Cost Scheduling

CN-326
Fall 2016
 Introduction
• Time and cost are the two most important components
of project economy.
• If time is not important, management can utilize its
resources in the most cost-effective way, even stopping
work on one project, moving to another for a while,
and then coming back. This allows the management to
complete the project in minimum cost.
• On the other hand, if money is not important,
management can obtain the best of resources and
schedule work around the clock, hence completing the
project in minimum time.
 Introduction
• The objective of the project manager would
then be to identify the budget and cash inflow
constraints and develop a project schedule
with the most efficient usage of available
resources with cost incurrence within the
identified budget and cash flow limits.
 COSTS IN A CONSTRUCTION PROJECT
Variable Costs
• Variable Costs are costs that are incurred in relation to
the variation in duration of an activity, project phase or
whole project. This means that if the duration (of
project, phase or activity) changes, the associated
variable cost changes in relation.
• For e.g: cost of labor incurs daily, cost of excavator
incurs hourly, etc. Some indirect costs may also be
variable; for e.g., cost of site utilities incurs monthly,
cost of labor accommodation incurs weekly, cost of site
security incurs daily, etc.
 COSTS IN A CONSTRUCTION PROJECT
Fixed Costs
• A set cost that remains constant regardless of duration
or the work performed by a resource. In other words,
any variation in duration or resource work does not
affect the fixed cost. Fixed costs can be assigned to
activities, WBS levels as well as resources.
• A resource fixed cost can refer to its mobilization, de-
mobilization, installation or calibration cost. Like
variable costs, fixed costs can be direct or indirect.
 COST PLANNING AND SCHEDULING
• Cost planning and scheduling refers to the
procedure of identifying the overall project
budget and the allocation of this budget to
individual activities in accordance with the
resource requirement as well as in
consideration with the cash inflow constraints
 COST PLANNING AND SCHEDULING
It involves the following four major processes:
• Resource Planning
• Cost Estimating
• Cost Budgeting
• Cash Flow Analysis
 Cost Planning and Scheduling
Resource Planning
• Determining what resources and what quantities
of each should be used to perform project
activities and developing the most efficient
resource loaded schedule.
Cost Estimating
• Developing an approximation (estimate) of the
cost of the direct and indirect resources as well as
other cost incurrence needed to complete project
activities and hence complete project.
 Cost Planning and Scheduling
Cost Budgeting
• Identifying project-level and activity-level
budget constraints.

