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COST AND VALUATION ENGINEERING. A LECTURE PAPER PREPARED BY ENGR. N.P. UGOCHUKWU NZURUMIKE.

FNSE, FNIMechE FOR THE COMPLSORY REFRESHER COURSE FOR PROSPECTIVE CORPORATE

MEMBERS OF THE NIGERIAN SOCIETY OF ENGINEERS.

1.0 INTRODUCTION.

Cost and Valuation Engineering, to many of us here seated is a new field of Engineering Study.

Truly you are not or cannot be said to be wrong going by the well known fields of Engineering

studied in most Universities the World over. Surprisingly this is a field in which the Engineer has

been pushed to play a second fiddle by other professions in the past. Today the Engineer is up

and claim that which is rightfully our and in our domain.

2.0 DEFINITIONS. 2.1. VALUATION ENGINEERING: This is the art of estimating the fair monetary measure of

the desirability of ownership of specific properties for specific purposes.

2.2 COST ENGINEERING: This is that area of Engineering practice where engineering judgment and experience are utilized in the application of scientific principles and techniques

to problems of Business and Management Projects.

3.0 PRINCIPLES OF VALUATION ENGINEERING. 3.1 THE NATURE OF VALUATION

Engineers practice valuation through the organized field of Engineering Valuation. To gain an insight to the nature of engineering valuation, examination of the types of valuation will repay study. Valuation is the art of estimating the fair monetary measure of the desirability of ownership of specific properties for specific purposes. Broadly, valuation is of three types; Ordinary Valuation, Formal Valuation, and Engineering Valuation.

3.2 TYPES OF VALUATION

Almost everybody gets directly involved in Ordinary Valuation practice whereby in ordinary

exchange of property, the value is determined by the judgment of the seller and the buyer.

3.2.1 FORMAL VALUATION As the property to be exchanged gets more complicated, the practice becomes Formal Valuation hereby the value is determined by judgment of specially qualified valuators. Real property is usually the realm where formal valuation is applied, and values are mostly fixed by expert judgment. In some cases mathematical computations of varying degrees are required in frequently straight forward and non- technical manner.

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3.2.2 ENGINEERING VALUATION. Engineering valuation is the art of estimating the value of specific properties where Professional Engineering knowledge and judgment are essential. The properties covered under this of valuation are mines, factories, buildings, machinery, industrial plants, Engineering constructions of all kinds, and public utilities. The purposes of engineering valuation are related IO the legal aspects of transfer of properties, to utility rate making, taxation, condemnations, mergers, restructuring, financing etc.

Marston et al (1936) explain that the term estimate is used in Engineering Valuation in the sense in which it is employed in general engineering practice. They aver that it indicates a carefully considered computation of some quantity, the exact magnitude of which cannot be determined. In conclusion, they state that the estimate represents the true magnitude as closely as it can be determined by the exercise of sound judgment based on appropriate computations; and warn that it should not be confused with off- hand approximations that are little better than outright guesses.

3.3 THE SPECIALISED NATURE OF VALUATION ENGINEERING. The entire process of engineering valuation from preliminary examination of enterprise to functional classification of assets, and from costing basis to depreciation application are all engineering activities. For example the taking of inventory at the preparatory stage would necessitate frequent reference to construction plans and specifications. The determination of the costing basis is an engineering question, while the estimation on replacement basis requires determination of alternative process engineering schemes. Depreciation or the estimation of the consumed usefulness of the property for plant, machinery, vessels and vehicles, requires professional engineering judgment. From this sketch one sees the accent on engineering multlidisciplinarity in engineering valuation, the proper approach in procuring such professional service being the retaining of a professional engineering firm with engineers of various disciplines rather than a firm of other professionals that have dragged in one engineer to its service.

3.4 VALUATION CLASSIFICATIONS AND CAREERS The art of engineering valuation mentioned above has developed since about 1890 when Engineers,

industrialists, economists and the courts began to be drawn into active participation in Formal Valuation

work in the US. At that time as extensive industrial expansion took place, Formal Valuation activity

shifted from the province of the merchant, the accountant and the financier to the Engineer. Since then the

art of Engineering Valuation has been continually undergoing improvement, that between it and Formal

Valuation, at least six known classifications of valuation practice have evolved. These are: (i) Appraisal Review and Management; (ii) Business Valuation; (iii) Machinery & Equipment Valuation, (iv) Personal Property Valuation; (v) Real Property Valuation; (vi) Technical Valuation. Many more are

on the way

3.5 VALUATION CLASSIFICATIONS/DISCIPLINES The classifications mentioned above follow generally the categories of properties broadly respecting special conditions calling for multi-specialization collaboration among experts from diverse professional backgrounds.

