by H. Carl Bauman American Cyanamid Co.

COSTS A W O R K B O O K F E A T U R E

Mechanics of Project Cost Control

Control is the key to sur­vival in a competitive society

Λ Ν Υ estimate of capital cost, no matter how painstakingly prepared, is meaningless without provisions for subsequent control of expendi­tures.

The exercise of adequate capital cost control starts with preliminary engineering considerations when the project is initially conceived. Physical development of the process should be based on criteria of sim­plicity and availability of standard materials of construction. Every profitable process is potentially sub­ject to obsolescence by a competi­tor's entry into the field with im­proved process or method. In the high-obsolescence chemical industry particularly, conservation of design becomes a practical necessity.

It is during the preliminary engi­neering phase that most benefit may be had from a careful examination and review of alternatives. Should one large storage tank be used in­stead of two smaller ones? Are the compressors somewhat overdesigned to be sure to deliver full capacity under all circumstances? Are safety factors conservatively large? To overcome inherent extra cost re­sulting from a pessimistic design approach, some companies are ready to accept a process unit which per­forms at somewhat less than 100% of design capacity when delivered

to the operators. Experience has taught that minor alterations, im­proved operating efficiency, and clarification of product requirements invariably result in increased produc­tivity after initial operation.

All steps thus taken in engineering to minimize cost are reflected in the details of the project control estimate. Responsibility for the next step in cost control passes to the purchasing department for negotiating and plac­ing orders sufficiently within the esti­mate to allow for minor variances

and normal contractor's extras. From here on in, expenditures of re­maining project funds are made in the field and amount to 30 to 60% of the total. Since such expendi­tures include all labor, construction equipment and materials, and re­maining process piping, electrical, instrumentation, and insulation ma­terials, the application of cost con­trol centers at the job site is desirable.

Figure 1 outlines a typical field organization for a large cost-plus project, showing responsibilities in

MANAGER CONSTRUCTION COST ENG. MANAGER

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PROJECT COST ENG.

RESIDENT ENGINEER

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t_ Figure 1 . Outl ine of α typ ica l f ie ld organizat ion for a la rge cost-plus project shows responsibilities in cost control

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Figure 2. Flow of information for cost control

the cost control function. The resi­dent engineer or client's construction superintendent is responsible for the smooth operation of the construction organization. He reports to his company's construction manager. During the life of the job, a close liaison is maintained with the proj­ect manager or project engineer.

The field cost engineer assigned to the project is functionally responsible to the manager of cost engineering, but has a "bed and board" responsi­bility to the resident engineer. It is the duty of the field cost engineer working with the project cost engi­neer in the home office to coordinate, assist in administering, and report

periodically the status of all job costs compared with the project control estimate. To keep the price of cost control at a minimum, he draws his information from job personnel necessary to the construction effort, and limits his staff to a clerk or two, depending on job size and com­plexity. In a well planned organi­zation the cost engineer depends on the job accountant, timekeeper, and construction engineers to provide, through their normal records using the job cost code, the information necessary for project control.

Figure 2 shows the flow of infor­mation for cost control. At this point it is well to reiterate the neces­sity for a "frozen'" project control estimate coded to a standard code of accounts. The complexity of con­struction makes it important to have a clearly defined description of work items, so that errors in communica­tion can be held to a minimum. It provides the common language for quick interchange of information revealing trouble areas needing im-

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Figure 3. Detailed cost report is compared with project control estimate

A INDUSTRIAL AND ENGINEERING CHEMISTRY

mediate attention. All current job progress is channeled to the field cost engineer. From the home office he receives monthly reports of engi­neering and drafting man-hours and dollars expended, along with a sched­ule of drawing and specification completion. From the job ledgers come monthly expenditures and commitments in coded detail. The timekeeper's records provide craft and nonmanual man-hour expendi­tures. Quantities of equipment and material in place are provided daily by the construction superintendent's quantity surveyors, take-off men, or foremen. All purchase orders placed, either at the home office or in the field, are posted currently and a continuing warehouse inventory is maintained.

Each month after the project ac­countant has struck a trial balance from the ledgers, the field cost engi­neer assembles all current informa­tion on a detailed cost report form similar to that shown in Figure 3, compared with a replica of the de­tailed project control estimate. At this point fact is now history and the cost engineer assumes his role as evaluator and estimator to project job costs to completion. Armed with daily reports of unit cost prog­ress (Figure 4) for concrete, ex­cavation, masonry, steel, piping, electrical, and others, he is pre­pared to predict an over- or underrun for the work items. Analysis of these reports and comparison with the original estimate turn up trouble spots for attention before they be­come too serious. When this occurs between monthly report periods, the item is "red-flagged" to the resident and project engineers for remedial measures. This approach is cost control at its effective best.

Philosophically, the mere existence of a cost control system is the best insurance for keeping project costs within a tight estimate. The more widely the base of cost consciousness is spread among personnel involved in the capital program, the better the possibility of consistently good cost performance. Not the least of the cost engineer's functions is to keep promoting cost awareness even in such unromantic areas as job housekeeping and construction equipment maintenance.

To be most effective, cost reports should be brief but revealing. Pub­lishing a many-paged detailed re-

LOCATION U.S.A. JOB ORDER NO.1000

'./EEKLY LABOR COST MEMO

FOR WEEK ENDING December 20, 1958 Aluminum Piping CLASS OF '..'ORK Coded (152 &650)-506-Size V Diameter UNIT Joint (Weld and/or Screwed)

LAST WEEK

ENDING 1 2 - 1 3 - 5 8 ENDING

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REMARKS

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PREPARED BY

PER UNIT FOR EQUIPMENT RENTAL.

Figure 4 . Reports of unit cost progress turn up trouble spots before they are serious

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32,700 3,20C 35,900 36,000 (100) 78.000 6.500 8U.500 82.000 2.500

^ • TOYAI. ÏETIMATE

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Figure 5. A cost report to be effective should be br ief

port is almost a guarantee that it will not be read by the busy people to whom it is directed. The cost engi­neer therefore prepares a summary-cost report for distribution. This is generally a one-page document set up as shown in Figure 5. It reports expenditures and commit­ments, estimated costs to complete, and expected over- or underruns of the authorized budget for each im­portant item of cost. Brief explan­atory notes bring significant changes in predicted cost to the attention of those concerned. Any large inher­ent overrun has already been studied in detail and reported separately to the project and construction man­agers for immediate attention. In the event an expected overrun can­not be contained, the current sum­mary cost report serves as the instru­ment for requesting additional funds to complete the project.

Properly organized, the cost con­trol procedure should require no more paper work than needed for normal operation of the construction program. Efficient use of the writ­ten records needed for craft labor time, warehouse inventory control, and accounting purposes will also serve the cost engineer's purpose without duplicating expenditures. The returns brought by control are often handsome in terms of fixed capital dollars saved.

Our authors like to hear from readers. If you have questions or comments, or both, send them via The Editor, l/EC, 1155 16th Street N.W., Washington 6, D.C. Letters will be forwarded and answered promptly.

VOL. 51 , NO. 7 · JULY 1959 6 9 A