Return 

COST ENGINEER - his Past, Present, and Future


COST ENGINEER - his Past, Present, and Future

This article describes the role of the Cost Engineer in the past, in the present, and in the future.

 

Prior to our review of the past, present and future of the Cost Engineer as the member of Project Management team, let us find out who needs the Cost Engineer. Obviously, the need for Cost Engineers has been created by Project Managers themselves. On any large and long duration engineering project, the Project Manager - responsible for the total project - is unable to handle alone all involved engineering, material supply, construction, as well as the time and costs aspects of his project, plus his personal contacts with the project sponsors. Hence, for engineering and materials he depends on his Project Engineers, for construction – on his Field Engineers, and for time aspects – on his Project Scheduler. For all project cost matters, the Project Manager depends on his Project Accountant, and (mainly in USA, Canada, Arab Emirates, but less in other countries) also on his Cost Engineer. The Cost Engineer is employed only because the Project Manager expects to find in him the person who could handle all project cost matters better than done by his Project Accountant. Namely, it is the well known fact that the Project Accountant advises the Project Manager about project cost overruns only after invoices had been paid, and than it is almost always too late to mitigate the project execution. The Project Manager expects that his Cost Engineer would be able to discover immediately any likelihood of cost overruns, and that much sooner than this is reported by his Project Accountant.                   

 

Cost Engineering – that deals with project cost planning and control during construction - is a rather very new branch of Engineering, and the Cost Engineer is a relatively new and still rare addition to the Project Engineering team.  The AACE International is the first professional organization of Cost Engineers worldwide.  It was created in 1956 by 59 cost estimators, on their first meeting at the University of New Hampshire in Durham, New Hampshire, USA. Since that time, AACEI has grown substantially, defining clearly the whole concept of Cost Engineering and the role of the Cost Engineer in the Project Management team. Today, AACEI - The Association for the Advancement of Cost Engineering Through Total Cost Management - has over 8,000 members, comprising over 80 local sections, located in 80 countries throughout the world.

       

Although the number of 8,000 Cost Engineers may appear impressive, actually in the world there are only very few Cost Engineers when compared with the number of Project Managers. For example, the organization known as PMI Project Management Institute, created in 1984, comprises over 370,000 members worldwide. Considering the membership in these two professional organizations, this means that for each Cost Engineer there are as many as 47 Project Managers. The employment of  Cost Engineers in Project Management teams is very popular in the USA (~3650 AACEI members), Canada (~1030), and Arab Emirates (~585), but it is much less popular in other countries such as Australia (~175), Qatar (~131), Saudi Arabia (~125), UK (~94), India (~75), South Africa (~75),  France (~45), Brazil (~39), China (~21), Japan (~19), Germany (~12), Russia (~10), Bahrain (~8), Mexico (~7), Italy (~7), Venezuela (~4), Greece (~3), Argentina (~2), Belgium (~1), Portugal (~1), and Sweden (~1). Actually, the ratio figure of ‘47’ may be even higher, because some members of AACEI are not Cost Engineers, but Cost Estimators, Risk Engineers, Schedulers, and even Project Managers. Generally, almost in very country of Europe, South America, Africa, and Asia, the Project Accountant alone - but not the Cost Engineer - is employed to handle project costs during construction of large engineering projects. There the belief governs that "engineers have no idea about money matters". Surprisingly, even today there are very few universities worldwide that have the curriculum called Cost Engineering.       

Cost Engineer in the Past      

         Hence, we can say, that prior to the year 1956, there were no Cost Engineers on this Earth, because the total concept of Cost Engineering – covering project cost planning and control during project execution - was created only in the year 1956, and in the USA by AACEI, as already mentioned above. Surely, prior to that time, and already since the antiquity, many large and monumental engineering projects were executed. The planning and constructing Egyptian pyramids, Roman aqueducts, bridges, medical churches and castles, required always some kind of project management effort. Roman emperors, medieval popes and kings financed their projects and always designated some persons who acted as their Project Managers and who became responsible for the project execution and quality, but seldom for the project costs. Even when sometimes some knowledgeable officials were employed to handle project costs, they were never Cost Engineers.        

