Ss 2 cost engineering management training- 2017 -dr moustafa ismail ch 5-6

CCP Cost Engineering Training 1011 BTA - Dr. Moustafa Ismail 2017 LEC- I 1
Cost Engineering Management
Training Course:
Association for the Advancement
of Cost Engineering
Nov. 2017
LECTURE 2
‫وبركاته‬ ‫هللا‬ ‫ورحمة‬ ‫عليكن‬ ‫السالم‬
2017

Nov. 2017CCP Cost Engineering Training 1011 BTA - Dr. Moustafa Ismail 2017 LEC- I 2
Section 1 Chapter 5: Engineering Role & Project Success
The success of many products and projects is predicated upon
an effective and efficient engineering effort. Improved
engineering efforts are essential in many applications given
globalized competition and product/project liability issues,
Product, Project, and Process Development
Development of products, projects, processes ranges from
simple to the incredibly complex. It may depend on the
concurrent or predecessor development of other items.
Pure and Applied Research
Non product oriented, it is for testing & information gathering
like chemical interaction between different component.

Applied research:
Typically carried out by the performing organization for enhancing
existing product or extending its applications.
Product, Project, and Process Life Cycles
The life cycle of a particular product/project will have a significant
influence on all design decisions, including producing plant and
equipment. ( Cars- buildings- factory)
Computer-Aided Design (CAD)/Computer-Aided Engineering (CAE)
In product, project, and process development, designers have been
aided significantly by the advent of computer-aided design (CAD) &
computer-aided E (CAE) software. (work station % software)

Computer-Aided Manufacturing (CAM)
Computer-aided manufacturing (CAM) provides the counterpart
advantages of CAD/CAE software to the factory floor. Design
information from CAD/CAE software can be ported directly into
CAM software design is sent directly to the machine.
Prototypes
Organizations will typically develop prototypes prior to large-scale
production, to test designs and also test customer reaction. It is a risk
mitigation approach.
Patents and Trade Secrets
It is concerned with investment protection. Typically, organizations
can protect this investment through either patents or trade secrets. In
the U.S., 17 years.

Product Liability: Sellers must be ware to not injure the buyer and
avoid litigation and compensations.
Product, Project, and Process Design
Standardization
It attempts to base product designs, in whole or in part, advantages;
decreases cost, time, and maintenance- while a default can spread over
a large number of the product.
Process Selection:
Process selection relates to the production methods chosen ,
continuous or discrete.

Process Selection:
Continuous, (less expensive overtime), like petro-chemical plants,
power plants and manufacturers with assembly-line methods, wire/cable
manufacturers and automotive manufacturers.
Discrete, any type of custom product, such as a concrete pre-cast plant,
structural steel fabrication shop, or machine shop. Some products will
envelope both methods, sometimes by the same organization. (structure
steel factory- assembly). It is using more labor, adding cost it may be a
privilege when labor are less expensive.

Manufacturability
Design should consider the issues of product design, and on issues of
manufacturing the design as well, design should be:
1. Forgiving of minor inaccuracies
2. Easy to fabricate
3. Based on efficient use of labor, materials, and equipment.

Constructability-
Designs can be developed and may make sense, from the designer‘s
viewpoint, but create significant problems in their construction.
Generally. Choosing welded vs. bolted connection in a steel structure
is a constructability review, the same may apply for precast
foundation or cast in place. The concept for improved constructability
is to increase the fabricated elements in a workshop and reduce such
casting and fabrication/assembly in the site where the labor cost shall
reduce and level of skilled labor is not a concern.
It is a market
orient topic in
KSA

Make or Buy Decisions
Decision-makers with are concerned with "make" or "buy" decisions-
when to sub-contract- or buy a part of the scope, fabricate, or
installation, rent equipment, installation( cost-time-quality-safety)-
For know how and trade secret the decision is make. The driver is
always quality in lower cost.
Engineering Production/Construction
Production Health and Safety
Personnel health and safety is paramount in any industry; as well as
from both a humanitarian and an economic standpoint. Incidents causes
disruption to the process and loss of labor time. Safety program shall be
considered in the processes to decrease/eliminate incidents.

