Construction Management Chair

COTM 4602
COST ENGINEERING

Chapter 3
Total Cost Management, TCM
GETANEH GEZAHEGNE
February 2015

Outline
Total Cost Management, TCM
1. Introduction to TCM
2. Cost Engineering in TCM
3. Applying TCM Frameworks
4. Cost Engineering & Project Lifecycle
5. Considerations in Costing

AAU, EiABC, Cost Engineering, Lecture Notes, February 2015, Getaneh G.

1. Introduction to TCM
1.1 TCM concepts
TCM covers the planning, measuring, and control of the
totality of company resources invested in assets and
projects over their total life cycle.
TCM is the effective application of professional and
technical expertise to plan and control resources, costs,
profitability and risk.
It is a systematic approach to manage cost throughout
the life cycle of any enterprise, program, facility, project,
product, or service.
This is accomplished through the application of cost
engineering and cost management principles, proven
methodologies, and the latest technology in support of
the management process.
AAU, EiABC, Cost Engineering, Lecture Notes, February 2015, Getaneh G.

1. Introduction to TCM
1.1 TCM concepts
It ties all the Cost Engineering skills and knowledge
areas together into a single process and it establishes
Cost Engineering as a unique discipline that supports
business and project management alike.
Whatever your job (cost engineer, scheduler, planner,
estimator, project manager, project control engineer, value
specialist, etc.) you will find all the elements of your area
of practice in the TCM process.

AAU, EiABC, Cost Engineering, Lecture Notes, February 2015, Getaneh G.

1. Introduction to TCM
1.1 TCM concepts
TCM is the area of engineering practice where
engineering judgment and experience are used in the
application of scientific principles and techniques to
problems of business and program planning; cost
estimating; economic and financial analysis;
cost
engineering; program and project management; planning
and scheduling; cost and schedule performance
measurement, and change control.
In summary, the list of practice areas stated above are
collectively called Cost Engineering; while the process
through which these practices are applied is called TCM.

AAU, EiABC, Cost Engineering, Lecture Notes, February 2015, Getaneh G.

1. Introduction to TCM
1.2 Importance of TCM based process
The objective of Portfolio, Program and Projects
Management on the basis of TCM based process enables:

Management of each project, program, and asset in

your portfolio will be aligned and integrated,

Ultimately achieving whatever the strategic

objective of the business (such as improved
profitability).

It makes sure everything is aligned with business

strategy and offers top-to-bottom business benefits.
o

Profitable Asset Portfolios: resources go where theyll get the

best IRR/RONA/EVA.

Integrated/Aligned Programs: projects are all integrated,

aligned and coordinated.

Controlled Projects: each project gives business the results that

were planned for.

AAU, EiABC, Cost Engineering, Lecture Notes, February 2015, Getaneh G.

1. Introduction to TCM
1.2 Importance of TCM based process
TCM combines asset and project life cycle management:

Return on Assets is largely driven by practices

used before projects begin: With TCM, owners
understand and manage the costs of their asset base
over the entire asset life cycle.

Successful Projects are required if the planned

return is to be achieved: With TCM, owners and
contractors control the costs of their projects over
the entire project life cycle.

AAU, EiABC, Cost Engineering, Lecture Notes, February 2015, Getaneh G.

1. Introduction to TCM
1.2 Importance of TCM based process
TCM covers more than just projects, but also how to
plan, measure and control the investment of a companys
limited resources in all its assets.
TCM is also more than just a mile-high view; it includes
3 summary processes and 27 detailed sub-processes
covering each and every skill and knowledge area of Cost
Engineering (see the reading assignment notes).

AAU, EiABC, Cost Engineering, Lecture Notes, February 2015, Getaneh G.

2. Cost Engineering in TCM

2.1 Concept and Attributes of TCM
2.1.1 Concept
TCM Starts With a Simple Concept: Plan-Do-CheckAssess, PDCA.

PLAN
(plan activities)

ASSESS
(evaluate
measures, act
upon variances)

PDCA
Cycle

DO
(perform
activities)

CHECK
(measure
performance
of activities)

AAU, EiABC, Cost Engineering, Lecture Notes, February 2015, Getaneh G.

2. Cost Engineering in TCM

2.1 Concept and Attributes of TCM
2.1.2 Attributes
Continuous Improvement: TCM is at heart a quality
management process that employs feedback and
improvement!
Integrated: Every TCM process has PDCA steps that are
all linked back to business strategy!

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2. Cost Engineering in TCM

2.2 Key Benefits of PDCA based TCM
A key benefit of using PDCA as the stem cell of TCM
(i.e., all 27 TCM processes grow out of it) is that PDCA
supports both Continuous Improvement and Control.
With PDCA, one can:

Establish a plan with budgets, thresholds, etc.;

Kick the work off properly;

Measure performance; and

Finally, assess that performance against the plan

(and ultimately strategic objectives) and make
either corrective actions to stay on plan (control) or
to improve the plan as needed to achieve objectives
(improvement).