How Cost Engineering was born? It is well known that it evolved from Cost Estimating. The Estimator created ESTIMATED COSTS, enabling the Cost Engineer to convert all project cost figures to BUDGET by adding CONTINGENCY and PRORATES. When some information about work progress had arrived, the Cost Engineer entered the data into accounts called ACTUALS. By comparing ACTUALS with BUDGET, he was able to report in detail about the cost status of various Project Cost Accounts belonging to Project Objects, as well as about the total project. Because of changes occurring in the project execution, or design modification that affected the total project cost, another type of account was needed: this was FORECAST. This arrangement allowed the BUDGET to be a fixed figure. Then, when comparing FORECAST with BUDGET, and FORECAST with ACTUALS, the Cost Engineer was able to assess how much the actual cost of various Project Objects and of the total project differed from the forecasted figures and from the budget figures. Later, the concept of EARNED VALUE had been invented, allowing the Cost Engineer to find out whether at some given time during construction the cost of individual project objects, as well as that of the total project, was already overrun or under-run. Because Project Management needed to know when and what invoices arrived, and whether they had been paid and when, therefore another type of accounts was created: BOOKINGS. Paying bills was always the responsibility of the Accountant (who knew Business Accounting). Therefore the Cost Engineer (unfamiliar with Business Accounting) was excluded, and the Accountant alone handled this vital area of Project Accounting, maintaining accounts of contractors, suppliers and engineering firms. Another type of account was also necessary to record the flow of funds from the Project Sponsors: COMMITMENTS. Because these accounts need also the dual entry accounting (unfamiliar to the Cost Engineer), the Accountant took care for this part of Project Accounting too. This way, the Total Project Accounting was done by two persons: the Cost Engineer became responsible for BUDGET, FORECAST and ACTUALS, and the Project Accountant for BOOKINGS and COMMITMENTS. This division of responsibility impacted negatively the total project cost control. Unfamiliar with any dual-entry accounting methodology that could allow him to handle jointly BUDGET, FORECASTS, ACTUALS, BOOKINGS and COMMITMENTS (interlocked in the dual-entry Accounting Network), the Cost Engineer found himself unable to understand and to manage the Total Project Accounting.

Cost Engineer in the Present    

Today the Cost Engineer’s scope of responsibilities is still rather restricted. When he is attached to an engineering-only project, the Cost Engineer makes manpower forecasts, generates reports about the progress of project documentation development, does the archiving of important project cost documents, and publishes various man-hour and man-power cost reports. Surely, he is not expected to know about the overall finances of his project, because there the actual dollar costs - particularly the profits made by his engineering firm - are usually considered as the confidential matter.

On the other hand, when the Cost Engineer is employed on a large EPC (Engineering, Procurement, Construction) project, then his job is more complex, because he must be also involved in project procurement and construction. The Cost Engineer creates the BUDGET, compares FORECASTS with BUDGET, and ACTUALS with FORECASTS, and using the concept of EARNED VALUE, he tries to predict  at any given time whether various Project Objects, as well as the total project, can be completed as scheduled and within the Budget. His involvement with BOOKINGS and COMMITMENTS is very limited.  Although he reviews and ensures that all issued purchase orders and incoming invoices are approved by his Project Manager and forwarded to the Project Accountant, he does not worry whether the bills can and will be later paid or not, as this is not his responsibility. Furthermore, he seldom has time and interest to manage ledgers of all project participants, by tracking their invoices and bills paid. He believes strongly that only the Project Accountant must do this part of project accounting, inclusive of maintaining accounts of involved contractors, suppliers and engineering firms. Of course, the Project Accountant can do all these tasks easily, because he has to his disposition the powerful Business Accounting system that is based on the dual-entry (DEBIT=CREDIT) accounting method. However, the Cost Engineer is practically unable to control the Accountant, because so far the Cost Engineer has not been equipped with an alternative accounting methodology. Such methodology must suit the project cost control, must permit handling total project costs in the most efficient dual-entry accounting manner (DEBIT=CREDIT), and must consider the critical relationship between ACTUALS and BOOKINGS, that remains undefined in the present cost control methodology.

