Project Selection, Economics, Estimating

Dr. Perkins

CE 438

6 February 05

Today

• 40 Minute Lecture– ESM 401– ESM 450

• General Project Selection Concepts– Economics

• Estimating

• Your Projects

Remember

• Remember Project Life Cycle

• Organizations

Project Selection

• “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

Project Selection

• Values, Vision, and Mission

• Objectives and Goals

• Strategy

• Programs and Projects

Project SelectionGeneral 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?

Note!!

• The following applies to components and engineering decisions within a project as well.

• If they warrant it

• Ultimately provide return on investment?

• How about the future?

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

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

Nature of PS models:Caveats

• Project decisions are made by managers --- NOT by PS model!

• A PS model APPROXIMATES, but does NOT DUPLICATE reality!

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

Project Evaluation Factors (PEFs)

• Who decides??

• Production Factors

• Marketing Factors

• Financial Factors

• Personnel Factors

• Administrative and Misc. Factors

Nonnumeric PS Models:

• Sacred Cow• Operating Necessity• Competitive Necessity• Product Line Extension• Comparative Benefit

Model

Numeric PS Models:Profit / Profitability

• Average Rate of Return

• Discounted Cash Flow (NPV)

• Internal Rate of Return• Benefit/Cost (Profitability Index)

• Other Profitability Models

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

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.

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

PS Models

• Idealized view of reality

• Representing the STRUCTURE of the problem, not the detail

• Deterministic or stochastic

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]

General Cost Terms

• Handout

Estimating

Main types of construction?

• BuildingsCommercial

OfficesStores

Residential

Single Multi-family,

Hi-rise

• Public OccupancySchoolsHospitalsPolice/fireTransportation terminals

• Heavy ConstructionRoads

BridgesPorts and AirportsTunnelsPipelines

• IndustrialManufacturing PlantsProcess

Oil and GasChemicalsAgricultural

Power Generation

• SpecialtiesHazardous Waste

Military Facilities

Communication

Golf Courses

Demolition

Arctic

• Also might divideNew constructionRenovation/remodel/upgradeDemolition

• Or by• Owner

StateFederalLocalPrivate

Location

• Near industrial centers

• Off highway

• Off shore

• Remote (Bush)

• Foreign– Various Locations

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

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

• 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)

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

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

Non-construction Estimates

• Owners estimate of owners expensesContract administration

Insurance

Lost or interrupted work

Permits and fees

Housing and travel

A/E estimate of A/E’s expenses

(Contract type)HoursOther expenses

Sub-consultantsSoils

TravelConstruction phase?

InspectionTesting

Types of estimate• Guess

• Educated guess

• SWAGWith or without lanyap

• Historical, similar project

• Historical, unit prices

• Estimating guides

• Crew size and production rate

Cost Items

• Labor

• Supervision

• Installed Materials

• Installed equipment

• Supplies and Consumables

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

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

Project Selection Estimates

• Usually based on conceptual

• Estimate of costs

• Estimate of benefits

• “The future, cloudy it is.” – Master Yoda

Engineering Design Estimates

• Selecting materials

Insulation thickness

Heat loss

Fuel expense• Design life• Economic analysis• Careful with “free money”

Never call it that

Change Orders

• Type I and Type II

• Extra labor, materials, etc.

• Delays

• On critical path?

• Delay job.

• Extra overhead

• Legal and consulting

Steps in contactor’s estimating process

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?

 Attend the pre-bid meeting!

Estimate• Manager allocates work• Be sure subs will bid• Take off major installed equipment

Check delivery timesBarge schedules

Schedule for quoteCheck delivery options, FOB

• Take off quantities• Special matters• Pre-bid fly over• Hire consultants• Do your own borings?

Historical unit prices

• Escalate?

• CPI, ENR– Felix work

Fig. 2: AK Highway CCI vs. Anchorage CPI-U for the period 1974 to 1983 (normalized to 1982-84=100)

405060708090

100110120130140150160

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74

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Dates

AK HighwayCCI

AnchorageCPI

Linear(AnchorageCPI)

Linear (AKHighway CCI)

Average Rate of Inflation 1974-1986: 8.0%

Average Rate of inflation 1974-1986: 8.2%

Fig. 5: Alaska HCCI vs. California HCCI

405060708090

100110120130140150160170180190

1974

1976

1978

1980

1982

1984

1986

1988

1990

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1994

1996

1998

2000

Dates

Alaska Highway CCI

California Highway CCI

Linear (Alaska HighwayCCI)

Linear (California HighwayCCI)

Fig. 6: Alaska HCCI vs. ENR Construction Cost Index

405060708090

100110120130140150160170180190

1974

1976

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1982

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1994

1996

1998

2000

Dates

0

1,000

2,000

3,000

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6,000

7,000

Alaska Highway CCI

ENR Construction CostIndex

Estimating guides

Production rate

See next

Unit Price

Read the front!

Factors

Crew size and production rate

Size crew and supervision

Equipment

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.

Do you still want to bid??!!

• If so, secure bonding and financing

• Prepare bid documents with prices blank

• Check subs and major suppliers again?• When, to the minute, will they give you the

price?• How?•  • Develop plan for bid delivery.• Communications• Time

Post bid

• Protest?

• Negotiations

• Intelligence?

• When is a deal a deal?

Plan for changes

• Pre-job photos and videos

• Documenting changes

• Know the contract

• Document everything

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.