3.6 APPRAISAL REVIEW & MANAGEMENT Valuation is practiced under this classification by valuers / appraisers whose functions relate

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to the administration of appraisal/valuation activities within the private or public sector.

3.7 BUSINESS VALUATION This classification is for the determination of the market value of the going business including all its tangible and intangible assets. The business enterprise valuations can be made either to express the value of the total business, or the capital stock of the business, or the controlling interest, or the minority interest.

Disciplines required for business valuation include administrators, accountants, investment analysts, Engineers, real estate surveyors, stockbrokers etc. 3.8 PERSONAL PROPERTY VALUATION Valuers functioning under this classification practice under the following sub-classification or disciplines: (i) Residential Contents (general), (ii) Fine arts, (iii) Antiques and Decorative arts,

(iv) Gems and Jewellery, (v) classified specialties.

3.9 MACHINERY & EQUIPMENT VALUATION Under this classification the relevant appraisers carry out valuation of manufacturing/process industries. The Engineer is the prime professional in this specialty.

3.10 REAL PROPERTY VALUATION

The real property valuer is expected to have skill in one or more specializations of this classification: (i) Urban buildings, (ii) Residential properties, (iii) Rural properties (including farms and agri-business), (iv) Timber and Timberland. The Estate Surveyor is the prime professional for real property valuation. 3.11 TECHNICAL VALUATION This embraces all activities required in estimating the value of certain special types of real and personal properties. Specializations within this classification include Aircraft, Computers & High Tech Personal property, Marine Survey, Mines and Quarries, oil & Gas, public utilities. Under this classification with its diverse disciplines, the engineer is prime professional. In the US, the interests and advancement of Business, Personal Property. Equipment, and Technical Valuations are promoted by the American Society of Appraisers headquartered in Washington DC.

4.0 PRINCIPLES OF COST ENGINEERING. A Cost Engineer is by education, training and professional experience, competent to develop and make practical use of the principles of engineering cost management which embraces activities such as cost estimating, cost control, value engineering, Planning, Scheduling, Construction management, investment appraisal, risk analysis, conceptual studies, profitability analysis of engineering projects and processes. The cost engineer is a qualified professional dedicated to total cost management over the life cycle of a project, facility or manufacturing Operation.

The purpose of cost engineering is to determine standard cost for execution of works, quotations, cost control, cost assessment and cost management. Cost must be calculated based

on the engineering facts by account. Allocation and distribution in most cases are not valid.

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Sound mathematics and correct procedures are necessary for developing cost estimating

systems, however it is more important for cost managers and users of cost information to

understand how costs are developed

4.1 THE INTERNATIONAL COST ENGINEERING COUNCIL (LCEC). The International Cost Engineering Council (ICEC) founded in 1976 is the world- wide council/forum for cost engineering. It is a non profit organization with the objective to promote cooperation between national and multi-national cost engineering organizations worldwide for their mutual well being and that of fellow members. The ICEC has over 40 multinational member countries including the

Association for the Advancement of Cost Engineering (AACE International) of the United

States of America founded in 1956 and the Association of Cost Engineers, United Kingdom

founded in 1961 to mention but a few.

4.2 OBJECTIVES OF ICEC

* To encourage, promote and advance the Science and art of cost engineering and project management for the public good, worldwide. * To coordinate and sponsor International Cost Engineering and Project Management Congress (on a worldwide scale). The objectives of the Institute of Appraisers and Cost Engineers a division of the Nigerian Society of Engineering but is not includes but is not limited to the promotion of art, science and practice of Engineering and cost engineering and maintenance of high ethical standards. To co-operate with other International bodies having objectives cognate with those of IA&CE and to liaise with similar bodies for the purpose of the reciprocal exchange of information and mutual benefits. The IA&CE is dedicated to the 21st century total Cost Engineering Management.