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2. Cost Engineering in TCM

2.2 Key Benefits of PDCA based TCM
Another key benefit of TCM is that:

The processes are all integrated such that scope,

cost, time, risk, value, and resources are each
considered for their interrelationships.

Each process map in TCM includes inputs and

outputs from and to the other processes.

Each assessment and planning step revisits the

objectives, thereby keeping all processes aligned
with business strategy.

AAU, EiABC, Cost Engineering, Lecture Notes, February 2015, Getaneh G.

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2. Cost Engineering in TCM

2.2 Key Benefits of PDCA based TCM
TCM Covers the Entire Asset and Project Life Cycle:

As a two-dimensional diagram, the PDCA loop

looks like it returns you to the same point you
started. However, it is a three-dimensional
concept; you keep advancing and improving your
plans as the asset or project life cycle progresses.

In this illustration, the center bar represents the life

cycle of an asset/project over time. The spiral
represents the fact that PDCA is a never ending
process for managing costs over that life cycle.

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2. Cost Engineering in TCM

2.2 Key Benefits of PDCA based TCM
TCM Covers the Entire Asset and Project Life Cycle:

Asset Life Cycle

Project Life Cycle

APPRAISE

SELECT

DEFINE

AAU, EiABC, Cost Engineering, Lecture Notes, February 2015, Getaneh G.

EXECUTE

CLOSE
OUT

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2. Cost Engineering in TCM

2.3 TCM Level Process Maps

2.4 TCM Framework: Functional Process

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3. Applying TCM Frameworks

TCM is a process map. So, the main use of TCM for

business is as a model for developing or improving their
own processes.
By understanding TCM, it enable to build processes for
asset and project cost management at organizations.
In a nutshell, TCM framework can be used as:

As a guide for process development or reengineering:

A go-by that can be modified to suit each
company's processes, phasing, org., lexicon, etc.
o Can be applied in parts, but take care that the
resulting process is integrated.
o

As a reference for businesses or any institution.

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3. Applying TCM Frameworks

TCM is by nature multi-functional/multi-skilled; it is

best suited for training those with over-arching capital
management, project or program management, project
controls, or similar responsibilities where cost, time, risk,
value for assets and/or projects must be considered in an
integrated way.
However, it is also useful for pointing out to specialists
(e.g., estimators, schedulers, etc.) that their work function
does not exist in a vacuum and shows how they must
work in concert with the other disciplines.
Again, TCM is not a how-to with specific procedures
for specialists.

AAU, EiABC, Cost Engineering, Lecture Notes, February 2015, Getaneh G.

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4. Cost Engineering and Project Lifecycle

4.1 Strategic Planning & Project Programming
The programming of capital projects is shaped by the
strategic plan of an organization, which is influenced by
market demands and resources constraints.
The programming process associated with planning and
feasibility studies sets the priorities and timing for
initiating various projects to meet the overall objectives
of the organizations.
However, once this decision is made to initiate a project,
market pressure may dictate early and timely completion
of the facility.

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4. Cost Engineering and Project Lifecycle

4.2 Problem
In order to gain time, some owners are willing to forego
thorough planning and feasibility study so as to proceed
on a project with inadequate definition of the project
scope.
Invariably, subsequent changes in project scope will
increase construction costs; however, profits derived
from earlier facility operation often justify the increase in
construction costs.
Generally, if the owner can derive reasonable profits
from the operation of a completed facility, the project is
considered a success even if construction costs far
exceed the estimate based on an inadequate scope
definition.
Does this attitude hold true?
Ability to influence construction cost over time?
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4. Cost Engineering and Project Lifecycle

4.3 Key Practice Areas of CE in Project Control
Costing: cost estimating, budgeting;
Cost Management: cost/schedule planning, cost/schedule
assessment;
Risk Assessment; and
Procurement & Contract Administration: Project
Procurement, Drafting & Negotiation, Contract
Management, Dispute Avoidance and Dispute Resolution.

AAU, EiABC, Cost Engineering, Lecture Notes, February 2015, Getaneh G.

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4. Cost Engineering and Project Lifecycle

4.4

Public Construction Projects Implementation

Procedures
Basic Construction Project Life Cycle for Public Projects
include:

Project Planning,

Survey,

Design,

Construction and Construction Supervision,

Operation and Maintenance,

Scrapping, Demolition and Removal, and

Post Evaluation.

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4. Cost Engineering and Project Lifecycle

4.5 Potential entities for the utilization of Cost Engineers
Professional Services
Federal Government Technical Ministries, Departments,
Parastatals, Agencies, Defense/Armed Forces, Police,
Paramilitary Agencies, and Universities.
Private Sectors:- for Engineering Economy / full
realization of their Engineering/Process projects.
Cost Engineers will prove very useful for the Public
Property Procurement and Administration
Agency,
PPPAA.

