Project and Cost Engineers' Handbook, Fourth Edition (Cost Engineering)

338 Pages·2004·3.59 MB·English

by  Kenneth K. Humphreys

PROJECT AND
COST ENGINEERS’
HANDBOOK
Fourth Edition

Copyright © 2005 by Marcel Dekker

1.
Applied Cost Engineering, Forrest D.Clark and
A.B.Lorenzoni
2.
Basic Cost Engineering, Kenneth K.Humphreys and
Sidney Katell
3.
Applied Cost and Schedule Control, James A.Bent
4.
Cost Engineering Management Techniques, James
H.Black
5.
Manufacturing Cost Engineering Handbook, edited by
Eric M.Malstrom
6.
Project and Cost Engineers’ Handbook: Second
Edition, Revised and Expanded, edited by Kenneth
K.Humphreys
7.
How to Keep Product Costs in Line, Nathan Gutman
8.
Applied Cost Engineering: Second Edition, Revised
and Expanded, Forrest D.Clark and A.B.Lorenzoni
9.
Managing the Engineering and Construction of Small
Projects: Practical Techniques for Planning,
Estimating, Project Control, and Computer
Applications, Richard E.Westney
10.
Basic Cost Engineering: Second Edition, Revised and
Expanded, Kenneth K.Humphreys and Paul Wellman
11.
Cost Engineering in Printed Circuit Board
Manufacturing, Robert P.Hedden
12.
Construction Cost Engineering Handbook, Anghel
Patrascu
13.
Computerized Project Control, Fulvio Drigani
14.
Cost Analysis for Capital Investment Decisions, Hans
J.Lang
15.
Computer-Organized Cost Engineering, Gideon Samid
16.
Engineering Project Management, Frederick
L.Blanchard

COST ENGINEERING

A Series of Reference Books and Textbooks

Editor

KENNETH K.HUMPHREYS, Ph.D.
Consulting Engineer

Granite Falls, North Carolina

Copyright © 2005 by Marcel Dekker

17.
Computerized Management of Multiple Small Projects:
Planning, Task and Resource Scheduling, Estimating,
Design Optimization, and Project Control, Richard
E.Westney
18.
Estimating and Costing for the Metal Manufacturing
Industries, Robert C.Creese, M.Adithan, and B.S.Pabla
19.
Project and Cost Engineers’ Handbook: Third Edition,
Revised and Expanded, edited by Kenneth
K.Humphreys and Lloyd M.English
20.
Hazardous Waste Cost Control, edited by Richard
A.Selg
21.
Construction Materials Management, George Stukhart
22.
Planning, Estimating, and Control of Chemical
Estimation Projects, Pablo F.Navarrete
23.
Precision Manufacturing Costing, E.Ralph Sims, Jr.
24.
Techniques for Capital Expenditure Analysis, Henry
C.Thorne and Julian A.Piekarski
25.
Basic Cost Engineering: Third Edition, Revised and
Expanded, Kenneth K.Humphreys and Paul Wellman
26.
Effective Project Management Through Applied Cost
and Schedule Control, edited by James A.Bent and
Kenneth K.Humphreys
27.
Cost Management of Capital Projects, Kurt Heinze
28.
Applied Cost Engineering: Third Edition, Forrest D.Clark
and A.B.Lorenzoni
29.
Planning, Estimating, and Control of Chemical
Construction Projects: Second Edition, Revised and
Expanded, Pablo F.Navarrete and William C.Cole
30.
Value Engineering: Analysis and Methodology, Del
L.Younker
31.
Project and Cost Engineers’ Handbook: Fourth Edition,
edited by Kenneth K.Humphreys

Copyright © 2005 by Marcel Dekker

edited by
KENNETH K.HUMPHREYS

Consulting Engineer
Granite Falls, North Carolina, U.S.A.

PROJECT AND
COST ENGINEERS’
HANDBOOK
Fourth Edition

NEW YORK
MARCEL DEKKER

Copyright © 2005 by Marcel Dekker

Although great care has been taken to provide accurate and current information, neither
the author(s) nor the publisher, nor anyone else associated with this publication, shall be
liable for any loss, damage, or liability directly or indirectly caused or alleged to be caused
by this book. The material contained herein is not intended to provide specific advice or
recommendations for any specific situation.

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and are used only for identification and explanation without intent to infringe.

