Chapter 10: Project Cost System

1. CE 366PROJECT MANAGEMENT AND ECONOMICSRobert G. Batson, Ph.D., P.E.Professor of Construction EngineeringThe University of AlabamaRbatson@eng.ua.edu

2. Chapter 10:Project Cost System

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

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

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) • Project number 200808 • Area code 05 • Work type code 03157.20 (See Figure 3.10 for all) • Distribution code: 1-total; 2=material; 3=labor; 4=equipment; 5-subcontact

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

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

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

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)

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

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

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

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

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

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)

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

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

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