1. Project Selection, Economics, Estimating Dr. Perkins CE 438 6 February 05

2. Today 40 Minute Lecture –ESM 401 –ESM 450 General Project Selection Concepts –Economics Estimating Your Projects

3. Remember Remember Project Life Cycle Organizations

7. Project Selection

8. “Projectized” organization, all work is a project. –But may have some special issues see below Functional organization –Must decide if can be done within the functional area. –If so, project might not be needed, but see below

9. Project Selection Values, Vision, and Mission Objectives and Goals Strategy Programs and Projects

10. Project Selection General Concepts Will there be a customer? Will the project survive competition? –Internal projects –External Is the need for the project recognized as supporting company strategy? Can company handle the risk and uncertainty?

11. Note!! The following applies to components and engineering decisions within a project as well. If they warrant it

12. Ultimately provide return on investment? How about the future?

13. Project Selection Criteria for PS Models Nature of PS Models Types of PS Models Uncertainty Analysis and Risk Management Information Base for PS Models Project Proposal

14. Overview of PS Process Decision Makers: Who will align corporate needs and project goals Project Selection: Chose candidate project using Evaluation Criteria Dealing with Uncertainty: Risk Analysis Strategically selecting best Projects: Project Portfolio Process (PPP) Locking up the deal: Writing a Project Proposal

15. Nature of PS models: Caveats Project decisions are made by managers --- NOT by PS model! A PS model APPROXIMATES, but does NOT DUPLICATE reality!

16. Nature of PS Models: Method Start with detailed list of firm’s goals Create list of project evaluation factors (PEF’s) Weigh every element in PEF list Compute an overall score for project based on weighted PEF’s Select project that has the closest alignment with firm’s goals

17. Project Evaluation Factors (PEFs) Who decides?? Production Factors Marketing Factors Financial Factors Personnel Factors Administrative and Misc. Factors

18. Nonnumeric PS Models: Sacred Cow Operating Necessity Competitive Necessity Product Line Extension Comparative Benefit Model

19. Numeric PS Models: Profit / Profitability Average Rate of Return Discounted Cash Flow (NPV) Internal Rate of Return Benefit/Cost (Profitability Index) Other Profitability Models

20. Choosing the PS Model Dependent on wishes and philosophy of management 80% of Fortune 500 firms choose “nonnumeric” PS models Firms with outside funding often chose scoring PS models Firms without outside funding often chose profit / profitability PS models

21. Management of Risk: Terminology Risk: Decision based on complete information about the probability of each possible outcome. Uncertainty: Decision based on incomplete or insufficient data. Game: Decision based under conditions of conflict.

22. Areas of Uncertainty Project timing & expected cash flow. Direct outcome of project, i.e. what exactly will the project accomplish Side effects and unforeseen consequences of project

23. PS Models Idealized view of reality Representing the STRUCTURE of the problem, not the detail Deterministic or stochastic

24. Numeric PS Models: Scoring Unweighted 0-1 Factor Model Unweighted Factor Scoring Model Weighted Factor Scoring Model Constrained Weighted Factor Scoring Model S = ∑(x) S = ∑(s) S = ∑(s·w) S = ∑(s·w) ∏(c) [Handout]

25. General Cost Terms Handout

26. Estimating Main types of construction?

27. Buildings Commercial OfficesStores Residential Single Multi-family, Hi-rise Public Occupancy Schools Hospitals Police/fire Transportation terminals

28. Heavy Construction Roads Bridges Ports and Airports Tunnels Pipelines Industrial Manufacturing Plants Process Oil and Gas Chemicals Agricultural Power Generation

29. Specialties Hazardous Waste Military Facilities Communication Golf Courses Demolition Arctic

30. Also might divide New construction Renovation/remodel/upgrade Demolition Or by Owner State Federal Local Private

31. Location Near industrial centers Off highway Off shore Remote (Bush) Foreign – Various Locations

32. By project contracting plan –Traditional –Design-construct –Turnkey –Fast-track –Owner’s forces

33. By contract type –Lump sum (AKA hard dollar) –Cost plus –Cost reimbursable (fixed fee) –Unit price

34. Contractor’s Organization –No sub-contractors –All sub-contractors Labor Force –Union (closed shop) –Non-union (open shop) –Mixed –(Double-breasted) –Local vs. Expat (expatriate)

35. Who’s doing the estimate? –Owner –A/E –Contractor –Subcontractor –Government –Consultant

36. When (what phase) Concept A/E Components 15%, 35%, 65%, 95% Is the budget fixed? Cast in concrete Contactor’s Bid Post bid negotiations Usually non-government Changes

37. Non-construction Estimates Owners estimate of owners expenses Contract administration Insurance Lost or interrupted work Permits and fees Housing and travel

38. A/E estimate of A/E’s expenses (Contract type) Hours Other expenses Sub-consultants Soils Travel Construction phase? Inspection Testing

39. Types of estimate Guess Educated guess SWAG With or without lanyap Historical, similar project Historical, unit prices Estimating guides Crew size and production rate

40. Cost Items Labor Supervision Installed Materials Installed equipment Supplies and Consumables

41. Subcontractors Home Office Expense Overhead Bonds, Insurance, Permits Job Office Expense Mobilization Travel Demobilization

42. Operating Equipment –Capital cost –Operation costs –Fuel –Permits –Insurance

43. Project Selection Estimates Usually based on conceptual Estimate of costs Estimate of benefits “The future, cloudy it is.” –Master Yoda

44. Engineering Design Estimates Selecting materials Insulation thickness Heat loss Fuel expense Design life Economic analysis Careful with “free money” Never call it that

45. Change Orders Type I and Type II Extra labor, materials, etc. Delays On critical path? Delay job. Extra overhead Legal and consulting

46. Steps in contactor’s estimating process

47. Preliminary Get resources to bid the job Decide if you will bid Get plans, get on bidders list Engineer’s estimate reasonable Broad brush estimate, schedule Subcontracting strategy Consider your resources Call your bonding company Do you still want to bid?

48. Attend the pre-bid meeting!

49. Estimate Manager allocates work Be sure subs will bid Take off major installed equipment Check delivery times Barge schedules Schedule for quote Check delivery options, FOB Take off quantities Special matters Pre-bid fly over Hire consultants Do your own borings?

50. Historical unit prices Escalate? CPI, ENR –Felix work

54. Estimating guides Production rate See next Unit Price Read the front! Factors Crew size and production rate Size crew and supervision Equipment

55. All methods Is production rate average or high? Where do you put you operating factor? Read the front! Check contract for delays, risk Liquidated damages Experience with owner, location, etc.

56. Do you still want to bid??!! If so, secure bonding and financing Prepare bid documents with prices blank

57. Check subs and major suppliers again? When, to the minute, will they give you the price? How? Develop plan for bid delivery. Communications Time

58. Post bid Protest? Negotiations Intelligence? When is a deal a deal?

59. Plan for changes Pre-job photos and videos Documenting changes Know the contract Document everything

60. Ethics Never lie, cheat, or participate in any dishonest act Admit your mistakes forthrightly, if they are mistakes More often, just state the facts, without blaming anyone, yourself included Don’t “trade on the specifications” unless it is in writing Nothing unethical about asking for what you have coming! Or demanding, if the situation warrants it.