Project Costing

Fundamental
Components of Project Cost
• The project cost is a cost required to procure
all the needed products, services and
resources to deliver the project successfully.
• Example: In an example of a construction
project, the cost estimation starts from land
acquisition cost, construction cost, materials
cost, administration cost, labor cost and other
direct and indirect costs.
Project Costing
• Cost management is concerned with the
process of finding the right project and
carrying out the project the right way.
• It includes activities such as planning,
estimating, budgeting, financing, funding,
managing, controlling, and benchmarking costs
so that the project can be completed within
time and the approved budget and the project
performance could be improved in time.
 Step 1 Resource Planning
• Resource planning is the process of
ascertaining future resource requirements for
an organization or a scope of work. This
involves the evaluation and planning of the
use of the physical, human, financial, and
informational resources required to complete
work activities and their tasks. Most activities
involve using people to perform work. Some
activities involve materials and consumables.
• Other tasks involve creating an asset using mainly
information inputs (e.g., engineering or software
design). Usually, people use tools such as equipment
to help them. In some cases, automated tools may
perform the work with little or no human effort.
• Resource planning begins in the scope and
execution plan development process during which
the work breakdown structure, organizational
breakdown structure (OBS), work packages, and
execution strategy are developed.
• The OBS establishes categories of labor resources
or responsibilities; this categorization facilitates
resource planning because all resources are
someone's responsibility as reflected in the OBS.
• Resource estimating (usually a part of cost
estimating) determines the activity's resource
quantities needed (hours, tools, materials, etc.)
while schedule planning and development
determines the work activities be performed.
• Resource planning then takes the estimated
resource quantities, evaluates resource
availability and limitations considering project
circumstances, and then optimizes how the
available resources (which are often limited) will
be used in the activities over time. The
optimization is performed in an iterative manner
using the duration estimating and resource
allocation steps of the schedule planning and
development process.
 Step 2: Cost Estimation
• Cost estimating is the predictive process used to
quantify, cost, and price the resources required by
the scope of an investment option, activity, or
project. It involves the application of techniques that
convert quantified technical and programmatic
information about an asset or project into finance
and resource information.
• The outputs of estimating are used primarily as inputs
for business planning, cost analysis, and decisions or
for project cost and schedule control processes.
• The cost estimating process is generally
applied during each phase of the asset or
project life cycle as the asset or project scope
is defined, modified, and refined.
• As the level of scope definition increases, the
estimating methods used become more
definitive and produce estimates with
increasingly narrow probabilistic cost
distributions.
• Cost estimating could be performed by
dedicated software systems like
• Cleopatra Enterprise cost estimating and
project cost databases like CESK that are
created and maintained to support the various
types of estimates that need to be prepared
during the life cycle of the asset or project.
 Step 3: Cost budgeting
• Budgeting is a sub-process within estimating used
for allocating the estimated cost of resources into
cost accounts against which cost performance
will be measured and assessed. This forms the
baseline for cost control. Cost accounts used
from the chart of accounts must also support the
cost accounting process. Budgets are often time-
phased in accordance with the schedule or to
address budget and cash flow constraints.
 Step 4: Cost control
• Cost control is concerned with measuring variances
from the cost baseline and taking effective corrective
action to achieve minimum costs.
• Procedures are applied to monitor expenditures and
performance against the progress of a project.
• All changes to the cost baseline need to be recorded
and the expected final total costs are continuously
forecasted. When actual cost information becomes
available an important part of cost control is to
explain what is causing the variance from the cost
baseline.
• Based on this analysis corrective action might be
required to avoid cost overruns.
• Project performance measurement process should be
run in a continuous improvement cycle until project
completion:
• The process for performance assessment starts with
planning and having the right tools in place. Dedicated
cost control software tools can be valuable to define
cost control procedures, track and approve changes
and apply analysis.
• Furthermore, reporting can be enhanced and
simplified which makes it easier to inform all
stakeholders involved in the project.
• Cleopatra Cost Control helps you achieve
• Project cost control and always tracing back cost
components to its original budget.
• Scope change management. Estimate costs and add it to
your project controls document.
• Project completed? The feedback process will be in place.
Send the actuals to your cost models to increase their
accuracy and quality for future estimating.
• Where most tools are limited to either being cost
estimating software or a cost control tool, Cleopatra
Enterprise is both.
 Bonus Step: Benchmarking
• As a bonus step, it is wise to add Benchmarking
to the project cost management process.
• Benchmarking helps close the loop between
project A and project B. The knowledge from
project A (referring to the running and
executed projects) are analyzed and the
feedback is reflected in project B (the next
projects). That's how an improvement cycle is
created to increase project performance.
• Benchmarking is widely used by technical
industries to improve the performance of the
projects. Software systems such as Cleopatra
project benchmarking aid estimators and
project controllers in answering the complex
question: How to use project big data to
execute projects within time and budget.
• The goal of project benchmarking is to store
data from executed and running projects to
extract valuable project metrics and to
benchmark current estimates. Performing
statistical analysis on historical data can result
in valuable information on relationships
between variables, which can be used to set
up a reliable cost knowledgebase or calibrate
existing ones.
• It is important to note that project benchmarking does
not only include the comparison between projects, as it
is also interesting to compare revisions within a project.
• What you can achieve with Cleopatra Benchmarking
• Collect historical project data that can provide valuable
analysis and project comparison to make critical
business decisions.
• Benchmark your estimates against your previous
projects and improve your cost estimate significantly.
• Extract metrics across projects to enhance future cost
estimating accuracy.
• Develop meaningful and interactive reports.
• Export & Import data easily from Excel.
