Select Page
My Five Best Cost Engineering Practices

My Five Best Cost Engineering Practices

This is the second part of a two-part series of articles on cost engineering and project controls by Kevin Mattheys. The two parts are as follows:

  • Part 1 – What is Cost Engineering?
  • Part 2 – My five best Cost Engineering practices

In Part 1 I presented some background information and discussed how cost engineering differs from project controls. In Part 2, I share my five best cost engineering practices, based on many years’ experience.

Introduction

Following on from last months article where I espoused my views on Cost Engineering and where it fits in, I will now discuss five particular practices, which if addressed correctly and diligently, generally lead to improved outcomes on projects. This is by no means an exhaustive list however it is practices in which I have experienced both the positives and negatives and have learnt enormously from them over the years.

The Database (or data model as some call it)

Crucial to the success of any endeavour is the ability to access information that is relevant, timeous and trustworthy and on which sound decisions can be made. An integrated database that is continuously updated, normalised with current project information, tested against international norms and standards and allows project teams to estimate, plan and control from early in idea development until final completion of the project is worth its weight in gold. This is reflected in Figure 1.

Crucial to the success of this continual data recycling is the use of a well thought out and structured set of ‘codes’ so that this myriad of information is able to be dissected and reported on efficiently and in a meaningful way. These ‘codes’ are crucial also for quickly assimilating data for storage back into the estimating repositories which leads to better future estimates. These codes typically relate to the Work Breakdown Structure (WBS), the Organisation Breakdown Structure (OBS) and the Cost Breakdown Structure (CBS). Another important code is what is referred to as the project Code Of Accounts (COA) which identifies equipment and other related costs into ever increasing levels of detail.

Unfortunately, too often an organisation is not willing to invest in the database as it is deemed to be ‘too expensive’ leading to a gradual degradation and decline of both the system and content over time. This is not a ‘nice to have’ anymore, it is an absolute essential and for a number of companies this is their competitive advantage.

There are systems out there but what happens far too frequently is that companies try and make financial systems do project control work with pretty disastrous results more often than not.

From integrated database to improved decision-making

Figure 1:  From integrated database to improved decision-making

 

The Team

A Cost Engineering team will usually have a mix of leadership/managerial, technical, analytical and administrative competencies on large projects or programmes. The team must work together and should possess at least two traits which are somewhat unique. These are the ability to be methodical and disciplined. These people are subjected to mountains of data and they need to be methodical in analysing and reporting this information. They also need to be disciplined as reports are required on time, every time. Reports need to be accurate and meaningful, otherwise credibility is compromised and that is tough to restore.

One critical success factor is the application of a disciplined process of Plan, Do, Check and Assess (see Figure 2 below) for all project phases and monthly reporting cycles. Once you have delivered a report late or the integrity of the information is suspect you will be continuously bombarded with queries of all sorts. One should also ensure you have an in depth understanding of the details behind the reports so that if a question is asked you have the answer.

The Total Cost Management Framework process (there are others as well)

Figure 2:  The Total Cost Management Framework process (there are others as well)

 

An area within the team that frequently gets misunderstood by senior management, however, is the Project Control/Cost Control and Financial Control functions. This is because the word ‘cost’ is deemed to be common to both so they must therefore do the same work. Nothing is further from the truth. Project Control/Cost Control is the control of the project scope against a budget and time frame and then forecasting where the costs and schedule will end. It is forward looking and attempts to anticipate where the project is heading whilst proactively identifying possible future pitfalls and preparing risk mitigation plans.

Financial control (backward looking) is about making the requisite payments to contractors and suppliers timeously against signed off and approved invoices and then reflecting these costs correctly in company balance sheets, departmental cost centres and/or company asset registers. These two functions should never be confused with each other, yet, in practice this happens all too frequently.

As John Maddalena so eloquently put it: “Plan by commitment, not expenditure. In that one statement is captured the entire complexity of the project controls framework and the key difference between projects and business”.

The WBS and Change Management

I have found that if ownership of the Work Breakdown Structure (WBS) as shown in Figure 3 resides within the Cost Engineering or Project Controls team, the propensity to change the WBS is reduced significantly. This is because it can only be changed via a formal signed change request which is then clearly and regularly communicated to all stakeholders via the formal change management process.

It is also strongly recommended that regular formal meetings are held to discuss and sign off on proposed changes and that the business and project decision-makers attend. This stimulates constructive debate and forces a decision there and then with the obvious benefit of a consensus decision and speedy implementation. It must also be noted that each and every change introduced into the change management system has to be prepared, costed and possibly executed by individuals in the team. Studies have shown that the more these changes are introduced the greater the loss of productivity and hence schedule delays occur. Most people will also be reluctant to request changes for change sake as there will be numerous questions asked.