Library of Congress Cataloging-in-Publication Data
A catalog record for this book is available from the Library of Congress.

ISBN: 0-8247-5746-7

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Neither this book nor any part may be reproduced or transmitted in any form or by any
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Current printing (last digit):
10 9 8 7 6 5 4 3 2 1

PRINTED IN THE UNITED STATES OF AMERICA

Dr. James M.Neil, PE, 1927–2003

Jim Neil served the cost engineering profession with distinction as an author,
educator, and professional engineer. A strong supporter of education, Jim
Neil worked tirelessly with the AACE International Education Board in
developing reference materials for the profession and in fostering the growth
of and support for scholarship programs. Upon Jim Neil’s unexpected passing
in 2003, Barry McMillan, Executive Director of AACE International said,
“Jim quietly made an enormous impact on our Association, on the profession,
on the business community, and on those who knew him in other walks of
life.”
This book is dedicated in memory of Dr. James M.Neil, PE. His
contributions to the cost engineering profession and to education will long be
remembered.

Copyright © 2005 by Marcel Dekker

Preface

Twelve years have passed since the publication of the Third Edition of the
Project and Cost Engineers’ Handbook. In some ways nothing about the topic
has changed. In other ways, everything has changed. Nothing has changed in
the fundamental principles of cost engineering. They remain as they were
back then. However, with the explosive growth of e-mail and the Internet, the
gathering and sharing of data and information has indeed changed dramatically.
E-mail was a novelty when the Third Edition was published, and the fax was
the predominant method of sharing documents and information over great
distances. Now e-mail, scanners, and cell phones dominate communications
and the facsimile machine is destined to become a museum piece.
When the Third Edition was published, “INTERNET” was understood in
the cost engineering and project management professions to mean the
International Project Management Association. Now “INTERNET” is the
worldwide web and the International Project Management Association has,
of necessity, abandoned the Internet name and now is simply IPMA.
In this same period IPMA and the International Cost Engineering Council
(ICEC), both of which are confederations of national cost and project
management associations, have expanded dramatically to include well over
60 national cost and project associations around the world, more than double
the previous number of national associations within the IPMA and ICEC
organizations.
Projects and products have become more and more multinational in nature,
and cost engineers and project managers are increasingly concerned about
international cost considerations.
In this same period projects seemingly have become more risky and cost
and project engineers are increasingly concerned about risk analysis. Risks
have even been exacerbated by the proliferation of cost and schedule software
which is all too often misused by persons lacking the experience which is
necessary to discern when the output of the software, be it an estimate or a
schedule, is realistic. Work which was previously done by an experienced
cost or project engineer all too often is now handled by an inexperienced

v

Copyright © 2005 by Marcel Dekker

person who relies on software without really understanding its limitations or
if the inherent assumptions made when the software was developed are
reasonable for the project at hand.
Further, business scandals and corporate mismanagement seem to have
proliferated with increased frequency, resulting in project failures, bankruptcies,
corporate collapse, and in some cases, criminal indictments. This has brought
increased concern about business and engineering ethics.
For these various reasons, except for necessary factual and reference

chapters of the Third Edition have been retained in this Edition. However, the
Fourth Edition expands on the Third Edition with the addition of discussions
of international project considerations, project risk analysis and contingency,
ethical considerations and, of course, the Internet.
As was the case with the previous three editions of the Project and Cost
Engineers’ Handbook, this work would not have been possible without the
many contributions of members of AACE International, the Association for
the Advancement of Cost Engineering. My thanks go to them and to AACE
International for once again agreeing to sponsor this book. Special thanks go
to the Houston Gulf Coast Section of AACE International and the late Aaron
Cohen, PE CCE and the late Thomas C.Ponder, PE CCE who in 1979 were
responsible for originating the first edition and to Dr. Lloyd M.English, PE
who collaborated with me on the third edition.

