Ce03 10

Visit our website at www.aacei.
org
October 2003
October 2003
Executive Article -
How to Befuddle a
College Professor
(Without Really Trying)
Certification Paper -
Use and
Implementation of a
Project Historical
Database
Technical Article -
Economics of
Equipment Acquisition
- A Case Study
Technical Article -
Preliminary Economic
Decisions -
A Simplified Approach
Notes from your
Technical Board -
Why You Should Join
Technical Committees
and SIGs
Education Board News -
Why Support
Education?
Certification Corner -
Publishing a
Certification Paper
The Ethics Corner -
Whistleblowers
Checklist
Executive Article -
How to Befuddle a
College Professor
Certification Paper -
Use and
Implementation of a
Project Historical
Database
Technical Article -
Economics of
Equipment Acquisition
- A Case Study
Technical Article -
Decisions -
Notes from your
Technical Board -
Why You Should Join
Technical Committees
and SIGs
Education Board News -
Why Support
Education?
Certification Corner -
Publishing a
Certification Paper
The Ethics Corner -
Whistleblowers
Checklist
IN THIS ISSUE
IN THIS ISSUE
The AACE International Journal of
Cost Estimation, Cost/Schedule Control, and Project Management
Our Vision: Advancement of
Cost Engi neeri ng Through
Total Cost Management
Our Vision: Advancement of
Cost Engi neeri ng Through
Total Cost Management
Promoting the Planning and Management of Cost and Schedules
Cost Engineering Focus:
ECONOMICS
Cost Engineering Focus:
ECONOMICS
Use and Implementation of a Project Historical Database System 18
David B. Roggenkamp, CCE
The collection of cost, schedule, resource, and technical data from completed projects can facilitate the
development of benchmarks, ratios, factors, and other statistical analyses to measure and evaluate project
performance and quality. Over time, if a company introduces and properly uses a project historical database
system, individual project performance, as well as corporate decision making in choosing the best projects to
pursue, will improve. This concept involves expanding project management and corporate management
thought processes beyond the easier, and more easily understood project process cycle relating to individual
projects, to the broader concept of treating individual projects as integrated activities in the overall corporate
budget or strategy.
Economics of Equipment AcquisitionA Case Study 26
Sameer Kumar and Jeffrey Kvalheim
This case study pertains to a privately held manufacturer of standard and custom read/write preamplifiers used
in hard disk drives. This company had a dominant share of the worldwide market for preamplifiers that were
designed into many of the new disk drives introduced in the market. The study provides an overview of the
company; a description of the equipment methodology (for a flame atomic absorption spectrometer); and
shows how a capital investment justification analysis was accomplished for the purchase of this equipment.
Preliminary Economic DecisionsA Simplified Approach 30
Gustavo A. Perez
This article intends to develop simplified expressions to capture the essence of and provide insight into the
understanding of economic decisions, all this with the help of traditional discounted cash flow equations. This
approach provides a new view of the payback period concept which, though a simple method, ignores the pro-
ject's life and the value of money at different times. The author maintains that the payback periodor the
return on original investmentacts as a constraint on the preliminary analysis at the moment feasibility stud-
ies start. Finally, this article also contributes with an approximation to the EAW comparison which allows us to
make decisions in cases of projects with different life cycles.
Departments
AACE International
Board of Directors
President
Ozzie F. Belcher
Belstar, Inc., VA
703-645-0280/fax: 703-645-0286
e-mail: president@aacei.org
President-Elect
Clive D. Francis, CCC,
Black & Veatch, MI
734-622-8543/fax: 734-622-8700
e-mail: preselect@aacei.org
Past President
Dr. James E. Rowings Jr., PE CCE
Peter Kiewit & Sons, Inc., NE
402-943-1334/fax: 402-271-2989
e-mail: pastpres@aacei.org
Vice President-Finance
Robert B. Brown, PE
PMA Consultants of Illinois, LLC, IL
312-920-0404/fax: 312-920-0405
e-mail: vpfinance@aacei.org
Vice President-Administration
William E. Kraus, PE CCE
B & C Project Services, CO
970-206-0947/fax: 970-226-1818
e-mail: vpadmin@aacei.org
Vice President-Regions
Joseph Wallwork, PE CCE
GREYHAWK North America, NY
516-921-1900/fax: 516-921-5649
e-mail: vpregions@aacei.org
Vice President-TEC
James G. Zack Jr.
Fluor Daniel, CA
949-349-7905/fax: 949-349-7919
e-mail: vptec@aacei.org
Director-Region 1
Mahendra P. Bhatia
SNC-Lavalin Inc., Calgary, Canada
403-294-2100x2421/fax: 403-294-2875
e-mail: dirregion1@aacei.org
Director-Region 2
Douglas W. Leo, CCC
Eastman Kodak Co., NY
716-722-6466/fax: 716-722-1100
Director-Region 3
Robert E. McCoy, CCC
BWXT Y-12, LLC, TN
865-482-7658
Director-Region 4
Marvin Woods, CCE
Project Controls Group, Inc., MO
314-838-4987/fax: 314-389-8957
Director-Region 5
Stephen W. Warhoe, PE CCE
303-740-2665
Director-Region 6
Mark G. Grotefend, CCC
253-835-8081
Executive Director Ex-officio
Barry G. McMillan
e-mail: bmcmillan@aacei.org
Presidents Message ................................3
In Our Estimation ..................................5
Letters to the Editor................................7
Executive Article ....................................8
Notes from your Technical Board........11
Education Board News ........................12
Certification Corner ............................13
The Ethics Corner................................14
For the Bookshelf..................................24
Professional Services Directory ..............34
AACE International Bulletin ..............35
Article Reprints and Permissions ..........42
Calendar of Events ..............................43
In This Issue
On the Cover: Keynote speaker Harry W. Zike presents at the 47th Annual Meeting of
AACE International. A full article appears on page 38. Photos courtesy of Marvin Gelhausen.
Board of Directors Contact List ........................1
Index to Advertisers ......................................34
In Memory Of ......................................37
AACE International Sections Online ..........37
Special Feature..............................................38
Statement of Ownership, Management, &
Circulation ....................................................44
The AACE International Journal of
Cost Estimation, Cost/Schedule Control, and Project Management
ESTABLISHED 1958
Featured Articles
Policy concerning published columns, features, and articles -
Viewpoints expressed in columns, features, and articles published in Cost Engineering journal are solely those of the authors and do not represent an official position of AACE
International. AACE International is not endorsing or sponsoring the authors work. All content is presented solely for informational purposes. Columns, features, and articles
not designated as Technical Articles are not subject to the peer-review process.
COST ENGINEERING
Vol. 45, No.10/October 2003
Managing Editor - Marvin Gelhausen
e-mail: mgelhausen@aacei.org
Graphic Designer/Editor - Noah Kinderknecht
e-mail: nkinderknecht@aacei.org
AACE International Headquarters
209 Prairie Avenue, Suite 100
Morgantown, WV 26501
ph: 800.858.COST
fax: 304.291.5728
Cost Engineering Vol. 45/No. 10 OCTOBER 2003 3
Ozzie F. Belcher,
President
Presidents
A Blueprint to Succeeding in a Global Economy
Presidents Message
Cost Engineering (ISSN: 0274-9696) is
published monthly by AACE International,
Inc. Periodicals postage paid at
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office. POSTMASTER: Send address
changes to AACE International; 209 Prairie
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only. Subscription rates: United States,
US$60/year; all other countries, US$76/year.
Overseas airmail delivery is available at
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annual-year basis only. Copyright 2003 by
AACE International, Inc. All rights reserved.
This publication or any part thereof may not
be reproduced in any form without written
permission from the publisher. AACE
assumes no responsibility for statements
and opinions advanced by the contributors
to its publications. Views expressed by them
or the editor do not necessarily represent
the official position of Cost Engineering, its
staff, or AACE International, Inc. Printed in
Pontiac, IL, USA. Cost Engineering is a
refereed journal. All technical articles are
subject to review by a minimum of three
experts in the field. To submit a manuscript
for peer review, please e-mail it to
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Publishing, and in the ABI/Inform database.
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Engineering must be received at least 7
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not apply to technical papers.
R
ecently, while driving to work a
local radio station made an
announcement about a US federal
government contractor award. During the
commercial break I thought, here is
another announcement of a private
company doing work with the US
government. After the commercial break,
the announcer came back and stated the
award was made to another government
agency because they had offered a better
price than private industry. This award
really brought the idea of competing in a
global economy to the forefront.
By now we all know the story of a large
global retailer and their global business
model, which is simply to bring to the
consumer the lowest prices everyday. Some
30 years later, their model has proven that it
worksnot only in rural areas, suburban
areas, and urban areas, but also
internationally. Other international
retailers, producers of goods and services,
have adopted similar business models that
are helping them to compete globally.
Colleges and universities have had to
become more innovative in their methods
to replace lost revenue as a result of the
changing global economy. These
institutions are performing work and study
with the aid of government grants and
private sponsorships in an effort to generate
revenue. They are also embracing having
food vendors build and operate facilities on
their campuses. In return for the
opportunity to access the campus
marketplace, the food vendors share a
portion of their revenue with the institution
and in some cases turn over ownership of
the facility to the institution at the end of
the agreement term. These same
institutions are embracing public-private
partnerships to upgrade aging mechanical
systems, dormitories, and other campus
facilities.
At the governmental level, I recently
read another example of how a young
nations president faced many of the same
issues that we face in todays global
economy. The article was featured in the
August Harvard Business Review and was
authored by Robert D. Hornats. There was
no magic piece of legislation to solve all of
the global issues, but there was the
development of a blueprint to help what
was at that time a developing nation
become one of todays developed nations.
The point of the article was that the
blueprint developed over 160 years ago, is
still a good blueprint for us in todays global
economy.
As we have seen in the four examples
above, of competitive contracting, private
business models, educational organizations
and government policies, it is necessary to
have a blueprint for your organization to
succeed in todays fast-paced changing
world. Competing in todays global
economy is not just about being
competitive abroad, it means being equally
competitive at home. It means that the
products and services offered by your
organization have to have overwhelming
value, both domestically and
internationally A global blueprint for
success is an organizational model that
works both domestically and
internationally. I know of no other
association that is better suited in the
continued development of your
organizations blueprint to compete in a
global economy than AACE International.
AACE Internationals offerings in the
management of cost and schedules is a
vital part of what your organization needs to
have as part of its blueprint for competing
in a global economy. Whether you are
researching international markets,
international wage data, materials costs,
equipment costs, labor productivity for
various trades in other geographical areas,
or considering international ventures.
AACE International has data on the
management of cost and scheduling issues,
membership expertise, and corporate
sponsors with international experience to
help your organization succeed on a global
level. The AACE International website now
gets over 600,000 hits per months, its 5,000
members, and countless site visitors, use
4 Cost Engineering Vol. 45/No. 10 OCTOBER 2003
AACE International for its many different
offerings. Just a few of these offerings are
listed below.
International section meetings;
Cyber Section meetings;
Student Sections and scholarships;
Continued education and training;
On-line education and training;
SIGs (Special Interest Groups);
Recommended Practice Guides;
Opportunities to present papers and
be published in the AACE
International journal;
The opportunity to pursue the only
i n t e r n a t i o n a l l y - r e c o g ni z e d
certification for the management of
cost and schedules; and
Assistance in updating and further
development of your organizations
global blueprint.
In order to make sure the AACE
International blueprint stays on the
leading edge of, the management of cost
and schedules, the AACE International
Board of Directors (BOD) has
implemented an action item list that is
updated monthly and flows between the
various Section Presidents to the Board of
Directors. The action item list is an ever
changing document that enables any one
of AACE Internationals 5,000 members
to present an idea at the Section level, if
approved by their Section colleagues, the
idea can be forwarded for immediate
consideration by the sections regional
director for consideration as an action
item for the BOD. The list was developed
by AACE International Past President
Harry Jarnagan and continues to be a tool
that helps AACE International meet the
worlds leadership needs in the
management of costs and schedules.
I ask that you take the AACE
International challenge and visit our
website, on-line library, or call our
headquarters office to find out how AACE
International can help your organization
update or develop your blueprint for
succeeding in todays global economy.
Ozzie Belcher
President AACE International
President Belstar Inc.
REFERENCES
1. Hornats, Robert D. Abraham Lincoln
and the Global Economy, Harvard
Business Review, Aug. 2003
2. WTOP radio August story about the US
government awarding a government
contract to another government agency
because they could perform the work
cheaper than private industry.
AACE Internationals Approved Education Provider Program
Join the Ranks of AACE International's
Continuing Education Providers
AACE International's Approved Education Provider (AEP) program is designed to provide cost and manage-
ment professionals and their companies with a means of identifying suitable professional development courses
and providers. AACE International's high standards for granting AEP status and its ongoing review of
Providers activities, ensures quality AEP programming, which results in satisfied participants.
AACE International's AEP Program offers:
A provider approval system whose standards ensure quality continuing education programming
Continuous quality improvement through course review and ongoing support from AACE International
staff
Recognition by AACE International of professional development hours (PDHs)
A centralized, permanent database that maintains and issues provider reports and participant records
Course promotion and organizational recognition on AACE International's website500,000 hits per
month
What This Means for You
AACE International's AEP status is a win-win situation. You or your organization will benefit and so will your
constituents. Why? The AACE International AEP program offers an established and proven process for con-
ducting quality continuing education programs, networking opportunities with other continuing education
providers, less paperwork, and broad appeal.
Whether you are a consultant, professional trainer, AACE International Section, university instructor, or you
are experienced in the field of educating others -- AACE International's AEP status will benefit you and your
organization!
Visit our website at www.aacei.org
E-mail info@aacei.org for an application Call 1-800-858-2678 or ++304-296-8444
The 2004 Dues Invoices are in the Mail!
In Our Esti
In Our Estimation
Charla Miller, Staff Director, Education and Administration
O
ctober is here, which means that it's time for you to start
thinking about renewing your AACE International
dues. Invoices will be in the mail early in October a
few months before the end of the year so that you can either get
a 2003 tax deduction or include your dues in your budget for next
year.
We are excited about some of the Association's new programs
that were implemented in 2003 or are in the planning stages now,
and enhancements to existing programs that will make your
membership even more valuable.
Here's a sample of what's new and different:
Virtual LibraryAll AACE International members now
have access to the thousands of technical articles in the
Virtual Library-Member Edition. For free downloads of
available articles in the library, go to the AACE International
website, www.aacei.org. Click on Bookstore, then on the
link in the orange shaded area, 00. AACE International
Publications. Here, you can search by keyword to find
articles of interest. Any article that is available for sale can be
downloaded for free as long as your membership is current.
Distance Learning courseswe continue to add new
distance learning courses that are designed for internet or
CD delivery. Topics range from basic estimating, to project
management, to topics that will hone your supervisory skills.
You can see the complete list and register on the website.
Planning and Scheduling Professional Specialty
Certificationa new specialty certification for planning and
scheduling professionals is under development, with the first
exam slated for the 2004 Annual Meeting in Washington,
DC. Watch the website and Cost Engineering journal for
announcements about the program.
Approved Education Provider (AEP) Programa new
program was launched this year to give education providers
a way to stand out from the crowd. By completing the
application on www.aacei.org you can start the approval
process to get your courses listed on our website, have
publicity in Cost Engineering annually, and to obtain
authorization to include the exclusive AEP logo in your
printed materials and advertising.
Corporate Sponsorshipthe list of Corporate Sponsors
continues to grow as more companies realize the value of this
program. A new feature that has been added this year is the
Virtual Library-Corporate Sponsor Edition. When the
Corporate Sponsor purchases an annual license, selected
employees have access to everything in the Corporate
Virtual Library, including our most current technical papers.
GlobalPhone Calling Cardthis international calling card
is one of our newest affinity programs. It will give you
substantial savings on all US and international long distance
calling. If you misplaced the card you received in the mail
last year, go to the website and sign up on-line.
In addition to this list of new and enhanced benefits, AACE
International continues to provide quality membership services
such as:
Active websitethe AACE International website has
information on every aspect of the association's activities.
Website usage has doubled in the past two years, to nearly
eight million hits per year, proving that every month more
and more people find and use this valuable resource.
On-line Bookstorea convenient way to order estimating
and management books from leading publishers,
Professional Practice Guides and other CDs, papers, and
reference texts published by AACE International. The
bookstore is always open for your convenience.
Cost Engineering journalthis monthly publication
continues to be filled with technical articles and news items
that you will find valuable in your career.
Annual Meetingmembers always get discounted
registration rates to attend this 3-day conference of cost and
management professionals, as well as continuing education
seminars put on by AACE International and by other
organizations with which we have cooperative agreements.
Technical Division Listservson the website, you can join
a listserv that allows you to participate in any of the 25
technical committees and special interest groups.
