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
“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
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] Numeric PS Models:Scoring
General Cost Terms • Handout
Estimating Main types of construction?
Buildings Commercial Offices Stores 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 • 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 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 • 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
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?
Estimate • 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 • Escalate? • CPI, ENR • Felix work