The problem lies in the fact that Business Accounting is oriented towards PROFIT, whereas the accounting required to handle project costs must be oriented towards BUDGET. The Project Manager is always interested to know whether his project can be completed as scheduled and within the allocated budget. He wants to know immediately when and where any danger of project cost overrun exists, and so that he can introduce an immediate corrective action. Generally, the Project Manager is not interested to find out whether any profit was achieved when his project is completed. Unfortunately, the Project Accountant can supply the Project Manager with a reliable information about any project cost overrun only after invoices had been paid, and then it is always too late for the Project Manager to introduce any remedial action. This happens because Business Accounting - used by the Project Accountant - has accounts such as ASSETS, LIABILITIES, EQUITIES, INCOMES, and EXPENSES. Of these five accounts only the last two have any direct application to engineering projects. There is no provision for such accounts as FORECASTS and ACTUALS, needed in the project accounting. Hence, the Project Accountant has no means to report about the comparison between FORECASTS and ACTUALS that can yield the critical information on possible and current cost overruns. Only D-E Project Accounting - based on the dual-entry (DEBIT=CREDIT) methodology and very similar to Business Accounting - has all types of accounts needed by Cost Engineering. Therefore, D-E Project Accounting represents  the right and only choice for Cost Engineers to utilize.

Moreover, the current methodology (single-entry accounting) of Cost Engineering is unable to bridge the gap between ACTUALS and BOOKINGS, meaning that it cannot supply any reliable comparison between advanced costs of Project Objects (DEBIT: Accounts of Construction, Materials, Engineering) versus money earned by Project Participants (CREDIT: Accounts of Contractors, Suppliers and Engineering Firms). Because of this fact, the Cost Engineer is unable to discover any immediate danger of cost overrun until he receives the already paid-amount data from the Project Accountant. What is more, the Cost Engineer cannot control the Project Accountant, because so far the Cost Engineer has no alternative methodology that would allow him to do so without duplicating the job of the Accountant. Only the D-E Project Accounting, independent from Business Accounting (and promoted though my email articles, my book, TECA computer program, and illustrated by my website) allows the Cost Engineer to control the Project Accountant independently. Only then the Cost Engineer is able to discover instantly any danger of project cost overruns, and to plan and to control project costs - inclusive of maintaining accounts of contractors, suppliers, and engineering firms -  during project execution, easily and efficiently.

Cost Engineer in the Future

The Cost Engineer will become indispensable in the project team only if he can prove being capable to supply his Project Manager with the project cost information that is more current and more reliable than that supplied by the Project Accountant. Only then - worldwide, and not only in the USA, Canada and Arab Emirates - Project Managers will demand employment of Cost Engineers in their teams.

We can make an analogy to Project Schedulers. The need for Project Schedulers was triggered by the invention of the CPM Critical Path Method, starting in the year 1970. At that time, the CPM was considered by Project Managers as too complex to be practicable. Yet, thanks to the computer technology, this method revolutionized the way projects are being scheduled and time-controlled.  Prior to that time, the position of the Project Scheduler was unknown, and the scheduling was done by the Project Manager or his Project Engineer, using bar-charts. Similarly, for the Cost Engineer to succeed, he must be furnished with a methodology that can allow him to grasp the total project cost, comprising all basic elements of the Project Accounting Network, such as BUDGET, FORECASTS, ACTUALS, BOOKING, and COMMITMENTS. He must become as knowledgeable and important as the CFO (Chief Financial Officer) of any business corporation. This means that the Cost Engineer must know the dual-entry (DEBIT=CREDIT) accounting, but not Business Accounting (that does not fit Project Cost Control because it is PROFIT oriented), but D-E Project Accounting (that fits Project Cost Control because it is BUDGET oriented). Today, the majority of Project Managers and Cost Engineers seem to believe that the D-E Project Accounting is too complex to be practical. Yet, because computers made the complex CPM theory workable and applicable to Project Scheduling, it is certain that computers will make also the complex dual-entry project accounting workable and applicable to Project Cost Engineering.