Certificationin addition to the new specialty certification
on planning and scheduling, the AACE International
Certification and Interim Certification programs continue to
provide professional recognition to qualified individuals.
Member+Plus Programthis member-get-a-member
program will provide you with tangible rewards - valuable
coupons for each member you recruit. Use the coupons
toward your dues, publications, Annual Meeting registration
fees, or a variety of other fees, and help grow the association
at the same time.
Networking Opportunitiesthere are many ways to
network with your peers using AACE international's
resources, from monthly section meetings and regional
meetings, to listservs and committee involvement, to
attending Annual Meetings and continuing education
seminars.
Employment Searchesone of the most popular features of
our website is the employment section, where employers
post job openings, and members can post resumes.
Affinity Programsuse the various insurance, car rental,
credit card, hotel discount, and other special benefit
programs for members.
Annual Scholarshipsthe internet brings us more and
more applications each year for the competitive scholarship
program. Bright young engineering students, after they
leave college, become part of the employment pool for our
members' companies. When you pay your dues, consider a
donation that will help the best and brightest learn about
AACE International.
Education Endowment Funddonations are being
accumulated in this Fund that will help AACE International
design state-of-the-art distance learning courses. If you
would like to help, you can donate any amount to the
Education Endowment Fund.
So watch your mail for your 2004 dues invoice and
membership card. Please renew your dues early and help AACE
International keep its costs down. You can renew your dues by
mail, phone, fax or website whatever method is easiest for you.
From this extensive list of benefits, I'm sure you can see that
membership in AACE International is a good value. We hope
you agree and take advantage of the many resources AACE
International provides. x
CALL FOR VOLUNTEERS!
Volunteers are needed for the AACE Certification Board. It's fun, fulfilling, frustrating, satisfying, time-
consuming, and rewarding - all of these adjectives describe what it is like to be a member or chair of the
AACE International's Certification Board. The Certification Board meets twice a year. For those who do
not have company support for the travel, this can be a rather expensive proposition, although one of these is
normally held at the annual meeting.
Perhaps the foremost is the ability to have a direct influence on the content and direction of your
Association's certification operations. Additionally, you will find that satisfaction of helping to produce new
materials and directions for other cost/management professionals can be very rewarding personally.
You simply need to contact the Certification Administrator at:
AACE International Headquarters, (304) 296-8444, or e-mailing: info@aacei.org.
Popular Certification Review Course and Examination
Come to Denver in December
The four-day certification review course and examination will be held in Denver, Colorado on December 3-6, 2003.
This course features detailed coverage of important topics, with extra time allowed for working out sample problems and examples,
and plenty of time for interaction with the instructor.
The final portion of each day, candidates will take one part of the certification examination. The exam will be in the standard
multiple choice exam format. A 2500-word paper will be due at the time of the exam. (Please note, candidates who have not
submitted their papers in advance and who do not bring them to the exam site will not be permitted to take the examination.)
The cost of this entire package including the seminar with handouts, examination fees, continental breakfast, lunch, and afternoon
break each day is only US $1875. Find more details on location and price, and a registration form on our website, www.aacei.org,
or call Headquarters with your questions at 1-800-858-COST (outside US and Canada, ++1.304.2968444).
IMPORTANT:
The deadline to register for this option is October 24th in order to comply with certification application regulations. Registrants must
complete the certification application and submit it with registration. In order to sit for the certification exam, all applicants must meet
fundamental certification program eligibility requirements. If you are interested, please contact the AACE Headquarters to ensure you meet
these criteria (at least 8 years of professional experience of which up to four years may be substituted by a degree in a related profession).
Re: ENR article of May 26, 2003
Critics Cant Find the Logic in Many of todays CPM
Schedules
AACE International (AACEI) is a professional association
that has developed project cost and time management technical
standards since 1956. The May 26, 2003, article entitled, Critics
Cant Find the Logic in Many of Todays CPM Schedules raised
issues of concern to AACEI.
AACEI agrees with certain issues: The increased number of
CPM practitioners caused by personal computer technology
makes it vital to define scheduling standards and to qualify
individuals. Employers must recognize scheduling as an
important skill, and provide for more training. Such training
could prevent excessive use of constraints or patently incorrect
logic, a common practice among untrained schedulers, and one
that we wholeheartedly discourage.
AACEI disagrees with certain other assertions. First, we
believe that the project schedule is a reflection of the project
plan. Scheduling techniques and software are merely tools used
to document, analyze, and update the plan. Research on over
400 schedules revealed that many project teams dont plan
project execution well nor do they clearly document the plan.
Building a plan is hard work requiring dedicated input from all
functional representatives prior to the development of the
schedule. Better planning results in better project schedules
and outcomes. Contrary to the May 26th article, the advances in
scheduling software are an asset to those project teams equipped
with the right scheduling skills in a strong planning culture.
Lacking a well-developed plan, scheduling software and
techniques only mask that fundamental project deficiency.
Many project teams dont have well-trained schedulers who
can document the project plan and correctly translate it into the
mathematical model that is the CPM schedule. At issue is the
lack of scheduling training within the industry, not the features of
the software. Project managers often admit that they dont have
scheduling skills themselves, nor do they have such expertise
available to them. Thus, many project schedules are cobbled
together by someone who does not understand scheduling
theory, or who is not properly trained in the software. Todays
scheduling software requires more, not less, expertise in CPM
fundamentals to avoid errors, and obtain the maximum benefit
from these tools, particularly when involved in todays complex
projects.
We believe that the problem isnt whether to use the
Precedence Diagramming Method (PDM) or the Arrow
Diagramming Method (ADM). Both methods are equally valid
and equally susceptible to misuse; well-trained schedulers should
be skilled at both. In addition, software capable of using different
activity calendars is essential to schedule project realities;
forming and placing concrete on a five day per week calendar,
while it cures 24 / 7 is a simple example. Properly trained
schedulers realize how this affects schedule calculations and the
impact on the projects critical path.
Experienced schedulers can easily detect improperly
constructed schedules developed with an alternative agenda.
The need for such reviews is more important today to resolve
delay disputes. An expert scheduler using other diagnostic
software can detect scheduling irregularities, and rarely will the
sneaky scheduler get away with CPM dirty tricks. However,
the industry should look at scheduling from the perspective that
quality scheduling practices and software tools will improve the
likelihood of project success. Since project delay events, such as
late material delivery or delays in contractor work become part of
the project record, these can be validly shown in the CPM
network, resulting in an as-built schedule that can clarify issues
and resolve disputes in a timely and fair manner.
Using todays software, a well-trained scheduler is a vital asset
to the project team; able to develop an appropriately detailed
schedule that is a reliable model to track progress from project
start to completion.
AACEI will continue to advance CPM theory and
capabilities to enhance the practice of scheduling in the industry.
The AACEI Certification Program has certified professionals in
project controls skills for three decades and is now developing a
specialty certification in Planning and Scheduling to help
improve scheduling practices and to provide employers with
highly qualified scheduling expertise.
All participants in project delivery should be committed to
improving scheduling skills. AACE International is leading the
way in educating the industry in the highest standards of
scheduling practice. x
Harry Jarnagan, PE CCE
Hatch Mott MacDonald
Past President, AACE International
Comments and Suggestions
If you have any comments or suggestions about anything you have
read in the Cost Engineering journal, letters to the editor may be sent
to Marvin Gelhausen, AACE International, 209 Prairie Avenue, Suite
100, Morgantown, WV 26501 or e-mailed to mgelhausen@aacei.org.
The viewpoints expressed in columns published in Cost Engineering
journal are solely those of the authors and do not represent an official
position of AACE International.
Letters to the
Marvin Gelhausen, Editor
Letters to the Editor
Editors Note: Harry Jarnagan, PE CCE, has sent the
following Letter to the Editor to the Engineering News-
Record concerning a May 26, 2003, article titled, Off the
Critical Path? Experts Debate the State of CPM Scheduling, by
Richard Korman with Stephen H. Daniels. The article was the
cover story for ENRs May 26 issue. Because the article was read
and shared by many AACE International members, Jarnagan
has also asked that his letter be shared with the readers of the
Cost Engineering journal.
How to Befuddle a College Professor
Executive
Ronald M. Winter
Executive Article
A
funny thing happened on the way to writing a review on
a textbook on CPM (critical path method;) the world
tilted. When it finally straightened, I was left with 50+
emails from friends and strangers, excited people talking about
their recollections of the beginnings of CPM theory, a reference
list of textbooks as long as my arm, a slightly confused college
professor, and newly-found knowledge about my favorite subject;
namely CPM scheduling using precedence diagramming
method (PDM).
It all started when I began reviewing a textbook titled,
Construction Scheduling with Primavera Project Planner,
second edition by Leslie Feigenbaum. I was reading the section
where Mr Feigenbaum explains how to compute a CPM
manually. I shook my head (this is when the tilting began,) re-
read the section a second and then a third time. Was I losing my
mind, or did this college professor just compute the CPM
incorrectly?
As a sanity check, I discussed this issue with the members of
the AACE International Planning and Scheduling Committee.
They could not believe this either! There was a definite
consensus of the group that the method used in this textbook was
inconsistent with the correct method of computing a CPM for a
PDM network, and thus was incorrect.
Cloaked with this mantel of virtue and armed with the
knowledge that I was correct, I contacted the book's author, Mr
Feigenbaum by e-mail. I explained in my letter who I was and
that I was reviewing his textbook. My appreciation of many of the
features to be found in his textbook (see my review of this book
on page 24) was conveyed. Then, I 'dropped the bomb.' I said,
Unless I am mistaken, your method of computing a CPM
is completely non-standard and (I am afraid) does not produce
the same results as the 'standard' approach in all cases. At the
very least, your workday calculations do not match those
produced by P3.
I finished my email by suggesting that Mr. Feigenbaum
contact me to discuss the issue.
The very next day, a very polite but guarded Mr.
Feigenbaum called me and we had a long discussion. Did I
understand that this book was internally reviewed by experts in
the scheduling field and then submitted to the publishers who
also had their experts review the textbook for correctness? Yes, I
said. Did I understand that this very popular and widely-
distributed textbook has been sold world-wide for five years and is
on its second edition? Yes, I said. Did I understand that a great
many other textbooks compute the CPM in the exact manner as
they do here at Texas A&M? Err, no, I said. What books?
Over the course of the next couple of days, Mr. Feigenbaum
was able to locate and list the following list of textbooks that
showed the same method as that used at Texas A&M.
This list includes the following.
1. Antill, James M. and Ronald W. Woodhead. Critical Path
Methods in Construction Practice, 4th Edition, John
Wiley & Sons, (1990).
2. Chen, W.F. The Civil Engineering Handbook, CRC Press,
(1995).
3. Humphreys, Dr. Kenneth K, PE CCE, Jelen's Cost &
Optimization Engineering, 3rd Edition, McGraw Hill,
originally authored by Frederic C. Jelen and James H. Black.
4. Kerzner, Harold. Project Management: A Systems
Approach to Planning, Scheduling and Controlling, 5th
Edition, Van Nostrand Reinhold Co., (1995).
5. Meredith, Jack R. and Samuel J. Mantel Jr. Project
Management: A Managerial Approach, 2nd Edition,
Wiley.
6. Moder, Joseph J. and Edward W. Davis and Cecil R.
Phillips. Project Management with CPM, PERT and
Precedence Diagramming, 3rd Edition, Van Nostrand
Reinhold Co., (1983).
7. OBrien, James J. and Fredric L. Plotnik. CPM in
Construction Management, 5th Edition, McGraw Hill.
8. Stella, Paul J. and Thomas E. Glavinich. Construction
Planning & Scheduling, 2nd Printing, AGC of America,
(1994).
9. Wiest, Jerome D. and Ferndinand K. Levy. A Management
Guide to PERT/CPM with GERT/PDM/ DCPM and
other Networks, 2nd Edition, Prentice-Hall, (1977).
10. Willis, Edward C. Scheduling Construction Projects.
This got me to doubting my own basis of knowledge, so I
went through my library only to find that my references did not
show how to calculate a PDM CPM network. I then asked my
AACE International Planning and Scheduling Committee peers
for such references and this is the list that we came up with,
1. AACE International. Skills & Knowledge of Cost
Engineering, 4th Edition, AACE International, edited by
Richard E. Larew,
2. Harris, Paul E. Planning and Scheduling Using Microsoft
Project 2000, ISBN 0-95-777833-3, ISBN 0-95-777834-1,
ISBN 0-95-777835-X, ISBN 0-95-777836-8.
3. Harris, Paul E. Project Planning Using SureTrak for
Windows Version 2.0/Version 3.0, Paul E Harris ISBN 0-
6463795-9 , ISBN 0-95-777830-9, ISBN 0-95-777831-7,
ISBN 0-95-777832-5,
4. Primavera, Inc. Primavera Training Guide, Course 601.
The PMI Body of Knowledge (PMBOC) in the Time
Management section does not offer to show how any CPM
network is calculated, much less a PDM network.
So it appears that the version of calculation used by Mr.
Feigenbaum at the Texas A&M University, College of
Architecture, Department of Construction appears to be better
supported by references than the method used by the AACE
International.
Along the way, we stopped describing the methods of
computing a PDM CPM with such long descriptions and starting
calling them, The Aggie Method (for Mr. Feigenbaum's
university) and The AACE Method, to denote the method that
is adopted by AACE International. As it appears that there are
definitely two methods available to compute a PDM CPM and
that both apparently give the same answers, an explanation of the
two methods is in order.
As a means of improving communication in the following
explanations, I will refer to days and day numbers when I
actually mean time units. We all recognize that a CPM
schedule can be computed in minutes, hours, days, weeks,
months, or years. As most construction projects are scheduled in
days, we are all familiar with the reference to days.
The AACE International Method
It is possible that AACE International adopted this technique
sometime after the software Primavera Project Planner (P3) was
released in 1985. The technique describes the method that P3
uses to compute a PDM network. I learned this technique well
before becoming involved with AACE International and believed
that it was the only way to correctly calculate the CPM. All of my
scheduling associates also use this technique and were unaware
of another technique.
Rule 1 Day numbers for a CPM network begin with Day 1.
Rule 2 For each activity without any unresolved predecessor
relationships, you first compute the start and finish day
numbers. Given a particular early start day number (ES) and
the activity duration (Duration,) you compute the early
finish day number (EF) using the following rule,
EF = ES + Duration - 1
Rule 3 Once the ES and EF day number have been
computed, you compute the ES for a finish-to-start (FS)
relationship to the successor activity using the following
formula,
ES(successor) = EF(predecessor) + Lag + 1
The other three relationships are calculated as 'normal'
without the + 1 adjustment.
Rule 4 Activities are statused as having begun in the morning
before work begins and having ended in the evening after
work has ended.
Rule 5 Once day numbers are computed, they are converted
into dates using the work calendar for that activity without
any further modification.
The Aggie Method
It is possible that this technique is older than the AACE
International Method. This appears to be the technique used by
Microsoft Project to compute a PDM network. This PDM
method is very similar to the method used in ADM calculations.
The Aggie Method is a widely taught method and its practitioners
also seem to be unaware that another technique exists.
Rule 1 Day numbers for a CPM network begin with Day 0.
Rule 2 For each activity without any unresolved predecessor
relationships, you first compute the start and finish day
numbers. Given a particular ES and the duration, you
compute its EF using the following rule,
EF = ES + Duration
Rule 3 Once the ES and EF day numbers have been
computed, you compute the ES for a FS relationship to the
successor activity using the following formula,
CPM Calculation Rules Summary
AACE Method Aggie Method
Begin with Time Period 1 Begin with Time Period 0
For Activities: For Activities:
Early Finish = Early Start + Duration - 1 Early Finish = Early Start + Duration
For Relationships: For Relationships:
FS rel.: ES = EF
(Predecessor)
+ Lag + 1 All rels.: ES = ES/EF
(Predecessor)
+ Lag
All others.: ES = ES/EF(Predecessor) + Lag
Statusing: Statusing:
Activities begin at the start of the day Activities start and finish at the end of
and finish at the end of the work period. the work period.
Changing work time units into dates: Changing work time units into dates:
Convert time units directly into Dates Add one to each Start Time Unit and then
convert to dates.
Convert Finish time units directly to dates.
Table 1CPM Calculation Rules Summary
ES(successor) = EF(predecessor) + Lag
The other three relationships are calculated using the same
formula, only adjusting the start and end points of the
relationship as required.
Rule 4 Activities are statused as having begun and end in the
evening after work has ended.
Rule 5 Since the day starts at the end of the day, you must
adjust all start day numbers by first adding 1 work day and
then converting them to dates using a work day calendar.
Finish dates are converted directly without adjustment.