AAU, EiABC, Cost Engineering, Lecture Notes, February 2015, Getaneh G.

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4. Cost Engineering and Project Lifecycle

4.5 Potential entities for the utilization of Cost Engineers
Professional Services
The Cost Engineers training and professional experience
will prove very useful for Federal Government
Customs Destination Inspections and the on going
Privatization exercise in the country with the attendant
benefits to the Ethiopian economy.
Cost Engineers will also prove very useful for the
Insurance Industry as the engineering Assessors / Loss
Adjusters.

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5. Considerations in Costing
5.1 What is Cost?

Cost is every thing

It costs time
It costs resources
It costs money
EVERYTHING
invested in assets and projects is a
COST
That is why it is called
TOTAL COST MANAGEMENT (TCM)

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5. Considerations in Costing
5.2 Major Costs Associated with Constructed Facilities
The cost of a constructed facility to the owner include
both the initial capital cost and the subsequent operation
and maintenance costs.
5.2.1 Initial Capital Cost
The capital cost for a construction project includes the
expenses related to the initial establishment of the
facility:

Land acquisition, including assembly, holding and improvement;

Planning and feasibility studies;
Architectural and engineering design;
Construction, including materials, equipment and labor;
Field supervision of construction;
Construction financing;
Insurance and taxes during construction;
Owner's general office overhead;
Equipment and furnishings not included in construction; and
AAU, EiABC, Cost Engineering, Lecture Notes, February 2015, Getaneh G.
Inspection and testing.

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5. Considerations in Costing
5.2 Major Costs Associated with Constructed Facilities
5.2.1 Initial Capital Cost
Construction Cost: the sum of all costs, direct and
indirect, inherent in converting a design plan for material
and equipment into a project ready for start-up, but not
necessarily in production operation; the sum of field
labor, supervision, administration, tools, field office
expense, materials, equipment, and subcontracts.
Direct Cost: in construction, cost of installed equipment,
material and labor directly involved in the physical
construction of the permanent facility;
Indirect Costs: in construction, all costs which do not
become a final part of the installation, but which are
required for the orderly completion of the installation
and may include, but are not limited to, field
administration, direct supervision, capital tools, startup
costs,
contractor's
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AAU, EiABC,
Cost Engineering,
Lecture Notes,fees,
February insurance,
2015, Getaneh G. taxes, etc;

5. Considerations in Costing
5.2 Major Costs Associated with Constructed Facilities
5.2.2 Operation and Maintenance Costs
The operation and maintenance cost in subsequent years
over the project life cycle includes the following
expenses:
Maintenance and Repair Cost: the total of labor,
material, and other related costs incurred in conducting
corrective and preventative maintenance and repair on a
facility, on its systems and components, or on both.
Maintenance does not usually include those items that
cannot be expended within the year purchased. Such
items must be considered as fixed capital.

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5. Considerations in Costing
5.2 Major Costs Associated with Constructed Facilities
5.2.2 Operation and Maintenance Costs

Operating Cost: the expenses incurred during the normal

operation of a facility, or component, including labor,
materials, utilities, and other related costs. Includes all
fuel, lubricants, and normally scheduled part changes in
order to keep a subsystem, system, particular item, or
entire project functioning. Operating costs may also
include general building maintenance, cleaning services,
Insurance, taxes, Financing costs , and similar items.

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5. Considerations in Costing
5.3 Influence on Construction Cost with time
The owner or facility sponsor holds the key to influence
the construction costs of a project because any decision
made at the beginning stage of a project life cycle has far
greater influence than those made at later stages.
Moreover, the design and construction decisions will
influence the continuing operating costs and, in many
cases, the revenues over the facility lifetime.
Therefore, an owner should obtain the expertise of
professionals to provide adequate planning and feasibility
studies.
Many owners do not maintain an in-house engineering
and construction management capability, and they should
consider the establishment of an ongoing relationship
with outside consultants in order to respond quickly to
requests.
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5. Considerations in Costing
5.3 Influence on Construction Cost with time

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5. Considerations in Costing
5.4 Project Cost Management Process
Project cost management: includes the processes
required to ensure that the project is completed within an
approved budget.
Cost estimating: encompass developing an approximate
estimate of the costs of the resources needed to complete
a project.
Cost budgeting: it is allocating the overall cost estimate
to individual work items to establish a baseline for
measuring performance.
Cost control: it is controlling changes to the project
budget.

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5. Considerations in Costing
5.5 Basic Principles of Cost Management
Most members of an executive board have a better
understanding and are more interested in financial terms
than engineering project terms, so project managers must
speak their language.
Profits: are revenues minus expenses.
Life cycle costing: considers the total cost of
ownership, or development plus support costs, for a
project.
Cash flow analysis: determines the estimated annual
costs and benefits for a project and the resulting annual
cash flow.

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