Enabling Knowledge.pdf

 AACE International Certified Cost Technician Primer 1st Edition – January 2011 Updated September 2018 SUPPORTING SKILLS AND KNOWLEDGE OF A COST ENGINEER Based Upon AACE International R...

 AACE International Certified Cost Technician Primer 1st Edition – January 2011 Updated September 2018 SUPPORTING SKILLS AND KNOWLEDGE OF A COST ENGINEER Based Upon AACE International Recommended Practice 11R‐88, Required Skills and Knowledge of Cost Engineering Part 1 Acknowledgments: Michael Pritchett, CCE CEP (Author) Pete Griesmyer Donald McDonald Jr., PE CCE PSP Valerie Venters, CCC Larry Dysert, CCC CEP Copyright 2011‐2018, AACE International, Inc. AACE International CCT Primer Cost Engineering and Total Cost Management AACE International is dedicated to the tenets of furthering the concepts of Total Cost Management and Cost Engineering. Total Cost Management is the effective application of professional and technical expertise to plan and control resources, costs, profitability and risk. Simply stated, it is a systematic approach to managing cost throughout the life cycle of any enterprise, program, facility, project, product or service. This is accomplished through the application of cost engineering and cost management principles, proven methodologies and the latest technology in support of the management process. Total Cost Management is that area of engineering practice where engineering judgment and experience are used in the application of scientific principles and techniques to problems of business and program planning; cost estimating; economic and financial analysis; cost engineering; program and change control. Cost engineers often specialize in one function with a focus on one side of the asset and project business. They may have titles such as cost estimator, parametric analyst, strategic planner, scheduler, cost/schedule engineer, project manager, or project control lead. They may work for the business that owns and operates the asset (emphasis on economics and analysis), or they may work for the contractor that executes the projects (emphasis on planning and control). But no matter what their job title or business environment, a general knowledge of, and skills in, all areas of cost engineering are required to perform their job effectively. Purpose of This Document This Primer provides someone who is preparing to sit for AACE International’s Certified Cost Technician (CCT™) certification exam, a detailed outline of the skills and knowledge necessary to successfully achieve this certification. The Primer is based upon AACE International Recommended Practice 11R‐88, Required Skills and Knowledge of Cost Engineering. It is intended to outline what core skills and knowledge of cost engineering a person is required to have in order to be considered a professional practitioner, and in doing so, establish the emphasis of core subjects for AACE International education and certification programs. This Primer addresses part one of 11R‐88, “Supporting Skills and Knowledge.” It is recommended that in addition to this document, reading Skills and Knowledge 6th Edition, AACE International’s TCM Framework, and other specialty texts such as Schaum’s Beginning Statistics 2nd Edition, Schaum’s Statistics Crash Course and economics reference workbooks. The latest reference list can be found at the AACE International website – www.aacei.org. To successfully pass the CCT exam, there will be problems that must be correctly solved. It is beyond the scope of this primer to provide example problems. CCT candidates can find example problems in publications such as AACE International’s S&K 6th Edition, and other reference material, as identified on the certification section of www.aacei.org. A general caution, while this primer is intended to support one seeking to successfully achieve AACE International’s CCT certification, it cannot be substituted for one’s actual knowledge and experience. Carefully review the current minimum requirements necessary for achieving any of the AACE certifications at www.aacei.org. This publication was developed by the AACE International Education Board to assist young professionals in preparing for the AACE International Certified Cost Technician (CCT) exam. The Education Board will continue to update and improve this document as needed to support the CCT exam. Recommendations and or comments are highly welcomed and should be forwarded to the AACE International Education Board at [email protected]. Copyright 2011‐2018, AACE International, Inc. AACE International CCT Primer Table of Contents 1. Elements of Cost a. Cost b. Cost Dimensions c. Cost Classifications d. Cost Types e. Pricing f. Cost Estimating 2. Elements of Analysis a. Statistics and Probability b. Economic and Financial Analysis c. Optimization and Models d. Physical Measurement 3. Enabling Knowledge a. Enterprise in Society b. People and Organizations in Enterprises c. Information Management d. Quality Management e. Value Management f. Environmental, Health and Safety (EHS) [AACE International Recommended Practice 11R‐88, January 17, 2006] Copyright 2011‐2018, AACE International, Inc. AACE International CCT Primer  I. SUPPORTING SKILLS AND KNOWLEDGE 3. Enabling Knowledge a. Enterprise in Society 1. Societal Values: Society The human environment in which the enterprise exists as defined by its economic, political, legal, and other attributes. Society’s stakeholders are its citizens, including enterprises [TCM Framework, 11.1.1]. Social Values Economic costs consider that the value of money is relative to time, currency, and context, including the societal context; that is, an amount of money saved to benefit both the enterprise and society has a greater value than the same amount of money saved to benefit only the enterprise. All societal values must be considered in planning, measurement, and assessment [TCM Framework, 11.1.1]. A challenge with considering societal values is in how to measure them. They tend to be highly subjective and differ between individuals, groups, cultures, locales, and so on. It is also difficult to determine who the stakeholders in society are for a given situation. Much of the work involves very complex valuation modeling. Some social scientists consider it nearly impossible to make an economic‐based decision with any certainty that will maximize social welfare; however, enterprises are increasingly expected by society (politically, legally, or otherwise) to make the attempt [TCM Framework, 11.1.1]. 2. Decision Policy: Definitive position of an organization on how investment or project decisions will be made. Establishes the basis for decision models. Provides a basis for consistent and appropriate decision making and defines authority and accountability within the organization. The term Policy could also be used [10S‐90]. Copyright 2011‐2018, AACE International, Inc. AACE International CCT Primer  3. Ethics: 1. At all times each person in the enterprise must judge the means and the ends of a process against personal and societal values and rules of conduct. These values and rules of conduct are referred to as ethics. In judging, people and organizations must ask questions about the means and ends such as: Are they fair, respectful, responsible, honest, and honorable? Society sets the framework for this questioning, but individuals and organizations make the judgments and set the rules. Discussions of society values therefore often involve a discussion of ethics or ethical values. Most enterprises will have an ethics policy if none other concerning social values [TCM Framework, 11.1.2]. 2. Business ethics is considered a management discipline because of the social responsibility movement that began in the 1960’s. During the 1960’s social awareness movements emphasized the expectations of businesses to use their influence to address social problems. People asserted that since businesses were making profits, it was also their responsibility to work to improve society. Many replaced the word stockholder with stakeholder, including employees, customers, suppliers, and the wider community [S&K 6th Ed., Chap 20]. 