S
o which method is right for you? Well if you plan to take
the upcoming AACE International Scheduling
Certification test, you had better know and use the AACE
International Method. People using the Aggie method will be
marked incorrect and will probably not pass the certification
exam. Those using P3 to compute their CPM should also use the
AACE International method if they wish to understand how the
underlying calculations are made.
If you are a slightly-worried, senior lecturer at the Texas
A&M University, College of Architecture, Department of
Construction, and you have a very popular textbook using the
Aggie Method, I would suggest that you keep on using the Aggie
Method. Mr. Feigenbaum, I would like to take this opportunity
to apologize for ruining your weekend in early August of this year.
Either way, I think that from now on, we all should first
preference our discussion of how to compute a PDM CPM
network by first saying which method we are employing.
It appears that for the past 15+ years, there have been two,
formalized and competing methods for computing a PDM
CPM. The really interesting thing about this fact is that
apparently no one knew this. Table 1 summarizes the two
methods.
If we were to use both methods on the same five, one-day
activities in a serial chain of FS relationships, Table 2
summarizes both calculations. x
About the Author
Ronald M. Winter has over 17 years of experience
in computerized scheduling, delay claims
preparation, information management, and project
management in technical construction and
manufacturing industries. He has developed and
implemented CPM scheduling and management
information systems for an impressive variety of
projects.He began his carrier as a scheduling engineer with Fluor
Engineers in Compton in 1974. He has been a programmer and project
manager for GTE Sprint. He has been an industrial trainer and
customer service representative for a voice mail manufacturer. For the
past 13 years he has worked in the construction industry as a contract
scheduler, a consulting scheduler, a delay claims engineer, and as the
sole software designer and programmer of the Schedule Analyzer
Professional software suite of scheduling and claims software. Mr.
Winter has a B.S. degree in engineering from UCLA and a M.S. in
systems management from USC. He is a member of AACE
International, CMAA, and PMI. He can be contacted by e-mail at:
ron@ronwinterconsulting.com
e viewpoints expressed in columns published in Cost Engineering journal
are solely those of the authors and do not represent an official position of
AACE International. Nor is AACE International endorsing or sponsoring
the authors work
CPM Calculation Example: A Chain of 5 1-Day Activities with FS Relationships:
AACE Method Day #'s Both Methods Calendar Date 'Aggie' Method Day #'s
Act 1 ES = Day # 1 ES = 05AUG03 Act 1 ES = Day # 0
Act 1 EF = Day # 1 EF = 05AUG03 Act 1 EF = Day # 1
One may proceed down the left or the right side of the table above. Each method produces the same calendar dates
as shown in the center column.
Table 2CPMCalculation Example
The 2004 Dues Invoices are in the Mail!
Payments should be made on or before December 31, 2003. If
you have any questions concerning your dues invoice you may
contact AACE International Headquarters at:
phone: 800.858.COST
fax: 304.291.5728
e-mail: info@aacei.org
Why You Should Join AACE Internationals Technical
Committees and Special Interest Groups
Notes from
Notes from your Technical Board
Kul B. Uppal, PE, Technical Committees Director and F. Sam Griggs, CCE, Special Interest Groups Director
H
ow often have you heard the term, You can not teach
an old dog new tricks? While this may have been
acceptable motto years ago, in today's environment we
must be prepared to learn new tricks or we may become a dead
dog!
Having said this, we would like to raise the issue of AACE
International members joining a technical committee or special
interest group (SIG) and getting involved with exciting upcoming
projects. It is only through volunteering your services for the
betterment of your profession that you can achieve your own
professional goals and at the same time fulfill your desire for
acquiring new tricks, new tools and techniques.
If you would like to have a lively discussion with peers who
are doing work similar to what you specifically perform,
becoming a member of a committee or special interest group will
give you that opportunity. Technical committees are dedicated to
a specific function area, while special interest groups are
dedicated to a specific industry.
In the coming months, technical committees and special
interest groups will get involved with several exciting projects
initiated by AACE International, including the following.
Assisting with the development of Recommended Practices
in each technical committees area of interest.
Publishing a Professional Practice Guide (PPG) in each
committee and SIG's areas of interest.
Reviewing drafts of upcoming sections of the Total Cost
Management Framework.
If you are interested in joining a committee/SIG and getting
involved with any of these upcoming projects, please visit
www.aacei.org/technical, or contact Jennifer Bates, CCE, Chair
of the Technical Board, or Phil Larson, CCE, Co-chair of the
Technical Board, or the committee/SIG Chairs directly.
The Technical Board currently also has openings for Chairs
of the following committees and SIGs:
Contract Management Committee;
Business and Program Planning Committee;
Economic and Financial Analysis Committee;
Aerospace Special Interest Group;
Forest Products Special Interest Group; and
High Tech Special Interest Group.
If you are interested, send a copy of your resume and
qualifications to, Kul Uppal, PE, Director of the Technical
Division, or to Sam Griggs, CCE, Director of the SIG Division.
Being a chairperson does not have to take a lot of time; most
of the interaction takes place through e-mails. Naturally, there
can be much more hands on involvement if you have time and
energy. It is a great way to meet new professionals in your field!
Please consider volunteering for one of these key positions your
fellow members will greatly appreciate your service to the
association. x
Viewpoints expressed are solely those of the authors and do not represent
an official position of AACE International.
Important Announcement About Future Arranged AACE Certification Exams
The AACE International Certification Exam can now be arranged at any time during the year (as well as at
AACE International Sections in June/July and December) as long as the following criteria are met:
Headquarters Certification Administrator must receive a forty-day advance request for the exam
date
On-site exams require a minimum of five candidates
The proctoring body must be approved by AACE Internationals Certification Board
All participant's applications must be in to headquarters no later than 14 days in advance of the
exam date.
For further information, contact Sandra Willard at: AACE International Headquarters,
209 Prairie Avenue, Suite 100, Morgantown, WV 26501 phone: 304-296-8444 fax: 304-291-5728
New Distance Learning Course
Available through
AACE International
An Applied Framework for Project Management Distance Learning Course by Corpedia is now available on the
AACE International website.
This 20 hour training series carries 20 PDHs on completion. Topics include professional project managements
five disciplined processes: Initiating; Planning; Executing; Controlling; and Closing. This course is recommended
for anyone interested in the profession of project management.
Visit our website for detailed information: http://www.aacei.org/distancelearning/courses.shtml#DLP20.
Why Support Our Education Programs?
Education
Education Board News
Donald F. McDonald Jr., PE CCE, and Frank D. Postula, PE CCE, Education Board Members
D
id you realize that in almost every industry, there is a
common deficiency in the training of engineers,
scientists, and business professionals in the
fundamental skills of cost management and cost engineering?
Cost engineering is a specialty area that is often forgotten or given
short shrift by formal corporate education. AACE International's
Education Board attempts to rectify this deficiency by
aggressively preparing educational materials and teaching
seminars for AACE International members and the public.
Developing and making available quality continuing education
programs is a key focus of the Education Board's charter.
We are currently implementing plans to expand our
education activities to a new level compatible with today's
technology and learning methods. CD-based training, self-paced
distance learning courses, books, and other leading-edge
resources are being prepared with donated funds.
AACE International created the Education Endowment
Fund to provide a perpetual source of support for the
development of the Ed Board's expanding educational agenda.
The Education Endowment Fund is a financial pool of invested
capital, the earnings of which are devoted to the support of AACE
International's educational programs. Contributions are invested
and managed by professionals with the objective to maximize
total return within conservative parameters. Each year, potential
new and continuing Ed Board projects are evaluated for possible
funding with the earnings produced by the investment portfolio.
For example, earnings are used to develop new learning media
that allows access by cost professionals anywhere in the world via
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donors are also able to obtain tax benefits because AACE
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educational society. Please consider making a donation to the
AACE International Education Endowment Fund. Do so by
denoting your gift as For AACE International Education
Endowment Fund.
The Education Board also promotes collegiate education
through its annual scholarship award program. AACE
International awards scholarships to deserving students in
programs related to cost engineering/cost management. Ed
Fund contributions from AACE International members are the
sole support for these awards. The scholarship program is now in
its fourth decade. To date, over $800,000 has been given to assist
students with their education. We need your continued support
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There are many possible ways to contribute, including gifts
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The Education Board wants to express our deep appreciation
for your past and continued financial support of our education
programs! x
Publishing a Certification Paper
in the Cost Engineering Journal
Connie S. Cowder, CCC, Certification Board Member
Certificatio
Certification Corner
C
ertification papers are now being published in the Cost
Engineering journal. Papers that score 90% and above,
are interesting, usable, and can offer tools of the trade
or nuggets of information, are now being recommended for
publication in the journal.
If you get published, this counts for two credits towards your
recertification. If you present a paper on cost engineering at an
AACE International or other major technical society meeting,
you can obtain two credits. See the guidelines for certification
maintenance for other ways to obtain recertification credits.
What does it take to get the recommendation for
publication? The key to success is following the guidelines for
preparing a paper. The paper must be a minimum of 2,500 words
not including the abstract, figures, tables and appendices.
Follow the format of the paper guidelines by including a title
page, table of contents, list of tables if applicable, list of figures if
applicable, and an abstract. The paper begins with an
introduction, then the body, a conclusion and a list of references
and bibliography.
The certification paper graders evaluate each aspect of the
paper. Do not omit a required section of the paper. The body of
the paper should flow in a logical sequence with a common
theme throughout the paper. When you indicate something will
be discussed, be sure to discuss it! If several acronyms will be
used, add a section that includes all the acronyms and what they
stand for. In all cases, when first using an acronym include what
it stands for. Never assume that the reader knows the acronym.
When stating facts or knowledge on a particular topic, be
sure your information is accurate. Research numerous materials
to glean information from multiple sources. In preparing the
conclusion, there should not be any new data rather a summary
of the information that briefly discusses the contents of the paper,
any major points that were discussed in the body of the paper, any
interpretations or conclusions of the material presented. The
paper is also evaluated on neatness, general quality of writing and
illustrations, and adhering to the paper requirements.
The main function of a certification paper is to determine
the candidate's ability to communicate a professional topic
clearly and effectively. Please follow the AACE International
guidelines when writing your certification paper. These are
available online (http://www.aacei.org) and from headquarters. If
you have any questions, please feel free to contact any member
of the Certification Board, or our Administrator, Certification
and Education, Sandra Willard, at 800-858-COST or 304-296-
8444, or send an e-mail to: swillard@aacei.org. x
Alabama
Arabian Gulf (Dec. 11)
Atlanta
Aurora-Edmonton
Central Savannah River
Chinook-Calgary
Chornobyl
Caribbean
Delaware Valley
East Tennessee
Genesee Valley
Great Lakes
Hawaii
Houston-Gulf Coast
Indonesia
Kansas City
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National Capitol
Northern West Virginia
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The Fourth Quarter (4Q) 2003
Certification Exam will be
given at the following AACE
International sites on
Saturday, December 6, 2003.
AACE International Certification Exam
The Final Deadline to
submit an application
for this exam is
October 24, 2003
Editors Note - In addition to meeting standard eligibility
requirements, candidates for certification as a CCE or CCC must
submit a professional paper (noted above) and take a written
examination.
A Checklist for Whistleblowers to Follow
The Ethics C
Dr. Kenneth K. Humphreys, PE CCE
The Ethics Corner
I
n the September issue, I discussed the Challenger disaster
and the hard choices made by Roger Boisjoly, PE in
reporting what he knew to the Presidential Commission on
the Space Shuttle Accident. When that article was originally
published by the Professional Engineers of North Carolina it
caught the attention of Kent Russell, PE, who wrote to me with
his thoughts about it. Mr. Russell was involved in an ethical
situation such as that experienced by Roger Boisjoly and found it
necessary to blow the whistle. The following is his commentary
on his experience:
On Jan. 28, 1986, 73 seconds after launch, the space shuttle
Challenger exploded killing everyone on board. There are several
important lessons related to engineering ethics that can be
learned by examining this disaster. First, any engineer who has
taken an unpopular position on a safety issue has to admire the
efforts of Roger Boisjoly to stop the fatal launch. Notwithstanding
Boisjoly's commendable efforts, the launch took place, and seven
people died.
The article in The Ethics Corner . . . referred to Mr.
Boisjoly as a whistleblower because of his report to the
Presidential Commission following the accident. Although he
was clearly a whistleblower, it is important to make the
distinction that he became a whistleblower after the tragedy he
was attempting to prevent with his argument to delay the launch.
Until the Challenger accident, Mr. Boisjoly was working within
the system to communicate his safety concerns. The accident
gave the issue the notoriety that was needed to focus the resources
and resolve the problem.
Although we will never know the answer, I wonder if the o-
ring problem would have received the necessary attention if the
launch had turned out to be just another near missas the ones
before had. Would they have completed the planned redesign of
the booster's failed joints before the next launch, or was the
culture that hampered the identification and resolution of safety
issues so ingrained that a tragedy was necessary to bring the issues
to light?
Raising these questions will not, of course, change the
outcome of past events, but they are relevant in examining the
best way to address safety issues raised by whistleblowers in the
future. Whistleblowers, after all, are often trying to prevent a
tragedy by spotlighting neglect, abuses, or acts of incompetence
that could threaten public safety. If it takes a tragedy to bring a
serious problem to light, the whistleblower has failed.
The obstacles that stood in the way of resolving the
Challenger's o-ring problem share several common attributes
with safety issues that are typically raised by whistleblowers. If the
whistleblower is to be successful in preempting a Challenger-like
outcome, these obstacles must be identified and overcome.
Probably the biggest obstacle the whistleblower faces in
drawing attention to a safety issue is the nature of the problem
itself. Plain and simple, the problems are tougheither difficult
to recognize or difficult to resolve. Less challenging problems get
resolved long before someone meets with so much opposition
that they find it necessary to work outside of the system. When
the engineers at Morton Thiocol were presenting their case for
delaying the Challenger's launch, they were not able to prove
that launching in cold weather would degrade the performance
of the solid rocket booster's o-rings. Roger Boisjoly and Robert
Ebeling recognized the increased risk associated with launching
in cold weather, but their concerns were overshadowed by the
inconclusiveness of their data and the political liability of
delaying the launch.
If Boisjoly and Ebeling could have been certain that the
launch would end in tragedy, I'm sure they would have found a
way to persuade those with authority to delay the launch to do so.
Their chances of delaying the launch would also have been
better if they had been able to quote some definitive rule or
standard that dealt specifically with the situation at hand. The
challenges they faced in convincing management to make a
conservative decision were not unique, however. When
pernicious safety issues arise, their resolution usually involves
making judgment calls with respect to risks associated with each
option. Political and economic pressure can cause lines to
become blurred so that concepts such as acceptable risk,
adequate assurance, and margins of safety play less of a role in
decision-making. The data that Boisjoly and Ebeling presented at
the on-line teleconference didn't prove that the o-rings would
fail; however, there certainly appeared to be enough evidence to
call into question their reliability. Because of the decision to
launch in spite of this evidence, all of the planned and systematic
measures of the shuttle's quality assurance program were unable
to provide high degree of mission safety and reliability for which
they were intended.
The legacy of this tragedy has provided the needed incentive
for whistleblowers like me to stand firm when met with
opposition to efforts to correct conditions that could be harmful
to the health and safety of the public. Although I have worked in
the electric utility industry for 28 years, mostly in commercial
nuclear power, until recently I have never been involved in any
issues that led to whistleblowing because of an inability to resolve
problems within the framework of the responsible organization.
But earlier this year when I became aware of a condition at a
commercial nuclear power plant that I believed could endanger
the health and safety of the public, the client company responded
phlegmatically and decided not to take immediate action to
correct the condition. When it became evident that I was not
going to be successful working within the system, I was faced
with two alternatives, neither of which were pleasant. I could
either look the other way, or I could blow the whistle, which
would clearly put me at odds with the client company.
Because I liked my job and I eschew conflict, particularly
with an employer or client, I considered forgetting about the
issue and moving ahead with what I was hired to do. But then I
remembered a lesson I had learned years before from reading
about the Challenger accident: that a single lapse in vigilance
can cause systems, even those designed for a high degree of
reliability and safety, to fail. Once I realized I was not just dealing
with a technicality, but a potential ticking time bomb, the
decision to continue my fight became a no-brainer. Not only was
the decision to correct the deficiency in the best interest of the
public welfare, it was in my personal best interest to do so. I knew
that if I turned my back on this issue, I would be a co-conspirator
in any resulting tragedy. So with the burden that had been placed
upon my conscience and values, I decided to relentlessly move
forward.
Although I had never been a whistleblower, I was not so
naive as to believe that the road ahead was going to be easy. I had
read of the financial and emotional wounds that had been
experienced by others trying to draw attention to abuses of public
trust. I knew I would have to steel myself for a difficult and
possibly long battle. As I moved through the process of taking on
a corporate leviathan, I found the following tenets helpful in
building resolve and improving the chances of success.
