PROJECT PLANNING, SCHEDULING & COSTPROJECT PLANNING, SCHEDULING & COST

Presented to

Prof. G. Tararkji, &

Engineering Management (ENGR 801) Class

of

School of Engineering & Computer Science

San Francisco State University

By

Jose Calle

Duad Shirzai

Kim Phuong

Mumtaz Nazir

Ricardo Galdamez

March 12, 2003

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Table of Contents

Page

LIST OF ILLUSTRATION...................................................................................................ii

INTRODUCTION. By Ricardo Galdamez................................................................................1

PLANNING by Jose Calle......................................................................................................5

SCHEDULING by Kim Phuong............................................................................................10

COST by Mumtaz Nazir.........................................................................................................17

CONCLUSION by Duad Shirzai...........................................................................................27

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List of Illustration

Page

Figure 1. Gantt Chart.........................................................................................................12

Figure 2. PERT/CPM Flow Diagram.................................................................................13

Figure 3. PERT/CPM Flow Diagram.................................................................................14

Figure 4. Example of forward and backward pass calculation for a network....................16

Figure 5. Estimates at Project Stages.................................................................................18

Figure 6. Ranges of Estimates over Project Cycle.............................................................18

Table 1. Data for the Basic Estimating Techniques...........................................................22

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INTRODUCTION

What is a Project

To better understand the general process of planning, scheduling and costing in an

engineering project it is important to first have a clear idea and understanding of what a

project is and that is the reason why this report first introduces the subjects of project and

project management. After the overall idea of project management is introduced, this

report then concentrates on the specific areas of the planning, scheduling and costing

processes.

All of us are constantly undertaking projects in our day to day lives for example:

Preparing for a weekend picnic, repairing leaky faucet, fixing up the house for our friends

visit, and writing a term paper for a school project. Projects are integral part of our lives

and usually we tend to carry out these projects in a disorganized way. For example, we

finally get around to fixing the faucet when we can no longer tolerate the noise of the

dripping water and we tend to began writing out a term report the day before is due.

So, it is now clear that we are surrounded by projects and we work on them daily but we

rarely do we strive to manage these projects in an organized way unless of course you are

at work. Although humanity have been carrying projects for thousands of years, modern

project management is a recent development and to a large degree it is a byproduct of the

major projects of World War II when a conscious effort was made to coordinate their

enormous budget, schedule and resource complexity as efficiently as possible.

The common characteristics that all projects share are the following:

Projects are goal oriented

Involve the coordinated undertaking of interrelated activities

They are of finite duration; meaning that they have beginning and an end.

They are all to a certain degree unique

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In general these four characteristics distinguish projects from other undertakings. Each

of these characteristics has important implications so we will examine them carefully.

Goal Orientation

Projects are directed as achieving specific results; that is they are goal oriented. It is these

goals that drive the project forward and all planning, scheduling and costing are

undertaking so as to achieve them.

The fact that projects are goal oriented suggests that an important feature of managing

projects is to identify relevant goals, starting at the highest levels and then working down

to the grass roots. It also suggest that a project can be viewed as the pursuit of carefully

chosen goals and that progress on the projects entails on achieving ever higher levels of

goals, until finally we have attained the ultimate goal.

Coordinated Undertaking of Interrelated Activities

Projects are inherently complex and entail carrying out multiple activities that are related

to each other in both obvious and subtle ways. Some activities cannot be executed until

other tasks have been completed, some must be carried out in parallel, and so on. Should

the tasks get out of sync with each other, the whole project may be jeopardized.

When we reflect on this basic characteristic of projects, we realize that a project is a

system that is a whole made of interrelated parts.

Limited Duration

Projects are undertaken in a finite period of time. In other words, projects are temporary.

They have well-defined beginnings and ends. Simply put it, when the project goals are

achieved, the project ends. A large part of the project effort is dedicated to ensuring that

the project is accomplished at the appointed time. To do this, schedules are created

showing when tasks should begin and end. The specific subject of schedules is

developed in the third part of this report.