3. One definition is that ethics is the science of judging specifically human ends and the relationship of means to those ends or the art of controlling means so that they will serve specifically human ends. In terms of business, ethics is concerned with the relationship of business goals and techniques to human ends [S&K 6th Ed., Chap 20]. AACE Canon of Ethics (refer to the AACE International web page www.aacei.org for any updates) The AACE member, to uphold and advance the honor and dignity of Cost Engineering and the Cost Management profession and in keeping with the high standards of ethical conduct will (1) be honest and impartial and will serve employer, clients, and the public with devotion; (2) strive to increase the competence and prestige of their profession; and (3) will apply knowledge and skill to advance human welfare. I. Relations With the Public A. Members will hold paramount the safety, health, and welfare of the public, including that of future generations. B. Members will endeavor to extend public knowledge and appreciation of cost engineering and cost management and its achievements, and will oppose any untrue, unsupported, or exaggerated statements regarding cost engineering and cost management. C. Members will be dignified and modest, ever upholding the honor and dignity of their profession, and will refrain from self‐laudatory advertising. D. Members will express an opinion on a cost engineering or cost management subject only when it is founded on adequate knowledge and honest conviction. E. On cost engineering or cost management matters, members will issue no statements, criticisms, or arguments that are inspired or paid for by an interested party or parties, unless they preface their comments by identifying themselves, by disclosing the identities of the party Copyright 2011‐2018, AACE International, Inc. AACE International CCT Primer  or parties on whose behalf they are speaking, and by revealing the existence of any pecuniary interest they may have in matters under discussion. F. Members will approve or seal only those documents, reviewed or prepared by them, which are determined to be safe for public health and welfare in conformity with accepted cost engineering, cost management and economic standards. G. Members whose judgment is overruled under circumstances where the safety, health, and welfare of the public are endangered shall inform their clients or employers of the possible consequences. H. Members will work through professional societies to encourage and support others who follow these concepts. I. Members will work only with those who follow these concepts. J. Members shall be objective and truthful in professional reports, statements, or testimony. They shall include all relevant and pertinent information in such reports, statements, and testimony. II. Relations With Employers and Clients A. Members will act in all matters as a faithful agent or trustee for each employer or client. B. Members will act fairly and justly toward vendors and contractors and will not accept any commissions or allowances from vendors or contractors, directly or indirectly. C. Members will inform their employer or client of financial interest in any potential vendor or contractor, or in any invention, machine, or apparatus that is involved in a project or work for either employer or client. Members will not allow such interest to affect any decisions regarding cost engineering or cost management services that they may be called upon to perform. D. When, as a result of their studies, members believe a project(s) will not be successful, or if their cost engineering and cost management or economic judgment is overruled, they shall so advise their employer or client. E. Members will undertake only those cost engineering and cost management assignments for which they are qualified. Members will engage or advise their employers or clients to engage specialists whenever their employer’s or client’s interests are served best by such an arrangement. Members will cooperate fully with specialists so engaged. F. Members shall treat information coming to them in the course of their assignments as confidential and shall not use such information as a means of making personal profit if such action is adverse to the interests of their clients, their employers, or the public. 1. Members will not disclose confidential information concerning the business affairs or technical processes of any present or former employer or client or bidder under evaluation, without consent, unless required by law. Copyright 2011‐2018, AACE International, Inc. AACE International CCT Primer  2. Members shall not reveal confidential information or finding of any commission or board of which they are members, unless required by law. 3. Members shall not duplicate for others, without express permission of the client(s), designs, calculations, sketches, etc., supplied to them by clients. 4. Members shall not use confidential information coming to them in the course of their assignments as a means of making personal profit if such action is adverse to the interests of their clients, employers, or the public. G. Members will not accept compensation—financial or otherwise—from more than one party for the same service, or for other services pertaining to the same work, without the consent of all interested parties. H. Employed members will engage in supplementary employment or consulting practice only with the consent of their employer. I. Members shall not use equipment, supplies, laboratory, or office facilities of their employers to carry on outside private practice without the consent of their employers. J. Members shall not solicit a contract from a governmental body on which a principal officer or employee of their organization serves as a member. K. The member shall act with fairness and justice to all parties when administering a construction (or other) contract. L. Before undertaking work for others in which the member may make improvements, plans, designs, inventions, or records that may justify copyrights or patents, the member shall enter into a positive agreement regarding the rights of respective parties. M. Members shall admit and accept their own errors when proven wrong and refrain from distorting or altering the facts to justify their decisions. N. Members shall not attempt to attract an employee from another employer by false or misleading representations. O. Members shall act in professional matters for each employer or client as faithful agents or trustees and shall avoid conflicts of interest. 1. Members shall avoid all known or potential conflicts of interest with their employers or clients and shall promptly inform their employers or clients of any business association, interests, or circumstances that could influence their judgment or the quality of their services. 