1. To avoid a conflict of interest and maintain ethical
autonomy, separate yourself from the accused. My first step,
which I think is appropriate in most whistleblowing cases,
was to resign from my job with the client company. If your
employer believes that the position you have taken is not in
his best interest, then it is unethical to continue to take a
salary from him while accusing him of wrongdoing. Also, if
you are part and parcel of the corporate culture, making
morally autonomous, reflective, honest decisions about the
contested issue will be more difficult.
2. Make sure your premises are sound and your facts are
correct, and then proceed with communicating your
concerns in a professional manner. Because you are
presenting yourself as someone capable of making
judgments on important ethical issues, even minor errors
can create a large credibility gap. More importantly, your
accusations can be damaging to those who stand accused
even if your accusations prove to be frivolous. It is also
important to resist the temptation to exaggerate or
sensationalize your concern. To me the greatest insult is to
be ignored after communicating something that I think is of
utmost importance. After failing to create even a passing
interest at lower levels of management, I was tempted to
remove the perceived vapidity of my concern by ignoring
protocol and making a few phone calls that would cause my
story to leap into the headlines. But with the knowledge that
legitimate issues would eventually get the attention they
deserve without any extra hype, I decided on a more guarded
approach. After methodically presenting my concern
through the management chain and eventually to the
appropriate regulatory agency, I found no need to plead for
listeners. It was then I discovered that the second greatest
insult was to see a bevy of special investigators and
management, who heretofore seldom spoke or even made
eye contact when I passed them in the hall, suddenly show
an ostensible interest in me and my concerns. Not only is it
unnecessary and unethical to embellish your story, any
window dressing will surely be discovered during the
ensuing investigation.
3. If possible, enlist others who share your view in the fight, but
be prepared to go it alone if necessary. To many of those who
had heard of my plans to blow the whistle, my actions
appeared circumspect. Other indicated that they agreed with
my position, but were not willing to go on record with their
belief because of fear of retaliation. I found that the
unwillingness by others to commit to the cause was largely a
result of a long history of the company dodging the bullet.
Problems similar to the one I was labeling as egregious had
happened before without tragic consequences. The longer
one walks through a minefield without an errant step, the
less cautious he becomes. Those who could not see the
potential for a disastrous outcome from longstanding
deficiencies were not willing to accept the risk of taking an
unpopular stand. Those involved in making the decision to
launch the Challenger were probably of the same mindset.
4. Enlist the support of professional societies and regulatory
agencies when the issue involves violation of professional
standards or regulatory requirements. In industries that are
heavily regulated for the purpose of safeguarding public
safety, the process for employees or members of the public to
voice safety concerns is standardized and usually
straightforward. But it is also important not to expect too
much from these agencies as well. Some of the shine from
the badge of the regulator is lost when an outsider points to
a regulatory violation that the responsible agency did not
recognize. Although the agency is required to enforce the
regulations, it would be unrealistic to expect them to pursue
violators with the same rigor as if they had discovered the
non-compliance themselves. It is better for the whistleblower
to be prepared for some of the same posturing and protracted
investigations he may have seen from the offending
organization. Professional societies may be willing to enter
an amicus curiae brief when litigation is involved; however,
they are also going to be cautious about taking sides in a
dispute for fear of tarnishing their reputation if the
allegations prove to be frivolous.
5. Stay focused on the issues that merit the public's trust and
avoid peripheral concerns. While there is nothing wrong
with acting in your own best interest, whistleblowers, who
must win the support of others to be successful, will fail to
gain that support if they even create the perception that they
are seeking to make personal gains from their actions. If the
whistleblower wishes to seek remedies for any personal
damage, these actions should be delayed, if possible, until
after resolution of any public health and safety issues.
6. Come forward and be identified as the one blowing the
whistle. Whistleblowers may have legitimate reasons for
wanting their identity to be protected such as avoiding
retaliation or unwanted publicity. The option of identity
protection needs to remain available to encourage reporting
of harmful acts that would otherwise go unreported.
However, whistleblowers who insist on anonymity may
AACE International is developing the Planning and Scheduling
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The creation of this first-of-its-kind certification program was
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13-16, 2004, at the Omni Shoreham Hotel in Washington, DC.
Michael C. Ray, PE CCE, President of Legis Consultancy Inc., of
Atlanta, GA, is leading the task force by serving as Task Force Project
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Jr.; Ron. F. Cagle; Timothy T. Calvey, PE; Kymberli Coffman, CCE
(Certification Board Representative); Edward E. Douglas III, CCC;
Dr. John O. Evans III; Clive D. Francis, CCC (AACE International
President-Elect); Lee J. Hobb; Kenji P. Hoshino; Marlene M. Hyde,
CCE; Nicholas L. Kellar, CCC (Certification Board Representative);
Gilbert A. Laterza; Vera A. Lovejoy, CCC; Paul E. Makris; Donald F.
McDonald Jr., PE CCE (Education Board Representative); Barry G.
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Thomas F. Peters, PE; Zartab Z. Quraishi, PE CCE; Dr. Parviz F. Rad,
PE CCE (Education Board Representative); Dr. James E. Rowings Jr.,
PE CCE (AACE International Past President); Robert Seals; Ian A.
Street, CCE; Heath I. Suddleson; Stephen P. Warhoe, PE CCE
(AACE International Director, Region 5); Anthony J. Werderitsch, PE
CCE; Ronald M. Winter; James G. Zack Jr. (AACE International Vice
President-TEC).
For more than a quarter of a century, AACE International has
defined new levels of professionalism through rigorous certification
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AACE's CCC, CCE, and ICC designations represent the standard of
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For additional information on AACE International, its
certification program, the new specialty certification in planning-
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our website at www.aacei.org or contact AACE International
Headquarters at 800-858-COST or 304-296-8444.
appear surreptitious. If you are accusing an organization of
wrongdoing, that organization deserves an opportunity to
seek clarification from their accuser and even mount a
defense against the accusations. This becomes difficult when
the identity of the accuser is unknown.
7. Most importantly, be relentless until you have achieved your
objective. A whistleblower may enthusiastically pursue what
appears to be a winnable battle for a while, but indifference
or even cynicism can slowly set in if opposition to his efforts
becomes steadfast. The whistleblower whose concerns are
premised on morality and who applies the rules of practice
for his profession needs to know that he will lose the battle
only if he gives up. History has shown over and over that our
society applies a rule-of-law consensus that will not tolerate
ignoble acts by institutions that have been entrusted with
making decisions that involve taking measured risk with
public health and safety.
In conclusion, practitioners who in the course of their work
discover acts that are unethical or place the public safety, health
or welfare in jeopardy, should make every effort to resolve
disputes the within the workplace. Issues surrounding
whistleblowing are seldom unambiguous and the process can
damage public trust and upset collegial relationships within the
workplace. The mere fact that an issue generates public interest
cannot, and should not, easily purge the mundane necessity of
business success. Whether you are able to resolve your concerns
internally or find it necessary to go public, it is important to
handle disputes in a professional manner. Discussions with my
former employer were sometimes emotionally charged and
passions ran high; however, for the most part an atmosphere of
mutual respect prevailed, which helped maintain objectivity.
Those who work in professions that involve public health
and safety must take care not to become so preoccupied with the
daily routine and work patterns that they become insensitive to
the importance and potential dangers of the activities in which
they are involved. Once an individual identifies a condition or
activity that is harmful or unethical, that individual has a moral
obligation to take corrective action, even if it involves breaking
ranks with the institution and becoming a whistleblower.
If you ever come face to face with a situation that suggests
the need to blow the whistle, consider Mr. Russell's suggestions
on the actions to take. His checklist of steps is an excellent guide
on approaching these problems in an ethical manner. x
This column is adapted from Chapter 12 of the book, What Every
Engineer Should Know About Ethics by Kenneth K. Humphreys, PE
CCE, Marcel Dekker, Inc., New York. The book provides a more detailed
description of the Challenger disaster with photographs and illustrations
detailing the failure mechanism. This column was first published as part
of the book, What Every Engineer Should Know About Ethics, by Dr.
Kenneth K. Humphreys, PE CCE.
Cost Engineering journal invites your comments on this article and your
suggestions for future Ethics Corner articles. Comments and suggestions
may be sent to Dr. Kenneth K. Humphreys, PE CCE, 1168 Hidden Lake
Drive, Granite Falls, NC 28630, (828)728-5287, Fax - (828) 728-0048, e-
mail - icec@ICostE.org
The book is available for purchase at Section 12 of the AACE
International Online Bookstore, www.aacei.org or www.cost.org.
The viewpoints expressed in column published in Cost Engineering
position of AACE International, nor is AACE International endorsing or
supporting the authors work. The columns are presented solely for review
and informational purposes by our readers, who are encouraged to
respond.
AACE International Specialty Certification Update
Planning and Scheduling Professional (PSP)
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The AACE International
T
he goal of any company is to make
a profit, so there is a continuous
effort to improve any and all
processes. In the harsh light of todays
competitive business environment, every
effort and opportunity to improve a
companys capital project process cycle
needs to be explored.
Most managers are aware of, and use,
some variation of the project process to
evaluate capital projects. Unfortunately,
the use of this process is usually applied to
capital projects on the narrow basis of each
individual project as a stand-alone entity.
Seldom are individual projects looked at as
integrated individual activities in the
overall picture of the total corporate
budget or business strategy. This can and
usually will wind-up hampering a
company from taking full advantage of the
learning experience provided by
measuring and analyzing the results and
taking corrective action.
The premise of this article is that the
implementation of a project historical
database system will allow a company to
improve their project process in light of the
total corporate capital budget. The
collection of cost, schedule, resource, and
technical data from completed projects
can facilitate the development of
benchmarks, ratios, factors, and other
statistical analyses to measure and evaluate
project performance and quality. This
information will assist project management
and the company to select the right
projects to do in the first place, and then to
properly execute the selected projects.
Project Process Cycle
The project process cycle is a fairly
well-known and recognized management
tool. This project process is generally
described as a cycle where the steps of
planning activities/projects, executing
them, measuring and analyzing results,
and taking corrective actions are
continually repeated throughout the life of
the project [1]. The project process cycle
can roughly be equated to the popular
management tool known as the continuous
improvement process. If all the
components of this process are followed,
we can be more assured of completing a
more enjoyable and successful project.
This process is relatively easy to
envision and use on individual projects
with the total support from the project
team. It is very easy to see the value-added
payback when looked at on an individual
project basis. A project management team
is in a constant state of evaluating the
impacts of quantities, worker hours,
productivity, material costs, and material
deliveries on the project costs and the
project schedule.
What is more difficult to appreciate is
the project process cycle in the context of a
companys total capital budget. It is very
common for an individual project in a
companys total budget to be looked at as a
totally stand-alone entity versus being
viewed as an integrated activity in the
overall corporate project process. If this
point of view is allowed to prevail in the
organization, the process cycle will usually
breakdown. In this context, the activities of
planning a project and executing the
project are usually followed, with the
project process cycle being applied to the
individual project. However, when the
individual capital project is completed, the
budget has been spent and the project
team members have been assigned to other
projects, the idea of company performance
measurement and project portfolio
assessment unfortunately is seldom
thought of as a high priority. The eventual
overriding result of this short-circuited
process cycle is treating each individual
project in a companys budget as a new
experience with no legitimate documented
historical knowledge to base future
decisions on. In other words, we do not get
the advantage of continuous improvement
in the project process and will possibly
continue to make the same mistakes over
and over.
It is common for management to
mistakenly think they have historical data
to evaluate new projects with, when in
reality all they may have is a project title
that sounds similar and a bottom line
project cost. What is lost in this example is
the logical and methodical gathering and
analysis of actual project history, the lack of
which can lead to erroneous management
budget decisions. So, as a project
management team, it is our responsibility
to educate management and ourselves to
the true meaning of project historical
analysis in the context of the total company
budget and business strategy. This is where
an organized, well thought out database
system, supported by raw individual capital
project actual costs, actual schedules, and
project technical data, can over time assist
CERTIFICATION PAPER
Use and Implementation of a
Project Historical Database System
ABSTRACT: In todays competitive business environment every effort and opportunity to improve
a companys capital projects process cycle needs to be explored. Most managers are aware of,
and use, some variation of the project process to evaluate capital projects. Unfortunately, the
use of this process is usually applied to capital projects on the narrow basis of each individual
project as a stand-alone entity. Seldom are individual projects looked at as individual activities
in the overall picture of the total corporate budget or business strategy. This can, and usually
will, wind-up hampering a company from taking full advantage of the learning experience
provided by measuring and analyzing the results from completed projects, and taking corrective
action to improve overall results. This article will put forward a way to implement a project
historical database system. The collection of cost, schedule, resource, and technical data from
completed projects can facilitate the development of benchmarks, ratios, factors, and other
statistical analyses to measure and evaluate project performance and quality. Over time, if a
company introduces and properly uses a project historical database system, individual project
performance, as well as corporate decision making in choosing the best projects to pursue, will
improve. This concept involves expanding project management and corporate management
thought processes beyond the easier, and more easily understood project process cycle relating
to individual projects, to the broader concept of treating individual projects as integrated
activities in the overall corporate budget or strategy.
KEY WORDS: Database, decision-making, performance, and project history
management when making corporate
budget decisions.
Outputs of a Project Historical Process
The information streams leading to
and from the historical system are
unprocessed cost, time, resource and
technical data flowing in, and processed
information products coming back out.
These products are calculated
information needed to measure and
evaluate performance and quality. These
products provide information tools to help
improve functions such as strategic cost
estimating and scheduling, project risk
evaluation, planning, and organizational
workload forecasting.
The potential information products
are illustrated in Figure 1, and fall into
these categories [2]:
Tools for Strategic and Conceptual
Cost Estimation and Scheduling
ratios, factors, benchmarks,
parameters, cycle time, and other data
essential to estimating, budgeting, and
project front end planning.
Measures of Estimating Database
Qualityfeedback on actual cost to
help improve the detailed estimating
database by establishing productivity
factors. Items usage, labor/material
ratios, etc.
Measures of Project, Function, and
Organizational Quality and
Performanceobjective factors
related to issues such as rework, unit
productivity, process variance, and cost
of quality compared to other projects.
Subjective project factors can be
captured as well.
Tools of Organizational
Forecasting objective factors that
when applied to gross budget forecasts
can yield organizational workload and
resource forecasting based on
technical and performance
characteristics of the project backlog.
Tools for Planningwork breakdown
structures, schedule logic, account
coding, lessons learned from
successful and failed approaches, and
other go by information can be used
to speed up and improve the quality of
project front end planning.
Tools for Risk Assessmentidentify
risk factors for evaluating project risk
considering types of technology,
execution strategies, etc.
Anatomy of a Project Historical Database
System
Now that we have discussed where a
project historical reporting process fits into
the total implementation of the project
process, how can we provide the
information products discussed in the
Figure 1Uses of Historical Information
previous section to support process
performance measurement and process
assessment? Planning the implementation
of a project historical data collection and
analysis system should include nothing less
than considering the following
components:
management of the system and
information responsibility;
data code structure and level of detail;
data and information collection,
storage, maintenance procedures; and
database information retrieval and
analysis procedures.
With this outline, we will now proceed
to discuss the development of a project
historical database and reporting system.
System Management and Responsibilities
Some person or group within the
project management organization needs to
be identified as the responsible entity for
holding the historical project files, entering
the data into an electronic database, and
maintaining the data system. A likely
candidate for taking responsibility of the
system would need to have experience
working in and with large database
programs, be one of the principal users of
the system in the course of their daily work
responsibilities, have more than a passing
knowledge working with historical data,
and be well versed in comparative
statistical cost analysis.
To provide all the appropriate
documentation and raw data needed to
establish a useful system, there will most
likely be other individuals or groups
involved with supplying supporting
information. Depending on the size and
organization of the company, or the size of
the project, groups such as project controls,
which normally have in-depth knowledge
of the actual cost and scheduling of a
project should get involved in the
gathering of required information.
Another likely group to get involved would
be engineering which is responsible for the
technical project data such as capacities,
layouts, specifications, etc.
As an aside, it should be noted that
project historical files might not be full-
blown, all-inclusive project closeout files.
In some organizations, the engineering
group will want to keep their own technical
closeout files.
Data Code Structure and Level of Detail
To implement a project historical
system, a fixed and adhered to coding
structure needs to be established that will
allow for the consistent retrieval and
analysis of the information that is input to
the database system. It should be noted
that there is no universal standard be-all,
do-all code-of-account structure in wide
use today, so there is significant leeway
from company to company, or industry to
industry, in acceptable and meaningful
structures. Since all projects are not
exactly similar, even within an individual
company, there will most likely be several
different sorting code structures needed to
fully use database project analysis.