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Uniqueness

Projects are to a degree, non-recurring, one of a kind undertakings and the extent of

uniqueness varies considerably from project to project even if you are an engineer

building hundreds of identical MacDonald's restaurant. True the basic plan of a

MacDonald’s restaurants may be the same while the principal source of their uniqueness

may lie in the special soil conditions surrounding the building, or the requirements for

installing a new sewer system for the first time or the need to work with a new team of

carpenters and so forth.

On the other hand, if you are designing the operating system of a new-generation

computer, you are clearly working on a highly unique effort as you may be doing

something that has not done before. So, because past experience not always offers you

with precise guidance on what you can expect in your new project, it is safe to say that

projects are filled with certain degree of risk and uncertainty.

The Subject of Project Management

If we ask a seasoned engineering professional what is the fundamental objective in

carrying out a project one may guess correctly that the answer would be “completing a

job” or “to get the job done”. True however, given a few moments to reflect further any

professional may amplify their response “My most basic objective is to get the job done,

on time, within budget and according to specifications.” These three items are so

commonly identified by project professionals as very important parameters in the project

management process that they have been given a name; the triple constraints. They

constitute the focal point of the project’s professional attention and energy. Indeed,

project management entails carrying out a project as effectively as possible in respect to

the constraints of time, money and specifications.

To deal with the time constraint, project professionals establish deadlines and work with

schedules. Some fairly sophisticated computer assisted scheduling tools such as

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PERT/CMP, GERT and VERT are available to help them manage the time dimension

more effectively.

Money constrains are handled with budgets. First cost estimates are made to get an

educated idea of what a project tasks will cost. Once the project is under way, the budget

is monitored to make sure that expenses are not getting out of hand. Money buys

resources and that is the reason that project managers have developed several tools for

managing human and material resources such as resource loading charts, resource Gantt

charts and linear responsibility charts.

Of the three constrains perhaps specifications are the most difficult to handle.

Specifications what the final product of our project effort should look like and how it

should function. For example, if the project is improving the drainage of a town and want

to make sure that it main drainage system will be able to handle a flood that occurs

statistically once every 100 year then, the engineer must make sure that the channels and

sewers are built to the specified sizes.

The Project Life Cycle

Projects have beginnings, middle periods and endings. This may seem self evident but it

is not trivial if you are concerned with the management of projects since where you are in

the project life cycle will have a strong bearing and what one should be doing next and

what options are open at that particular point in time.

There are different ways to view the project life cycle and one of the most common views

is dividing these life cycles into four broad phases: project conception, planning,

implementation and termination. Following is a discussion that will walk us through the

process of planning, scheduling and costing.

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PLANNING

A project starts as a need by the owner for the design and construction of a facility

to produce a product or service. The owner’s study must conclude with a well-defined set

of project objectives and needs, the minimum requirements of quality and performance,

an approved maximum budget, and a required project completion date.

The procedures used for project management vary from company to company and even

among individuals within a company. Although each project manager develops his or her

own style of management, and each project is unique, there are basic principles that apply

to all projects.

This report presents these principles and the basic steps to develop a work plan to manage

a project through each phase from conceptual development to completion.

A typical project consists of three basic components: scope of work, schedule, and

budget.

Scope of Work

Project planning is the heart of good project management because it provides the central

communication that coordinates the work of all parties. Planning also establishes the

benchmark for the project control system to track the quantity, cost and timing of the

work required to successfully complete the project. It starts at the beginnings of a project,

with the scope of work, and continues throughout the life of the project. The

establishments of milestones and consideration of possible constraints are major parts of

planning.

The source of many problems associated with a project is failure to properly define the

project scope. Too often the focus is just on budget or schedule. Not only should the

scope, budget, and schedule be well defined, but each must be linked together since one

affect the other, both individually and collectively.

Since the project scope defines the work to be accomplished, it should be the first task in

the development of a project, prior to the development of either the budget or the

schedule. It is the duty of the PM to ensure that the project scope, budget, and schedule

are linked together.

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As changes occur, additional planning is required to incorporate the changes into the

schedule. There are many situations or events that can arise that can impact a project

schedule. Examples are changes in personnel, problems with permits, change in a major

piece of equipment, or design problems in structures. Good planning detects changes and

adjusts the schedule in the most efficient manner.