Unplanned or unnecessary scope changes have huge impacts on project cost, time and productivity. A strong change register and change management process is an absolute prerequisite. Studies conducted by IPA indicate that engineering changes, construction changes and schedule delays are primary drivers of increased costs on projects. Don’t underestimate the effect that good change management can have on a project.

A typical Work Breakdown Structure

Figure 3:  A typical Work Breakdown Structure

 

Contracts

We are all aware that there are many different forms of contract in the project world ranging from fully reimbursable to Lump Sum Turnkey; see Figure 4. Does the Cost Engineering team understand the pros and cons of each type? Does the team know why a particular type was selected for a particular scope of work on the project? Does the team have access to these contracts at short notice? Even better still, do they have them next to them in case they need to check some contract detail? Does the team understand the implications on the level of detail required in the corporate progress tracking and reporting systems for each type of contract?

The Cost Engineering team must have access to these documents and must also know and understand them intimately. Have them close by at all times. The Cost Engineer/s and the procurement team need to work hand in hand and must assist each other in their daily work. If this relationship breaks down, the project will inevitably be compromised as reporting becomes dysfunctional and difficult.

Remember though that the responsibility for using the contract information for analysis and reporting lies solely with the Cost Engineer and your integrity will be severely compromised if you share sensitive or confidential information with others who have no right to this information, especially labour rates. Never, ever, compromise yourself in this way.

Different contracting options

 

Figure 4:  Different contracting options

 

Processes and Procedures

Many hours are spent designing and implementing these standards. They are there to ensure predictability and repeatability which is so necessary in Cost Engineering / Project Controls. The last thing you want is the same set of data giving you five different answers.

Often during the application of these standards on projects, the team may add or improve on these standards if new or innovative ways of executing the work are discovered, or flaws are unearthed in current processes. It is crucial to these corporates or companies that they are able to quickly and smartly gather these new innovations or flaws and build them back into existing standards for the portfolio of future projects to benefit from them. Alas all too often this is not done. Staff members write up the close out manuals highlighting best practices developed on their projects but the manuals are then left on the shelf gathering dust and the staff move on to other projects before proper debriefing has taken place.

Lessons learned and process improvements must find their way back into the respective systems and procedures effortlessly and quickly.

Closing remarks

The five best practices mentioned above have, based on my experience, tended to become difficult issues to manage especially on larger types of projects or programmes. I have, however, found that these practices are crucial for improved project outcomes.

In closing I would also like to suggest that, with the ever increasing availability and functionality of technology, I am convinced now, more than ever before, that the Cost Engineering or Project Controls team needs to have a dedicated database administrator/technical Information Technology (IT) person available to them. The complexities of database set up, reporting and maintenance is taking more and more time from the Cost Engineering/Project Control team who should be doing analytical type work and walking the site instead of trying to fine tune databases and spreadsheets in their offices. Being able to provide specialised, ad hoc, reports in an agile fashion tailored for the project is becoming ever more crucial as project complexities increase.

I hope you have found this article useful and I look forward to publishing further articles on Cost Engineering in the near future.

References

Maddalena, John – Director, Barsure

If you have any comments or suggestions on how to improve the article, please feel free to contact the author or leave your comment below.

What is cost engineering?

What is cost engineering?

By Kevin Mattheys.  This is the first part of a two-part series of articles on cost engineering and project controls. The two parts are as follows:
Part 1 – What is Cost Engineering?
Part 2 – My five best Cost Engineering practices
In Part 1, I present some background information and discuss how cost engineering differs from project controls. In Part 2, to be published next month, I share my five best cost engineering practices.

Introduction

Cost Engineering as a discipline has been around for a number of years. A number of standards have been developed over these years by various organisations. The most widely recognised organisation for these standards currently is the Association for the Advancement of Cost Engineering International or AACEI.

Before these standards became widely accessible and acceptable, corporates developed their own, relatively similar standards, using in-house databases (mainly spreadsheets). These spreadsheets resided on each individual’s computer, were not integrated into other systems and became the ‘intellectual knowledge’ of that individual instead of the company. The soon to be retiring ‘grey beards’, who have this intellectual knowledge, have presented many corporates with the huge challenge now of how to capture this dispersed intellectual knowledge into their corporate systems for future use before they retire.

Many corporates and project companies have taken, or used, the standards mentioned above and translated them into something that they believe provides them with a competitive advantage and that is aligned with their unique terminology or culture. The personnel on the projects (Cost Engineering and/or Project Controls) then apply these standards to the project for its natural duration or for however long they may be required to do so.

An area, I find, that leads to a lot of confusion is the manner in which different terms are interpreted. This tends to lead to misunderstanding especially between owner organisations and contracting organisations. In this article, and others to follow, I attempt to articulate the difference between Cost Engineering and Project Controls as a starting point.

