AKSUM UNIVERSITY

FACULTY OF CIVIL AND CONSTRUCTION MANAGEMENT

DEPARTEMENT OF CONSTRUCTION TECNOLOGY AND

MANAGEMENT

COST ENGINEERING(CE) - COTM 4201

CHAPTER ONE

FUNDAMENTAL PRINICIPLES OF COST ENGINEERING

 Terminologies for 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
Average Original Value
100%

Depreciation Value

Full Depreciation
Residual Value

Residual Value

Useful Life “n” years

 Terminologies for Cost Engineers
• 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.
• All-in Plant Rate
A compounded rate which includes the costs
originating from the ownership or hire of plant
together with operating costs.
 Terminologies for Cost Engineers
• Direct Cost
Costs directly rendered to the production of the work.
It includes, all-in material costs, all-in labor costs and all-
in plant costs
General Overhead Costs
• Overhead Costs
Site Overhead Costs

• 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.
 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 VC
r FC

0 Output/volume
Output/volume
 Total Cost = Fixed Cost +Variable Cost
bi
rr

TC=FC+VC

FC

Output

Fixed cost is a short-run concept. All costs

are variable in the long run.
 6. CONSIDERATIONS IN COSTING
6.1. What is Cost?

Cost is every thing

“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)
CONT.
6.2. Major Costs Associated with Constructed Facilities
The cost of a constructed facility to the owner include both the initial
capital cost and the subsequent operation and maintenance costs.
A . Initial Capital Cost: the capital cost for a construction project
includes the expenses related to the initial establishment of the
facility:
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;
Insurance and taxes during construction;
Owner's general office overhead;
 Equipment and furnishings not included in construction; and
Inspection and testing.
CONT.
6.2. Major Costs Associated with Constructed Facilities
 Construction Cost: the sum of all costs, direct and indirect,
inherent in converting a design plan for material and
equipment into a project ready for start-up, but not
necessarily in production operation; the sum of field labor,
supervision, administration, tools, field office expense,
materials, equipment, and subcontracts.
 Direct Cost: in construction, cost of installed equipment,
material and labor directly involved in the physical
construction of the permanent facility;
 Indirect Costs: 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, startup costs, contractor's
fees, insurance, taxes, etc;.
CONT.
6.2. Major Costs Associated with Constructed
Facilities
B. Operation and Maintenance Costs: The operation
and maintenance cost in subsequent years over the
project life cycle includes the following expenses:
Maintenance and Repair Cost: the total of labor,
material, and other related costs incurred in
conducting corrective and preventative
maintenance and repair on a facility, on its systems
and components, or on both. Maintenance does not
usually include those items that cannot be
expended within the year purchased. Such items
must be considered as fixed capital.
CONT.
6.2. Major Costs Associated with Constructed
Facilities
Operating Cost: the expenses incurred during the
normal operation of a facility, or component,
including labor, materials, utilities, and other
related costs. Includes all fuel, lubricants, and
normally scheduled part changes in order to keep a
subsystem, system, particular item, or entire
project functioning. Operating costs may also
include general building maintenance, cleaning
services, Insurance, taxes, Financing costs , and
similar items.
CONT.
6.3. Influence on Construction Cost with time
The owner or facility sponsor holds the key to influence
the construction costs of a project because any decision
made at the beginning stage of a project life cycle has
far greater influence than those made at later stages.
Moreover, the design and construction decisions will
influence the continuing operating costs and, in many
cases, the revenues over the facility lifetime. Therefore,
an owner should obtain the expertise of professionals to
provide adequate planning and feasibility studies.
Many owners do not maintain an in-house engineering
and construction management capability, and they
should consider the establishment of an ongoing
relationship with outside consultants in order to respond
quickly to requests.
CONT.
6.3. Influence on Construction Cost with time
CONT.
6.4. Project Cost Management Process
Project cost management: includes the processes required
to ensure that the project is completed within an approved
budget.
Cost estimating: encompass developing an approximate
estimate of the costs of the resources needed to complete a
project.
Cost budgeting: it is allocating the overall cost estimate to
individual work items to establish a baseline for measuring
performance.
Cost control: it is controlling changes to the project
budget.
CONT.
6.5. Basic Principles of Cost Management
Most members of an executive board have a better
understanding and are more interested in financial terms
than engineering project terms, so project managers must
speak their language.
Profits: are revenues minus expenses.
Life cycle costing: considers the total cost of
ownership, or development plus support costs, for a
project.
Cash flow analysis: determines the estimated annual
costs and benefits for a project and the resulting annual
cash flow
CONT.

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