Project Costing Hitesh Gupta

11/09/2012

Direct CostsCan be identified specifically with a particular sponsored project

E.g if company produces artisan furniture, cost of wood & cost of craftsperson

Can be controlled by good supervision and job control

Includes Direct labour, Repair labour, Operating costs of equipments, Supplies, Permanent materials, Subcontract costs

Indirect Costs Incurred for common or joint objectives & can’t be identified readily & specifically with a particular sponsored project

Can be controlled by efficient engineering, proficient staff, construction time, etc

Costs like advertising, depreciation, general supplies for firm, accounting services, Office Payroll and expense, Property taxes etc

Dealing with Contingency items for cost estimation

Occurrence:

•May or May not occur

Contingency Exposure

•Minor to Maximum amount, •Can’t be estimated

Dealing :

• Should be computed & listed separately but not in actual estimates• Markup decided if max cost explained to contractor

Minimizing effect :

•If specifications contain: force-majeure (e.g., war, strike etc) unforeseen condition (e.g. Irregular final rock surface) clauses•Builders All-Risk Insurance

Dealing with Escalation items for cost estimation

Increase in cost during construction

• Project risks may escalate more than reasonable estimation• Consists of total project labour costs and permanent material costs

Labour Costs

•Unescalated labour costs * % increase in labour cost ( reviewing labour contracts, reviewing trends in particular craft, overall wage increase throughout country etc)

Material Costs

• Minor costs as quotations will be firm for life of project. •Escalation in material be determined after receipt •Computation performed same as labour

Relevance of making cash flows for cost estimation

Cash Forecast prepared:

•To establish capital requirements – For purchasing construction P&M, insurance, etc

•To estimate interest expense - Interest on capital invested

•To analyze, & select investment projects where expected returns extend beyond 1 year.

• To gauge time to completion (more time = more overheads)

• To estimate initial investment/cost required

Relevance of calculating cost of promoter’s funds in final estimate

Loan/Debt Requirement• Future interest payments

Cost of Capital – •Opportunity Cost

Employer’s Cost• For future pricing/tariffs

Risk involved Project

Examining Explanation

Nature of subsoil affect type of machine used and the necessity of soil protection.

Size of excavation affect type of machine used & method to excavate.

Scale of work large volume of excavation may involve complicated phasing arrangement & work planning

Ground water condition

affect degree of protection (watertight sheet piling or dewatering may required.)

Surrounding condition impose certain restrictions and precautions (eg. diversion of government drain, or underpinning work to nearby building foundation)

Process followed for selecting method of excavation

Deciding Mark-UpProject Characteristics

• Size, Cash flow, Location etc

Company’s Characteristics• Past Profit, Current Workload, Experience etc

Economic Environment• Labour availability, Tax, Economy etc

Project Documentation• Type of Contract, Completeness of documents,• Pre-qualification, number of competitors etc.

Refinement Required

Across-the-Board Markup vs Differential Markup• Mark-up should be allocated to each cost

Cash flow-based model to calculate Mark-Up• Mark-Up (Percent) = (PV of disbursements/PV of receipts) -1 (*100)

Costs involved in different forms of Guarantees

Bid bond or tender bond•Bid bonds are usually issued for 1% to 5%

Performance bond•After tender is accepted•Replace bid bond•10% to 20% contract amount

Retention bond• Client may withhold 5%-10% of contract amount

Payment guarantee•Ensures payment to contractor

Insurance policies available for covering Contractor’s Risk

Employers Liability Insurance (EL) • Aagainst liability for injury or disease to employees

Third party or Public Liability Insurance (PL) - •Someone suffering loss not party to insurance contract. •Depends on amount & scope of works

Contract Works Insurance (CW) - •Covers costs of losses and damages of works undertaken•e.g. flooding a completed property or burning down a newly built house.

Professional Indemnity Insurance (PI) - • Covers incorrect design of part of works •e.g. drainage system.

Tools and Temporary Works Insurance (TTW) 

All Risk Insurance (AR) - Covers all other losses

Points of major differences of cost calculations that occurred between joint venture partners of Sierra Tunnel Project

(Cost for New Machinery Vs Used P&M)

Plant and Machinery • Net charge would reduce

Maintenance • Cost more to maintain used machinery

Estimated Production • Decrease

Interest cost• Decrease as there is no purchase

Excavation cost• Increase

Relevance of Project Accounting understanding in Project Costing

With reference to IAS 7 (statement of cash flows)

 Developing the Budget 

• Identifying Cost Accounts (interest charges, rental expenses, taxes, etc.)• Developing a Schedule of Cost Accounts• Making a Forecast Estimate

Monitoring Budget Implementation - Cash Flow Status Report

• Provides a summary for monitoring the cash inflows and outflows.• Manager will be able to perceive if budget is being closely implemented• If cash inflow coming from the client is timely and sufficient.

Evaluating Financial Reports

• Disclose fund adequacy or inadequacy• Negative results would prompt contractor to thresh-out matter with client before

proceeding with project

Relevance of ABC costing for Infrastructure development business

Projects use ABC costing in some form

Provides a Clear Understanding of Processes• provide better understanding of processes performed• how processes react to different inputs & variables.

Assign Cost to Activities

• Identify activities & assign costs to them• Identify cost drivers associated with activities • Assign costs to projects (by cost driver rate * volume of cost driver units

consumed by project)

Technique adopted for project budgets

• Identify sources of cost-drivers/project costs• Help in indentifying control measures

Thanks