Cash Flow Analysis

• Analyzing project cash flows (outflow and
inflow) and adjusting schedule as needed.
 COST ESTIMATING
Step 1. Estimating Direct Costs
– a. Performing quantity take off.
– b. Taking Subcontractor Quotations.
– c. Determining Activity Direct Costs.
• Material unit price
• Labor unit price
• Equipment unit price
 COST ESTIMATING
Step 2. Estimating Indirect Costs
• Indirect costs include field office overheads –
managing the job in field, and home office
overheads – supporting the job and business.
• The field office overhead is a project
overhead chargeable to each project while
the home office overhead is a general
overhead not chargeable to a specific project.
 Contractor’s Field Office Overhead
(Project Overhead) Checklist
• Foreman, engineer, supervisor,
superintendent, manager wages
• Watchman and Timekeeper wages
• Taxes
• Professional services (Surveyor,
Engineer, Architect, CM, Attorney)
• Bonds (Bid, performance, etc.)
• Temporary Buildings and Structures
• Site Office (Tools/storage, Toilet
facilities, Fences, guard rails, ramps,
barricades, Signs and markers,
Maintenance)
• Building permits (Fees, licenses,
etc.)
• On-Site Transportation (rent of
vehicles, fuel, maintenance)
• Material Testing
• Utilities (Temporary heat, light, and
power, Temporary water, Temporary
telephone )
• Plant (Rental of machines and
equipment, maintenance, Elevators,
hoists, chutes, Plant depreciation)
• Insurance (Public liability, Fire and
extended coverage, Workers'
compensation)
• Penalty costs (for completing
project after specified date)
• Bonuses to be achieved on early
project completion (-ve indirect
cost).
 Contractor’s Home Office Overhead
(General Overhead) Checklist
• Contractor's office (building or
rental), shop, equipment yard
(Heat, light, power, Furniture,
fixtures, computers, other
equipment)
• Insurance
• Depreciation
• Office supplies, postage, printing
• Utilities, telephone, intercom
• Payroll taxes on officers and office
personnel
• Other taxes, licenses, permits
• Outside accountants, legal fees,
other professional services
• Dues and subscriptions
• Employee wages and benefits
(Executives, Engineers,
Draftsmen, Estimators,
Accountants, Clerks,
Stenographers, etc.)
• Vehicles, Travel and
entertainment
• Marketing, Advertising and
promotion
• Interest on loans
• Maintenance
 COST ESTIMATING
Step 3. Estimating Total Project Cost
• The total project cost will be the sum of the
direct costs and indirect costs.
 COST ESTIMATING
Step 4. Accounting Contingency
• Contingency includes provision for uncertainty.
Estimate uncertainties may arise from:
– Inadequacies in estimate data and method
– Concern regarding "soft" areas in the estimate (escalation,
productivity, schedule etc.)
– Untried process (new technology)
– Extent of errors and omissions
– Weather, strikes, accidents, delays, etc.
– Abnormal market activity
• Contingency is usually taken as a percentage of total
project cost.
 COST ESTIMATING
Step 5. Adding Profit
• The amount of profit that is added is a factor
of the type of project, its size, the amount of
competition anticipated, the desire to get the
job, and the extent of risk associated with the
project.
• Profit may vary depending upon the company
needs work, competition, desire to move into
a new avenue.
 CASH FLOW ANALYSIS
• The owner needs to know, with accuracy, how
much cash must be available each month of the
project to pay the contractor's invoices.
• Like the owner, the contractor also needs to be
able to predict its cash needs for a project.
• Contractors receive income from the owner in
the form of paid invoices.
• That cash is then paid out to in-house labor, sub-
contractors, and material and equipment
suppliers.
• To stay in business, the contractor must diligently
manage these "cash flows."
 CASH FLOW ANALYSIS
• The management of cash flow is made difficult by the
fact that payments are made in different increments
depending on the type of activity.
– Subcontractors generally invoice the general contractors at
the end of each month for the work completed.
– The general contractor typically pays the subcontractor
after the general contractor's invoice has been paid by the
owner.
– A general contractor pays its labor at the end of each
week.
– Materials are generally provided to the contractor on
credit, with the contractor paying the supplier in full at the
end of the month.
• To properly project cash flow, each activity must be
tracked in the manner in which the payment will be
made.
 Technique
• The technique that is used to project cash flow is very
similar to the manner in which resources are
scheduled.
• The cost of each activity must first be identified from
the estimate and assigned to the activity.
• If this is being done manually, the network can be
plotted in a time-scaled bar chart form and with the
activity direct costs noted on each activity as shown in
Figure.
• This figure is commonly called a cost-loaded schedule;
it is the basis for projecting both income and costs for
project managers.
 Example
• Example 1: Consider the highly simplified project in which
four major activities are scheduled across a 4-month time
span
Example
Payment Projection - Development of
Project S-Curve
• The S-curve is nothing more than a graphical
presentation of the cumulative expenditures over
time. It is also sometimes called as the schedule
of values curve, Payment Curve or Cash Outflow
Curve.
• The S-curve is an attempt by the contractor to
model as precisely as possible its cash needs for a
project.
• As activities come on-line, the level of
expenditures increases and the curve has a
steeper middle section.
Payment Projection - Development of
Project S-Curve
• Toward the end of a project, activities are
winding down and expenditures flatten again.
The points are connected by a smooth curve
since the assumption is that the expenditures
are relatively evenly distributed over each
time period.
• The S-curve is essentially a graphical portrayal
of the outflow of monies (i.e., expense flow)
for both direct and indirect costs.
 Income Projection – Development of
Step Curve
• The Step curve is nothing more than a graphical
presentation of the cumulative income over time.
It is also sometimes called as the income curve,
or Cash Inflow Curve.
• The flow of money from the owner to the
contractor is in the form of progress payments.
• Estimates of work competed are made by the
contractor periodically (usually monthly) and are
verified by the owner's representative
 Income Projection – Development of
Step Curve
• Depending on the type of contract (e.g., lump
sum, unit price, etc.), the estimates are based
on evaluations of the percentage of total
contract completion or field measurements of
quantities placed.
• Assume contractor originally included a profit
or markup in his bid of $50,000 (25%) so that
the total bid price was $250,000.
 Income Projection – Development of
Step Curve
• The owner retains 10% of all validate progress payment
claims until one-half of the contract value (i.e.,
$125,000) has been built and approved.
• The retainage (retention money) will be deducted from
the progress payments on the first $125,000 and
eventually paid to the contractor on satisfactory
completion of the contract.
• The progress payments will be billed at the end of the
month, and the owner will transfer the billed amount
minus any retainage to the contractor’s account 30
days later
 Income Projection – Development of
Step Curve
• The amount of each progress payment can be
calculated as:
Pay = 1.25 (indirect expense + direct expense)
- 0.10[1.25 (indirect expense + direct expense)]
• The minus term for retainage drops out of the
equation when 50% of the contract has been
completed.
 Income Projection – Development of
Step Curve
• Because of the delay in payment of billings by
the owner and the retainage withheld, the
revenue profile lags behind the expenses.
• The income/ revenue profile has a stair-step
appearance since the progress payments are
transferred in discrete amounts based on the
preceding equation
 Income Projection – Development of
Step Curve
• The shaded area between the revenue and
expense profiles indicates the need on the
part of the contractor to finance part of the
construction until such time as he is
reimbursed by the owner. This difference
between revenue and expense makes it
necessary for the contractor to obtain
temporary financing.
Income Projection – Development of
Step Curve
 Income Projection – Development of
Step Curve
• The temporary financing is usually provided by banks or
financing companies. Interest is charged by the bank on
the amount of the outstanding balance called Overdraft.
• It is not unusual for the contractor to shift cash demands
to the front of the job, overvaluing early activities while
undervaluing later items.
• This is commonly called front end loading the job. Within
reason, this is an accepted practice since in the early part
of a project contractors often are faced with hidden costs
not easily attached to specific work activities.
• This also helps offset the overdraft borrowing
requirement, which can severely impact a contractor's
cash flow.
 Income Projection – Development of
Step Curve
• Some contractors offset the overdraft borrowing requirement
by requesting front or mobilization money from the owner.
This shifts the position of the revenue profile so that a
reduced, or zero, overdraft occurs
 Example 2
1
2
3
4= 2+3
5=4*5%
6= 4*5%
7=4+5+6
8=7*10%
9=7-8
10
11=4+5
12=10-11
13
14
15=13-14
Problem
Problem