A good planning requires the following:

Work Breakdown Structure (WBS)

It divides the project into smaller parts that can be managed. The concept of WBS is

simple; in order to manage an entire project, one must manage and control each of its

parts. The WBS is the cornerstone of the project work plan. It defines the work to be

performed, identifies the needed expertise, assists in selection of the project team, and

establishes a base for project scheduling and control.

A WBS is a graphical display of the project that shows the division of work in a multi-

level system. The smallest unit in the WBS is the work package. A work package

provides a detailed description of the work required to meet project needs and to match

the project manager’s initial plan work. The work package should be assembled by each

team member and supplied to the PM within 2 weeks of the kick-off meeting.

Planning the Project Team

The PM should develop a preliminary WBS that identifies the major tasks that must be

performed. A detailed list of tasks should be prepared and grouped into phases that show

the sequence of tasks and the interdependences of work. This information will assist the

PM in selecting the technical expertise that will be required of the project team.

All of this preparatory work is required because the PM can not effectively form the

project team until the work to be done is known.

All team members represent their respective discipline’s areas of expertise and are

responsible for early detection of potential problems that can have an adverse effect on

the project’s objectives, cost, or schedule. If a problem occurs, each team member should

notify his immediate supervisor and the PM.

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It is important that each team member clearly understands the project objectives and

realizes his or her importance in contributing to the overall success of the project. A

cooperative working relationship is necessary between all team members.

Since the initiative and responsibility to meet project objectives, cost, and schedules rests

with the PM, he or she should be kept fully advised and informed.

The PM must organize, coordinate, and monitor the progress of the team members to

ensure the work is completed in an orderly manner.

Kick-off-Meeting

After the formation of the project team, the PM calls the first team meeting, commonly

called the kick-off meeting. It is of the most important meeting in a project and is held

prior to starting any work.

The kick-off meeting allows the team to set priorities, identify problem areas, clarify

member responsibilities, and to provide general orientation so the team can act as a unit

with a common set of goals.

At the meeting the PM should present the project requirements and the initial work plan,

discuss working procedures, and establish communications links and working

relationships.

Prior to the meeting the PM should prepare general project information data, including

the project name, project location, job account number, and any other information needed

by the project team. Standards, policies, procedures, and any other requirement should

also be presented.

Minutes of the meeting must be recorded and distributed to team member. In particular,

there should be documentation of the information that is distributed, the agreements

among team members, and the identification of team concerns or questions that require

future action by the PM or team members.

Purposes of the kick-off meeting: to orient team members regarding project objectives

and needs, to distribute the project manager’s overall project plan, and assign to each

team member the responsibility of preparing work packages for the work required in his

or her area of expertise. Work packages should be prepared and returned to the PM with

two weeks of the kick-off meeting.

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Successive meeting should be held weekly throughout the duration of the project. These

meetings are necessary to keep the team acting as a unit to ensure a continuous exchange

of information. The best way to solve conflicts is through open discussions and

compromise.

Weekly/Monthly Reports

To be meaningful, reports must be issued on a regular basis. Two reports should be

prepared, a weekly report, and a monthly report for each project. Much of the weekly

report can be obtained from the minutes of the weekly team meeting. The report should

include: work completed, work in progress, work scheduled, and special problems.

Generally, the weekly report is used by the PM to coordinate the work in progress.

The monthly report should contain milestones that have been achieved, a tabulation of

costs to date compared to forecast costs, and an overlay of planned and actual time

schedules.

The Follow-Up Work

After the exchange of information at the kick-off meeting and a review of the required

work by each team member there may be a need to readjust the work breakdown

structure of the initial project plan. These situations should be resolved within two weeks

of the kick-off meeting.

The team as a whole must then work to find alternative methods of handling the project

to keep the estimated cost within the approved budget. If a solution can not be found, the

owner must be advised so an agreeable solution can be determined for a scope of work

that matches the approved budget. It is important to resolve issues of this nature at the

beginning of the project, when choices of alternatives can be made, rather than later when

it is too late.