2. Members shall not solicit or accept gratuities, directly or indirectly, from contractors, their agents, or other parties dealing with their clients or employers in connection with work for which they are responsible. Copyright 2011‐2018, AACE International, Inc. AACE International CCT Primer  III. Relations With Other Professionals A. Members will take care that credit for cost engineering and cost management work is given to those to whom credit is properly due. B. Members will provide prospective employees with complete information on working conditions and their proposed status of employment. After employment begins, they will keep the employee informed of any changes in status and working conditions. C. Members will uphold the principle of appropriate and adequate compensation for those engaged in cost engineering and cost management work, including those in subordinate capacities. D. Members will endeavor to provide opportunity for the professional development and advancement of individuals in their employ or under their supervision. E. Members will not attempt to supplant other cost engineers or cost management professionals in a particular employment after becoming aware that definite steps have been taken toward the others’ employment or after they have been employed. F. Members shall not maliciously or falsely, directly or indirectly, injure the professional reputation, prospects, practice, or employment of another, nor shall they indiscriminately criticize another’s work. Proof that another cost professional has been unethical, illegal, or unfair in his/her practice shall be cause for advising the proper authority. G. Members will not compete unfairly with other cost professionals. H. Members will cooperate in advancing the cost engineering and cost management profession by interchanging information and experience with other cost professionals and students, by contributing to public communication media and to cost engineering, cost management and scientific societies and schools. I. Members will not request, propose, or accept professional commissions on a contingent basis under circumstances that compromise their professional judgments. J. Members will not falsify or permit misrepresentation of their own or their associates’ academic or professional qualifications. They shall not misrepresent or exaggerate their degrees or responsibility in or for the subject matter of prior assignments. Brochures or other presentations incident to the solicitation of employment shall not misrepresent pertinent facts concerning employers, employees, associates, joint ventures, accomplishments, or membership in technical societies. K. Members will prepare articles for the lay or technical press that are only factual, dignified, and free from ostentatious or laudatory implications. Such articles shall not imply credit to the cost professionals for other than their direct participation in the work described unless credit is given to others for their share of the work. Copyright 2011‐2018, AACE International, Inc. AACE International CCT Primer  L. Members will not campaign, solicit support, or other wise coerce other cost professionals to support their candidacy or the candidacy of a colleague for elective office in a technical association. IV. Standards of Professional Performance A. Members shall be dignified and modest in explaining their work and merit and will avoid any act tending to promote their own interests at the expense of the integrity, honor, and dignity of the profession. B. Members, when serving as expert witnesses, shall express a cost engineering and cost management opinion only when it is founded upon adequate knowledge of the facts, upon a background of technical competence, and upon honest conviction. C. Members shall continue their professional development throughout their careers and shall provide opportunities for the professional development of those cost professionals under their supervision. 1. Members should keep current in their specialty fields by engaging in professional practice, participating in continuing education courses, reading in the technical literature, and attending professional meetings and seminars. 2. Members should encourage their cost engineering and cost management employees to become certified at the earliest possible date. 3. Members should encourage their cost engineering and cost management employees to attend and present papers at professional and technical society meetings. 4. Members shall uphold the principle of mutually satisfying relationships between employers and employees with respect to terms of employment including professional grade descriptions, salary ranges, and fringe benefits. ─End of the AACE Canon of Ethics b. People and Organizations in Enterprises 1. Leadership: ‐ Today’s leaders must work to promote a team culture and establish partnerships with customers and suppliers. This is done through communication and information sharing among all stakeholders. Leaders now are considered team players. The leader does not work to control team members, but instead works to obtain commitment from them to support goals and objectives by fostering open communication, increased productivity through group efforts, and participatory decision making [S&K 6th Ed., Chap 20]. 1. Leadership Roles: Leadership is not about imposing control, but about obtaining commitment from people to support enterprise goals and objectives. It’s about positively influencing people’s behavior toward self‐control and enhanced individual and group performance. To obtain commitment from people around objectives, a leader must first understand those enterprise objectives, develop a personal vision of their purpose, and communicate the vision and get other stakeholders to see that they Copyright 2011‐2018, AACE International, Inc. AACE International CCT Primer  have a shared purpose. For this, a leader must develop an environment of mutual trust [TCM Framework, 11.2.1]. a. Managing – The manager role ensures the project is completed on time, within budget, and at acceptable levels of performance, It involves creating the administrative procedures and structure to monitor completion of the work. The manager role, viewed from the perspective of people challenges, involves creating an administrative system with enough structure and discipline to complete the project without the structure stretching into the realm of excessive bureaucracy. It is important to balance the need for structure and the need for autonomy and flexibility [S&K 6th Ed., Chap 20]. b. Facilitating – is one of the more subtle, yet profound roles for the project manager. Facilitation are those behaviors and attitudes that help others get their work done and is often achieved through the art of influencing others. It involves communication abilities, conflict resolution, the ability to actively procure necessary supplies and resources for the team as a whole, and the ability to motivate both individual team members and the team as a unit. The goal is to provide team members with choices, options, and a conductive setting and then trust that the team members will create the desired outcome [S&K 6th Ed., Chap 20]. Facilitation is needed when roadblocks such as conflicts between teams, resource shortages, or other obstacles call for the leader’s influence to clear the way or help the team members find paths to do their jobs [TCM Framework, 11.2.2] c. Mentoring – The role of mentor or coach is important when an individual’s skills, knowledge, or behavior need development or improvement and some guidance, assistance, feedback, or role modeling might help that individual and, by extension, also help the team [TCM Framework, 11.2.2]. This assistance takes the form of guidance and encouragement, which may or may not be directly tied to an actual project issue being faced by the individual but instead may be directed at assisting the individual in attaining a broader view of future career directions or advancement [S&K 6th Ed., Chap 20]. d. Participative Management – otherwise known as employee involvement or participative decision making, encourages the involvement of stakeholders at all levels of an organization in the analysis of problems, development of strategies, and implementation of solutions. By creating a sense of ownership in the company, participative management instills a sense of pride and motivates employees to increase productivity in order to achieve their goals. Employees who participate in the decisions of the company feel like they are a part of the team with a common goal, and find their sense of self‐esteem and creative fulfillment heightened. Managers must be willing to relinquish some control to their workers; managers must feel secure in their position in order for participation to be successful. Employees must also be willing to participate and share their ideas. Participative management does not work with employees who are passive or simply do not care. Managers should remember that participative management is not always the appropriate way to handle a given situation. Employees often respect a manager that uses his or her authority and makes decisions when it is necessary [Encyclopedia of Management, Amy McMillan; Revised by Debbie D. DuFrene]. 