ProjectManagementcost estimates.docx

1、ProjectManagementcost estimatesChapter 4 Cost estimates, Part 1: Definitions and PrinciplesA good estimate of project costs is necessary for subsequent management decisions and control. The most obvious reason for producing cost estimates is to assist in pricing decisions, but that is by no means th

2、e whole story. Cost estimates are usually needed for all projects, including in-house management projects and those sold without fixed prices. Timescale planning, pre-allocation of project resources, the establishment of budgets for funding, manpower and cost control, and the measurement of achievem

3、ent against expected performance all demand the provision of sound estimates.Cost definitions and principlesIt is generally understood in accounting circles that the word cost should never be used alone, without a qualifying adjective. It must always be made clear exactly what kinds of costs are mea

4、nt. There are many ways in which costs can be described, but within the space of this chapter it is necessary to outline some of the terms with which cost estimators and project managers should be acquainted. There is no need to clarify self-explanatory terms (such as labour costs, material costs an

5、d so on), and the following list has been limited to a few terms that may not be familiar to all readers. The list is in alphabetical order.Absorption costingSee Overhead recovery.Below-the-line costsA collective name for the various allowances that are added once a total basic cost estimate has bee

6、n made. These can include allowances for cost escalation, exchange rate fluctuation and other contingencies.Cost escalationCost escalation is the increase in any element of project costs when the cost of that element is compared between two different dates (for example, now and two years hence). Cau

7、sed by wage and salary awards and inflationary pressures on prices paid for materials and purchased components, cost escalation is usually expressed at an annual rate per cent.Direct costsCosts which can be attributed directly to a job or project task are termed direct costs. Thus if a person spends

8、 two hours in the manufacture of a component which is identifiable as being required for a particular project, then that time can be classed as direct labour and its cost can be recorded as a direct cost to be charged direct to the project. Similarly, materials, components and expenses directly attr

9、ibutable to a particular project can be classed as direct.Factory costApplicable to manufacturing projects, the factory cost is the total cost of a job or project before the addition of mark-up for profit. It comprises all direct and indirect costs for labour, materials and expenses. A very simple e

10、xample which shows the relationship of factory cost in the pricing structure is given in Figure 4.1. ”Design costs are often treated as indirect in routine manufacturing, to be recovered as overheads against bulk sales of the resulting product. The example in Figure 4.1, however, is for a special pr

11、oject. Although this is a very simple project, it can rank as a project none the less because it is for the design and one-off manufacture of a component to satisfy a customers special purchase order. All the design costs in this case can be recorded and attributed directly to the project, and they

12、have therefore been treated as direct costs.Fixed costsCosts are said to be fixed when they remain virtually unchanged and must continue to be incurred even though the workload might fluctuate between zero and the maximum capacity. These costs typically include management and administrative salaries

13、, rent, business rates, heating, insurance, buildings maintenance and so on. Fixed costs usually form by far the biggest component of a companys indirect or overhead costs (see Indirect Costs).itemPer hourDirect materialsBrass sheet Brass rod OtherTotal cost of direct materials1000.001500.001250.003

14、750.00Direct labour (standard cost rates) Design10 hours senior engineer25.00250.0015 hours design engineer15.00225.001 hour checker17.0017.00Manufacture200 hours sheet metal13.002600.0030 hours turner13.00390.0010 hour assembly13.00130.001 hour inspection16.0016.00Total direct labour costPrime cost

15、820.004570.00Overheads at 130% of direct labourFactory cost Mark-up at 50%Indicated selling price1066.005636.002818.008454.00Figure 4.1 Cost and price structure for a simple manufacturing projectIndirect costs (overhead costs or overheads)The provision of facilities and services such as factory and

16、office accommodation, management, personnel and welfare services, training, cost and management accounting, general administration, heating, lighting and maintenance gives rise to costs that must generally be incurred in running a business. These costs can include salaries and wages, materials and o

17、ther expenses, but (except in the unusual case of an entire organization set up specially to fulfil only one project) these general costs cannot be allocated directly to one job or project. They are therefore termed indirect costs, often called overhead costs, or simply overheads.Note that the provi

18、sion of facilities at the site of a construction project, although these might include accommodation and services that would be classed as indirect back at the main or home office, can be classed as direct costs. This is because they are provided specifically for the project in question, and can the

19、refore be identified solely with that project and charged directly to it.There are considerable differences between companies in the interpretation of direct and indirect costs. Some firms charge to projects the costs of printing drawings, for example, and recover those costs directly by billing the

20、m to the client or customer. Other firms would regard such costs as indirect, and charge them to overheads. Sometimes the classification of costs as direct or indirect can vary even from project to project within the same company, depending on what each customer has agreed and contracted to pay for

21、as a direct charge. Cost estimators and project managers must be clear on what constitutes direct and indirect costs in their particular company, and must also pay attention to any special provisions contained in the proposal or contract for each project.Indirect costs, although they are predominant

22、ly fixed costs, can sometimes include an element of variable costs. Maintaining a permanent headquarters would be a fixed indirect cost, since it must be incurred irrespective of normal workload fluctuations. Hiring temporary office staff to work in administrative departments would be a variable cos

23、t, because the rate of expenditure (the number and type of temporary staff hired) will vary according to factors such as workload and availability of permanent staff. Management can decide to increase or reduce the number of temporary staff (and hence their cost) at will. Classification of overheads

24、 into fixed and variable costs is not relevant to much of the argument in this book, but it is important in the manufacturing and process industries as a control in relating prices, profitability and the volume of production.Whatever the industry, management must always strive to keep the overhead e

25、xpenses as low as possible in relation to the direct costs, because high overheads can kill a companys chances of being competitive in the marketplace. It is in the variable overhead costs where the easiest and quickest savings can be made (short of relocating the company or dismissing some of the p

26、ermanent administrative and management staff).Labour burdenThe labour burden is an amount, usually expressed as a percentage of wages or salaries, that is added to the basic hourly or weekly rate for employees to allow for non-working time and various additional expenses. The constituents of a typic

27、al labour burden might be the cost of paid holidays, illness or other absence, and per capita amounts payable by the employer as employee benefits, either voluntarily or as a requirement of the national legislation. In the UK, for example, these would include employers National Insurance contributio

28、ns.Materials burdenMaterials purchased for a project, which are themselves chargeable as a direct cost, are typically marked up by contractors in order to recover their administrative and handling costs. These mark-ups generally range from 15 per cent (or less) for very large, costly items shipped d

29、irectly to site to 25 per cent or even more on small, low-cost items that have high handling and administration costs relative to their value. A common all-round rate used for the materials burden is 15 per cent.Overhead costsSee Indirect costs.Overhead recoveryMost project costing systems work on t

30、he basis of charging direct labour costs (including the labour burden) as time recorded on the job multiplied by the standard hourly cost applicable to the grade. An amount can then be added to this labour cost (usually as a rate per cent) to recover a part of the companys indirect, overhead costs.

31、The simple example in Figure 4.1 illustrates this principle.The same overhead rate (130 per cent in Figure 4.1) would normally be applied over all similar projects carried out by the company. In some industries the overhead rate can rise to 200 per cent or even higher (as, for example, in companies

32、with a very high level of research and development to fund). In labour-intensive industries, with little research and development and no high-grade premises, the overhead rate might be 50 per cent or even less. It is not possible to indicate norms, since the circumstances of companies vary considerably from one to another (even where they are carrying out similar work). Obviously, a company which manages to keep its indirect costs (and overhead rate) to a minimum enjoys a competitiv