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Responsibilities of Parties

Each of the three principal parties in a project has a role to fulfill in the various phases of

design development and construction.. A team approach between the owner, designer,

and contractor must be created with a cooperative relationship to complete the project in

the most efficient manner.

The owner is responsible for setting the operational criteria for the completed project.

Owners also need to identify their level of involvement in the project. The owner is also

responsible for setting parameters on total cost, payment of costs, major milestones, and

the project completion date.

The designer is responsible for producing design alternatives, computations, drawings,

and specifications that meet the needs of the owner. It is the duty of the designer to

produce a project design that meets all federal, state, and local codes, standards, and

environmental and safety regulations. In addition a budget for the design should be

prepared, along with a design schedule that matches the owner’s schedule. As part of

their design responsibility, designers usually prepare an estimate of the probable

construction cost for the design they have prepared. Major decisions by the owner to

proceed with the project are made from the designer’s cost estimate.

The cost and operational characteristics of a project are influenced most, and are easier to

change during the design phase. Because of this, the designer plays a key role during the

early phase of a project by working with the owner to keep the project on track so the

owner/contractor relationship will be in the best possible form.

The construction contractor is responsible for the performance of all work in accordance

with the contract document that has been prepared by the designer. This includes all

labor, equipment, material, and quality. The contractor must prepare an accurate estimate

of the project, develop a realistic schedule, and establish an effective project control

system for cost, schedule, and quality.

The owner’s PM leads a project management team which consists of each Design PM

and Construction PM that is assigned a contract from the owner. The owner’s PM is

responsible for the accomplishments of all work, even though he or she has limited

resources under their direct control because the work has been contracted to various

organizations

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SCHEDULING

History of Scheduling

Project management is the planning, scheduling, and controlling of project

activities to meet project objectives. After goals of the project are defined, it is important

to express them in terms of specific tasks, and to break them into a cohesive schedule and

plan. The primary reason for scheduling a project is to ensure that an imposed deadline

can be met. The ideal schedule is one that provides an effective means for planning,

organizing and controlling a project. It should let the manager quickly anticipate

financial, material, and personnel requirements, and analyze the effects of temporary

delays and suspensions caused by any number of problems, such as labor shortages,

funding difficulties, poor subcontractor coordination, late arrival of diagrams, or

defective workmanship. When scheduling, project managers should allow enough time

to complete the project properly. While it is true that many projects are set up with built-

in time constraints, it is important to be as realistic as possible about this.

The most effective kind of schedule is a graphic display. Until around 1958, the only tool

for scheduling projects was the bar chart developed by Henry Gantt. They are often

called Gantt charts. They are simple to construct and easy to read. They are helpful in

the early phases of the projects. They remain the best tool for communicating to team

members what they need to do in given time frames. As the project progresses and as

activities get more complex and detailed, the Gantt chart has certain limitation that makes

it desirable to switch to some other scheduling tool. In the late 1950s and early 1960s,

two methods of scheduling were developed that used arrow diagrams to capture the

sequential and parallel relationships among project activities. One method was called

Critical Path Method (CPM); the other was Performance Evaluation and Review

Technique (PERT).

Gantt Chart

Gantt chart is a chart that uses timelines and other symbols to illustrate multiple, time-

based activities or projects on a horizontal time scale (Baker, p312.) Gantt charts are the

most commonly used scheduling charts in business because they are easy to produce and

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simple to understand. Gantt charts have a list of dates at the top and a list of tasks down

the left side. A line to the Gantt chart shows the date where each task begins and ends on

the chart based on its precedence and duration. The level of scheduling detail you display

in our Gantt charts will be determined by the time periods you use on the top: daily,

weekly, hourly, monthly, or whatever is appropriate for your project. Gantt charts are

best used as visual overview of project timelines. Gantt charts are useful for envisioning

the entire project through time. Although Gantt charts are easy to construct and simple to

understand, they have serious drawbacks. Gantt charts do not show the effect of a delay

in a phase because they do not show the interdependencies among tasks. If an activity

falls behind, it is difficult to tell how it will affect the rest of the work. They do not

indicate the existence of a network of activities. Gantt charts do not indicate the

percentage of total work that each phase represents. They do not show which phase are

critical to the completion of the project within an allotted time. Gantt charts also do not

reflect the revisions of the planning activities.