2. Motivation/Incentives (Behavioral Science): Motivation – is defined as “That process, action, or intervention that serves as an incentive for a project team member to take the necessary action to complete a task within the appropriate confines and scope of performance, time and cost” [S&K 6th Ed., Chap 20]. Copyright 2011‐2018, AACE International, Inc. AACE International CCT Primer  Traditionally, theories of motivation have characterized the subject from the perspective of evolution, biology, drives, needs, and social influences. Each of these perspectives is in agreement that individuals display a wide range of motives [S&K 6th Ed., Chap 20]. Biological Perspective ‐ is considered an evolutionary approach. It asserts that actions or behaviors that contribute favorably to the preservation and expansion of the species will produce motivation [S&K 6th Ed., Chap 20]. Drive Theories – state that certain behaviors are the result of individuals meeting the requirements of specific drives. Drives are considered complex combinations of internal stages of tension that cause the individual to take action to reduce the level of tension. The goal of reducing tension is to achieve an internal state of equilibrium or balance or “homeostasis” [S&K 6th Ed., Chap 20]. Incentive Theories – state that individual behavior is pulled in certain directions based on the external conditions in the specific stings. These approaches can work in settings when the manager and team members have the ability and the resources to identify a desires behavior that can be awarded by providing the identified incentive. The incentives must be valued by the group and may need to come directly from the group members. The incentives also need to be appropriate to the culture of the organization [S&K 6th Ed., Chap 20]. Theory of Needs – is another approach to motivation primarily based on work done by David McClelland, who developed the concept that people who value the need for achievement are often those people who are the leaders in the areas of creativity and economic growth. This approach is based on the premises that, as humans, challenging environments provide us with an opportunity to achieve excellence, or to compete against others successfully will provide motivation. The need to achieve and compete within one’s own professional discipline can self‐motivate many individuals [S&K 6th Ed., Chap 20]. Fear of Failure – can describe another motivational basis to act and succeed. This approach can be a strong motivator in situations when the consequences for failure are especially distasteful or catastrophic. However, it should be employed only in unusual circumstances, such as if a project is headed for crisis, and immediate action is required [S&K 6th Ed., Chap 20]. Hierarchical Theory – of motivation was set forth by Abraham Maslow. It adopts the premise that the basic physical needs and more subtle social or psychological needs will motivate people. Maslow states that people are motivated by the desire to satisfy these various needs according to a hierarchy, with the most basic needs placed at the bottom of a “needs pyramid.” When one need is satisfied, the individual will then move upward to the next need [S&K 6th Ed., Chap 20]. Career Stages – is a different approach presented by Schein through a model that describes major stages in a person’s career. An understanding of an individual’s current career stage by the leader can be used in developing tangible approaches to individual motivation. The drivers (i.e., motivators or demotivators) may come from either intrinsic or extrinsic sources. Sources of intrinsic motivation rise from within people, such as a personal desire to Copyright 2011‐2018, AACE International, Inc. AACE International CCT Primer  learn or to help others. Extrinsic sources originate from outside the person, such as rewards or improved working conditions. To have an impact, extrinsic sources must either counter or complement intrinsic sources. For example, if a person has no desire to learn, an offer of reimbursement for education costs is unlikely to have an effect on that person’s actions. If, however, that person has a desire for money or esteem, an opportunity for higher pay or a better title with an increased level of education may have an effect. A leader must understand a person’s intrinsic motivation in order to find extrinsic motivators or incentives that will improve behavior and performance without violating anyone’s ethics [TCM Framework, 11.2.1]. Hint: Given a list, be able to describe the basic themes of two or more generally accepted behavioral science theories: McGregor‐ Theory X and Y – Douglas McGregor was an early proponent of management as a profession. McGregor stated that management demands a scientific base of research and application to make it a successful profession. He developed two theoretical constructs of the nature of man in relation to his work, known as Theory X and Theory Y. Theory X The average person has an inherent dislike of work and will avoid it if possible. The average person must be coerced, controlled, directed, or threatened with punishment to put forth adequate effort toward achievement of organizational objectives. The average person prefers to be directed, wishes to avoid responsibility, has relatively little ambition, and wants security. Control should be externally imposed Theory Y People are self‐motivated and will exercise self‐direction and self‐ control toward achieving objectives to which they are committed. Average people learn to not only accept but also seek responsibility. People are capable of a high degree of imagination, ingenuity, and creativity in solving organizational problems. The average person’s intellectual potential is only partially used. Central to a discussion of McGregor’s two theories is the matter of control. Under Theory X, control is externally imposed, while Theory Y emphasizes self‐control or an internal control. Theory Y implies that within a climate of trust and respect, the employee is capable of putting forth willing effort and controlling work habits [S&K 6th Ed., Chap 20]. Herzberg‐Motivation‐Hygiene – Frederick Herzberg studied the relationship between the role of work and working conditions. He developed a motivational‐ hygiene theory based on the concepts of satisfiers and dissatisfiers. He found that real motivation resulted from the worker’s involvement in accomplishing an interesting task, not from the working conditions or environmental factors that are peripheral to the job. The hygiene factors, though, must be adequately provided if a person is to rise above them and be able to involve oneself in meaningful tasks. Herzberg’s emphasis on job enrichment stated that increasing the challenging content of the job would cause Copyright 2011‐2018, AACE International, Inc. AACE International CCT Primer  the employee to grow both in skill and in a feeling of accomplishment [S&K 6th Ed., Chap 20]. Argyris‐Effects of Organization on Individuals – Chris Argyris advanced some of McGregor’s theories and said that the organization may be the source and cause of human problems. He believed that individual’s needs and organizational needs were not met effectively in most organizations, as he described the dichotomy between these