Kenneth K.Humphreys, PhD, PE CCE

vi
Preface

Copyright © 2005 by Marcel Dekker

updating and some expansion of Chapter 3, “Cost Estimating,” all of the

Acknowledgments

The editor wishes to acknowledge the many individuals who have contributed
to all four editions of the Project and Cost Engineers’ Handbook.
Special thanks are due to AACE International (the Association for the
Advancement of Cost Engineering) for once again sponsoring this book as
they did with the prior three edition. Thanks are also due to the International
Cost Engineering Council and its member associations for providing much of
the information which forms the basis for the new material in this edition.
Personal thanks go to Charles P.(Chick) Woodward for his insights on
international project considerations and to Michael Curran, President of
Decision Sciences Corporation, St. Louis, Missouri, from whom I gained a
deep appreciation for concepts of risk analysis and its value in project
evaluation.

vii

Copyright © 2005 by Marcel Dekker

Contents

Preface
v
Acknowledgments
vii
Contributors
xv

1.
Cost Engineering Basics
1

1.1
Mathematics of Cost Comparisons
1

1.2
Depreciation
4

1.3
Accelerated Cost Recovery System: 1981–1986
9

1.4
Modified Accelerated Cost Recovery System (MACRS)
10

1.5
Cost Comparisons of Unequal Durations
11

1.5.1
Continuous Interest
16

1.6
Inflation
18

1.7
The Learning Curve
22

1.8
Profitability
26

1.9
Working Capital
29

1.10 Conceptual Costing
30

1.11 Forecasting
30

1.12 Value Engineering
32

1.13 Optimization
35

1.13.1
Linear Programming
35

1.13.2
Dynamic Programming
38

1.14 Nomenclature
40

Recommended Reading
41

2.
Cost Accounting
43

2.1
Project Cost Accounting
43

2.2
Role of Cost Accounting
44
2.2.1
Accounting Terms
44

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Copyright © 2005 by Marcel Dekker

2.3
Classification of Costs
47

2.3.1
Direct Costs
49

2.3.2
Indirect Costs
49

2.3.3
Overhead Costs
50

2.3.4
Standard Costs
51

2.3.5
Joint Costs
52

2.3.6
Job Order and Process Costing
54

References
55

Recommended Reading
55

3.
Cost Estimating
57

3.1
Capital Cost Estimation
57

3.1.1
Purpose of Estimates
57

3.1.2
Fixed Capital and Working Capital
58
3.1.3
Current Trends in Capital-Cost Estimating
58

3.1.4
Types of Estimates
59

3.1.5
Functions of Capital-Cost Estimates
61

3.1.6
Cost of Making Estimates
61

3.1.7
Representation of Cost Data
62

3.1.8
Factored Estimating
63

3.1.9
Codes of Account
73

3.1.10
Startup Costs
74

3.1.11
Evaluation of the Estimate
76

3.2
Operating Cost Estimation
77

3.2.1
Definitions
77

3.2.2
Purposes of Operating Cost Estimates
77

3.2.3
Raw Materials and Utilities
78

3.2.4
Operating Labor
79

3.2.5
Maintenance
79

3.2.6
Indirect Payroll Cost
80

3.2.7
Operating Supplies
80

3.2.8
Laboratory and Other Service Costs
80

3.2.9
Royalties and Rentals
80

3.2.10
Indirect Costs
81

3.2.11
Distribution Costs
81

3.2.12
Avoidance of Nuisances
81

3.2.13
Contingencies
81

3.2.14
Shortcut Methods
82

3.2.15
Components of Total Product Cost
85

3.3
Summary
85

References
85

Recommended Reading
86

4.
Economic Equivalence and Profitability
87

4.1
Introduction
87

4.2
Profitability Analysis
89

Contents
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Copyright © 2005 by Marcel Dekker