Constructing a Gantt Chart

The general procedure is to break the overall project down into its separate but

interrelated subprojects. List each phase, each effort that produces some specific result.

Looking at the whole project, and "exploding" or subdividing it into discrete, manageable

units is called "Work Breakdown Structure" (WBS). When the list of subproject is

complete and in proper sequential order, each having a specific and verifiable character

and a specific time of completion, estimate the duration of each phase and decide which

can be carried out concurrently. It will turn out that some can while others must wait

upon the completion of the previous phase. Below is an example of a Gantt chart.

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Figure 1

Network Diagram

A network diagram is a graphic representation of a series of activities and events

depicting the various aspects of a project and the order in which these activities and

events must occur. A network is also called an “arrow diagram”. It reflects all activities

and events from the beginning to the ending of the project. The few rules of networking

may be classified as those basic to all arrow networking systems. Before an activity may

begin, all activities preceding it must be completed. Arrows imply logical precedence

only. Neither the length of the arrow nor its “compass” direction on the drawing has any

significance. Event numbers must not be duplicated in a network. Any two events may

be directly connected by no more than one activity. And lastly, networks may have only

one initial event (with no predecessor) and only one terminal event (with no successor).

An example of a network is represented in the below figure

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Figure 2

PERT/CPM

The two most common forms of networking systems are PERT and CPM. In 1958, the

U.S Navy needed a way to monitor and control the Polaris missile program. It especially

needed a method for minimizing the conflicts, delays, and interruptions that so frequently

plague government projects. To accomplish this, the Navy developed PERT. PERT

enabled the Navy to determine time schedules and resource requirements for each

activity. PERT facilitated the rescheduling and reassignment of resources with a

minimum delay to projects. PERT emphasizes the control of the time element of

program performance and treats explicitly the uncertainty in the performance times of the

activities. The PERT system is based on three time estimates of the performance time for

each activity: an optimistic (minimum) time, a most likely (modal) time, and a

pessimistic (maximum) time (Moder & Phillips P.10).

Optimistic time (a)

Most likely time (m)

Pessimistic time (b)

Expected time (te)

te = (a + 4m + b)/6

The PERT system gives the probability of meeting given scheduled dates without having

to expedite the project activities. On the other hand, programs comprised primarily of

deterministic activities utilize CPM, which omits the statistical considerations and is

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based on a single estimate of the average time required to perform the activity in

question. Projects using PERT usually faces fewer constraints than projects using CPM.

PERT is often used in government projects, especially research and development ones,

like those related to space program, military defense, and medical research. CPM is more

applicable to construction projects. It works best when time can be estimated accurately

and costs can be determined in advance. Below is a partial network diagram in a

construction project using CPM.

Figure 3

PERT/CPM Problems

Unfortunately, PERT and CPM are not without their disadvantages. PERT networks are

based upon the assumption that all activities start as soon as possible. Regardless of how

well we plan, there almost always exist differences in performance times and scheduled

times. Unless the project is repetitive, there usually exists a lack of historical information

upon which to base the cost estimates of most optimistic, most pessimistic, and most

likely time. There exists a distinct contrast in PERT systems between planners and doers.

This human element must be accounted for in order to determine where the obligation

actually lies. In most organizations, PERT planning is performed by the program office

and functional management. Yet once the network is constructed, the planners and

managers become observers and rely on the doers to accomplish the job within the time

and cost limitations. Management should convince the doers that they have an obligation

toward the successful completion of the established PERT/CPM plans.

Basic Scheduling Computations

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In order to know how long the project will take and when activities may be scheduled, we

can look at the arrow diagram and the estimated durations of the individual activities.

