1. CE 366 PROJECT MANAGEMENT AND ECONOMICS Robert G. Batson, Ph.D., P.E. Professor of Construction Engineering The University of Alabama Rbatson@eng.ua.edu

2. Chapter 10: Project Cost System 2

3. Project Cost System A company-specific information system with two objectives: –Project cost control –Capture labor and equipment productivity and cost data in a forms suitable for estimating costs in the future Project cost control includes –Preparation and approval of the construction budget –Cost accounting to capture costs of field work –Comparison of accrued costs with budgeted amount –Reports that: summarize costs that are exceeding budgets; forecast final project costs and overruns Timely project cost status information must be available, reviewed, and action taken to prevent and/or minimize cost overruns 10.1

4. Data for Estimating Labor and equipment expenses are –Priced in light of past experience (hopefully captured in forms compatible with company needs and procedures) –Adjusted for current supply/demand and for regional differences, if work is bid across country or countries Project cost system should capture –Work description –Production rates per worker or equipment item –Hourly costs of labor and equipment General rule: smaller contractors depend on unit costs, whereas large companies base portions of their estimating on production rates 10.2

5. Project Cost Codes Many forms of alphabetical, numerical, and mixed cost codes are used –Highway Bridge uses a numerical methods based on CSI Master Format –Larger projects use the WBS and associated “WBS dictionary”, providing a structural relationship between schedule activities and cost accounts Highway Bridge format (200808 05 03157.20.3) 1.Project number 200808 2.Area code 05 3.Work type code 03157.20 (See Figure 3.10 for all) 4.Distribution code: 1-total; 2=material; 3=labor; 4=equipment; 5-subcontact 10.3

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7. Importance of Project Cost Codes and Cost Accounting Every project expenditure is coded in accordance with the project cost code system, leading to accurate and timely cost status reports Every project is coded consistently (same established work types and distribution codes) Project cost accounting is a key practice on each project, and within company’s overall accounting –an elaboration on the basic project expense accounts –concerned not just with costs, but with man-hours, equipment-hours, and amount of work accomplished –the basic data for both cost control and estimating –Supplements (does not replace) cost awareness/control of field supervisory personnel

8. Timing and Detail of Reports Labor and Equipment Costs –Estimates contain uncertainty –Labor and equipment application, and work progress, vary from plan –Must be monitored/reported in sufficiently short time intervals (see Section 10.8) using cost accounting information Other Cost Controls and Reports –Disbursement policies/controls apply to materials and subcontract –Regular accounting practice captures non-labor field overhead –Monthly financial accounting reports are adequate for overall project cost monitoring 10.5

9. Labor Time Cards For each worker (foreman, craftsman, laborer, operator), hours worked within each cost code are recorded –must be accurate –unproductive time assigned to work code that incurred it Daily time cards (Figure 10.1) are SOP –header information –shows workers present and what work types they performed, for how long (nearest hour or half-hour) –hourly rates also entered –foreman included, unless company policy is to charge his work to separate overhead account Weekly time cards (Figure 10.2) –separate card for each worker, labor distribution daily –a tendency of foreman to wait until reporting date, then reconstruct from “pocket time book” or memory 10.6

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12. Measurement of Work Quantities (Work in Place) A necessary adjunct to cost accounting, if production rates are to be recorded Typically a weekly determination on same cycle as schedule and cost updates Many work measurement methods –Direct field measurement by supervisors, cost engineer, or PM –Estimates of percentage of work complete –Computations from drawing with progress markings –Determination from network activity completion estimates 10.7

13. Work Quantities from Network Activities In schedule monitoring, activities are declared complete, or are assigned a percentage complete Must be translated into cost code quantities (Figure 10.3) Must be checked to verify field quantities match drawings, in that differences in quantities may have been introduced Activities in progress can yield deceptive work measurement estimates –percent activity complete ≠ percent work complete –activities with more than one work classification have to be broken down into cost code classification when weekly work quantity is noted (example p. 235) 10.8

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15. Weekly Labor Reports Labor productivity is measured by either: man-hours per unit of work (production rate) cost per unit of work (unit price) Budgets for each of these are possible from the project cost estimate, so “actuals” can be compared to budgets Use of man-hours avoids impact of wage rates that may be different than those used in budgeting (leading to a fair estimation of the productivity control achieved by supervisor) Unit prices mix both labor productivity with actual wage rates to reflect what final costs may be, but are a misleading measure of productivity control.10.9