4.2.1
Depreciation
90

4.2.2
Practical Examples of Economic Comparisons and
Profitability
92

4.2.3
Lease Versus Purchase
95

4.2.4
Economics for Capital Projects or Replacements
97

4.2.5
Scheduling a Loan Payment
101

References
115

Recommended Reading
116

5.
Cost Control and Reporting
117

5.1
Introduction
117

5.2
Project Formats
118

5.2.1
Contracting Party Viewpoints
118

5.3
Establishing Baselines for Control
119

5.3.1
Cost Control Variables
120

5.4
Status Evaluation and Control
124

5.4.1
Cost/Schedule Integration
124

5.5
Reporting and Analysis
128

5.5.1
Frequency of Reports
129

5.5.2
Variance Analysis
129

5.5.3
Report Distribution
129

References
134

Recommended Reading
135

6.
Project Management and Schedule Control
137

6.1
Project Management, Organization, and
Execution Conflict
137

6.2
Project Management and Control
141

6.3
PERT, CPM, Arrow and Precedence Scheduling
156

Recommended Reading
167

7.
Cost Indexes, Escalation, and Location Factors
169

7.1
Cost Indexes
169

7.1.1
How to Use an Index
171

7.1.2
How an Index is Compiled
173

7.1.3
Analysis of some Building Cost Indexes
175

7.1.4
Limitations in Using Published Indexes
177

7.1.5
Procedure for Estimating Escalation
179

7.2
Location Factors
181

7.2.1
Background Sources
182

7.2.2
International Location Factors
184

7.2.3
Country Cost Indexes
197

7.2.4
Cost Data Sources
197

References
197

Recommended Reading and Other Information Sources
198

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Copyright © 2005 by Marcel Dekker

8.
Operations Research Techniques
201

8.1
Linear Programming
201

8.1.1
Two-Dimensional Graphical Solution
205

8.1.2
Simplex Method
207

8.1.3
Conversion to Simplex Form
208

8.1.4
Interpretation of Simplex Solutions
211

8.2
Dynamic Programming
212

8.3
Simulation
213

8.3.1
Coin Problem
214

8.3.2
Random Variables
215

8.3.3
Queuing Problem
216

8.3.4
Discussion
218

Recommended Reading
220

9.
Risk Analysis: How to Do it and How Not to Do it
221

9.1
Introduction
221

9.2
The Fourth Variable
222

9.3
The Monte Carlo Approach
223

9.4
Contingency
224

9.5
Avoiding Risk Analyst Induced Risk
225

9.6
Conducting the Risk Analysis
226

9.7
Available Risk Analysis Software
226

References
227

Recommended Reading
228

10. Cost Engineering in a Worldwide Economy
229

10.1 Introduction
229

10.2 Project Elements Checklist
230

10.2.1
Project Design
230

10.2.2
Bulk Materials
230

10.2.3
Engineered (Process) Equipment
231

10.2.4
Construction Labor
231

10.2.5
Construction Equipment
232

10.2.6
Construction Management Staffing
232

10.2.7
Schedule
232

10.2.8
Local Infrastructure Requirements
232

10.2.9
Material & Equipment Delivery (Shipping & Customs) 233

10.2.10 Progress Payments (Cash Flow)
234

10.2.11 Local Taxes
234

10.2.12 Insurance
235

10.2.13 Project Finance
235

10.2.14 Legal Recourse
235

10.2.15 Social System
235

10.3 How Do You Begin?
236

10.4 Conclusion
237

Recommended Reading
238

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Copyright © 2005 by Marcel Dekker

11. Computer Applications for Project Control
239

11.1 Why Consider Computerization?
239

11.2 Definition of Terms
240

11.3 Considerations in the Design of Project
Management Systems
244

11.4 Basic Steps in System Design and Implementation
245

11.5 A Review of Project Control Software
257

11.5.1
Planning and Scheduling Software
257

11.5.2
Cost Estimating Software
258

11.5.3
Economic Analysis Software
260

11.5.4
Management Reporting Software
260

11.5.5
Risk Analysis Software
260

11.6 Computer-Aided Design Applications for
Project Management
261

11.6.1
Basic CAD Components and Capabilities
261

11.6.2
CAD Applications to Cost Control
262

11.6.3
CAD Applications to Weight Control
262

11.6.4
CAD Applications to Document Control
262

11.6.5
CAD Applications to Maintenance
263

11.6.6
CAD Applications to Construction Planning
263

Recommended Reading
264

12. Cost Engineering Ethics
265

12.1 Black and White, or Gray?
265

12.2 The International Cost Engineering Council
Canons of Ethics
266

12.3 Computer-Aided Nightmares
267

12.4 A Computer-Assisted Catastrophe
269

12.5 International Project Ethics
272

References
274

Recommended Reading
274

Appendix A. AACE International Certification Programs
275

A.1
Introduction
275

A.2
Certified Cost Engineer/Certified
Cost Consultant Examination
275

Exam Basis
275

Exam Schedule
276

Exam Format
276

Preparation Guidance
278

The Professional Paper
278

Sample Exam Questions
280

Answers to Sample Exam Questions
283

A.3
Interim Cost Consultant Examination
283

Exam Basis, Schedule and Format
283

ICC Sample Exam Questions
283

A.4
Planning and Scheduling Professional
Certification Examination
284

Contents
xiii

Copyright © 2005 by Marcel Dekker