These estimates may be based on a single time value (CPM), or it may be based on a

system of three time estimates (PERT). The basic scheduling computation first involves

a forward and then a backward pass through the network. The forward pass

computations give the earliest (expected) start and finish times for each activity and the

earliest occurrence time for each event. The backward pass computations will give the

latest allowable start and finish times for each activity and the latest allowable occurrence

time for each event. After the forward pass and backward pass computations are

completed, the slack (or float) can be computed for each activity, and the critical and

subcritical paths through the network determined. The critical path is the longest route

through a network that contains activities absolutely crucial to the completion of the

project.

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Figure-4

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COST

When considering a project, one of the earliest requirements is to obtain an

estimate of the likely budget for the project. At the inception of the project, Price data are

not available and appropriate techniques of cost estimating have to be adopted. The

purpose of this article is to indicate the theory, techniques and practical applications of

project cost estimating throughout the stages of the project cycle.

Cost Estimating

The record of cost management in engineering especially construction industry is not

good. Many projects show massive cost and time over-runs. These are frequently caused

by underestimates rather than failures of cost management or contract administration.

Estimates of cost and time are prepared and revised at many stages throughout the

development of a project. (Figure 5) They are all predictions or approximations. The

object is to predict the most likely cost of the project. The degree of realism and

confidence achieved will depend on the level of definition of the work and extent of risk

and uncertainty, giving a range of most probable costs. This range can be plotted against

time to give an idealized cost envelope, as illustrated in Figure 6.

Generally, such envelopes show that there is a narrowing range and increasing certainty

as the project progresses. The band is wider when the project commences because

information is at a minimum (time and cost data, scope and organization) and many risks

are latent, unrecognized by the project team. Project risk decrease over the life of the

project, but not in a continuous way and from time to time there may be increasing risks,

or new risks that arise during the projects’ development.

Any estimate should be presented as a most probable value with a tolerance; particular

areas of risk and uncertainty should be noted and, if necessary a specific contingency

allowance should be included in the estimate

It is commonly reported that the requirements of an estimate are to predict the cost and

schedule for the work identify and quantify potential problems and risks and forecast

expenditure.

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Figure 5 Estimates at Project Stages

Figure 6 Ranges of Estimates over Project Cycle

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The two key points at which estimates are prepared in the project life cycle are at

sanction, when the client becomes committed and at tender when the contractor becomes

committed

Cost and Price

It is important, when reviewing estimating techniques, to be clear as to the definition of

Cost is the cost directly attributed to an element of work, including direct overheads; for

example, supervision. Price is the cost of an element of work, plus allowance for general

overheads, insurance, taxes, finance and profit (sometime known as ‘ the contribution’)

Price = Cost estimate + Risk + Overheads + Profit + markup

The first aim is to estimate most probable cost of the works. The cost of an element of the

works comprises quantity proportional, time related and fixed costs. Quantity

proportional costs are the direct costs of materials in the permanent works, with some

exceptions: for example the cost of concrete may vary whether or not it is batched.

Time related cost typically relates to plant and labor. The cost of operating an excavator

is a time-related cost. It needs an operator. Maintenance and fuel, whatever volume of

rock is excavated. The cost of bringing the excavator to site and taking it away is lump

sum start and finish costs. Payment of a specialist subcontractor is another example of

fixed cost.

These costs usually have to be translated into quantity proportional unit rates in bill of

quantities, confusing control, because if the time taken to carry out the work is longer, the

cost will increase but the payment due will remain the same as quantity remain the same.

It should be noted that plat and labor could not be varied daily, again emphasizing the

fact that the cost is related to provision of resource, not the quantity of work completed.

Finally, the direct overhead costs of management, establishment, and consumables that

can be charged against a project should be asses and spread over the other cost centers,

giving the total cost top perform the work.

The price of the work is derived from the cost and is sometimes described as cost plus

mark-up. The price must cover general overheads incurred by an organization which

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cannot be charged directly to a particular project (administrative staff, senior

management, office maintenance, insurance etc.) and the payment of taxes, interest

charges on monies borrowed and contingencies allowances for risk and uncertainties, and

finally the profit of organization.

There are some other factors which influence the overall cost and hence price of

engineering works. These may include the location, the degree of innovation, the type of

contract, the method of measurement and payment conditions and risk surrounding the

projects.

