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
19
74
19
75
19
76
19
77
19
78
19
79
19
80
19
81
19
82
19
83
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
1992
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
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
Dates
0
1,000
2,000
3,000
4,000
5,000
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.