The Institute of Appraisers and Cost Engineer (IA&CE) a division of the Nigerian Society of Engineers is in the process of joining the International Cost Engineering Council (ICEC) and the American Society of Appraisers (ASA) for International mutual benefits. 4.3 THE DIVERSE WORKS OF COST ENGINEERS INC1UDES:

Cost Estimating

Cost Control

Cost Planning

Scheduling

Risk 4.3.1 CRITERIA In modern times engineering and construction works are carried out with latest (21

st Century

technological concepts), therefore these services are becoming more sophisticated; the standards required are very high and demanding. Total Cost Engineering Management (TCEM) becomes more critical for full realization of projects from initial conception to final completion. Stakeholders want their project to be cost effective. Every client and every project will have different criteria for cost-effectiveness. These criteria engender a relationship between the underlisted factors:

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* Design * Material * Quality * Expenditure * Time * Special requirements of the project. The design team must be constantly aware of the requirements of the client and the options which are available in creating the desired balance within these relationships. Cost Engineering Concepts and methodology requires the highest integrity, broad based professional skill, sound oral/written communication, comportment and high professional ethics to exercise professional judgment in a fair and firm manner to all concerned at all times, hence attention to details must be paid to the followings: 4.3.2 Cost Control In recent times, rising prices, interest rates, high labour and energy cost and advanced technological concepts of engineering and construction projects have caused stakeholders to demand that their professional advisors should accept cost as an element in design. The successful cost control of engineering and construction project demands attention to details by Cost Engineers for full realization of the needs of the client within his financial limits. The initial conception/design stages are therefore, critical in establishing relationships between cost and quality, as by the time the sketch design is developed, much of the cost is already committed. By virtue of the nature of stakeholders in projects, it would not be ingenious to have many people working long and hard for many weeks or months to achieve a Cost-effective design which has the support of users, only to find that it is not affordable or that it is in excess of the approved budget. To avoid costly and frustrating re-designs, a cost plan must be established at earliest possible time, which matches the approved budget. The subsequent planning and design process is to be managed within this budget.

4.3.3 Cost Plan A cost plan (detail cost of each engineering system) provides the means of controlling the design so that the complete scheme may be built within the approved budget. Monitoring of the cost plan enables the Cost Engineers to detect at any time during the project if the budget is exceeded or to take immediate remedial action before planning and design process proceeds further. At each phase of the project, the cost plan is updated and the design managed so that the budget is not exceeded. Cost plan also provides basis for comparison of alternative designs / options.

A properly prepared/monitored cost plan gives the project Stakeholders confidence that it is

"on the right track" in respect of costs. 4.3.4 Scheduling Scheduling is an essential part of successful part cost engineering management from start to completion of projects. Attention to details is important in scheduling to ensure that as far as it is reasonably practicable, careful consideration is given to constraints as site, climate and manpower.

A properly prepared schedule must reflect the project parameters.

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4.3.5 Risk or Contingency The whole risk management concepts have numerous uses during design, construction, commissioning and maintenance. One critical factor that requires, resolution prior to performing any risk management activity must surely be a sound definition of what risk and contingency represent. Risk and contingency allowance must be considered as two very separate entities as the factors that constitute risk and contingency in probabilistic estimate are different.

RISK CONTINGENCY

Risk is the level of uncertainty in a task or a

project.

Risks are largely foreseeable. Cost Engineers assure against them e.g. meeting tight / declared operational dates escalation

Contingency items are things

which might not happen. Cost Engineers insure against them e.g. Design errors/omissions, estimating uncertainties, bad ground conditions etc.

Allowance for identified risk other than a simple incompleteness of design (e.g. an alternative process apparently competitive but without the knowledge that the client will allow a change in specification) Unforeseen and undeterminable costs.

Unknown factors which are likely to alter

the cost but which are not allowed for or expected at the outset of the project.

Sums of money allowed for known and anticipated expenditure, yet which is indefinite in size, timing and Specification.

Client additions/enhancements

to a Project.

An allowance for items which are known to be required, by contract team, for project, but costs details are not clear at the outset.

4.4 LIFE CYCLE COSTING

The 21st century engineering design concept is now based on the economic life cycle

cost, preference to the cheapest to the [possible constructional design, hence Cost Engineers must give careful consideration to the underlisted three "Rs":

* Running cost

* Repairs cost

* Replacement cost

These should be considered alongside the cost of initial construction work. Annual cost associated with utilities, operations and owners budget. It should also be remembered that the savings which arise are not just from the running cost but also from the maintenance, and renewal costs.

