Project Costing
Written by RJC | Monday, February 8th, 2010 | |
Filed under: Education
Project costing is the process of estimating all costs associated to a project after its initiation. In building a business case, estimating costs comes after a needs analysis. By estimating costs, the scope is defined and a project moves away from being just a concept.
Several purposes of conducting cost estimates include feasibility studies, selection from among alternative designs, selection from alternative investments, appropriation of funds and presentation of bids.
In project initiation, a needs analysis is performed to uncover all the requirements for a project. By estimating costs, the project scope is defined and decisions can bee made whether are not a project will either move forward or be abandoned. Estimating direct costs, continuing maintenance or life cycle costs and indirect costs are part of project costing.
Because many factors are unknown or undefined with the different types of costs, these costs are estimates. Guesses taken to create a working budget. The budget is an aggregate of all estimates of allocated resources.
Since the estimates are made prior to project approval, the reliability of these estimates can greatly contrast from the true costs of a project. As projects move from the planning phase to engineering phase to installing phase, these estimates become more reliable and closer to the true cost.
Meetings are part of the estimating process. It is important that timeframes and milestones need to be established as a guide while developing estimates.
Costs Related to a Project
In estimating costs of a project, all costs will be taken into consideration from the following:
- Direct costs
- Indirect costs
- General & Administrative costs
Direct costs are costs that can be attributable to a project. Examples include labor hours, materials, subcontracts, travel, design, manufacturing, testing and services.
Indirect costs are costs that are not directly attributable but can arise because of unknown factors; examples include labor, material burden and overhead. An example is that although you are able to estimate material costs as direct costs, certain situations create an indirect cost such as shipping delays or questionable quality.
General and administrative costs include expenses such as salary, administration costs, taxes, advanced design, etc.
A general rule is that total cost is all labor plus materials plus any other direct costs and overhead plus any general and administrative costs plus fees to determine price.
Approaches to Estimating Costs of a Project
Estimating costs for a project involves two different types of methods: the top down/direct and bottom up method.
The top down/direct method provides a ball park estimate figure based on experience, expert opinion or rule of thumb. Tools to estimate via the top down approach involves using analogy, parametric or equipment factored. This approach is more general and less precise because it deals with guesses and uses models from other standards to create an estimate. New projects without any historical data or reference will use the top down method.
The bottom up method uses detailed analysis to figure costs. Bottom up approach uses tools like on-line services, pricing databases, handbooks and catalogs. Estimating costs using this approach is based on firm quotes and is much more accurate. However, because certain factors in cost estimating are unknown, time spent on a bottom up method may delay projects. Repeat projects can use a bottom up approach because of historical data and reference.
Both methods are used to estimate costs of projects.
The Importance of Estimating Costs
Estimating costs may not be a fun activity and often times, not enough resources or planning goes into this phase of project management. However, its importance cannot be overlooked. By estimating costs of a project, it takes form and a plan is developed. The necessary resources, personnel, timeframe, etc. is laid out for the project selection phase.
It is important that cost estimates are not negotiated. Instead requirements, work, processes, etc. can be reviewed and negotiated.
Tagged as: cost estimating, project costing, project management |