Facility Layout:
The facility may be existing or new being built from the ground, it
needs design for the layout of the facility, to account for the labor,
equipment, inventory, material, transportation, future expansion is
also to be considered.
Assembly and Flow Process Charts
Assist in planning the facility layout and material flow and help to
analyze production operations in terms of operations sequences
performed, distances between operations, and operation time
requirements.

Quantitative Analysis in Facility Layout
Linear programming and Monte Carlo techniques can significantly
assist in facility layout and production decisions through modeling
and simulation.
• Linear programming is widely used to find optimal solutions to
problems it either minimize or maximize an objective function.
For example, material distances in a facility.
• Monte Carlo technique is used to simulate the waiting time for a
crane in a plant and relevant cost. The required data can be
generated through a computer software with random number
generators.

Reengineering:
• It is the fundamental rethinking and radical redesign of business
processes to achieve dramatic improvements in critical
contemporary measures of performance, such as cost, quality,
service, and speed. An example of reengineering might have your
supplier monitoring your inventory of their supplied item, since
they are better able to accomplish this task.
• Reengineering focuses on the optimization of the total
organization, rather than sub-optimization of individual
departments or units. It focuses with why not how.

Section 1 Chapter 6―Machinery, Equipment, & Tools
. Selecting, purchasing, tracking, storing, maintaining, and selling
machinery, equipment, and tools is an important project M
function that can greatly impact a project‘s cost and schedule.
Equipment Value Categories
Equipment values can be divided into two major categories:
1. Replacement cost (the cost new of an item having the same or
similar utility)
2. Market value (used equipment, secondary market value)
1. Replacement Cost,
 Reproduction Cost―is the cost new of an identical item.
 Fair Value―is the adjusted cost of a new item, considering the
cost of similar items, and taking into account utility and all
standard adjustments and discounts to list price.

.Sources of Data:
 Manufacturer selling price list, marketing and sales divisions,
 Quotations, invoices, and signed contracts
 Journals, trade seminars, and shows
2. Market value
 Fair Market Value-in-Place―is the monetary amount that may
reasonably be expected for an installed property in an exchange
between a willing buyer & seller, with equity to , neither under
pressure/ to buy or sell and both are aware of all facts & info.
 Fair Market Value-in-Exchange― Monetary amount that may
be expected for a property in an exchange between a willing
buyer & seller, with equity to both, neither under any pressure to
buy or sell, and both fully aware of all relevant facts.= retail value

. 2. Market value - cont.
 Orderly Liquidation Value― Estimated gross monetary amount
could be realized from a liquidation sale, given a reasonable
period of time to find a purchaser , with the seller being
compelled to sell on an as-is, where-is basis, as of a specific date
= wholesale value).
 Forced Liquidation Value― Estimated gross monetary amount
that could be realized from advertised and conducted p u b l i c
auction, with the seller being compelled to sell with a sense of
immediacy, as-is, where-is basis, as of a specific date = “under
the hammer” or “blow-out” value).

. 2. Market value - cont.
 Salvage Value/Part-Out Value― Estimated monetary amount
that may be expected for the whole property or a component of
the whole property retired from service, can be reused.
 Scrap Value― Estimated monetary amount that could be realized
for the property if it were sold for its material content, for
example, dollars per ton of steel or pound of copper.
 Sources of data:
• Used items/equipment sales advertisements
• Used equipment show room
• Successful past transactions, invoices, quotation, PO, contracts
• Journals and date published
• Auction data and brochure and flyers.

.
Valuation Examples- Subcategories of values

.Market value Example:
SK6 page 57

.
Trade Data/Cost Adjustments
Used equipment sales data is often inconsistent for the same or
similar pieces of equipment. To adjust/ normalize this
data, consider the following points, add deduct as appropriate:
 Different years of manufacture (adding value for newer).
 Different attachments, drive motors, etc.
 Location of the sale (i.e., equipment sold in a prime market or?
 Use (amount of wear/use).
 Condition (one of the most important considerations).