two sets of needs. Part of the problem, Argyris noted, was because of the bureaucratic nature of organizations and their hierarchical structures; he was an early proponent of the concept of ad hoc work groups, or project teams, that cross‐cut organizational lines. Argyris believed that the organization must change to conform to human needs, and that the organization should offer meaningful challenges and opportunities for responsibilities. A climate of open communication and trust is needed in all interpersonal relationships. Argyris advocated the development of interpersonal competence and authenticity in relationships as the first step in dealing with any personal differences that may block information flow and understanding of objectives at the individual, unit, and organizational levels [S&K 6th Ed., Chap 20]. Likert‐Four Model Systems – well‐known for the development of an attitude measurement approach known as the Likert‐type scale, Rensis Likert also developed the concept of the linking pin, a person who belongs to two groups in the organization. The linking pin shows that the entire organization is viewed as a set of overlapping and interacting groups. Likert advocated open communication within groups, development of mutual trust, consensus decision‐making, group goal setting, definition of roles, and shared responsibility. Likert further developed four basic styles of leadership related to a wide range of organizational variables: Exploitive‐authoritative Benevolent‐authoritative Consultative, and Participative group He believed that participative group, was ideal for a human‐concerned organization [S&K 6th Ed., Chap 20]. Mouton‐Managerial Grid – Dr. Robert Blake and Dr. Jane Mouton developed a concept called the managerial grid. They believed there was an unnecessary dichotomy in the minds of most managers between concern for people problems and concern for production problems. These concerns are complementary. They said that each manager has a discernible style of management based on the degree of concern for production and people. At one end is the manager who is only concerned with production; at the other end is the manager who coddles people at the cost of lost production. There are 81 possible positions on their managerial grid. Ideally, on the grid, a manager should be a 9.9. This manager stresses team management. Concerns for people and production are independent. The manager’s job is one of a coach, an advisor, or a consultant [S&K 6th Ed., Chap 20]. 3. Performance/Productivity Management: a. Productivity – A measure of output relative to input. Productivity (or efficiency) is improved by increasing output for a given input, or decreasing input for a given output. If the input is specifically work hours, the term commonly used is labor productivity [RP10S‐ 90]. Copyright 2011‐2018, AACE International, Inc. AACE International CCT Primer  b. Labor Productivity – A measure of production output relative to labor input. In economics, industrial engineering, and earned value management, quantity/work hour measurers are common (higher values reflect higher productivity or efficiency). In cost estimating, inverse measures such as work hours/quantity or unit hours are common (where lower values reflect higher productivity or efficiency). Regardless of the measure used, labor productivity (or efficiency) is improved by increasing production for a given work hour or decreasing work hours for a given production [RP10S‐90]. c. Production Rate – The amount of work, which may be accomplished in a given unit of time [RP10S‐90]. In general terms, labor productivity is defined as the ration of the value that labor produces to the value invested in labor. In an absolute sense, it is a measure of the extent to which labor resources are minimized and wasted effort is eliminated from a work process (i.e., work process efficiency). In earned value assessment productivity is a ratio (i.e., a factor) that compares the labor effort expended to that which was planned (sometimes called the “spent‐earned ratio”). In earn value terms, productivity is calculated as follows: Labor Productivity Factor = Expended Hours / Earned Hours, where the earned hours = percent physical progress x control budget hours [TCM Framework, 10.1]. Crew balance of skills Worker skill level samples – High +2% to 5% – Average +6% to 10% – Poor +11% to 20% [Richardson Estimating System; S&K 6th Ed., Chap 4] immediate supervision competence overall supervision competence worker and supervision attitudes work force sociological, cultural and demographic characteristics absenteeism and turnover overtime Sample adjustments to productivity rates: Work weeks in excess of 40 hours – 40 to 48 hours +5% to 10% – 49 to 50 hours +11% to 15% – 51 to 54 hours +16% to 20% – 55 to 59 hours +21% to 25% – 60 to 65 hours +26% to 30% – 66 to 72 hours +31% to 40% [Richardson Estimating System; S&K 6th Ed., Chap 4] level of technology used Learning Curve Copyright 2011‐2018, AACE International, Inc. AACE International CCT Primer  A graphic representation of the process in production effectiveness as time passes. Learning curves are useful planning tools, particularly in the project oriented industries where new products and workers are phased in rather frequently. The basis for the learning curve calculation is the fact that workers will be able to perform work more quickly after they get used to performing it [RP10S‐90]. One of the most important items affecting learning curve is the productivity improvement that results from a crew performing repetitive type operations. In a manufacturing environment or a construction project where similar kinds of work are done, the more the crew does the work, the faster and more efficient they become as they become familiar with working together, using the tools, possibly fabricating special tooling to make the work easier and faster, etc. This needs to be encouraged and factored into any budget or estimate made [S&K 6th Ed., Chap 4]. Work area environment samples Jobsite Conditions – Good +3% to 5% – Average +6% to 8% – Poor +9% to 15% [Richardson Estimating System; S&K 6th Ed., Chap 4]. Weather Temperature below 40 degrees or above 85 degrees add one percent per degree of variance for adjustment to productivity rate [Richardson Estimating System; S&K 6th Ed., Chap 4]. geographic location proximity to other work and contractors job layout work rules safety practices quality control practices (including quality circles) materials and tools availability Wages, salaries and benefits. 2. Organization Structure 1. Organizational Design: Traditionally, the design of an organization structure must consider the following principles: a) Division of Labor – Consider departmentalization or specialization b) Unity of Command – Consider lines or chains of command c) Unity of Directions – Consider authority and responsibility Copyright 2011‐2018, AACE International, Inc. AACE International CCT Primer  d) Span of Control – Consider levels of control and degree of centralization [TCM Framework 11.2.3]. 2. Basic Structures: Traditionally, there are three structural design frameworks used, for which the preceding principles are considered: a) Functional – Focused on division of labor or specialization (i.e., cost engineering) Functional designs encourage expertise development and avoid duplication of resources, but tend to be “siloed” or more focused on the needs of the specialty than the integration of specialties needed to serve processes, products, or customers. b) Divisional – Focused on unity of command and direction concerning product lines and/or regions. Typically, each division is organized functionally. Divisional design improve the focus on product and customers and decision making concerning them, but tend to use resources inefficiently because each division uses functional organization, which may foster detrimental rivalries. c) Matrix – Focused on tasks – Typically, task managers draw resources from functional and divisional organizations as needed. Matrix designs use resources efficiently and have a focus on the task (i.e., process, product, project, or customer), but they complicate decision making and allocation of resources because lines of authority are less clear (e.g., a person may have two supervisors: functional and project). Typically, each design will have lateral or “dotted line” relationships, liaisons, and temporary attributes to meet special needs [TCM Framework, 11.2.3]. 