering

Involvement
Operations
Business Project Director Construction /Commissioning

Process Engineering

Detailed Engineering
/Procurement Project
Control
Estimating

Business Feasibility Project Execution Start-up

Planning Planning Planning
 Potential of Decisions to
Influence Value

Potential of Changes to
Destroy Value

Project Life Cycle (Better Scope Definition/Time)

More involvement results in better scope definition