cost control during detailed engineering

8/19/2019 Cost Control During Detailed Engineering

1/13

Lecture 7-1CE-591 Cost Engineering and Control

Dr. Farrukh Arif, Assistant Professor, NED UETDr. Farrukh Arif, Assistant Professor, NED UET

COST CONTROL DURINGDETAILED ENGINEERING

Engineering Costs

CE-591- Cost Engineering

and Control


Dr. Farrukh Arif, Assistant Professor, NED UET

OUTLINE Introduction

First Step: The engineering Work-hour Estimate

Second Step: A Method for Measuring Progress

Third Step: Forecast Work-hours Required to Completethe Remaining Work

Total Engineering Cost− Salaries and Direct Payroll Burden

−

Fixed Overheads− Engineering Expenses

What to do about Work-hour Overruns

Summary


2/13



Introduction Control during detailed engineering falls into five categories.

− Contractor engineering work-hours and other office costs.

− Equipment.

− Detailed design of bulk materials.

− Procurement of bulk materials and awarding installation subcontracts.

− Project changes.

Our focus will be the first category i.e., cost of engineering.

Major contributor to this cost is work-hours.

Cost Engineer (CE) must take following steps before any control can be exercised overengineering work-hours.

− Develop measuring stick (i.e., realistic engineering work-hour estimate).

− Establish method of measuring progress (i.e., scale for evaluating percentagecompletion at any point in time).

−Forecast work-hours needed for completion (i.e. develop productivity relative to

the estimate and use it to predict the work-hours required from any point in t ime tocompletion of the remaining work).



First Step: The Engineering Work-hourEstimate (1/3)

Estimate is the CE’s primary control tool.

Engineering is broken down into number of specialactivities, such as;

− Design engineering and drafting

− Material procurement

− Scheduling

− Specification writing

−Cost engineering

Separate work-hours estimates should be established foreach of the above.

Total estimated engineering cost = (work-hour estimate Xaverage wage) + engineering expenses


3/13



First Step: The Engineering Work-hour

Estimate (2/3)

Supervisor estimates the work-hours required for his area ofresponsibility.

Supervisor’s estimate must be compared with historical recordsof similar projects and other in-house data before acceptance.

After contractor has completed his estimates, the ownersshould check it or compare it to his own independentassessment .

Points of variance should be discussed between owner andcontractor and a realistic estimate representing an achievable

goal should be agreed upon.

The agreed estimate becomes “the engineering control budget.”



First Step: The Engineering Work-hourEstimate (3/3)

Owners have temptation to accept or push contractor inaccepting low engineering work-hour estimate. It’s unrealisticand disaster .

This can result in high cost of cost control .

The engineering budget must be prepared early in order to beuseful.

On large projects, it is a good idea to aim at completing the

budget within two months after start of engineering . This provides supervisors more control over any probable

corrective actions required in troublesome areas .


4/13



Second Step: A Method for Measuring

Progress (1/5)

For effective control over engineering work-hours, manager must

know following four things.

1. Physical progress made to date.

2. Number of work-hours used.

3. Calendar time used.

4. Work-power levels employed.

By knowing these four things,

− one can forecast work-hours and calendar time required to

accomplish uncompleted work.

−Whether an increase in work-power (labor) is required.

Points 2,3,4 above can be obtained directly from accounting records.



Second Step: A Method for MeasuringProgress (2/5)

Point 1 requires special method of measurement.

The measuring method normally employed is physical percentage of

completion.

This includes; progress on preparation of drawings, purchasing,inspection, specialist design, and all other engineering activities.

Generally used approach

Engineering work broken down into major categories.

Contribution to each of the categories toward total percent completionis proportional to the percentage that the estimated work-hours for thecategory bears to the total estimated work-hours of the project.

The percentage completion for each individual major activities is

based on physical progress measurement.


5/13




Progress (3/5) Example: Table 1 illustrates a method of calculating percent progress.



Second Step: A Method for MeasuringProgress (4/5)

In practice, determining the engineering percent completion is acomplicated procedure.

Some organizations only measure production engineering.

i.e., activities leading to specific products/tangible results.− Approved-for-construction drawings.

− Material takeoffs.

Progress is not measured on support activities.− For e.g., Supervision, clerical work, scheduling cost control, procurement,

expediting, inspection and engineering support during construction.− These are considered as over-heads, time related activities.

− The approach is analogous to construction, where direct labor is supported byindirect labor included in field labor overheads.


6/13




Progress (5/5) If owner is to place reliance in a contractor’s method, owner’s CE must

verify that the method includes the following points.

1. Progress of individual activities based on realistic physical measure

independent of the work-hours consumed.

2. All engineering activities including supervision accounted for asproduction engineering or as a support function .

3. Activities should be broken down into sufficient detail to provide

realistic physical progress rather then global assessments.

4. Those using the developed methods should understand those clearly.

5. Provision should be available for reweighing the activities in caseinitial estimates were not realistic.



Third Step: Forecast Work-hours Required toComplete the Remaining Work (1/5)

Accounting record can tell us work-hours expended to date.