Importance of Early Estimate

Particular care should be taken when preparing the first estimate for the project as it

provides a basis against which further funds will be released and future estimates will be

compared with it. It is also at this point that the capital cost for the project will be

considered as part of a full financial appraisal of the project and the decision whether or

not to proceed with the project will be taken. The promoter(s) of the project should not

base the sanctioning decision on the first estimate but this has to be balanced by the extra

costs incurred as more detailed design is completed and more detailed estimate are

undertaken.

The earliest estimate is primarily quantification of risks. Effective estimating at this stage

requires that the estimator not only has access to comprehensive historical data, and is

capable of choosing and applying the most appropriate technique, but also has the

experience to make sound judgement regarding the levels of (largely unquantifiable)

risks.

Estimating Techniques

The five basic estimating techniques available to meet the project needs summarized

together with the data required for their application, in Table 1 these are:

a. Global

This term describes the ‘broadest brush’ category of technique, which relies on libraries

of achieved costs of similar projects related to the overall size or capacity of the asset

provided.

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Examples are:

Cost per megawatt capacity of power stations.

Cost per mile of road/freeways cost per square feet of building floor area.

Cost per ton of output for process plants.

The technique relies entirely on historical data and therefore must be used in conjunction

with inflation and a judgement of trends in levels of price (i-e market influence) to allow

for the envisaged timing of the project.

The use of this type of ‘rolled up’ historical data is beset with dangers, some more

specific of them are:

Different definitions of what costs are included

Different definitions of measurements of the unit of capacity

Not comparing like with like

Inflation

Market factors

b. Factorial

These techniques are typically used for process plants and power stations where the core

of the project consists of major items of plant, which can be specified relatively easily

and have current price obtained from suppliers. This technique provides factors for a

comprehensive list of peripheral costs, such as pipework, electric instruments, structure

or foundations. The estimate for each peripheral will be the product of its factor and the

estimate for the main plant items.

The technique does not require a detailed program, but nevertheless one should be

prepared to identify problems of construction, lead times for equipment deliveries and

planning approval which will go undetected if the technique is applied in a purely

arithmetical way. The technique has the considerable advantage of being predominantly

based on current costs, thereby taking account of market conditions and placing little if

any, on inflation indices. Factorial techniques are not normally reliable for site works,

including most civil and building and mechanical and electrical installation work, except

in a series of projects where the site circumstances are closely similar.

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Table 1 Data for the Basic Estimating Techniques

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c. Man-Hours

This is probably the original estimating technique. It is most suitable for labor- intensive

construction and operations such as fabrication and erection and instrumentation work

where there reliable records of productivity of different trades per man-hour. The total

man –hours estimated for a given operation are then costed at the current labor rates and

added to the cost of materials and equipment. The advantages of working in current costs

are obtained.

The technique is similar to operational technique. However in practice, it is often used

without a detailed program, on the assumption that the methods of construction will not

vary from project to project.

d. Unit Rates

This technique is based on the traditional ‘ bill of quantity’ approach to pricing

construction work. In its most detailed form a bill of quantities will be available

containing the quantities of work to be constructed, measured in accordance with an

appropriate method of measurement. The estimator selects historical rates or prices for

each item in the bill, using information from recent similar contracts, or published

information. As the technique relies on historical data it is subject to the general dangers

outlined above.

The technique is most appropriate to building and repetitive work where the allocation of

costs to specific operations is reasonably well defined and operational risks are more

manageable.

It is less appropriate for civil engineering, where the method of construction is more

variables and where the uncertainties of ground conditions are more significant

Despite its shortcomings, unit rate estimating is probably the most frequently used

technique. It can result in reliable estimates when practiced by experienced estimator

with good intuitive judgement, access to a reliable, well managed data bank of estimating

data and the ability to assess the realistic program and circumstances of the work.

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e. Operational Cost (Resource Cost)

This is the fundamental estimating technique, as the total cost of the work is compiled

from consideration of the constitute operations or activities revealed by the method

statement and program and from the accumulated demand for resources. Labor, plant and

materials are costed at current rates. The advantage of working in current costs is

obtained.

