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
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Values, Vision, and Mission
Objectives and Goals
Strategy
Programs and Projects
Project Selection
General 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
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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)
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Who decides??
Production Factors
Marketing Factors
Financial Factors
Personnel Factors
Administrative and Misc. Factors
Nonnumeric PS Models:
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Sacred Cow
Operating Necessity
Competitive Necessity
Product Line Extension
Comparative Benefit
Model
Numeric PS Models:
Profit / Profitability
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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?
• Buildings
Commercial
OfficesStores
Residential
Single Multi-family,
Hi-rise
• Public Occupancy
Schools
Hospitals
Police/fire
Transportation terminals
• Heavy Construction
Roads
Bridges
Ports and Airports
Tunnels
Pipelines
• Industrial
Manufacturing Plants
Process
Oil and Gas
Chemicals
Agricultural
Power Generation
• Specialties
Hazardous Waste
Military Facilities
Communication
Golf Courses
Demolition
Arctic
• Also might divide
New construction
Renovation/remodel/upgrade
Demolition
• Or by
• Owner
State
Federal
Local
Private
Location
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Near industrial centers
Off highway
Off shore
Remote (Bush)
Foreign
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Various Locations
• By project contracting plan
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Traditional
Design-construct
Turnkey
Fast-track
Owner’s forces
• By contract type
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Lump sum (AKA hard dollar)
Cost plus
Cost reimbursable (fixed fee)
Unit price
• Contractor’s Organization
– No sub-contractors
– All sub-contractors
• Labor Force
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Union (closed shop)
Non-union (open shop)
Mixed
(Double-breasted)
Local vs. Expat (expatriate)
• Who’s doing the estimate?
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Owner
A/E
Contractor
Subcontractor
Government
Consultant
When (what phase)
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Concept
A/E
Components
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15%, 35%, 65%, 95%
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Is the budget fixed?
Cast in concrete
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Contactor’s Bid
Post bid negotiations
Usually non-government
Changes
Non-construction Estimates
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Owners estimate of owners expenses
Contract administration
Insurance
Lost or interrupted work
Permits and fees
Housing and travel
A/E estimate of A/E’s expenses
(Contract type)
Hours
Other expenses
Sub-consultants
Soils
Travel
Construction phase?
Inspection
Testing
Types of estimate
• Guess
• Educated guess
• SWAG
With or without lanyap
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Historical, similar project
Historical, unit prices
Estimating guides
Crew size and production rate
Cost Items
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Labor
Supervision
Installed Materials
Installed equipment
Supplies and Consumables
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Subcontractors
Home Office Expense
Overhead
Bonds, Insurance, Permits
Job Office Expense
Mobilization
Travel
Demobilization
Operating Equipment
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Capital cost
Operation costs
Fuel
Permits
Insurance
Project Selection Estimates
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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
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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
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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
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Do you still want to bid?
Attend the pre-bid meeting!
Estimate
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Manager allocates work
Be sure subs will bid
Take off major installed equipment
Check delivery times
Barge schedules
Schedule for quote
Check delivery options, FOB
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Take off quantities
Special matters
Pre-bid fly over
Hire consultants
Do your own borings?
Historical unit prices
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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)
160
150
140
130
120
110
100
90
80
70
60
50
40
Average Rate of Inflation 19741986: 8.0%
AK Highway
CCI
Anchorage
CPI
Dates
1983
1982
1981
1980
1979
1978
1977
1976
1975
1974
Average Rate of inflation 19741986: 8.2%
Linear
(Anchorage
CPI)
Linear (AK
Highway CCI)
Fig. 5: Alaska HCCI vs. California HCCI
190
180
170
160
150
140
130
120
110
100
90
80
70
60
50
40
Alaska Highway CCI
California Highway CCI
Linear (Alaska Highway
CCI)
Dates
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
Linear (California Highway
CCI)
Fig. 6: Alaska HCCI vs. ENR
Construction Cost Index
7,000
6,000
5,000
4,000
3,000
2,000
1,000
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
190
180
170
160
150
140
130
120
110
100
90
80
70
60
50
40
Dates
0
Alaska Highway CCI
ENR Construction Cost
Index
Estimating guides
Production rate
See next
Unit Price
Read the front!
Factors
Crew size and production rate
Size crew and supervision
Equipment
All methods
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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?
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When, to the minute, will they give you the
price?
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How?
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• Develop plan for bid delivery.
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Communications
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Time
Post bid
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Protest?
Negotiations
Intelligence?
When is a deal a deal?
Plan for changes
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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.