16. Highway Bridge Weekly Labor Cost Report Weekly work measurement and payroll accounting enable production of labor cost report –Organized by cost code –Based on budgeted total quantity and labor cost Figure 10.4 (Version #1) –Compares labor unit costs, budgeted and “to date” –Shows labor cost savings and losses, to-date and projected Figure 10.5 (Version#2) shows –Cost difference (actual cost-budgeted cost) to date, also called cost variance –Deviation (actual cost/budgeted cost), which shows relative magnitude of the labor cost variances 10.10

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19. Equipment Cost Accounting Can be just as important as labor cost accounting on a given project, or to company management Companies must maintain equipment time and cost records on the project, through the cost accounting system Also, there is a general company account for each piece of equipment owned, leased, or rented; even if owned, an internal “rental rate” is established On the project, equipment time and hourly rates are used in conjunction with work completed to generate weekly equipment cost reports The rental rate is “all inclusive” -- ownership, maintenance, oil and fuel, repairs, etc., unless special cost accounts are maintained 10.11

20. Equipment Cost Reports Once each week, equipment cost are matched with the corresponding quantities of work produced (by cost code) Equipment expenses are charged to each account using –Budgeted rate –Number of hours (working, in repair, or idle) which are assigned to each cost code; idle time may need special care (Section 10.20) Credit is made to the equipment item’s general account, for later use in decisions whether or keep, replace, or sell the item A daily or weekly equipment time card (Figure 10.6) is maintained by the equipment supervisor Figure 10.7 is the July 21 Highway Bridge weekly equipment cost report, comparing unit and total equipment costs to date with budgeted costs 10.12

21. Monthly Cost Forecast Report Materials, Labor, Equipment, and Subcontracts each has –Budgeted amount –Cost to date –Estimate to complete (predicted additional costs) –Estimated final cost These can be computed at the work code level, then summarized and presented only for the major work classifications (Figure 10.8) Totaling costs across the types yields total estimated final cost; variance = estimated final cost - budget Total project variance for the Highway Bridge as of July 31 indicates a $15,751 (estimated) overrun 10.13

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23. Earned Value Analysis (EVA) Tends to be used in large projects, to assist the PM and his staff in assessing overall project cost and schedule status; also can be used (1) on individual activities to isolate those “in trouble” from the rest and (2) to forecast a range on most likely project cost at completion Compares physical work accomplished to date, with actual cost expenditure and the planned work to be accomplished by this date Input data for EVA at current time (now) –Cost budget for each activity or work category –Cost incurred for each activity that has started (whether finished, or not) 10.14

24. EVA “Fundamental Variables” Budgeted cost of work performed (BCWP) = for any activity or collection of activities, sum of the cost budgets assigned to each of the activities accomplished as of this date; for activities not yet finished, it is the activity budget multiplied by the percent complete; BCWP is also known as “earned value” of project to date Budget cost of work scheduled (BCWS) = for activities that were scheduled to finish by now (regardless of their status), BCWS is the original activity budget; for activities that are in progress now, use budgeted amount X percent completion expected by now Actual cost of work performed (ACWP) = for completed activities, this is the actual cost incurred; for activities that are in progress now, this is the cost to date 10.15

25. EVA Analysis Results Can plot these three variables versus time, each time they are updated, to assess cumulative project status, showing:  Cost variance CV = BCWP - ACWP  Schedule variance SV = BCWP - BCWS = earned value - planned value Positive values are good; the larger the better. Can calculate unitless indices (proportion deviation from plan) as follows:  Cost Performance Index CPI = BCWP/ACMP  Schedule Performance Index SPI = BCWP/BCWS Index values greater than 1 indicate positive performance to plan; the larger the better 10.16

26. EVA Example Single task project – 160 hours of labor expended over four weeks – $25/hour → total cost = $4,000 After three weeks, we “check up” on worker and find – 50 % complete with task – He enlisted another employee’s help; together they charged $3,500 to the project, to date ACWP =$3,500(Actual cost) BCWP =$2,000(Achieved progress) BCWS =$3,000(Planned progress) Cost variance CV = BCWP-ACWP = - $1,500 CPI = $2,000/$3,500 = 0.57 Schedule variance SV = BCWP-BCWS = - $1,000 SPI = $2,000/$3,000 = 0.66 10.17