Representative groups of varying code
structures that could be implemented to
assist in project historical analyses are a
cost code-of-account used to collect project
execution data, a process type code-of-
account to differentiate between various
processes, and an equipment type code-of-
account. The difficult part of developing
the coding structures is clearly and
logically delineating between the various
different components of a project with the
corresponding level of detail available,
depending on the complexity of the project
or process.
Most companies have some sort of
code-of-account structure for tracking
costs. Hopefully, the existing code-of-
accounts structure can logically be rolled
into the historical database collection
Table 1Project History Retrieval and Analysis System
process. The code structure should be able
to differentiate broad activity types
(administration, engineering, construction,
etc.) and resource types (labor and
material, discipline and trade, direct and
indirect). These breakouts will assist in the
analysis of projects through the use of
ratios, factors, and various benchmark
assemblies.
The size of a company, the size of
projects, or the process complexity
involved can dictate the levels of detail
used to develop the code-of-account
structure. Much of the raw data collected
from the various code-of-account sources
will have multiple input sources with
varying degrees of direct accountability for
the accuracy of the data. The discipline of
those involved in creating and inputting
the data to a code-of-account structure can
be one of the prime drivers in the validity
of the final data and the usefulness of the
resulting information.
A process code-of-accounts will
probably need to be developed because all
projects, even within a single company,
most likely will not be the same process
type. Statistical cost, time and resource
relationships are not consistent between
different project and process types. A
useful code structure must differentiate
between project and process types that
have different cost and schedule traits.
These traits include such things as the mix
of trades and disciplines involved, different
levels of effort and cycle time required,
different execution strategies and
contractor mixes, different emphasis on
resources (such as labor, material, process
equipment), different technologies,
different feedstock or product forms (i.e.,
liquid/solid/gas or raw/refined), and so on.
To properly differentiate the process, a
hierarchical code structure is
recommended. As with the previously
mentioned cost code-of-account structure,
the extent or level of effort that can or
should be expected is highly variable. At
the first breakout level, the system needs
the capability to differentiate between gross
process differences (i.e., civil, structural,
architectural; chemical process, physical
process, web process, etc.). At the second
level of breakout, for say a chemical
process, you might need to differentiate
between a chemical recovery process, a
batch chemical making process, and a
chemical distillation process. After the
second level of breakout, you can continue
to go as deep down into a chain of code
breakout as is reasonably needed or
required.
A project may have a work scope that
includes multiple process areas that must
be viewed for historical analysis purposes as
individual projects in the database. A
complication arises from the fact that most
projects have prorated costs that are not
directly accountable to the various process
areas. So the design of the historical data
analysis system must be capable of
allocating these prorates to the various
process areas within the overall project.
In the analysis of process projects,
which tend to be equipment-centric, one
of the prime indicators is the relationship
between the cost and design of the process
equipment to the total project cost and
schedule. Process equipment is one of the
first things identified when developing a
new project, so if we can relate overall total
project costs to the cost of process
equipment, it provides management with a
useful tool to do early upfront project
evaluations. As discussed previously, an
equipment code-of-account structure
should be developed with the goal to
provide differentiation between different
types of mechanical process equipment.
Table 2Technical Fact Sheet
Again this code structure should be broken
down to a reasonable level of detail that
can be reported to.
Data Collection/Storage/Maintenance
Procedures
The initial, unprocessed raw data
collection sources will most likely be a
combination of hardcopy items and
electronic data items. Since the data will
be presented for input to the database
system in both ways, a hardcopy of the raw
data should probably be the primary record
retention file. As an alternative, hardcopy
input could be scanned and captured
electronically in order to create a total
electronic archive. Tables 1-3 show
examples of data forms used to collect
project information.
An example of project historical
deliverables that should be provided by the
responsible groups for closed project files
as previously discussed includes the
following [3]:
Table of Contents
Project Summary
a) basic project/area fact sheet; and
b) written project narrative with
findings and appraisals.
Scope Documents
a) requirements document;
b) conceptual design proposal;
c) basis of design document;
d) project organization chart;
e) approved preliminary and final
funding documents; and
f) final acceptance notice.
Schedule
a) final statused master summary
schedule;
b) special/unique control level or
detail schedules; and
c) engineering and design progress
report
Project Estimate and PBS
a) project estimate
b) project breakdown structure
c) shop order basis of estimate
Cost and Performance
a) cost reports by process area;
b) final cost control report;
c) change order log;
d) cost and cash flow curves; and
e) performance curves.
Contracts
a) contract bid summaries;
b) subcontract plan; and
c) unit price and other detail cost
submittals.
Technical
a) plot or site plan, and block flow
diagram;
b) priced equipment list and
procurement; and
c) drawing list
Once the responsible partys have
provided this raw project data, the group
assigned ownership of the project historical
files can input the appropriate information
into the database. To appropriately use the
project information for historical analysis,
the fact that cost data can become obsolete
over time must be accounted for within the
system. Most cost calculations and analysis
require that cost data be adjusted to a
common time basis [2]. In todays
computer environment, database software
programs can readily provide the capability
to easily update and maintain current costs
through the many widely published cost
index tables, available on the internet,
from government agencies, or technical
publications.
Table 3Cost Report on Capital
Database Information Retrieval and
Analysis Procedures
If project teams or management
cannot easily access or interpret project
data, the value of the data will be minimal,
no matter how well it is collected and
organized.
Once a program like this gets
implemented, it is amazing how the output
from this type of system becomes requested
material. However, it should be noted that
this type of data will likely be sensitive
company property, so it should not be
casually handed out or left lying around in
public environments.
Database programs will allow you to
generate any number of reports from the
raw database. The reports and analysis can
be as simple or as complex as you want to
make it, as long as the input detail of the
raw database will meaningfully
differentiate it. Design supervisors can
monitor their performance in producing
drawings. Engineering and construction
can monitor department rework trends.
Project managers constantly want
comparative benchmark reports and
project risk assessments. Functional
departments can use the data for
forecasting their personnel requirements in
future years, based on long-term capital
budgets. The estimating department can
use database analysis to provide strategic
estimating for client budget evaluations.
Capital management can evaluate overall
project community cycle time cost
performance.
Over time, as the database size grows
and gets diversified, additional
opportunities to manipulate raw data exist.
Analysis that requires mathematical and
statistical manipulation can provide such
strategic information as charts of project or
equipment costs versus capacity, or the
variability of indirect project costs to
project process type or project size.
O
ver time, if a company introduces
and properly uses a project
historical database system as
outlined above, individual project
performance, as well as corporate decision
making in choosing the best projects to
pursue, will improve. This concept
involves expanding project management
and corporate management thought
processes beyond the easier and more
understood project process cycle, relating
individual projects to the broader concept
of individual projects as integrated
activities in the overall project portfolio.
Thus, management of the corporate
budget and business strategy can be
enhanced. x
REFERENCES
1. AACE International, Skills and
Knowledge of Costs Engineering, 3rd ed.,
Morgantown, WV: AACE International: p.
6-1.
2. Hollmann, John. Project History - Closing
the Loop, 1995 Transactions of AACE
International, Morgantown, WV: AACE
International, 1995.
3. Unidentified Company (name withheld
for privacy), Capital Project Process
Manual.
Certification Papers - Each candidate seeking
certification as a Certified Cost Consultant/
Certified Cost Engineer (CCC/CCE) is expected
to write a professional paper of a minimum of 2,500
words on a cost engineering-related subject and it
must be submitted before or at the time of the
examination. Each month some of the top scoring
entries are published as an example of what
constitutes a good entry. Other members and
readers will also gain insights on current industry
trends and projects with the publication of these
papers in the Cost Engineering journal.
ARTICLES AVAILABLE
Articles published in
previous editions of the Cost
Engineering journal may be
purchased individually through
the AACE International
Online Bookstore at AACE
Internationals website,
www.aacei.org.
The cost per article is US$7.50
for nonmembers and US$5.50
for members of AACE
International.
If you are interested in
purchasing additional copies of
articles appearing in this issue
please refer to the Article
Reprint and Permissions
information on page 42.
23rd Annual Fall
Seminar
East Tennessee Section
of AACE International
Oct. 20-22, 2003
Knoxville, TN
The East Tennessee Section
of the Association for the
Advancement of Cost
Engineering International will
present a 3-day seminar for cost
professionals Oct. 20-22.
The seminar will open on
Monday, Oct. 20, with technical
presentations and a keynote
address by JoelKoppelman, CEO
of Primavera Systems. On
Tuesday, Oct. 21, and
Wednesday, Oct. 22, there will
be seminar classes. For more
information, visit Website at
www.aace-ets.org
VISIT THE
CYBERSECTION!
This internet-based section can
be reached by going to Groups
at SBC Yahoo. Signing up to the
CyberSection involves getting a
Yahoo ID, and then joining the
group. The SBC Yahoo service is
free and allows AACE to take
advantage of current and
advancing online meeting
technology. Members may also
view previously downloaded
presentations from the group site
files and post messages. Be sure to
stop by the CyberSection and say
hello!
aaceicybersection-subscription@yahoo.com
DONT HAVE A LOCAL
AACE SECTION?
T
he AACE Planning and
Scheduling Committee has been
trying to establish a library of
reference books for its members use.
Even with such a library, we would still
need a synopsis to assist members in
narrowing their reference search. I
thought that I would help the cause by
purchasing one of the textbooks from the
recommended list and reviewing it. I
never intended to start a professional free-for-all; it just worked
out that way.
Overview
This is a handsome, well-illustrated textbook that can be re-
read and referenced many times. Primavera promotes Mr
Feigenbaums book on its own website under Project
Management Resources, at http://www.primavera.com/search/
pmsources.html. It is obvious that the author is very proficient in
developing economical construction work plans.
This book is almost exclusively tailored toward the
contractor, and not the owners representative. This focus gives
the author the ability to stick to the subject and not wander all
around, trying to hit every possible point. Items such as how to
review a baseline schedule or schedule update are almost
completely missing. With this in mind, I can say that I strongly
recommend this book to its target audience, once we address the
professional free-for-all issue.
CPM Calculation Method
This review should have only taken a couple of days, at most
to produce. Instead it consumed much of two weeks for me, Mr.
Feigenbaum, and a large number of people on the AACE
International Planning and Scheduling Committee. The reason
for this ruckus was the fact that we discovered that there exists two
different, formalized methods for computing a critical path
method (CPM) schedule using precedence diagramming
method (PDM.)
No one in the three above-mention groups of people were
aware of the fact that there are two methods. Mr. Feigenbaum
thought that his method (what I call, The Aggie Method) was
correct and AACE International, (myself included) thought that
our method (what I call the AACE Method) was correct. We
both though that there were no methods, just the right way and
the wrong way to compute a CPM on a PDM network. For more
on this, please refer to my sidebar piece titled, How to Befuddle
a College Professor.
The end result of this exercise is our new belief that for a
long time now, there has existed two distinct and different
methods for computing the CPM and that both appear to be
legitimate.
Mr. Feigenbaum does an excellent job of explaining and
demonstrating the Aggie Method. The only problem with this
approach is that the title of the book references Primavera Project
Planner (P3.) Unfortunately (for this book,) P3 uses the AACE
International Method of calculation. The exercises shown in the
book will not derive the work day numbers found in the software.
The calendar dates derived from the exercises do appear to match
those of the P3 software.
Minor Errors
The author makes a common mistake when trying to give a
real-world example of the use a relationship lag. He lists the
pouring and forming of concrete as the activity and the curing
time for the concrete as the relationship lag. Unfortunately for
this example, P3 uses the same calendar for the activity as it does
for the successor lag. This means that curing of concrete only
takes place on week days and not over the weekends or holidays.
A master schedule is presented early-on to allow for CPM
calculation practice and then to illustrate the points to be made.
As this is a construction-oriented book, it would have been nice
to show the NTP, mobilization, and substantial completion in
this sample schedule. In addition, the author freely uses one-day
activities, problematic to use in real construction conditions.
Certain errors exist in the illustrations. The fragnets listed on
pages 27-44 appear to be from the first edition of the book. They
do not match the master schedule presented earlier in many of
the activity IDs or descriptions.
The author lists three types of activity float and one type of
relationship float. From its description, the relationship float is
what P3 calls, free float. Later, the author says that P3 only
recognizes one type of float, total float. In actuality, P3
recognizes two types; total float and free float. To reduce
confusion, I believe that the explanations should be in line with
the software tool being discussed.
It appears from the various discussions in the book about
critical path, that the author is unfamiliar with the P3 feature
called longest path. This important feature was introduced in
P3 for Windows, Version 2.0b. Mr Feigenbaum describes the
critical path as the longest path but always uses this term with
lower case letters and as a description, not a feature or measure.
The discussion and illustration of hammocks is incorrect in
that the books says that P3 hammocks can summarize either the
start or the end of any activity. The illustration shows a
predecessor activity related to a hammock by a finish-to-start
relationship. This treatment is true of the P3e/c software product
but will only produce an error if tried with P3.
Showing his contractor-background, the author reiterates
Construction Scheduling with Primavera Project Planner, Second
Edition, by Leslie Feigenbaum, 340 pages, 200?, Prentice Hall,
ISBN 0-13-092201-3
For the Boo
For the Bookshelf
Ronald M. Winter
Construction Scheduling with Primavera Project Planner
how useful P3 barcharts are and downplays P3s ability to
produce time-scaled network diagrams. He says that time-scaled
network diagrams are only fit for large plotters and frequently end
up as a wall direction. The example of such a network diagram
in the book is so poorly done that it almost proves his point.
Mr Feigenbaum states that you should update a schedule by
inputting your estimates for each activitys percent complete.
This is advice goes against AACE International Recommended
Practices. The only accurate method for establishing the
progress of an activity is to estimate the remaining duration. And
contrary to the examples shown, an update form should never
contain late dates and total float. Besides confusing the foreman,
you are influencing the answer.
In Balance
After reading about all of these minor errors, I do not want
you to believe that I did not appreciate the book. Mr.
Feigenbaum has a terrific grasp of properly managing contractor
resources. The discussion began with how to make-up an
intelligent bid, showed how to build a good schedule, how to add
resources and costs, how to update the schedule, and finally how
to track and forecast time and cost deviations. This book is
written directly to construction contractors using real-world
construction examples.
Mr, Feigenbaum tells you to not use the start-to-finish
relationship. He explains the result of using start-to-start
relationships between independent activities. The author warns
against resource loading schedules if the work is being performed
by sub-contractors. Practical exercises in exporting and
importing data between P3 and spreadsheets for various
situations are very helpful. There is a very nice section on ethics
(the author is in favor of being ethical) when discussing cost
loading schedules and the concept of front-loading.
Final Note
There is another book currently out on the market with the
exact same title by David A. Marchman. This book is also on the
Primavera website reference list. This textbook was released in
1997 and based on P3 Version 2.0e. Customer reviews were luke-
warm, some saying that it offered little practical construction
value. I have not personally reviewed this other book. x
The viewpoints expressed in this column are those of the author
and do not represent a viewpoint of AACE International..
The entire collection of Cost Engineering
journals issued in 2002 - articles, columns, and
features are now available in one convenient,
portable, and searchable place!
Order now at www.aacei.org
-NEW CD-ROM-
Cost Engineering 2002
easy to use and fully searchable!
Call for Seminar Instructors
A
re you interested in offering continuing
education seminars for AACE International?
The Education Board is always looking for potential
instructors:
For the Continuing Education Opportunities (CEO)
on-site training program, and
For the Annual Meeting seminar programs such
as the 2004 Annual Meeting, in Washington,
DC, June 13-16. Normally one and two-day
seminars are preferred. Seminar proposals should be
forwarded to AACE International Headquarters.
For information on how to submit proposals for
either of these programs, contact:
Charla Miller, Staff Director -
Education and Administration
phone: 800.858.COST
fax: 304.291.5728
e-mail: cmiller@aacei.org.
A
T
his case study relates to VTC,
which had been in operation for
more than 30 years before it was
sold to Lucent Technologies in February
2000. It was initially formed to design and
manufacture chips in the 1970s as the
Microcircuits Division of Control Data
Corporation, then operated as VTC, Inc.,
from 1984 until 2000. The company
designed and manufactured integrated
circuits (ICs) for data storage applications.
VTC, Inc, which was privately held and
based in Bloomington, Minnesota,
specialized in standard and custom
read/write preamplifiers (preamps) used in
hard disk drives. Its products can be found
in the drives sold by the world's leading disk
drive manufacturers including Seagate
Technology, Quantum Corporation,
Western Digital, and Maxtor Corporation.
The majority of company's revenues were
from read/write preamplifiers that were
designed into many of the new disk drives
being introduced in today's market. In fact,
this company had a dominant share of the
worldwide market for preamplifiers before
Lucent Technologies bought this market
from VTC.