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In terms of life cycle costing, for a building to function effectively and efficiently over time careful consideration must be given at the design stage for the need to maintain and replace installations.

4.5 THE LIMITATION OF COST ENGINEERING:

4.5.1 SERVICES BY NON ENGINEERS.

Engineering Cost Control is becoming more difficult, occasioned by the pace of changes in

advanced Engineering design and construction (21st Century technology) together with

changes in procurement methods and specialist contractor works.

The difficulties faced by non engineers attempting to forecast and control engineering costs

are as follows:

Not many of them have broad based advanced engineering experience of the

design, construction and procurement methods.

Difficulty in prediction of preliminary costs during the early stage of the

project.

Difficulty in controlling engineering cost during the design phase in which options must be fully analyzed in line with their design concept, as changes will upset the cost plan.

Most of them tend to use parametric techniques (e.g. N/M2) and estimates of engineering costs based on these techniques can produce seriously flawed cost plan if full engineering design have not been carried out.

Specialist engineering designs are difficult to estimate as cost is related to design standard, complexity of the systems, and special requirements as needed by approving authority

In point of fact, their lack of in-depth knowledge of complex engineering design is a

major problem.

4.6 COST ENGINEERING PRACTICE IN NIGERIA Cost Engineering practice in Nigeria is semi - hijacked by non engineers hence the controversy over which field of the professions should attend to works pertaining to costing / cost management of engineering and processes. I can say with all sense of responsibility that the hijacking of cost engineering practice by non engineers was occasioned by exigency, but it must be emphasized that it is time we stopped using the element of exigency to continue with flawed professional process .

The depth of the Engineers professional training and knowledge as afore-discussed and the awareness/understanding of complex and latest 21

st Century engineering Design and systems

puts the engineer in the right perspective for full realization of Cost Engineering Practice

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The misrepresentation of facts by non engineers can not hold water for long and that is the truth because there is a difference between getting it done and getting it right.

Undoubtedly therefore, the engineers broad based background and professional competence,

empowers him or her to practice Cost Engineering works satisfactorily with the attendant

benefit to the Nigerian economy.

5.0 RECOMMENDATION TO IMPROVE PROJECT COST ENGINEERING PRACTICE IN NIGERIA.

Utilize competent, Professional Industrial Engineers and cost Engineers to determine what cost should be rather than using others and obsolete methods.

Be certain that projects cost estimates are adequate and flexible to cope with potential changes

in the market, the completion and technology

Cost Engineers will prove very useful for activities of department of Budget, Monitoring and Price Intelligence in the Presidency for the implementation of the Federal Government Due Process Procedure for engineering Projects.

Cost should be calculated based on facts and transactions rather than by allocations and

distributions.

Cost Engineers training and professional experience will prove very useful for Federal

government - customs Destination Inspection and the on going Privatization exercise in the country with the attendant benefits to the Nigerian economy.

Cost Engineers will also prove very useful for the Insurance Industry as the Engineering Assessors / Loss Adjusters.

Monitoring of Cost engineering curriculum in tertiary institutions in line with 21

st Century

technology.

NSE / COREN should press for the inclusion Cost Engineers fee in the Federal Government approved Scale of fees.

6.0 PROFFESSIONAL CERTIFICATIONS.

6.1 International Valuation Standards Committee (IVSC) a nongovernmental member of United Nations working with the World Bank.

6.2 International Cost Engineering Council (ICEC), membership is through affiliate institutions. 6.3 The Institute of Appraiser and Cost Engineers of Nigeria, a Division of The Nigeria Society of

Engineers.

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7.0 Conclusion I wish to conclude this paper by imploring members of the Institute of Appraisers And Cost Engineers (IA&CE) a division of the Nigerian Society of Engineers to promote and take charge of the art, Science, Management and practice of Cost Engineering with full sense of professionalism.

REFRENCIES

1. Otis Anyaeji Asset Appraisal & Cost Engineering within the context of The Nigeria Society of Engineers. October 2004.

2. Otis Anyaeji The Role of the Engineer in Valuation of Assets May 2001. 3. Dr Charles Mbelede Cost Engineering Practice: Nigeria as a Case Study 2003 4. Constitution Institute of Appraisers and Cost Engineers 2003

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