3. Teams: a. The matrix design complicates decision making because team, functional, and divisional managers may have conflicting authority over resources. Team members that report to multiple supervisors may become confused as to whom they should listen. This situation places a premium on leadership and planning [TCM Framework, 11.2.3]. b. Each TCM (Total Cost Management) map includes a planning step in which roles, authority, and responsibility are established. Also, the resource planning and procurement planning processes must consider the owner and contractor organization structures and how they will interact. These processes must also consider whether the owner or contractor has sufficient qualified resources for specific roles and activities [TCM Framework, 11.2.3]. c. Few endeavors of an enterprise are undertaken by individuals acting alone. Significant and challenging activities can only be accomplished through integrated efforts of several individuals. However, highly performing, successful teams do not just happen; they are built by leaders who can obtain the team member commitment, despite sometimes differing personal objectives, to support enterprise goals and objectives [TCM Framework, 11.2.2]. Copyright 2011‐2018, AACE International, Inc. AACE International CCT Primer  d. Team member’s differences are both challenges and opportunities. Differences in the way team members think and act can be leveraged so that a team takes a balanced approach to problems. Differences in team members’ cultural backgrounds can be taken advantage of in the same way. However, the attributes that add richness to a team may also add more complications for the leader to work through. Significant differences and conflicts should always be addressed, not ignored [TCM Framework, 11.2.2]. 4. Typical Organizations in TCM: While the TCM project control process almost always employs teams organized in a matrix structure, it is more common to find a divisional structure used for the strategic asset management process because the division usually “owns” and operates the asset (i.e., operational management) and has a less temporary focus than a project team. A division may have its own established capital management or strategic planning department, function, or team that handles much of the asset management process. However, when separate divisions within the enterprise are given authority to decide on major investments for their part of the asset portfolio, there is a risk that the decisions will be biased, often unintentionally, by their parochial needs and desires and by competitive instincts (i.e., “pet projects”) [TCM Framework, 11.2.3]. c. Information Management 1. Data, Information, and Knowledge: Data are the raw material of information management. Data include text, numbers, images, and so on that are generally not organized in a way to make them useful. Information is data that has been processed and presented in a way that makes it useful; that is, it enables knowledge to be obtained. Knowledge is learning from information about the past, present, and possible future. It confirms that past activities have or have not resulted in desired outcomes. I enables people to start altering their behavior to optimize future results (i.e., continuous improvement), or to speculate in the possible ways inputs may be related to outputs for the processes they are interested in [TCM Framework, 11.3.1]. 2. Databases and Database Management. 1. History: Historic Records – Documentation from past projects that can be used to predict trends, analyze feasibility and highlight problem areas/pitfalls on future similar projects [RP 10S‐90]. Historical Database – Records accumulating past project experience stored as data for use in planning, estimating, forecasting and predicting future events. Often includes data that has been processed so as to facilitate planning and other purposes such as validation and benchmarking (e.g., metrics, etc.) [RP 10S‐90]. 2. Reference Data: The reference data should be consistent, reliable, and competitive with a well‐defined basis (e.g., assumptions, conditions, etc.) such that any asset planning effort can determine how its requirements and basis conditions differ from the reference and adjust accordingly. Reference data are typically normalized to a standard basis (i.e., in terms of time, location, currency, conditions, etc.) [TCM Framework, 6.3.2]. Copyright 2011‐2018, AACE International, Inc. AACE International CCT Primer  3. Lessons Learned: A project team’s learning, usually defined during close out. Should be limited to capturing/identifying work process improvements. A finding that established policies or procedures were not followed is not a valid lessons learned [RP 10S‐90]. Lessons learned is qualitative information that describes what was learned during the performance of a process, method, or tool. Lessons learned are typically elicited through the use of subjective surveys, narrative descriptions, interviews, or formal lessons learned workshops. Lessons learned are captured in a database to support ongoing development or improvement of processes, methods, and tools [TCM Framework 6.1.2]. 4. Metric: Benchmarking and metrics are a form of reference data, but the purpose is primarily to support the validation of asset planning [TCM Framework, 6.3.2]. 5. Validation: Testing to confirm that a product or service satisfies user or stakeholder needs. Note difference from verification [RP 10S‐90]. 6. Basis: The quality of a reference database is judged by how reliable a planning “base” it is in terms of competitiveness and consistency, with consistency meaning that the basis is known and is consistent between similar items and does not change over time unless the change has been justified by analysis [TCM Framework, 6.3.2]. 7. Normalization: In database management, a process used to modify data so that it conforms to a standard or norm (e.g., conform to a common basis in time, currency, location, etc) [RP 10S‐90]. 3. Information Technology (IT) and Systems: Information systems are the mechanisms or tools by which knowledge is delivered to the enterprise and those it interacts with. They include hardware and software information technology (IT), which may include not only computers, but also telecommunications hardware, the Internet, or even a cork bulletin board. Information systems also include specific methodologies to build, select, and deliver IT solutions [TCM Framework, 11.3.1] 1. Enterprise Resource Planning/Management (ERP/ERM): Program / project resource planning of activities, supported by multi‐module application software and processes to help an enterprise manage key parts of its business which may include product planning, maintaining inventories, supply chain processes, providing customer services, human resources planning, etc. It may include other system involving any kind of resource consumption that can benefit from integration of information across many functional areas [RP 10S‐90]. d. Quality Management: 1. Quality: Conformance to established requirements (not a degree of goodness) [RP 10S‐90]. Copyright 2011‐2018, AACE International, Inc. AACE International CCT Primer  2. Requirements: An established requisite characteristic of a product, process, or service. A characteristic is a physical or chemical property, a dimension, a temperature, a pressure or any other specification used to define the nature of a product, process or service. A negotiated set of measurable customer wants and needs [RP 10S‐90]. 