.Equipment Condition Terms and Definitions
 Very Good (VG)— Equipment is in excellent appearance and
being used to its full design specifications without being modified
and without requiring any repairs or abnormal maintenance at the
time of inspection, or within the foreseeable future.
 Good (G)— Equipment that was modified or repaired and is
being used at or near its fully specified use.
 Fair (F)— Equipment used at some point below its fully specified
use, because of the effects of age and/or application, will require
general repairs and some replacement of minor elements in the
foreseeable future.

.Equipment Condition Terms and Definitions
 Poor (P)— Equipment being used at some point well below the
fully specified use. This equipment will require extensive repairs
and/or the replacement of major elements in the near future to
realize full capacity.
 Scrap (X)—Describes equipment that is no longer serviceable and
cannot be used to any practical degree regardless of the extent of
the repairs or modifications that may be undertaken. This
condition applies to equipment that has been used for 100 %
useful life, or that is 100 % technologically/ functionally obsolete

.Equipment Valuations
The task of evaluating and calculation of equipment residual values
(future values) for leases or life cycle costing depends on experience
and good data base.
 Residual Value Curves:
i. Normal Curve: L shape long-lived equipment
ii. Disrupted-Market: U shape – regulatory impacts or shortage in
market.
iii. Regulatory Change Curve: Impact of regulation changes on
market value.

.iv. High Obsolescence Curve: impact of technological development/
obsolescence( computers and mica-tronic equip).
v. New Tax Law/ High Inflation Curve: Tax laws – inflation can rise the
normal curve rapidly
SK6 page 60

.Variables That Affect Residual Value:
Twelve items should be considered in estimating residual values:
1. Initial Cost: ( some times ignored), for residual purposes, the
estimator/appraiser should consider basing his or her residual
estimate on ‗hard costs‘ (new machine cost+ items needed for
operable machine, to make it operate, drives, motors, electrical
and controls. Items referred to as ―soft costs‖ that should not be
included. ( foundation, taxes, debugging, freight, installation).

.Example:
A leasing company was presented with a transaction valued at $2.1
million. Subsequent investigation found the following:
1. The basic cost of the machine was $1.5 million.
2. The cost of foundations was about $400,000.
3. The cost of freight was $40,000. soft= 0.60
4. Taxes were $60,000.
5. Installation was estimated at $100,000 (all totaling $2.1 million).
 Historical ―residual curve‖ indicated 30 % of the new cost at end
including soft costs, would equal $180,000 at lease term.
Total Cost: $2.1 million x 30% = $630,000
Hard Cost: $1.5 million x 30% = $450,000
Difference: = $180,000= could present a future shortfall/loss
For some instances, like facility lease or financing or life-cycle
costing-soft costs to be considered in determining residual values.

Variables that affect residual value:
2. Maintenance—Maintenance adds significant value to the equipment
and its useful life, it affects the estimation/ appraising process for
residual value, leasing shall also consider maintenance.
3.Use/Wear and Tear— use/wear and tear is considered in estimating
residual values. Use of equipment in harsh service, versus mild service,
can be substantial. Most of the equipment work for 10-20,000.00 Hr.
then may need rebuild.
4. Population— Large sample, more data, will provide statistical
significance to the residual value.
5. Age— The equipment which is new in 2017 could be built in 2016,
both are considered new but with different price.
6. Economy— A used truck that sells for $35,000 in a strong(1-30d)
economy, sell for $18,000 in a recession(30-60d, add cost of money).

7. Changes in Technology—These changes occur in every type of
equipment, some changes have a more profound impact on value,
analysis of technological changes, over the past 20 Yrs., shows that
future advances in technology were generally known at the time of
lease origination. Currently used scanners had reduced the time
necessary to ―fix‖ an image from minutes to one second.
8. Foreign Exchange— Factors that influence foreign exchange
include international trade relations and the international political
environment, strong foreign currency increases the equipment price
and its residual value as well.
9. Tax Law— Tax law can affect such things as build rates and thus
the supply on the secondary market.( Used equipment)

10. Legislation/Regulation—
Although it cannot be predicted, a sense of future legislation can be
recognized, it can impact + or –ve.
11. Equipment Location— The location of equipment at the end of
the lease. Does the lessee require that the equipment be delivered to
a prime market location, or will it have to be sold in a remote area?
12. Method of sale – Cash- credit- LC- installments.
End of Variables that affect residual value

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