The company had an electroplating
line where they used both a copper
electroplating bath and a tin/lead alloy-
electroplating bath. In order to maintain
proper controls on these plating baths, the
company needed to have a way of
measuring the total metal contents in the
solution of the plating baths. At the time of
the study, VTC had no method to
analytically measure the total metal
contents in the plating baths in house. The
company had to rely on outside sources to
do their plating bath analysis for them at a
high cost. Because of the high cost and the
potential for a high rate of return on
investing in this piece of equipment to do
the analysis, the company was looking into
purchasing equipment to do the plating
bath analysis. The piece of equipment that
works best for these analyses is a flame
atomic absorption spectrometer. This is a
piece of equipment that has the ability to
measure concentrations of metals in a
solution [5].
This economic analysis describes what
the flame atomic absorption spectrometer
is and how it works. It also provides details
of the vendor selection and the capital
investment justification for the equipment.
FLAME ATOMIC ABSORPTION
SPECTROMETER METHODOLOGY
An explanation of how atomic
absorption works is if a light source of just
the right wavelength impinges on a free,
ground-state atom of interest, the atom may
absorb the light as it enters an excited state.
The light, which is the source of atom
excitation, is simply a specific form of
energy. The capability of an atom to absorb
very specific wavelengths of light is used in
atomic absorption spectrophotometry.
The quantity of interest in atomic
absorption measurements is the amount of
light at the resonant wavelength, which is
absorbed as the light passes through a
cloud of atoms. As the number of atoms in
the light path increases, the amount of
light absorbed increases in a predictable
way. By measuring the amount of light
absorbed, a quantitative determination of
the amount of analyte element present can
be made. The use of special light sources
and careful selection of wavelength allow
the specific quantitative determination of
individual elements in the presence of
others.
Supplying enough thermal energy to
the sample to dissociate the chemical
compounds into free atoms produces the
atom cloud required for atomic absorption
measurements. Aspirating a solution of the
sample into a flame aligned in the light
beam serves this purpose. Under the proper
flame conditions, most of the atoms will
remain in the ground-state form (lowest
energy, most stable, normal orbital
electronic configuration) and are capable
of absorbing light at the analytical
wavelength from a source lamp. The ease
and speed at which precise and accurate
determinations can be made with this
technique have made atomic absorption
one of the most popular methods for the
determination of metals in a solution [2].
EQUIPMENTVENDOR
SELECTION
Once the determination was made as
to what kind of equipment needs to be
purchased to do the plating bath analysis,
the next task on hand was to find a vendor
to supply the equipment to VTC. An
extensive search was done to try and find a
vendor that could supply a flame atomic
absorption spectrometer. Basically, what
was found was that there were only two
vendors. The first one was Hewlett Packard
and the second was Perkin Elmer.
VTC got quotes from each of the
vendors. However, the equipment quotes
were different. The equipment from
Hewlett Packard was a little more elaborate
and included some things that made it
automated. The Hewlett Packard quote
came in at around $50,000. The
equipment from Perkin Elmer was a little
TECHNICAL ARTICLE
Economics of Equipment
AcquisitionA Case Study
ABSTRACT: A number of economic analysis studies can be found on investment justification of
new equipment. These studies are unique in many ways in terms of the manufacturing process
the equipment will support, the science and engineering associated with the candidate
equipment and its complexity, the industry where this equipment is going to be deployed and
business alternatives considered (where one of the choices is purchase of new equipment). This
case study pertains to a privately held manufacturer of standard and custom read/write
preamplifiers used in hard disk drives. This company had a dominant share of the worldwide
market for preamplifiers that were designed into many of the new disk drives introduced in the
market. The study provides an overview of the company; a description of the equipment
methodology (for a flame atomic absorption spectrometer); and shows how a capital investment
justification analysis was accomplished for the purchase of this equipment. A knowledge of the
manufacturing process and the capabilities and complexities of the equipment helped in the
analysis.
KEY WORDS: Economic analysis, case study, and equipment
Sameer Kumar and Jeffrey Kvalheim
PEER REVIEWED
less sophisticated; it did not include all the
bells and whistles, and this quote came in
at around $30,000. Because the
equipment was being used for low volume
stuff, it was very apparent that VTC did
not need a piece of equipment that had all
the bells and whistles on it. So it was an
easy choice, based on options included,
price, and the fact that Perkin Elmer had
a local service representative in the Twin
Cities area while Hewlett Packards closest
service representative was in Denver,
Colorado. Another intangible that went
into the decision was that Perkin Elmer
had a good reputation in the industry for
making one of the best flame atomic
absorption spectrometers. The final
decision was to buy the Perkin Elmer
flame atomic absorption spectrometer.
The next step however was to be able to
justify the purchase of new capital
equipment [4,6].
DISCUSSION OF
FINANCIAL ANALYSIS
In this section, detailed financial
analysis relating to new capital equipment
justification is presented for a 5-year
evaluation period [1, 3].
Cost of Capital Equipment
The cost of the equipment to be
purchased includes the base cost of the
equipment, Minnesota sales tax, and
installation. The total expenditure for this
project was $29,027.57 (Line 4, Table 1).
Operating Costs
A one-time service contract charge of
$2,062.80 (Line 5, Table 1) would be
taken at the beginning of the 5-year
analysis. Floor space, utilities, and labor
costs are expected to remain constant for
the life of the analysis. The floor space and
utilities costs are $2,400 per year (Line 6,
Table 1) for the 5-year analysis. Based on
Table 1Detailed Financial Analysis Computation for New Equipment Justification Over a Period of Five Years
Line Description (years) 0 1 2 3
Capital Equipment
1. Equipment cost ($25,378.00)
2. Sales tax (6.5%) ($1,649.57)
3. Installation ($2,000.00)
4. Total cost ($29,027.57)
Operational Costs
5. Service contract cost ($2,062.80) $0.00 $0.00 $0.00
6. Floorspace and utilities ($2,400.00) ($2,400.00) ($2,400.00)
7. Labor costs ($10,392.00) ($10,392.00) ($10,392.00)
8. Total operating costs ($12,792.00) ($12,792.00) ($12,792.00)
Impact on Revenue
9. Saving from elimination of aspen $34,320.00 $34,320.00 $34,320.00 $34,320.00
10. Savings from elimination of APS Inc. $3,000.00 $3,000.00 $3,000.00 $3,000.00
11. Savings from scrap due to bad alloy $12,000.00 $12,000.00 $12,000.00 $12,000.00
12. Total impact on revenue $49,320.00 $49,320.00 $49,320.00
Discounted Cash Flow Analysis
13. Total operating cost ($12,792.00) ($12,792.00) ($12,792.00)
14. Net impact on revenue $49,320.00 $49,320.00 $49,320.00
15. Total pretax cash $36,528.00 $36,528.00 $36,528.00
16. Tax rate 34%
17. After tax cash flow $24,108.48 $24,108.48 $24,108.48
18. Depreciation rate 0.125 0.25 0.25
19. Depreciation (3,172.25) ($6,344.50) ($6,344.50)
20. Depreciation cash $1,078.57 $2,157.13 $2,157.13
21. Total net investment ($31,090.37)
22. Total after tax cash ($31,090.37) $25,187.05 $26.265.61 $26.265.61
23. Discount rate 15%
24. Discount factor 1 0.8696 0.7561 0.6575
25. Discounted cash flow ($31,090.37) $21,902.65 $19,859.43 $17.269.64
26. Cumulative cash flow ($31,090.37) ($9,187.72) $10,671.71 $27,941.35
27. Payback period (months) 17.55
Rate of Return Cash Flow Analysis ($31,090.37) $25,187.05 $26,265.61 $26,265.61
28. Total after tax cash
29. Rate of return on investment 78.09%
an analysis of usage, the equipment would
be operated approximately 10-hours a
week, at a cost of $20 per hour (Line 28,
Table 2), this amounts to $10,392 per year
(Line 7, Table 1).
Impact of Revenue
The purchase of this equipment was
expected to have a favorable effect on
profits for the 5-year analysis period. These
savings come from elimination of the
outsourcing to Aspen, saving $34,320.00
per year (Line 9, Table 1), elimination of
Applied Physical Sciences (APS) services,
$3,000 per year (Line 10, Table 1), and
scrap reduction because of poor alloy,
$12,000 per year (Line 11, Table 1).
Total real savings after operating costs
and taxes were expected to yield a positive
cash flow of $24,108.48 per year (Line 17,
Table 1).
Aspen Research in Roseville,
Minnesota, a chemical research laboratory,
had been contracted to conduct plating
bath analysis, essentially to determine
whether the composition of lead and tin is
Line # COST BY SENDING TO ASPEN RESEARCH
1. Cost per sample analyzed $300.00
2. # of samples run per week 2
3. Cost per sample to be couriered to Aspen Research $30.00
4. Total weekly expenses = $660.00
5. Total monthly expenses = $2,857.80
6. Total yearly expenses = $34,320.00
COST BY SENDING BOTH SAMPLES TO APPLIED PHYSICAL SCIENCES
7. Cost per sample analyzed $95.00
8. # of samples run per month 2
9. Cost per sample to be couriered to APS Services $30.00
10. Total monthly losses = $250.00
11. Total yearly losses = $3,000.00
LOSSES FROM UNPROCESSED WAFERS
12. Dollars lost from processing a wafer with bad alloy = ($1,500.00)
13. Lead time for Aspen results 24
14. Lead time if done in house 8
15. # of wafers plated in 24 hr period 20
16. # of wafers possibly plated with bad alloy from aspen 20
17. # of wafers possibly plated with bad alloy from VTC 12
18. Difference 8
19. $ Difference ($12,000.00)
20. Occurrences per year 1
21. Losses per year from Unprocessed Wafers ($12,000.00)
COST OF OWNNERSHIP OF AA SPECTROMETER
22. Acquisition cost (Worst case scenario including everything) = ($25,378.00)
23. Sales Tax (6.5%) ($1,649.57)
OPERATING COSTS
24. Service contract cost = ($2,062.80)
25. Monthly service contract cost over lifetime = ($137.52)
26. Floor space and utilities per month = ($200.00)
27. Labor required (persons/hr) 1.00
28. burdened labor rate for technician ($/hr) = ($20.00)
29. Work hours per week = 8
30. Work days per week = 5
31. Expected system utilization rate = 25%
32. Total direct labor costs per month = ($866.00)
33. Total direct labor cost per year = ($10,392.00)
Table 2Detailed Cost Computations for Contract Service Versus Cost of Acquisition of New Capital Equipment
investment was 78 percent, returning a five
year cash total of $55,483.03. It was
expected that the purchased equipment
would provide returns in chemical analysis
for other areas of VTC, and would save the
company thousands of dollars external
costs, while reducing the possibility of a
plating line being in a down condition.
The study shows how easy it is to apply
discounted cash flow and rate of return
analysis in making capital equipment
purchase decision. What is really required
in such decisions is to have a functional
area expert involved who is familiar with
the technical process and the complexity of
candidate equipment. x
REFERENCES
1. Ad Hoc Committee on Machine Tool
Justification, Investment for Competitive
Cost Justification Report, The Association
for Manufacturing Technology (AMT),
Washington, DC. (July 1992).
2. Beaty, Richard D. and Jack Kerber.
Concepts, Instrumentation and Techniques
in Atomic Absorption Spectrophotometry,
Technical Report, Perkin-Elmer
Corporation, Norfolk, Connecticut.
(1993).
3. Heard, Ed. Cost Justification: Getting
More Bang for Your Investment Bucks. IIE
Solutions, June 1996, pp. 32-37.
4. Park, Chan S. Contemporary
Engineering Economics, Third Edition,
Prentice Hall, Upper Saddle River, New
Jersey. (2002).
5. Perkin Elmer Instruments website.
http://instruments.perkinelmer.com/
6. Toth, Debora, Investing in New
Equipment. Graphic Arts Monthly, Vol.
63, No. 8, (August 1991): 86-88.
ABOUT THE AUTHORS
Sameer Kumar is a
professor of engineering
and technology
management at the
University of St. Thomas.
His major areas of interests
include optimization
concepts applied to supply chain management,
product innovation, capital investments
justifications and total quality management
effectiveness. He can be contacted at
skumar@stthomas.edu.
Jeffrey Kvalheim is currently a process
applications engineer at BOC Edwards, a
company specializing in process materials,
equipment and services with expertise in
semiconductor and vacuum dependent
processing; and also a graduate student in
manufacturing systems engineering program at
the University of St. Thomas.
in right proportion. Aspen Research
housed an inductibly coupled plasma mass
spectrometer.
Discounted Cash Flow Analysis
The equipment to be purchased was
depreciated over a 5-year life, 12.5 percent
the first and fifth year and 25 percent years
two, three, and four. The tax rate used on
profits returned was 34 percent and the
discount rate used was 15 percent returned
at the end of each year. Analysis showed a
rate of return on investment of 78.09
percent (Line 29, Table 1) and a payback
period of 17.55 months or roughly 1.5
years (Line 27, Table 1). After five years the
total discounted, positive cash flow of the
project was expected to be $55,483.03
(Line 26, Table 1).
Discussion
This equipment clearly pays for itself
within two years and returns money to
VTC with its purchase ($55,483.03 extra
after tax profits). In fact, compared to the
do-nothing approach, the purchase of the
chemical analysis equipment would
actually improve VTC's cash position.
Without the purchase of this
equipment, the test analysis would still
need to occur. Expenditures for external
testing would still exist and there would be
no real benefit to not purchasing the
equipment. By purchasing the equipment
VTC would save several thousands of
dollars each year ($24,108.48 per year) in
external testing.
In addition, there are other intangible
benefits to VTC that could not be
described in dollars and cents. These are
things like quality improvement, fast turn
around of testing, reduced down time,
improved work atmosphere, better and
more accurate test results, and faster
troubleshooting and prototype analysis. In
addition, as use of this equipment becomes
standard in the future, VTC may be able to
expand its use to test and analyze other
chemical processes within manufacturing.
This will further reduce possible future
external testing costs.
T
he recommendation to purchase
the equipment was made based on
the analysis presented earlier.
VTC's plating bath metal chemical
analysis needs could be met by purchasing
a flame atomic absorption spectrometer
from Perkin-Elmer. The return on the
Technical Articles - Each month, Cost
Engineering journal publishes one or more peer-
reviewed technical articles. These articles go
through a blind peer review evaluation prior to
publication. Experts in the subject area judge the
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T
o evaluate any investment, it is
necessary to possess a knowledge of
the different cash flows during the
entire life of the project. It is essential to
make an estimate of the initial investment,
of all operating costs, and of selling prices,
based on the information obtained during
a feasibility study. Having done this, the
usual practice is to apply discounted cash
flow techniques (DCF) to the data in order
to achieve a measure of its economy.
A problem with this is the implicit
error associated with previous estimations
that may condition results or at least
produce uncertainty or variability.
Therefore, a verifiable loss of accuracy in
the decision-making process is expected.
To predict this is one of the functions of
forecasting that is done as part of the
planning process.
With this in mind, the search for
alternative short-cut methods has
conceptual values and practical
applications, as long as the results are
conservative and only a small amount of
information is needed. Besides, these
methods can act as constraints to the
manipulated variables, giving a conceptual
frame work to argue.
Common Methods
As mentioned above, discounted cash
flow methods will be employed. They can
be written as a temporary series based in
the discount formula of the compound
interest. The net present (or actual) value
is a proven vehicle for economic study and
feasibility justification. Its definition can be
expressed as the following equation.
(equation 1)
The outcome of equation 1 is an amount of
money with the corresponding sign. If this
quantity is positive, then the project is
economically feasible. The greater the
value, the more attractive the project.
Another definition based in the same
equation is the well known internal rate of
return (IRR), which can be expressed as:
(equation 2)
It is the same as to write:
(equation 3)
where r is the internal rate of return of the
investment alternative. Its value must be
compared with the marginal capital cost, k.
This last value represents the cost of the
money used to make the investments.
Other expressions are used, but they
do not consider the time value of the
money; consequently, they are simpler but
inaccurate.
One example is the so-called ROI
(return on original investment), expressed
as:
(equation 4)
where F
c
is an original value (e.g., at
maximum capacity) or an expected value
along the planning horizon.
Another measure that expresses a
criterion for preliminary decision-making
and which is used more often, is the
payback period or payout time. It is defined
in the following:
(equation 5)
where t
R
is the payout time or pay-off in
years. A short cut approach based on the
usual measures.