3. Quality Planning: Identifies the quality features to be provided and plans for delivering them without deficiencies. Again, quality planning is not a separate process or function, but an integrated way of planning directed toward satisfying customer needs [TCM Framework, 11.4.3]. Translating customer needs into characteristics or products and service lines (e.g., quality function deployment analysis) [S&K6th Ed., Chap 21]. 4. Quality Management: Concerns the optimization of the quality activities involved in producing a quality product, process or service. As such, it includes appraisal, training, and prevention activities [RP 10S‐90]. 5. Quality Assurance: All those planned or systematic actions necessary to provide adequate confidence that a product, process, or service will conform to established requirements [RP 10S‐90]. 6. Quality Control: Inspection, test, evaluation or other necessary action to verify that a product, process, or service conforms to established requirements and specifications [RP 10S‐90]. Measuring quality levels and comparing them against desired levels (i.e., removing sporadic deficiencies) [S&K 6th Ed., Chap 21]. Maintains the results achieved through Quality Planning and Quality Improvement [TCM Framework, 11.4.3]. 7. Continuous Improvement: TCM is not about repeating history, but improving on it by performance‐ focused planning. The PDCA model is specifically a continuous improvement model [TCM Framework, 11.4.1]. 8. Plan‐Do‐Check‐Assess (PDCA): Universal improvement methodology, advanced by W. Edwards Deming and based on the work of Walter Shewhart, designed to continually improve processes by which an organization produces a product or delivers a service [RP 10S‐90]. The foundation for the Total Cost Management (TCM) process is synonymous with the Deming Cycle [RP 10S‐90]. PDCA is a time honored quality management approach sometimes called the Deming or Shewhart cycle [TCM Framework, 11.4.1]. An interactive approach to achieving preventive and corrective solutions. Some now have reduced PDCA to a more simple “Do‐and‐Reflect.” Regardless of the quality techniques applied, financial measures will be increasingly relevant as organizations move from decisions based on instinct and intuition toward fact‐based decisions [S&K 6th Ed., Chap 21]. Copyright 2011‐2018, AACE International, Inc. AACE International CCT Primer  9. Quality Measurement: If an organization makes the effort to collect data, validate the information, and report it, it might as well use the information. In fact, to state the obvious, the amount of use of and utility in the information will be proportional to the length of life of the COQ measurement system. In short, the uses of a COQ measurement system can range from favorably influencing employee attitudes toward quality management by quantifying the financial impact of changes to assisting in prioritizing improvement opportunities. 10. Quality Policy: Is an imposed requirement, meaning the enterpriser’s quality management strategy and approach is already established; TCM is a process to deploy that policy. In TCM, it is assumed that quality policy will reflect the ISO principles [TCM Framework, 11.4.2]. 11.Quality Standards: Possibly the most widely recognized authorities for establishing and maintaining standards are the International Organization for Standardization (ISO) and the American National Standards Institute (ANSI) [TCM Framework, 11.4.2]. 1. ISO 9000 is focused on an enterprise having, maintaining, and following a documented quality process and procedures. Enterprises apply and seek certification in the standard to assure their customers that they have a quality management system in place. [TCM Framework, 11.4.2]. 2. ISO 10006 is focused specifically on project management. 12. Quality Focused Practices in TCM 1. Benchmarking A measurement and analysis process that compares practices, processes, and relevant measures to those of a selected basis of comparison (i.e., the benchmark) with the goal of improving performance. The comparison basis includes internal or external competitive or best practices, processes or measures. Examples of measures include estimated costs, actual costs, schedule durations, resource quantities, etc. [RP 10S‐90]. The method can support both continuous and breakthrough improvements depending on whether “best” practice benchmarks are viewed as goals to be achieved or exceeded [TCM Framework, 11.4.4]. The benchmarking process identifies not only “benchmarks,” but also “enablers,” which are practices that facilitate best, or at least improved, performance [TCM Framework, 6.1.2]. 2. Cost of Quality Consists of the sum of those costs associated with (a (Cost of quality conformance; (b) Cost of quality nonconformance; and (c) Cost of lost business advantage [RP 10S‐90]. Cost incurred or expanded to ensure quality, including those associated with the cost of conformance and nonconformance [RP 10S‐90]. Cost of quality refers to the cost of error‐free, conforming, and not conforming (i.e., at variance) with these requirements. Costs of quality are generally analyzed in the following five categories: error‐free, prevention‐related, appraisal‐related, internal failure, and external failure. Prevention and appraisal Copyright 2011‐2018, AACE International, Inc. AACE International CCT Primer  costs, such as employee training or product testing, are essentially designed into the asset or process during asset planning, so performance assessment tends to focus on the “resultant” cost or variance during the asset’s use [TCM Framework 6.1.1]. 3. Value Analysis/Engineering The objective of the value analysis (VA) study is to improve the value for the intended project objectives. This VA practice covers a procedure for defining and satisfying the requirements of the user/owner’s project. A multidisciplinary team uses the procedure to convert design criteria and specifications into descriptions of project functions and then relates these functions to revenues and costs [S&K 6th Ed., Chap 22]. A practice function targeted at the design itself, which has as its objective the development of design of a facility or item that will yield least life‐cycle costs or provide greatest value while satisfying all performance and other criteria established for it [RP 10S‐90]. Value Analysis (VA) and value Engineering (VE), when applied as processes, are, “the” systematic application of recognized techniques which identify the function of the product or service, establish the worth of those functions, and provide the necessary functions to meet the required performance at the lowest overall cost. Typically, lowest overall cost refers to the lowest life‐cycle cost. While VE is focused on the development of new assets, and VA on existing assets or projects, their representation in a basic process map is the same [TCM Framework 7.5.1]. This is the application of value engineering methodology to the review of a partially complete or complete design, existing facility, or existing service to determine if it could be improved to better meet cost or other objectives [S&K 6th Ed., Chap 22]. 