Every Cost Engineer must understand that his role is to plan and to control the flow of MONEY that is funding his project. The Scheduler must be concerned with TIME, but the Cost Engineer must be concerned with MONEY. As far as the TIME aspects are concerned, the Cost Engineer must only define and then control when and how much money must be spent, and what amount of money was spent, to pay for Construction, Materials and Engineering.  The money flow of any large engineering project is as complex, or even more complex than that of any business corporation. It is well known fact that the Business Accountant can control the business firm only thanks to the dual-entry (DEBIT=CREDIT) accounting methodology. Therefore, because the engineering project money flow is very complex, the Cost Engineer must use the dual-entry accounting too to be able to control properly his project. However, the Cost Engineer cannot use Business Accounting, because it is PROFIT and not BUDGET oriented. Hence, the Cost Engineer must learn and use D-E Project Accounting that is BUDGET oriented and fits every type of engineering projects. 

The accounting concept of DEBIT=CREDIT is the only methodology that allows to comprehend the money flow, both in business as well as in project cost engineering. If you have any doubts regarding the dual-entry project accounting, click here to see the graph explaining the Project Accounting Network, or click here to see the simple example that proves the full correctness of the D-E Project Accounting theory, or to read all articles on this website, or read my book.

 Implementation of the D-E Project Accounting theory in Cost Engineering will make the participation of the Cost Engineer in project teams indispensable and his role superior to that of the Project Accountant. Already fully familiar with project budget and costs of individual Project Objects (subjects foreign to the Project Accountant), the Cost Engineer must also be able to monitor himself the accounts of involved contractors, suppliers, and engineering firms. Only then Cost Engineers will become wanted by all Project Managers in all countries worldwide.

 

The D-E Project Accounting renders the following advantages:

o  Any PROJECT COST OVERRUN can be detected almost instantly, allowing for some immediate corrective action.

o Dual-Entry Project Accounting provides the ‘missing link’ between ACTUALS and BOOKINGS, by introducing for progress measurement the concept of EARNED WORK, in addition to the already known EARNED VALUE.

o All invoices, purchase orders, change orders, and other documents that deal with project costs, are automatically and instantly gathered in the LEDGERS, that belong to contractors, suppliers and engineering and other project participating firms. These ledgers show always the current ACCOUNT BALANCE instantly, without any need on part of the Cost Engineer to do any calculations or data retrieval.

o The Cost Engineer needs to manage ONLY FOUR JOURNALS: FORECASTS, ACTUALS, BOOKINGS and COMMITMENTS. Because of the rule that DEBIT=CREDIT, data entry errors are practically eliminated, and TRIAL BALANCE shows instantly whether entered cost data are correct.

o PROJECT FINANCIAL STATEMENTS can be automatically and instantly generated. In place of BALANCE SHEET, INCOME STATEMENT, and CASH FLOW of Business Accounting, there are Project Status Finance Reports: BUDGET versus FORECAST, FORECASTS versus ACTUALS, ACTUALS versus BOOKINGS. The PROJECT CASH FLOW FORECAST can be generated automatically and instantly, based on the already defined Total Project Forecast.

o TIME-COST STATEMENTS related to Project Objects can be instantly generated, and all reports can be illustrated by histograms and S-Curves, by clicking some buttons on the computer keyboard.

o The project accounting of complex and long-duration projects can be performed easily and accurately, using monthly or even quarterly reporting periods, all generated in an UNIFIED FORMAT, fitting any type of engineering project and thus acceptable to all Project Managers in all countries of the world.

 

Conclusions

 

As you may notice when reading this and my other email articles – or reading my book, or using my computer program TECA, or when visiting this website - that I have tried to make the dual-entry project accounting theory popular among Cost Engineers.  The responses received by me varied: from a high level of acceptance to disbelief, to rebuttal, or even to complete rejection. Generally, the majority of Cost Engineers appear as they do not want to learn any new project cost control theory, particularly such that requires understanding the complex concept of DEBIT=CREDIT. However, opinions of Project Managers appear to contrary: they want their Cost Engineers to be able supplying the most current and reliable project cost information that is qualitatively much better than that supplied presently by their Project Accountants, and that can lead to prompt mitigation of project costs overruns.

     

        Hence, in my opinion, only when Project Managers will insist that their Cost Engineers are capable to handle project cost accounting in the most advanced form (D-E Project Accounting), only then the number of Cost Engineers will be much higher than that of today, considering all countries of the world.

 

Wieslaw J. Jurkiewicz, P.E.

Houston, Texas – January 2012       



Up Page