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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.

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Project selection economics estimating

Project Selection, Economics, Estimating

Dr. Perkins

CE 438

6 February 05


  • 40 Minute Lecture

    • ESM 401

    • ESM 450

  • General Project Selection Concepts

    • Economics

  • Estimating

  • Your Projects


  • Remember Project Life Cycle

  • Organizations

Project selection economics estimating

Project selection1
Project Selection

  • Values, Vision, and Mission

  • Objectives and Goals

  • Strategy

  • Programs and Projects

Project selection general concepts
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?

Project selection economics estimating

  • The following applies to components and engineering decisions within a project as well.

  • If they warrant it

Project selection2
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
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
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
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
Project Evaluation Factors (PEFs)

  • Who decides??

  • Production Factors

  • Marketing Factors

  • Financial Factors

  • Personnel Factors

  • Administrative and Misc. Factors

Nonnumeric ps models
Nonnumeric PS Models:

  • Sacred Cow

  • Operating Necessity

  • Competitive Necessity

  • Product Line Extension

  • Comparative Benefit Model

Numeric ps models profit profitability
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
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
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
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
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)


Numeric PS Models:Scoring


Main types of construction?

Project selection economics estimating

  • Buildings


    Offices Stores


    Single Multi-family,


  • Public Occupancy




    Transportation terminals

Project selection economics estimating

  • Heavy Construction



    Ports and Airports



  • Industrial

    Manufacturing Plants


    Oil and Gas



    Power Generation

Project selection economics estimating

  • Specialties

    Hazardous Waste

    Military Facilities


    Golf Courses



Project selection economics estimating

  • Also might divide

    New construction



  • Or by

  • Owner






  • Near industrial centers

  • Off highway

  • Off shore

  • Remote (Bush)

  • Foreign

    • Various Locations

Project selection economics estimating

Project selection economics estimating

  • By contract type

    • Lump sum (AKA hard dollar)

    • Cost plus

    • Cost reimbursable (fixed fee)

    • Unit price

Project selection economics estimating

  • 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)

Project selection economics estimating

When what phase
When (what phase)

  • Concept

  • A/E


  • 15%, 35%, 65%, 95%

  • Is the budget fixed?

  • Cast in concrete

  • Contactor’s Bid

  • Post bid negotiations

  • Usually non-government

  • Changes

Non construction estimates
Non-construction Estimates

  • Owners estimate of owners expenses

    Contract administration


    Lost or interrupted work

    Permits and fees

    Housing and travel

A e estimate of a e s expenses
A/E estimate of A/E’s expenses

(Contract type)


Other expenses




Construction phase?



Types of estimate
Types of estimate

  • Guess

  • Educated guess

  • SWAG

    With or without lanyap

  • Historical, similar project

  • Historical, unit prices

  • Estimating guides

  • Crew size and production rate

Cost items
Cost Items

  • Labor

  • Supervision

  • Installed Materials

  • Installed equipment

  • Supplies and Consumables

Project selection economics estimating

  • Subcontractors

  • Home Office Expense

  • Overhead

  • Bonds, Insurance, Permits

  • Job Office Expense

  • Mobilization

  • Travel

  • Demobilization

Project selection economics estimating

Operating Equipment

  • Capital cost

  • Operation costs

  • Fuel

  • Permits

  • Insurance

Project selection estimates
Project Selection Estimates

  • Usually based on conceptual

  • Estimate of costs

  • Estimate of benefits

  • “The future, cloudy it is.”

    • Master Yoda

Engineering design estimates
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
Change Orders

  • Type I and Type II

  • Extra labor, materials, etc.

  • Delays

  • On critical path?

  • Delay job.

  • Extra overhead

  • Legal and consulting


  • 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?


  • 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

  • Take off quantities

  • Special matters

  • Pre-bid fly over

  • Hire consultants

  • Do your own borings?

Historical unit prices
Historical unit prices

  • Escalate?

  • CPI, ENR

    • Felix work

Estimating guides
Estimating guides

Production rate

See next

Unit Price

Read the front!


Crew size and production rate

Size crew and supervision


All methods
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
Do you still want to bid??!!

  • If so, secure bonding and financing

  • Prepare bid documents with prices blank

Project selection economics estimating

Post bid
Post bid

  • Protest?

  • Negotiations

  • Intelligence?

  • When is a deal a deal?

Plan for changes
Plan for changes

  • Pre-job photos and videos

  • Documenting changes

  • Know the contract

  • Document everything


  • 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.