Those are history and can not be controlled anymore.

If a manager is to exercise control by focusing on unexpended hours.

i.e. where the trouble spots are and what is the magnitude of thetrouble.

This information is provided by the CE is cooperation with other

members of PM team by:1. Forecasting the work-hours required to complete the work in each category.

2. Comparing forecasts category by category with the budget.3. Analyzing the underlying reasons in categories that show budget overruns.

4. Comparing the forecasted work-hours with workers available to determine ifcalendar schedule can be met or if additional personnel are required.


7/13



Third Step: Forecast Work-hours Required to

Complete the Remaining Work (2/5) The forecast of engineering work-hours required to complete the work

is built up from detailed forecasts made by supervisors of each majorengineering function.

CE must check the forecast for consistency and reasonableness.Accounting record can tell us work-hours expended to date.

One such check is to determine work-hours required for 1% progress.

Example from Table 1:




The technique just described can be applied to engineering works as a

whole.

The composite percent completion combined with total work-hours

used will give the number of work-hours consumed to date toaccomplish 1% completion.

By plotting 1% completion curves for number of projects, it has been

found that they will fall into a pattern similar to following Figure 1,taken from an actual project.


8/13



Third Step: Forecast Work-hours Required to

Complete the Remaining Work (4/5)Figure 1:




Takeaways from Figure 1

The budget line slopes upward reflects change orders.

Detailed engineering estimate was not available until 30% point inengineering completion, which is late.

The high work-hours actually used at the 10% and 20% complete

points gave early warning of a serious deficiency in the preliminarybudget.

The actual line has a typical shape, and by comparing with the curves

from past projects, an early forecast, as shown by dotted line, couldhave been made at the 20% completion point.

Large discrepancy between the preliminary budget and actual results

show that reporting supervisor had a good concept of physical work tobe accomplished that was not reflected in the preliminary budget butwas belatedly recognized in the detailed estimate.


9/13



Total Engineering Cost

Salaries and direct payroll burden.

Fixed Overheads.

Engineering Expenses.



Salaries and Direct Payroll Burden (1/3)

Salaries are generally estimated and forecasted as averages.

Historical curves from past projects.

Figure 2:


10/13




Figure 2 shows typical pattern of variation in average engineeringsalaries over the lifecycle of a project.

Highest at the start of the project when managers, highly paid

specialists and designers are at work.

Average reaches a low point at about 50% of completion reflectinginflux of large number of draftsmen, technicians and less experienced

designers.

Upward blip at the end of engineering, reflecting higher paid follow-uppersonnel who are checking drawings, expediting vendors, and

trouble-shooting field erection problems.




Payroll burden is forecasted as % of salaries.

It covers employer’s cost items, such as;− Social security

− Worker’s accident liability insurance.

− Medical insurance.

− Vacation pay.

− Pension plans.

− Any other legal requirement and company policy.


11/13



Fixed Overheads

Fixed overheads are prorated.

Calculated in dollars per work-hours, calculated by accountingmethods and verified by auditors.

These fixed costs include;

− Office rentals.

− Utilities.

− Janitorial services.

− Corporate management.

Proration percentages are reexamined quarterly or semiannually.

These are normally not problematic for CE.

There is very little that a manager on an individual project can doabout these fixed costs.



Engineering Expenses (1/3)

Engineering expenses are within the control of individual project

managers.

These expenses normally average about 25% of the salaries.

Without careful control these costs can increase.

There are number of minor subaccounts that fall into engineering

expenses, but the major ones are as follows.− Computer Charges.

− Reproduction Cost.

− Travel cost and Relocation Expense.


12/13




The subaccounts can be best monitored by trend or tracking curves

(Figure 3).

Trend curves can be developed using following steps.

1. Establish average calibration curve by plotting actual expenditures

from two or three past projects. On these curves, plot % of total costsspent against % of engineering completion.

2. Translate the average calibration curve into the budget for yourparticular project.

3. Plot actual cost and compare to the calibration curve.

4. If actual cost track close to the calibration curve, no action need to betaken.

5. If actual cost begin to trend away from the calibration curve, eitherplus or minus, investigate to determine the reason.

6. Look for possible corrective action.

7. Forecast the total final cost.




Figure 3:


13/13



What to do about Work-hour Overruns

If there is an overrun in design/drafting work-hours, take following

actions.

1. Maximize the sue of standard drawings for typical items.

2. Control design alternate studies.

3. Investigate the flow of information between design sections,management and procurement.

4. Ask the engineers and draftsmen.

5. Minimize change orders.

Frequently engineering overruns can translate into construction

savings, so don’t be “penny wise and pound foolish.”



Summary

Three critical steps that CE must take to control engineering costs.

Develop realistic engineering work-hour budget.

Set-up method to measure physical progress.

Forecast the work-hours required to complete remaining work onmonthly basis.

cost control during detailed engineering

Documents