In the process industry, the working
capital is often estimated in a preliminary
evaluation as:
(equation 6.1)
or
(equation 6.2)
Then, using these last equations and
equation 5 and the NPV definition, we can
write:
(equation 7)
and, if we take a constant or average value
for the cash flows, as it has been mentioned
before, we get
(equation 8)
If the k values are normal and the
planning horizon is not too large (for
example two, three, or four years), we can
approximate it
(equation 9)
TECHNICAL ARTICLE
Preliminary Economic Decisions
ABSTRACT: This article intends to develop simplified expressions to capture the essence of and
provide insight into the understanding of economic decisions, all this with the help of tradi-
tional discounted cash flow equations. This approach provides a new view of the payback peri-
od concept which, though a simple method, ignores the project's life and the value of money
at different times. The vision supported here maintains that the payback periodor the return
on original investmentacts as a constraint on the preliminary analysis at the moment feasibil-
ity studies start. Finally, this article also contributes with an approximation to the EAW com-
parison which allows us to make decisions in cases of projects with different life cycles.
KEY WORDS: Simplified method, feasibility constraints, and investment decisions
Gustavo A. Perez
PEER REVIEWED
) (
) 1 (
1
T F
N
i
i
Ci
I I
K
F
NPV +
+
) (
) 1 (
1
T F
N
i
i
Ci
I I
r
F
+
+
0 ) ( r NPV
) (
0
T F
C
I I
F
r
+
F
t
i
CI
I F
R
1
F T
KI I

C T
F I

+
+
g
t
i
Ci
N
i
i
Ci
F K
K
F
NPV
1 1
) 1 (
) 1 (
1
]
1
+
+
+
R N
N
C
t K
K k
K
F NPV ) 1 (
) 1 (
1 ) 1 (
.. 1 ) 1 ( + + + Nk K
N
Cost Engineering Vol. 45/No. 10 OCTOBER 2003 31 Cost Engineering Vol. 45/No. 10 OCTOBER 2003 31
Then, equation 8 can be approximated as:
(equation 10)
A project economically feasible
implies that: NPV0, and gives the
following expression:
(equation 11)
Equation 11, in a preliminary way, is
an essential feasibility condition.
Obviously, it is only an approximation, but
we have incorporated to it the cost of
capital and the planning horizon, variables
which are not taken into account in the
aforementioned simple methods. Of
course, it is necessary to work out the
payback computation to use equation 11,
but this is a simple calculation.
Actually, the last equation works as a
constraint for the pay-off values. Its real
significance lies in the possibility of
calculating the time of total investment
recovery under certain conditions of
planning and the cost of money for the
enterprise.
If the working capital were expressed
as it is in equation 6.2, the final feasibility
condition would have the following
formulation:
(equation 12)
with similar comments as a constraint
equation for payback period.
The most conservative simplification
yields the approximate expression:
(equation 13)
resulting in equation 13 as a final
simplified constraint.
And if, for instance, the planning
horizon were very large (tending to
infinity), the approximate expression
would be:
(equation 14.1)
or
(equation 14.2)
Another conceptual equation can be
developed from the ROI definition. Using
the IRR with average or constant cash
flows, it would be:
(equation 15)
And reordering the last equation:
(equation 16)
This equation shows that if the
planning horizon is large, ROI is a good
approximation for the IRR values.
If equation 6 is used to achieve a
ROI approximation, we can obtain the
expressions:
(equation 17.1)
(equation 17.2)
And, again, the essential constraint on
economic feasibility comes to be:
(equation 18)
If we work algebraically with the
equation 16, we can see that equation 18
implies the fundamental inequality for
profitability with IRR method. It is:
(equation 19)
The last result brings a kind of
validation for the constraint shown in
equation 18.
Looking at equation 18, it is possible to
check its conservative degree . We can
derive the next expression to confirm the
statement:
(equation 20)
Obviously, comparing equations 19
with 20, it is easy to see the previous
argument.
The main purpose of this article is to
recreate approximate formulas, no matter
their conservative degree, as long as we can
use them in the first steps of an economic
decision.
By means of this method, which is
neither difficult nor time-consuming, it is
possible to find a help for the decision-
making process.
Another insight is provided with the
aid of equations 13, 14.1, and 14.2. For
instance, when the equality is
accomplished these equations are, in a very
rough way, an approximation of the IRR.
Using equation 14.1, the following relation
can be expressed:
(equation 21)
This last equation shows that if the
payback period is too short, the IRR
approximation is very large . This
statement explains the role of the cash
flows in the abnormal IRR values. A quick
capital recovery and a continuation of very
large cash flows during all the planning
horizon, is the explanation of IRR values
that exceed the normal market values. In
the case of a short planning horizon, the
conclusion is similar, but the values are
corrected by the inverse of the project life.
These comments allow us to have another
conceptual point of view.
1
]
1
+
+
R C
t K
Nk
N
F NPV ) 1 (
1
R
t
K Nk
N
+ + ) 1 )( 1 (
) (
1
R
t
Nk
N
+
+

R Nk
N
t
+ 1
R
t K
k
) 1 (
1
+
) (
1
R
t
k
+
1 ) 1 (
) 1 (
+
+
N
N
o
r
r r
r
,
_
+

N o
r
r r
) 1 (
1
1
R
t K
r
) 1 (
1
0
+
R
t
r
+
1
0
k r
k
N
r +
1
0
) ( ;
) 1 (
1

+
N
K
rt
R
0
1
1 r Nk
N
+
If the planning horizons, or the
projects' life cycles, do not match, the best
criterion is to use equivalent annual worth
(EAW), that is the uniform dollar amounts
at the ends of periods 1 through N, that are
equivalent to a project's cash flows. If we
remember equation 8, and the usual
definition for the EAW, it is:
(equation 22)
And then
(equation 23)
if we define:
(equation 24)
then equation 23 can be expressed as
(equation 25)
The comparison between projects
with different planning horizons can use
the last equation in the sense that:
EAW
1
>EAW
2
means that project 1 is
better than project 2
Consequently, according equation 25 it is
(equation 26)
With the last equation it is possible to
make a decision when the project life
cycles do not match in a simple way. Again,
the simplifications used in this work can be
applied to equation 26, to obtain the
simplified expressions that act as a
constraints. The fact is that equation 26 is
an interesting tool for these problems,
which can arise in equipment comparison
or replacement situations.
I
t is well-known that approximate
expressions may have large errors
under certain circumstances, but they
can be very useful if the information is
scarce or expensive. The planning horizon
and the cost of capital are always available
information for the decision-makers and,
normally, they help make an assumption
about the pay-off period. That is the reason
why it is advisable to take these variables
into account and combine them to achieve
a preliminary conclusion before a
feasibility study begins. And, in the case of
different planning horizons, the work
brings a tool to handle these problems. x
REFERENCES
1. Eschenbach, T. Engineering Economy.
Applying Theory to Practice. R. Irwin
(1995).
2. Degarmo, E.P.; W.G. Sullivan;
J.A.Bontadelli; and E.M. Wicks.
Engineering Economy, 10th edition,
Prentice Hall, 1997.
3. Holland, F.A.; F.A. Watson, and J.K.
Wilkinson. Introduction to Process
Economics, 2nd edition. Wiley, London,
(1983).
4. Peters,M.S. and K.D. Timmerhaus, Plant
Design and Economics for Chemical
Engineers, 4th edition, New York,
McGraw-Hill, (1980).
ABOUT THE AUTHOR
Gustavo A. Prez is with the Instituto de
Desarrollo y Diseo - INGAR, Consejo
Nacional de Investigaciones Cientficas y
Tcnicas, Avellaneda 3657 S3000GJC Santa
Fe R. Argentina
1
]
1
+
+
+
1 ) 1 (
) 1 (
N
N
k
k k
NPV EAW
1
]
1
+
+
+
1 ) 1 (
) 1 (
) 1 ( 1
N
N
R C
k
k k
t K F EAW
( )
k k
k
f N k f
i
i
N
N
i i
) 1 (
1 ) 1 (
,
+
+

[ ]
i
i
R i i
i
C
i
t K f
f
F
EAW ) 1 ( +
[ ] [
1
2
1
) 1 ( ) 1 (
2 2
2
1
1 1 R
C
C
R
t K f
F f
F f
t K f + +
Terms Used in this Article
EAW: Equivalent Annual Worth, ($/y);
f: function defined in equation 24;
F
c
: Annual cash flows, ($/y);
i: index of several summations;
I
F
,I
T
: capital investment, fixed and
working capital, respectively, ($);
k: cost of capital;
K: constant in equation 6.1;
N: planning horizon, (years);
NPV : Net Present Value, ($);
r: Internal Rate of Return (IRR);
r
0
: Return on Original Investment
(ROI);
t
R
: pay-off or payback period, (years); and
Greek Letters
: constant in equation (6.2).
Technical Articles - Each month, Cost
Engineering journal publishes one or more peer-
reviewed technical articles. These articles go
through a blind peer review evaluation prior to
publication. Experts in the subject area judge the
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authors on the strengths and weaknesses of their
submissions and what changes can be made to
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2004 Editorial Calendar
Cost Engineering journal is
announcing its 2004 Editorial
Calendar. Monthly themes are
tentative and subject to change.
However, the current schedule
includes the following.
January Information Technology
February Scheduling
March Productivity
April Project Controls
May Project Management
June Dispute Resolution
July Economic and Financial Analysis
August Project Management
September International Projects
October Cost and Schedule Control
November Planning and Scheduling
December Information Technology
These themes primarily reflect
the subject areas of papers that have
been accepted for and passed the peer
review process.
Atlanta Section
On Sept. 9, the Atlanta Section kicked-off its 2003-2004 pro-
gram year with the presentation of the AACE International
Certificate of Superior Performance Award to the membership by
Atlanta Section Past President Ron Cagle, CCE.
Current Section President Nelson Salabarria, who is leading
the campaign to build on the Section's success and expand the
techniques and professional expertise of the membership, has
been working hard on the upcoming presentations. The new sec-
tion officers and board of directors highlighted the activities the
Section is pursuing for the new program year.
The Atlanta Section's new meeting location of Aldo's Italian
Restaurant in Dunwoody and the well-received guest speaker of
the evening, Nick Hutchinson, of the Hartsfield Development
Program, proved a hit with all at the Section's first meeting.
Hutchinson spoke on Atlanta's Hartsfield Airport, one of the
busiest airports in the world, and it is undergoing major runway
and facilities expansion and renovation.
Aurora Edmonton Section
The Aurora Edmonton Section is pleased to provide a local
AACE International presence to central Alberta after a period of
absence. From a few initial e-mails in September of 2002, the
Aurora-Edmonton Section has sprung into existence. In that first
shortened year of getting established, Aurora Edmonton hosted a
short series of three dinner meetings, a Skills and Knowledge
workshop, and proctored the certification exams in Edmonton.
Now the board and committee chairs for Aurora-Edmonton are
gearing up for their first full year of existence. A full program of
seven dinner meetings is planned, beginning October 1 with
William Weir presenting on contract dispute resolution. We will
once again host the Skills and Knowledge workshops and certifi-
cation exams. We are looking at expanding our membership
base, and raising awareness of our existence. In addition to build-
ing membership, a second focus for any new section is broaden-
ing the volunteer base. If you are a member in the Edmonton
area and would like to help out with this dynamic new section,
your help would certainly be acknowledged and appreciated.
Congratulations to the 2003 board and committee chairs
Founding President and current Past President, Mohamed El-
Mageed, CCE; current President, Kent Bradley, CCE;
Treasurer, Anton Mitrovic; Secretary, Juan Paglicauan; Vice
President, Sami Fahmy; Membership Director, Ashraf El-Assaly;
Education Director, Mohamed Al-Hussein; Public Relations
Director, Ilona Maitra; Program Chair, Tufail Halepota, ICC;
and Webmaster, Wael El-Ghandour.
East Tennessee Section
At the August social meeting, the East Tennessee Section
honored Jennifer Bates for being named as an AACE
International Fellow and receiving the Award of Merit at the 47th
Annual Meeting in Orlando. President Kerri Hunsaker Stannard
and Past President Sue Jones presented Jennifer Bates an original
print by famed local artist, Robert Tino, to celebrate her achieve-
ment.
Planning for its 23rd annual Fall Seminar, to be conducted
in Knoxville Oct. 20-22, continued through the month of August
with weekly committee meetings, chaired this year by Lisa
Turvin. The new year got under way with a regular section meet-
ing, Sept. 22, at the Silver Spoon Caf in Farragut, Tennessee.
Rocky Mountain Section
The Rocky Mountain Section's speaker for September was
Gene Colabatistto, president of Space Imaging Solutions. Mr.
Colabatistto touched on a variety of subjects, including under-
standing the role of cost engineering in a high-tech, fast-paced
business environment.
Space Imaging is a leading supplier of visual information
products and services derived from space imagery and aerial pho-
tography. The company launched the world's first and only one-
meter resolution, commercial earth-imaging satellite, IKONOS
Submitted photo
The Atlanta Section was named a Superior Section at the 2003 Annual
Meeting at Orlando, Fla. The award certificate was presented at the
Sections Sept. meeting.
The AACE I
The AACE International Bulletin
Submitted photo
The Atlanta Section met Sept 9 and enjoyed a presentation by Nick
Hutchinson, of the Hartsfield Development Program. He spoke on
Atlanta's Hartsfield Airport, one of the busiest airports in the world,
currently undergoing major runway and facilities expansion and
renovation
TM
, on Sept. 24, 1999. Other products are produced from the
Indian Remote Sensing satellites, the U.S. Landsat satellites and
Canada's RADARSAT. Space Imaging also delivers aerial-
derived imagery products collected by its own digital airborne
imaging system (DAIS-1
TM
). For more information about space
imaging visit the web site at www.spaceimaging.com.
St. Louis Section
The St. Louis Section conducted its first meeting of the year
on Sept. 9. It was a walking tour of the Anheuser-Busch brewery
in St. Louis, MO. A-B is one of the landmark companies of the
city. A-B employs thousands of people in the area and is a major
contributor to the St. Louis economy. Mr. John Hegger, A-B
project engineer, led the tour. The tour started with the brewing
house and went through all five levels of the process, including
the detailed addition of hopps in the process. We then proceed-
ed to the yeasting area where tanks hold as much as four-million
bottles of beer. The tour proceeded to the line area where all
the different products are assigned lines for running the orders
from the distributors. This area stays around 30-degrees. The
tour finished with free samples of the product in the sampling
room. A-B samples its products on a daily basis, and all of its
plants are sampled each week and sent to St. Louis for detailed
examination. Most of the group then went to dinner at the Lynch
Street Bistro near the A-B facility. Attendance was good at 19
people. x
Submitted photo
The St Louis Section started off the 2003-04 year with a walking tour of
the Anheuser-Busch brewery in St. Louis, MO. There were 19 members
participating in the tour.
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If you are interested in making a contribution contact AACE International at 800-858-COST or 304-296-8444
John A. Condon, CCE, 1922 - 2003
John A. Condon, CCE, 80, of Spruce Pine,
NC, died Feb. 13, 2003, at his residence. He
was born Feb. 14, 1922, at Pensacola, Fla.
He graduated in 1949 with a Bachelor
of Building Construction degree in general
building construction from the University of
Florida, College of Architecture and Allied
Arts.
He joined AACE International in 1958. His employment
career included work as a construction cost consultant, an
estimator, and field worker. In 1991, he retired after 44 years of
working for, and with, professional appraisers and
constructors.He had served as a member of the AACE
International Appraisal Committee.
Over the years he had been a member of the Home and
Builders Association of South Florida, the American Society of
Appraisers. In 1961, while a partner with J.A. Condon &
Associates, Construction Consultants of Miami, he was advanced
by the American Society of Appraisers to senior member.
He is survived by his wife, Mary Condon. x
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In the November 2003 issue of
the Cost Engineering Journal. . .
Cost Engineering journal tentatively has its November
issue scheduled to feature Project Cost Control issues.
The Certification paper will be, Measured Mile
ProgressProject Controls to Support Equitable Recovery of
Production in Efficiency Claims by Thomas W. Presnell,
CCC, a principal with ASSESS Project Services, LLC, of
Snoqualmie, Washington.
One of the technical papers will be Progress and
Performance Measurement by Aaron Buntrock, a project asso-
ciate with CMS Inc., of Sarnia, Ontario, Canada.
Orlando Speaker Discusses Change
Special Feat
Special Feature
Marvin Gelhausen, Editor
O
RLANDO, FLChange was the topic of the keynote
address by Harry W. Zike at the 47th Annual Meeting
of AACE International at Orlando, Fla., on June 23.
Zike is vice president and chief financial officer of Siemens
Westinghouse Power Corporation. In introducing Mr. Zike, Jim
Rowings, Past President, said Zikes responsibilities with the
financial and business services of Siemens covers quite a span of
control within that business. He also noted that Zike is fluent in
German and English. Mr. Zike had been invited by Sam Griggs,
CCE to be the keynote speaker.
