Chapter 4
Cost management
Content
4.1. cost planning
4.2. introduction to cost estimation
4.3. cost control
Cost planning
* Plan Cost Management is the process of defining how the
project costs will be estimated, budgeted, managed,
monitored, and controlled.
* The key benefit of this process is that it provides guidance
and direction on how the project costs will be managed
throughout the project.
* This process is performed once or at predefined points in
the project
Cont.…
* The cost management plan is a component of the
project management plan
* the cost management plan uses the Project charter,
Project management plan, Schedule management
plan, Risk management plan, Enterprise
environmental factors, Organizational process assets
as an input
* then with the help of expert judgments, data
analysis and meetings the plan for cost management
will be prepared and documented
Introduction to cost estimate
* Project Cost estimation is the process of
valuing on monetary expression, including the cost of all
possible entrants necessary for the planning,
implementing and monitoring stages of the proposed
project under consideration.
* Cost estimation is the determination of the probable cost of a
project.
Project Cost includes:
*Preliminary investigation (project appraisal costs)
*Design and supervision (consultancy cost )
*Construction works (contractor’s cost )
* Land owning cost, etc…
Cont.…
Over all the main purpose of cost estimation can be
summarized as follow:
I. know the volume of work in reference to the fund
available.
II. determine actual cost per unit of item.
III. identifying engineering estimate of the work for
bidding purpose.
IV. work out economical use of materials , labor and
equipment.
V. in cases of variations to determine the extra cost to be
incurred.
VI.when there is escalation, to work out the escalation in
cost.
Information required for cost estimation
Correct information of the market price of the
materials at the time of need to be used as a basic
price.
Correct information of the rates of various
categories of skilled and unskilled laborers as
wage rates to be used for daily work rate.
Output of laborers per day for various types
of items (productivity).
Correct information of the rates of various
categories of equipment and tools as rental rates
to be used for major items of rates.
Up-to-date knowledge of the construction
Factors Affecting Cost Estimation
Factors which affect the cost estimation are
summarized as follow:
Type and documentation of the project.
Construction scheduling.
Bidding environment.
Quality and availability of material and labor (given
in specification).
Construction facilities ,tools and method of construction .
Location of the site: Transportation charges.
Proper management.
Land charges (lease).
Nature of subsurface condition. Etc….
Types of Costing or Estimation
* Estimation can be broadly classified as
preliminary (approximate) and detailed.
A. Preliminary /approximate costing
*This type of cost estimation is required to know the
financial position of the client before costly detailed
designs are carried out.
*Such estimates are based on practical knowledge and
cost of similar previous works. Examples of
approximate cost estimations are as follows:
Cont.…
Cost per functional unit
*Hospital =cost per bed, Dormitory = cost per student, Cinema
or theatre = cost per seat, residential buildings = cost per area,
road works = cost per kilometer length, culverts or bridges =
cost per meter span, water supply or sewerage projects = cost
per head of population.
B. Plinth area method – cost per m2
* Based on Plinth Area- roof area or external dimensions at the
plinth level (Courtyard & open area shall not be included) The rate
per meter square is deduced from the cost of similar building
projects in the locality .
C. Cubical Content method – cost per m3
*Based on cubical contents of various buildings,
i.e. Plinth area of the building x height x cubic content rate.
*Height should be taken from the top of flat roof (or halfway of the
sloped roof) to the top of concrete in foundation.
Cont.…
B. Detailed cost estimate( based on item
rate)
*This is the most reliable and accurate type of
estimate.
*The quantities of items are carefully prepared
from the drawings and the total cost worked out
from up to date market rates.
*A detail cost estimate thus requires quantity
surveying and analysis of the different rates for the
quantities prepared.
Fundamental approach to cost Estimation
In deciding to participate in the intended project
tender, the contractor shall carefully assess the
impact of the following key factors:
*Type of project
*Method of tendering
*Type of construction contract
*Number and progress of contracts already at hand.
*Resource availability i.e. skilled manpower, plants
and machineries.
*Financial position.
Cont.…
Once decision is made to participate in the
intended tender, the contractor shall give due
attention to the following major items listed
below.
*General and particular conditions of contract
contained in the bidding documents.
*Technical specifications.
*Drawings
*Estimated bill of quantities
*Method of measurement
*Site visits
*Construction method statements.
Basic Cost Components of a construction project
Basically the cost of any construction project comprises
*Direct costs, which include the direct cost of
materials, labor as well as equipment and
*Indirect costs, which include but not limited to head
office and site overhead costs.