 Types of Cost
• Direct Cost
• A direct cost is a price that can be directly tied to the
production of specific goods or services. A direct cost
can be traced to the cost object, which can be a
service, product, or department.
• Direct and indirect costs are the two major types of
expenses or costs that companies can incur. Direct
costs are often variable costs, meaning they fluctuate
with production levels such as inventory. However,
some costs, such as indirect costs are more difficult to
assign to a specific product. Examples of indirect costs
include depreciation and administrative expenses.
Direct Costs Examples: Any cost that's involved in
producing a good, even if it's only a portion of the cost
that's allocated to the production facility, are included
as direct costs. Some examples of direct costs are listed
below:
• Direct labor
• Direct materials
• Manufacturing supplies
• Wages for the production staff
• Fuel or power consumption
• Because direct costs can be specifically traced to a product,
direct costs do not need to be allocated to a product,
department, or other cost objects. Direct costs usually
benefit only one cost object. Items that are not direct costs
are pooled and allocated based on cost drivers.
 Indirect cost
• Indirect Costs are costs that are not directly
accountable to a cost object (such as a particular
project, facility, function or product). Indirect costs
may be either fixed or variable. Indirect costs
include administration, personnel and security
costs.
• These are those costs which are not directly
related to production. Some indirect costs may be
overhead. But some overhead costs can be
directly attributed to a project and are direct
costs.
• There are two types of indirect costs.
• One are the fixed indirect costs which contains
activities or costs that are fixed for a particular
project or company like transportation of labor to
the working site, building temporary roads, etc.
• The other are recurring indirect costs which
contains activities that repeat for a particular
company like maintenance of records or payment
of salaries.
 Recurring cost
• A Recurring Cost is a regularly occurring cost or
estimated cost which is documented with one
record-a Recurring Cost record--that describes the
income or expense and its pattern (how often it
occurs, the rate at which it increases or decreases,
the time period during which the cost applies, and
so forth). Recurring costs are stored in the
Recurring Costs table
• Recurring Costs provide a means of quickly
modeling the major components of your finances.
• You first establish a series of recurring costs to
represent such items as tax expenses,
estimated maintenance costs, and monthly
income from leases. Once you enter this
information, you can use these costs to
generate Cost, Cash Flow, and Base Rent
reports.
• Recurring Cost Examples
• Use recurring costs to:
• Record fixed expenses and income, or costs that change at a
fixed rate - For costs that are fairly static, enter one Recurring
Cost record describing the cost. rather than create individual
• Scheduled Cost records for each time vou encounter this cost.
for
• example, enter one Recurring Cost record describing vour
• monthly rent for a Year rather than enter 12 Scheduled Cost
records for each rent bill. For costs that change at a fixed rate,
complete the Yearly Factor field of the Recurring Costs table.
 Non- Recurring Cost
• Unusual charge, expense, or loss that is
unlikely to occur again in the normal course of
a business. Non recurring costs include write
offs such as design, development, and
investment costs, and fire or theft losses,
lawsuit payments, losses on sale of assets, and
moving expenses. Also called extraordinary
cost
 Fixed Cost
• A fixed cost is a cost that does not change with
an increase or decrease in the amount of goods
or services produced or sold. Fixed costs are
expenses tha have to be paid by a company,
independent of any specific business activities.
• In general, companies can have two types of
costs. fixed costs or variable costs. which
together result in their total costs. Shutdown
points tend to be applied to reduce fixed costs.
 Variable Cost
• A variable cost is a corporate expense that
changes in proportion to production output.
Variable costs increase or decrease depending
on a company's production volume; they rise
as production increases and fall as production
decreases. Examples of variable costs include
the costs of raw materials and packaging.
• A variable cost is a corporate expense that changes in
proportion with production output.
• Variable costs are dependent on production output.
• A variable cost can increase or decrease depending
on several factors, as opposed to a fixed cost which is
one- time or constant.
• The total expenses incurred by any business consist of
fixed costs and variable costs. Fixed costs are
expenses that remain the same regardless of
production output. Whether a firm makes sales or
not, it must pay its fixed costs, as these costs are
independent of output.
• Examples of fixed costs are rent, employee salaries,
insurance, and office supplies. A company must still
pay its rent for the space it occupies to run its
business operations irrespective of the volume of
product manufactured and sold. Although fixed costs
can change over a period of time, the change will not
be related to production.
• Variable costs, on the other hand, are dependent on
production output. The variable cost of production is
a constant amount per unit produced. As the volume
of production and output increases, variable costs
will also increase.
• Conversely, when fewer products are
produced, the variable costs associated with
production will consequently decrease.
Examples of variable costs are sales
commissions, direct labor costs, cost of raw
materials used in production, and utility costs.
The total variable cost is simply the quantity of
output multiplied by the variable cost per unit
of output.
• There is also a category of costs that falls in
between, known as semi-variable costs (also
known' as semi-fixed costs or mixed costs).
These are costs composed of a mixture of
both fixed and variable components.
• Costs are fixed for a set level of production or
consumption and become variable after this
production level is exceeded. If no production
occurs, a fixed cost is often still incurred.
 Normal Cost
• Normal costing is cost allocation method that
assigns costs to products based on the materials,
labor, and overhead used to produce them. In other
words, it's a way to find the price of an item that is
being produced using three different cost factors
(which make up the product cost).
• The product costs that make up normal costing are
actual materials, actual direct costs and
manufacturing overhead. The materials and direct
costs are the true costs that are associated with
producing the item such as raw materials (the
materials that make up the product) and labor.
 Expedite Cost
• "Expedite Fees" are fees added to another fee,
often a fee for service, to ensure that the
service provided will be expedited, meaning
that it will be provided sooner than the same
service would be provided without such a fee.