So What Is Cost Engineering ?

Many formal definitions exist and they can be found in literature or on the internet. In my mind, Cost Engineering is the practice of applying formal processes, procedures and techniques, systematically throughout each phase of the project, in the areas of business analysis, planning and scheduling, estimating and cost control to enable the project team to forecast, and communicate, realistic end-of-job costs and completion dates continuously during the project.

In many cases the terms ‘Cost Engineer’ and ‘Project Controls’ are used interchangeably. If we try and keep it simple, Project Controls is deemed to be the control required from the disciplines of Planning and Scheduling, as well as Estimating and Cost Control against an agreed and signed off scope. Cost Engineering, on the other hand, looks at the asset holistically from initial idea to asset demolition and acts as the integrator of all the information in order for the scope to be defined into manageable chunks for Project Control during the different phases of the project.

In a study done by IPA in 2009 titled Project Control Best Practices for Recent Projects, conducted by Robert Brown and Jennifer Martin, the following definitions were included:

Cost Engineering:
Cost Engineering refers to cost, schedule and resource analysis, planning, estimating, forecasting, control, and change management practices. Note that:
The word ‘engineering’ reflects the linkage of cost and schedule skills with specific technical knowledge;
Owner cost engineers work jointly with design engineers to optimise the project scope and improve its business value.
Project Control:
The ‘control’ practices of cost engineering including control level cost estimating and project control through execution.

With this as backdrop, I suspect that because the owner companies prepare defined packages of work (scope) for engineering contractors, these contractors, who are assigned a defined scope of work, use the term ‘Project Controls’ correctly. However, the owner companies, who develop these packages and then typically provide on oversight role, get subjugated by this apparent dichotomy and then revert to calling their employees ‘Project Controls Manager’, ‘Project Controls Leader’ or something similar. The owners forget, however, that they are in fact Cost Engineers who have helped to develop the scope and then need to see it through to completion and beyond.

Granted, there may be owner personnel who do perform a ‘project controls’ role, but the defining principle is whether you’ve helped to develop the scope or you control an agreed scope.

To assist further in clarifying this, let us reference the Total Cost Management Framework shown in Figure 1. This framework provides an excellent macro level starting point for all of the areas where Cost Engineers/Project Controls will probably be required. It also serves as an invaluable checklist to ensure that potential gaps are identified and then closed. These high level processes are further subdivided into sub-processes below this framework.

 

Total cost management framework

 

Figure 1: Total Cost Management Framework (A product of the Technical Board of AACE International)

As you can see from this model, Project Controls kicks off just before ‘Projects Implementation’. However, there is normally a large amount of definition and preparation work required during the Strategic Asset Management Process. I deem this to be primarily the work of the Cost Engineers who, together with Project Controls and the rest of the project team, must ensure that everything is correctly set up for effective project control. Areas to be addressed are understanding of the contracting strategy, systems to be used especially for forecasting, resources to be secured, reporting needs, etc.

I must also say that in my career Quantity Surveying was always included in the Project Control arena as they also have a unique and important role to play during project execution when it comes to progress and payment assessments. I must reiterate that the statements above are my personal view and can be interpreted differently by others.

And Where Does The Cost Engineer Fit In?

The Cost Engineer plays a key integration role on projects. The Cost Engineer must liaise and co-ordinate primarily with the Business Manager, the Project Manager and the Engineering Manager to make sure all parties are aligned at all times regarding cost, schedule and scope. The Cost Engineer is the eyes and ears of the project and must stay alert for any critical bits of information which could potentially affect the project.

Communication is crucial, as is the ability to process information and present it in a way that is meaningful, understandable and facilitates management decisions, especially the project end-of-job information. In this regard the Cost Engineer is damned if he does and damned if he doesn’t, especially if such news is not positive. No one likes bad news, especially Project Managers who have to present this to the various boards. However, the Cost Engineer must believe in, and stand by his findings. This is difficult to do against a tough project manager whom you are not able to convince about your analysis.

Closing remarks

Cost Engineering is the practice of applying formal processes, procedures and techniques, systematically throughout each phase of the project, in the areas of business analysis, planning and scheduling, estimating and cost control to enable the project team to forecast, and communicate, realistic end-of-job costs and completion dates continuously during the project.

The term ‘Cost Engineer’ reflects the linkage of cost and schedule skills with specific technical (engineering) knowledge. Owner cost engineers work jointly with design engineers to optimise the project scope and improve its business value.

References

Brown, R. & Martin, J., 2009, Project Control Best Practices for Recent Projects, International Project Analysis (IPA)

Total Cost Management Framework – A product of the Technical Board of AACE International