A. Direct Construction Cost
*Direct construction costs are all costs that can be
specifically booked with an activity in a project.
*The current trend is to assign as much as possible costs to
direct costs as these costs can be budgeted, monitored
and controlled far more effectively than the indirect
costs.
Cont.…
The direct costs mainly include material, labor ,
equipment and subcontract costs as described below
A. Direct material costs – These costs referring to the
cost of materials, consumables and components used
for executing an activity including the allowances for
scrap and wastages.
B. Direct labor costs – All costs related to the workers
working on a specific activity such as carpenters,
masons, erectors, painters, plumbers and so on.
C. Direct equipment costs – These costs referring to the
costs of machineries and plants used in executing a
specific activity .
Cont.…
D. Subcontract costs – In case some specific activities
are subcontracted, the subcontract price will be
considered as the direct cost of the activities to be executed
by the subcontractor .
B. Indirect Construction Cost
A. Indirect construction costs are all costs, which can
not be directly booked under a specific activity in a
construction project but required to keep the whole
project operational.
These costs are also called overhead costs, which mainly
include the head office and site overhead costs.
Cont.…
i. Head office overhead costs
*Head office overhead costs are all costs
required to run the whole operation of the
construction company, which usually
administers different projects at a time.
*These costs are not usually associated with
specific project but rather shared proportionally
by all projects under the company .
*Some of the checklists for head office overhead
costs are given below with further clarifications.
Cont.…
* Senior management costs – These refer to costs related
with salaries and benefit packages of the senior
management in the head office.
* Indirect labor costs – Staffs other than the senior
management members working at the head office such
as the technical, administrative, marketing, finance and
supply staffs.
*Head office building costs – In both cases, costs are
incurred in such a way either rental costs will be
paid, if the building is rented and building depreciation
will be considered, if the building is owned.
* Bidding Expenses – These costs are usually
associated with bid document purchases, site visit
expenses, bid bonds and so on. These costs are
sometimes called sunk costs.
Cont.…
* Expertise service costs – These costs will be incurred
when professional services are required such as the
services of external auditors, lawyers, management
consultants and external trainings.
*Office furniture and equipment – Different office
furniture and equipment are required depending on the
size and standard of the company .
* Office running expenses – The head office operation
requires lots of miscellaneous expenses such as
telephones, fax, internet services, stationery , mail
services and so many others.
*Workshops, garages and warehouses – Costs related to
central workshops, garages and warehouses such as the
depreciation costs of the buildings or rental expenses.
Cont.…
* Bank charges – It is very natural that companies may
borrow money from banks. Therefore, the interest to be
paid on the borrowed capital shall be considered under the
head office costs.
* Insurance charges – Employees medical insurance,
office building and small vehicles insurance.
*Transportation and travel expenses –costs related to
transportation, per diem and living expenses.
*Sundry expenses – These are miscellaneous expenses
such as advertisement expenses, reception parties and
donations.
Cont.…
ii. Site overhead costs
Site overhead costs are all costs required to run the
whole operation of a specific construction project at site
level.
These costs are not associated with specific activity in
a project but rather shared proportionally by all activities
within the project. Some of the site overhead costs are
listed below with further clarifications.
*Site management costs – These costs refer to costs
related with salaries and benefit packages of the site
management members in the project site.
* Indirect labor costs – salaries and benefits of staffs other
than the site management members working at the project
site such as site engineers, office engineers,
administrative and finance staffs, data collectors and so on.
Cont.…
* Mobilization and demobilization costs –These costs are
mainly transportation costs.
*Tender Expenses – These costs are related with the costs of
the contract performance security, advance repayment
guarantee, contractor’s all risk insurance, insurance of the
works and third party insurance depending on the contract
conditions agreed.
* Site offices –site offices are constructed from different materials
such as corrugated iron sheets, prefabricated materials, material
packing steel containers, steel structure and normal hollow
concrete blocks.
*Expertise service costs – these costs will be incurred when
professional services are required at the project site such as
lawyers, claim experts and so on.
* Office furniture and equipment – Different office furniture
and equipment are required depending on the size and
Cont.…
* Office running expenses - The site office operation
requires different expenses such as telephones,
fax, internet service, mail service and stationery .
*Radio communications - If the coverage area of
the construction project is vast, hand held and
stationed radio communications may be used within
the site and with the head office.
*Camp facilities – The costs of construction and
operation of other facilities such as restaurants,
recreational centers and playgrounds are also
included under the camp facilities.