He most difficult data to obtain are the productivity of labor and construction plant in the

geographical location of the project and especially the circumstances of the specific

activity under consideration.

The operational technique is particularly valuable where there are significant

uncertainties and risks because the technique exposes the basic source of costs. It also

provide a detailed current cost/time basis for the application of inflation forecasts and

hence the compilation of a project cash flow

It is the most reliable estimating technique for civil engineering work and it is frequently

used by major contractors and an increasing number of consulting engineers

Suitability of Estimating Techniques to Projects Stages

The objective should be to evolve a cost history of the project from inception to

completion with an estimated total cash cost at each stage near to the eventual out-turn

cost. This can be achieved if the rising level of definition is balanced by reducing

tolerances and contingency allowances that represent uncertainty.

There is some correlation between the five estimating techniques, which have been

described, and the estimating stages, which have been defined. This is related to level of

detail available for estimating.

a. Preliminary Stage:

This is an initial estimating at the earliest possible stages, there are likely to be no design

data available and only a crude indication of the project size or capacity, and the estimate

is likely to be of use in capital expenditure programs

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At this stage Global estimating technique can be used, which is a crude system that relies

upon the existence of data for similar projects assessed purely on a single characteristic

such as size, capacity or output. Widely used on process plant is the Factorial method,

where the key components can be easily identified and priced, and all other works are

calculated as factors of these components

b. Feasibility Stage:

Sometimes known as an appraisal estimate, this comprises directly comparable estimates

of the alternative scheme under consideration. It should include all costs that will be

charged against the project to provide the best estimate of anticipated total cost, and if it

is to be used to update the initial figure in the forward budget then it must be escalated to

a cash estimate.

A price can be defined as

Price = Cost estimate + Risk + Overheads + Profit + markup

Cost estimate largest of all these elements, often accounting for more than 90% of the

total price usually is derived from the Unit Rate or Operational assessment of the labor,

plant, material and subcontract work required. The cost of labor usually calculated per

hour per shift or per week.

c. Design Stage:

This is an estimate for the selected scheme. It usually evolves from a conceptual design

until immediate pre-tender definitive design is completed. A man –hours method is most

suitable for labor-intensive operation, like design, maintenance or mechanical erection,

and work is estimated in total man-hour and costed in conjunction with plant and material

costs. The design budget estimate should confirm the appraisal estimate and set the cost

limit for the capital cost of the project.

d. Construction / Execution Stage:

This is the further refinement to reflect the prices in the contract awarded. This would

require some re-distribution of the money. The unit rate method is a technique based on

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the traditional bill of quantity approach (Unit rate) where the quantities of work are

defined and measured in accordance with a standard method of measurement.

Realism of Estimates

The use of the word ‘realism’ in this context, rather than ‘accuracy’, is important. As

noted above, estimate are not accurate in accounting sense, and the make-up of the total

must be expected to change.

The realism of estimate will depend greatly on the nature and location of the work, the

level of definition of the project, and particularly on the extent of the residual risk and

uncertainty at the time, as discussed above.

Studies have shown that a standard deviation ranges from 4% to 15% in process industry.

However the ranges of accuracy for high-risk projects, and in particular development

projects, may be much greater.

Many estimating problems can be addressed by adopting:

A structured approach

Choice of the appropriate technique

Use of the most reliable data

Consideration of the risks

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CONCLUSION

To have a successful project there are several things that needs to be coordinate from the

start. There are three major things for a successful project; one is to have the project done

on time, second thing is to have the project under budget and the last thing is throughout

the whole project planning is the key. The project planning is the key to a good project

management simply it provides the central communication that coordinates the work of

all the different trades. The estimating of cost is very important to make the project

profitable. The cost estimate should be presented as a most probable value with the

tolerance by, identifying areas of risk & uncertainties and adopting the best suitable

techniques, so that it should not over run or under run the final project cost. In order to be

successful estimating and purchasing departments becomes a big contributor. There are

several common characteristics that all projects share are the following:

Projects are goal oriented

Involve the coordinated undertaking of interrelated activities

They are of finite duration

They are all to a certain degree unique.

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