4. Change Management The formal process through which changes to the project plan are identified, assessed, reviewed, approved and introduced [RP 10S‐90]. e. Value Management: 1. Value – A common answer might be that the amount of value received is determined by comparing what something is worth to an individual or business as compared to what was paid for it or the effort involved in its creation. There is no single type of value; instead there are these types: Cost Value – This is the amount of money (or monetary equivalents) that must be spent to produce or purchase an item [S&K 6th Ed., Chap 22]. Exchange Value – This is the value of an item on the open market should one try to sell or trade it. The exchange value of a new car drops in comparison to its cost value as soon as the new owner takes the car from the showroom [S&K 6th Ed., Chap 22]. Copyright 2011‐2018, AACE International, Inc. AACE International CCT Primer  Use Value – This is the value of an item to the user because of the functions or services it provides. A well‐maintained, basic old car may have little exchange value, but just as much use value to the owner as a newer, fancier car. The use value would equal the cost value of equally reliable replacement transportation [S&K 6th Ed., Chap 22]. Esteem Value – This is a value “in the eyes of the beholder” or a consequential that has evolved. A gold bracelet has a definite cost value, its exchange value is usually less than its cost, it has no use value, but it has an esteem value to an individual who loves jewelry. A favorable image is of extreme esteem value to a company but could be converted into monetary terms only if someone sought to buy the company name [S&K 6th Ed., Chap 22]. Satisfaction Value – This is essentially a combination of the above types of value [S&K 6th Ed., Chap 22]. 2. Value Management Is an umbrella term encompassing those practices designed to maximize the value of a project, item, or service through the examination of relevant considerations and the evolvement of a decision using a value system established by the client [S&K 6th Ed., Chap 22]. 3. Value Engineering A practice function targeted at the design itself, which has as its objective the development of design of a facility or item that will yield least life‐cycle costs or provide greatest value while satisfying all performance and other criteria established for it [RP10S‐90]. 4. Value Improving Practices (VIP) Some criteria to be considered a VIP may include: A formal, planned process with assigned responsibilities. A facilitated effort led by an independent practice expert. Involves all key stakeholders. Documents, communicates, and follows up on the results [TCM Framework, 11.5.1]. 5. Manufacturability Analysis Is used during asset planning to optimize product and production system design in consideration of the effective performance of manufacturing and related activities. Alternate materials, manufacturing technologies, and standardization are key considerations (e.g., use common parts for different products) [TCM Framework, 11.5.1]. 6. Constructability Analysis Is used during construction project planning and it involves methods to optimize the design in construction of the effective performance of construction activities. Alternate materials, unique construction sequencing (i.e., activity logic), and construction technologies are key considerations [TCM Framework, 11.5.1]. Is a form of both value engineering and value analysis that focuses on the construction phase only [S&K 6th Ed., Chap 5]. Copyright 2011‐2018, AACE International, Inc. AACE International CCT Primer  7. Reliability, Availability and Maintainability (RAM) Analysis Is used primarily during asset planning. It involves using quantitative methods to optimize the performance or operation (i.e., operability) of process systems and their components. RAM methods generally employ predictive modeling and simulation that consider future asset performance [TCM Framework, 11.5.1]. f. Environment, Health, Safety, and Security (EHS): 1. Quality Management. Phil Crosby, one of the most recognized authorities on quality management, established four “absolutes” of quality management: Quality is defined as conformance to requirements, not “goodness.” The system for causing quality is prevention, not appraisal. The performance standard must be zero defects, not “close enough.” The measurement of quality is the Price of Nonconformance, not indices. In other words, Crosby is saying that quality comes from planning and design, and the best measure of quality is cost. From that perspective, cost engineering, applied in the TCM process, is arguably a more central function to quality management than quality assurance and control. Crosby goes on further to say that quality is too important to be left to the quality control department, meaning that management must create a system that results in quality; a system in which TCM and cost engineers should play a key role [TCM Framework ,11.4.1] 2. Non‐Conformance/Prevention. Building EHS requirements into a quality management system like TCM has a profound impact on how corporations view EHS costs and account for them, In the past (and too often at present), management focus was on minimizing the cost of compliance and control (i.e., cost of non‐ conformance) inspection, fines, penalties, treatment facilities, site remediation, and so on. However, more proactive enterprises are talking TCM’s quality management approach and focusing on cost prevention through better design while considering the life cycle costs of their assets. TCM plans, measures, and assesses the full economic costs (including hidden opportunity costs) of the enterprise’s asset and project port6folio including prevention, appraisal, and failure costs in regard to EHS requirements [TCM Framework, 11.6.1]. 3. EHS Standards/Compliance. 1. ISO 14000: For environmental management, arguably the most significant voluntary standard is the International Organization of Standardization (ISO) ISO 14000. As with ISO 9000 (see Section 11.4 TCM Framework), the ISO 14000 series of standards pertain to the management systems that an organization employs to manage environmental matters, not to the environmental performance of the organization. The standard provides a framework for setting environmental requirements and for implementing them and assessing performance against them. ISO also publishes numerous safety standards that are usually for very specific applications [TCM Framework, 11.6.2]. 2. Sustainable Development Sustainable development is another life cycle issue to consider. As economic developments proceeds throughout the world, development actions must be carried out in a fashion that does not use resources in a manner or degree that compromises the ability of future generations to sustain such development. In other words, as a matter of strategy for an enterprise, planning must not only Copyright 2011‐2018, AACE International, Inc. AACE International CCT Primer  consider the life cycle cost of the asset, but the life cycle of the environment and its asset value as natural capital [TCM Framework, 11.6.2]. 4. Cost Engineering Terminology (Recommended Practice No. 10S‐90) LIFE CYCLE – The stages, or phases that occur during the lifetime of an object or endeavor. A life cycle presumes a beginning and an end with each end implying a new beginning. In life cycle cost or investment analysis, the life cycle is the length of time over which an investment is analyzed (i.e., study period) [RP 10S‐90]. QUALITY CONFORMANCE – Quality management activities associated with appraisal, training, and prevention adapted to achieve zero deviations from the established requirements [RP 10S‐90]. QUALITY NONCONFORMANCE – A deviation that occurs with a severity sufficient to consider rejection of the product, process, or service. In some situations the product, process, or service may be accepted as is; in other situations, it will require corrective action. It also may involve the provision of deliverables that are more than required [RP 10S‐90]. Note: This Primer contains references to AACE International’s Skills and Knowledge of Cost Engineering, 4th Edition (S&K 4th Ed). As of 2018, the current and only available book in print and digital is S&K 6th Ed. An AACE International Education Board product Copyright 2011‐2018, AACE International, Inc. AACE International CCT Primer