Mr. Zike calls his company, architects of a modern global
society. He says Siemens is busy building the worlds
infrastructure from medicine to industry. He opened his talk by
using the Websters dictionary definition of change, which is, to
make different; alter, to give a totally different form or appearance
to, transform. Zike says change really is, a very simple concept,
youve been living it since day one.
To visually make his point, Zike showed a slide photo of a gas
station sign that had been altered to reflect the ever higher cost of
gasoline. The self-serve was listed as cash or carry. Regular
gasoline required payment of an arm; plus gasoline required
payment of a leg; and premium gasoline required ones first born.
I remember when gasoline was 20-cents a gallon, Zike told the
audience.
Using a PowerPoint slide presentation, Zike commented on
a heading of, Times are a changing. He noted that for the first
time in US history, the results of a presidential election had been
challenged. This was in the 2000 election between George Bush
and Al Gore. Results of the Florida count were challenged with
the US Supreme Court ruling to decide the election.
Zike also referred to the world epidemics of AIDS and the
SARS virus. He says these also reflect change in that in earlier
years it was polio, today it is AIDS and SARS, and in the future
new epidemics will come along. He mentioned the emergence
of China as a world power and the decline of Russia. We dont
know what that means yet, it becomes a generational issue that
will mean more to your children than to us, he told the AACE
International members.
He continued by noting how most US residents were
shocked by the largest fraud scandals in corporate history that
brought down Enron and other corporations. Weve lived
through this, although it affected some of you personally, noted
Zike. Other changes have included residents of the world being
whisked through technology, information, and internet
revolutions. He believes wireless technology will be the next big
revolution of change and he says, just so it is clear, the internet
revolution is over.
He believes change affects all areas of ones life, both
personal and professional. He says some have been confused by
challenges to their religious beliefs. Some now find their worlds
in a state of confusion. The US has watched the Cold War shift
to a War on Terrorism. In some ways he believes the Cold War
was easier to deal with because each country knew its enemy and
was able to develop a plan of dealing with any threats. With
terrorism, it is all different. We dont know who they are, says
Zike and he says this makes it more difficult to figure out how to
deal with potential threats.
US residents have become frustrated by health care costs
dividing the nation. Zike says it is issues like this that are,
thought provoking. He believes the US health care crisis is
going to be the issue facing the US President over the next four
years. He says it, is like a cut that festers and doesnt go away.
Global warming has become a global issue. He says residents,
now understand that spam in any form is not good for you. He
Photo by Marvin Gelhausen
Harry W. Zike, vice president and chief financial officer for Siemens
Westinghouse Power Corporation, was the keynote speaker at the
47th Annual Meeting of AACE International at Orlando, Fla. Mr.
Zike spoke on June 23, on the topic of change.
says television viewers have watched Joe Six-Pack morph into
Joe Millionaire and that television shows billing themselves as
reality tv are becoming increasingly popular.
Zike believes some will try and get away from change and
from reality by trying to shelter themselves or ignore what is
happening around them. However, he believes this is fruitless.
He says, Youre going to be in for the shock of your life when you
get back, because the times will always change.
In returning to the question of, What is change? Zike takes
each letter used to spell out the word change, and give each letter
a word meaning and then combines each word into a definition
of change. The C is for continual; H is harassing; A is for and :
N is for nagging; G is for generations and E is for equally.
Therefore, Zike defines change as being continual, harassing and
nagging; and affecting all generations and being shared by all,
young and old. You can expect it, notes Zike, he says change is
going to happen and continue to happen.
Zike referenced a book, Who Stole My Cheese? Using a
PowerPoint video of a mouse and a piece of cheese on a
mousetrap, Zike advised his audience to keep their eyes on the
mouse. The brief video showed a mouse that was able to outsmart
the mouse trap and grab the piece of cheese. However, change
got the mouse. Just after successfully outsmarting the mousetrap,
video viewers watched the mouse get flattened by a swat from a
broom. The mouse had been busy figuring out how to get the
cheese and change sneaked up on it in the form of an owner out
to get the mouse whether by use of a mousetrap or a swat of a
broom. And Zike says that is the way life is, we have to learn to
anticipate change and to be aware of what is happening around
us so that changes we arent anticipating will not be what does us
in because we arent paying attention to our environments. He
mastered the mousetrap, but there was something else around the
corner that he hadnt planned for, explained Zike.
To drive home the point of how change affects each
generation, Zike notes that, people starting college this year
were born in 1985. He says, They have no meaningful
Past President Dr. James E. Rowings Jr., PE CCE, congratulates and
presents Harry W. Zike, vice president and chief financial officer for
Siemens Westinghouse Power Corporation, with a speakers gift, following
Zikes presentation at the 2003 AACE International Annual Meeting.
President-Elect Clive D. Francis, CCC, and President Ozzie Belcher talk with Harry W. Zike, vice president and chief financial officer for Siemens
Westinghouse Power Corporation. Mr Zike was the keynote speaker at the 47th AACE International Annual Meeting at Orlando, Fla. in June 2003.
He spoke on the topic of change.
recollection of the Reagan era, and probably do not know that he
had ever been shot. This referred to former U.S. President
Ronald Reagan who survived an assassination attempt. He also
pointed out that for those born in 1985, There has only been
one pope in their lifetime. For these young people, he says,
They do not remember the Cold War, Tianamen Square means
nothing to them, bottle caps have always been screw off and
plastic, and they will ask, Atari, what is that?
Continuing, he says, The statement that you sound like a
broken record means nothing to those born in or since 1985.
They have never played Pac Man and have never heard of Pong.
They have always had an answering machine. They have always
had cable and would feel constrained with 13 television
channels. They cannot fathom life without a remote control, and
roller skating has always meant in-line for them.
Other generational points include that to the 1985 kids, Jay
Leno has always been the host for the tonight show. They have no
idea why Jordache jeans were so cool, popcorn has always been
cooked in the microwave, the Vietnam War is ancient history to
them. They cant imagine what hard contact lenses are. Kansas,
Chicago, Boston, America, and Alabama are places, not bands
and there has always been MTV.
Having shared all of this, Zike asks the audience, So what?
He said the somewhat humorous points were shared in an effort
to show that, Change will occur, so get a life. He says one needs
to always be prepared for and to anticipate change. He says his
presentation used just one generation, students who are entering
college this fall. Think of the changes they are going to have to
go through, what they will have to face, he told the audience.
He believes it is a natural reaction to become frustrated by
change, but his advice is to get over the frustration quickly and to
accept responsibility for change. Change has already happened
by the time it registers in your head, so simply accept
responsibility for it, advises Zike. He believes the whole goal of
change is to confuse us. But he believes we can somewhat
manage change by always being prepared and anticipating
change as a continual, harassing, and never ending feature of life.
Zikes next video clip showed an Eskimo ice fishing. He says
he uses this photo to try and get us to learn to anticipate change.
He says this Eskimo probably doesnt have a lot of change in his
life. He has been ice fishing and has been doing it the same way
day after day. But in this video, a killer whale comes up through
the ice. That wasnt what the Eskimo was anticipating to catch,
but that is the way that change occurs. Zike says the point is, You
have to anticipate change even though youve been doing the
same things every day. He adds, Dont manage change, you
cannot control it anyway. Instead, his advice is to not try to
change people, but instead work on changing behaviors.
He believes if AACE International members will embrace
change, they will have in fact anticipated it, and thus they will be
ready for it. In fact, Zike calls for everyone to force change. By
doing this, he says, Youre in control again.
However, Zike also points out that there are some things that
should never change. He lists these as, your integrity, morals,
ethics, and values.
In a question and answer session that followed, Zike was
asked how he was trying to force change and take control. He
responded that his goals for his company are to get stock prices
up again, to continue as one of the top 100 companies in the
world, to grow shareholders value over the next five years.
Asked about the US economy, Zike says he believes the US
has turned the corner. He noted that the previous dot.com
bubble business had burst, network and mobile phone businesses
had cratered, and old technology businesses were seeing flat
growth. However, he is seeing improvements as there has been
tremendous growth in power plant construction, there is a
resurgence of dotcoms and players are starting to come back.
Zike believes this is a normal cycle. He says bubbles burst quickly
whenever a lot of people are looking to make a lot of money fast.
Asked about the power business and its future, Zike believes
there will continue for this generation to be a reliance on fossil
fuels. The burning of fossil fuels will be here for the rest of our
generation, 20 or 30 years, the alternatives will be for our
children, notes the speaker. He believes it will take awhile to
develop reliable fuel cell technology. He believes the use of
nuclear power plants may come back in a generation or two.
Looking at the world economy, Zike believes the next US
generation can position itself to take advantage of a growing
Asian market. He says Japan is currently still in recession, but
China and other countries such as Malaysia are coming back. he
believes China will be a primary player of the future. He notes
that there are 10 dialects to the Chinese language and he believes
US youths would be wise to learn Chinese as a second language.
Zike believes the economies of many countries are like
rubberbands, they will come flying back, he says. In Latin
America, he believes Mexico has potential for being the biggest
growth sector. Only certain countries have the stability to make
a go of it, notes Zike. He believes southeast Asia will come back
stronger than Latin America. He says globalization can be both
stabilizing and destabilizing. He believes business in some
countries will embrace globalization and for those businesses it
will be stabilizing while the country in general will be
destabilized by globalization.
He believes countries trying to market products cheaper than
each other are in a race to being the least or worst. He says
production needs to have a rate of return in order to provide
healthy growth. At the same time, Zike says this natural
competitiveness is something he, doesnt think we can stop,
doesnt think we want to stop because to do so would stop
creativity. You have to find better ways to do things, smarter
ways, he notes. Zike says the industrial revolution lead to an
intellectual revolution.
To be successful in the future, he believes one will have to
embrace change. By anticipating change, he believes we will be
able to flip the negatives to positives and he believes this is the
best end result since change is going to happen anyway.
AACE International member Mark Chen told Zike, Your
presentation is very thought provoking. For AACE International,
he believes the comments should be considered as the
association looks for ways to relate change to its change
management classes.
Zike says this was true for Siemens bought Westinghouse in
1998. He says Siemens was a German Company and
Westinghouse was a US company. Both had been in business for
150 years. You cant change the people, the culture, or the 150
yearsto do so would be to try and make yourself something that
youre not. Zike says change management in and of itself is an
abstract, a concept. To use change management in a real world
business situation like Siemens acquiring Westinghouse, Zike
says, I have to relate to you as a person and we have to find
common ground. He says change is an uphill battle for people
and he believes it can best be accomplished by, first respecting
each other as persons and then begin to deal with the issues. His
advice is to watch out for egos that can get in the way and years
of prior training that can also get in the way of successfully
merging different entities into one united force.
Dr. Rowings thanked Zike for what he called, great
comments. Rowings says he believes many of the points could
also be used by AACE International Sections and he hopes that
those who heard the keynote speech will take the comments back
and discuss them at upcoming section meetings. x
The viewpoints expressed in columns published in Cost Engineering
position of AACE International.
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Pages 18-23
Use and Implementation of a
Project Historical
Database System
Most managers use some variation of
the project process to evaluate capital
projects. Unfortunately, this is usually
applied on the narrow basis of each
individual project as a stand-alone entity.
Seldom are individual projects looked at
as activities in the overall picture of the
total corporate budget. This doesnt take
full advantage of experiences provided by
measuring and analyzing the results from
completed projects, and taking corrective
action to improve overall results. This
article puts forward a way to implement a
project historical database system. The
collection of cost, schedule, resource, and
technical data from completed projects
can facilitate the development of
statistical analyses to measure and
evaluate project performance and quality.
Over time, if a company properly uses a
project historical database system,
individual project performance, as well as
corporate decision making in choosing the
best projects to pursue, will improve. This
concept involves expanding project and
corporate management thought processes
beyond the more easily understood project
process cycle, to the broader concept of
treating projects as integrated activities in
the overall corporate budget or strategy.
Reprint 20744
Pages 26-29
Economics of Equipment
AcquisitionA Case Study
By Sameer Kumar and Jeffrey Kvalheim
A number of economic analysis
studies can be found on investment
justification of new equipment. These
studies are unique in many ways in terms
of the manufacturing process the
equipment will support, the science and
engineering associated with the candidate
equipment and its complexity, the
industry where this equipment is going to
be deployed and business alternatives
considered (where one of the choices is
purchase of new equipment). This case
study pertains to a privately held
manufacturer of standard and custom
read/write preamplifiers used in hard disk
drives. This company had a dominant
share of the worldwide market for
preamplifiers that were designed into
many of the new disk drives introduced in
the market. The study provides an
overview of the company; a description of
the equipment methodology (for a flame
atomic absorption spectrometer); and
shows how a capital investment
justification analysis was accomplished for
the purchase of this equipment.
Reprint 20745
Pages 30-32
DecisionsA Simplified
Approach
By Gustavo A. Perez
This article intends to develop
simplified expressions to capture the
essence of and provide insight into the
understanding of economic decisions, all
this with the help of traditional discounted
cash flow equations. This approach
provides a new view of the payback period
concept which, though a simple method,
ignores the project's life and the value of
money at different times. The vision
supported here maintains that the payback
periodor the return on original
investmentacts as a constraint on the
preliminary analysis at the moment
feasibility studies start. Finally, this article
also contributes with an approximation to
the EAW comparison which allows us to
make decisions in cases of projects with
different life cycles.
Reprint 20746
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Cost Engineering Journal, Volume 45/Number 10, October 2003
AACE International, 209 Prairie Avenue, Suite 100, Morgantown, WV 26501 USA phone: 304-296-8444
fax: 304-291-5728 e-mail: mgelhausen@aacei.org or nkinderknecht@aacei.org website: www.aacei.org
Calendar
Calendar of Events
October 2003
6 Deadline for Sections to notify AACE
International Headquarters if wishing to
host the Winter (4Q) Certification
Exam.
Contact: info@aacei.org
www.aacei.org
7 Submittal Deadline for the December
2003 issue of the Cost Engineering
Journal.
www.aacei.org
6-10 Comprehensive Five-day Training
Program for Energy Managers, The
Association of Energy Engineers (AEE),
Sheraton Premiere Tysons Corner,
Washington, DC
Contact: phone (770) 925-9633,
fax (770) 381-9865,
www.aee.center.org
20-22 23rd Annual Fall Seminar,
East Tennessee Section of AACE
International, Knoxville, TN
Contact: www.aace-ets.org
24 Deadline for Winter (Q4)
Certification Examination Registration.
www.aacei.org
28-30 13th Annual METALCON
International Conference and Exhibition,
PSMJ Resources, Inc., Tampa
Convention Center, Tampa, FL
Contact: 800-537-7765 or
617-965-0055, www.metalcon.com
November 2003
7 Submittal Deadline for the January
2004 issue of the Cost Engineering
Journal.
16-21 2003 ASME International
Mechanical Engineering Conference,
Research Development and Design
Expo, and Defense Research and
Engineering Conference and Exposition,
American Society of Mechanical
Engineers (ASME), Marriott Wardmen
Park & Omni Shoreham Hotels,
Washington DC
Contact: 1-800-THE ASME (843-2763)
infocentral@asme.org
December 2003
1-2 Congrs Francophone du
Management de Projet 2003, Paris,
France
Contact:info@afitep.fr
http://www.afitep.fr
16-21 Optics and Photonics in Global
Homeland Security, The International
Society for Optical Engineering,
Renaissance Washington DC Hotel,
Washington DC
Contact:phone 1.360.676.3290,
fax 1.360.647.1445
www.spie.org/info/hls
6 The AACE International Second
Quarter (3Q) 2003 Certification Exam,
AACE International.
Contact: AACE International
304-296-8444, www.aacei.org
January 2004
31 Deadline to Submit Technical
Papers for the 2004 AACE International
Transactions
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February 2004
18-19 A/E/C Systems Annual
Tradeshow and Conference, A/E/C
Systems- Technology for Design and
Construction, Orange County Convention
Center, Orlando, FL
Contact: Hanley-Woods Exhibitions
phone 972-536-6380,
fax 972-536-636,
www.aecsystems.com
March 2004
22-26 TUgis Annual Geographic
Information Sciences Conference,
Planning, Prevention, and Response:
GIS and Homeland Security, Center for
Geographic Information Sciences,
Towson University, Towson University
Campus,Towson, MD
Contact: Susan Wooden
phone 410-704-5297
swooden@towson.edu
April 2004
17-21 ICEC 4th World Congress 2004,
International Cost Engineering Council
(ICEC), Cape Town, South Africa
Contact: www.icec.com
June 2004
13-16 AACE Internationals 48th
Annual Meeting, AACE International,
Washington DC
www.aacei.org
18-21 18th IPMA World Congress on
Project Management, Budapest, Hungary
Contact:tetspeed@inext.hu
http://www.ipmacongress.hu

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