Project Cost

COST

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 Costs Project Cost
Total funds needed to complete the project
Value or total amount of money needed for a
business

Project Cost Management

Ensuring that the project is completed within an approved budget
Achieved by
Managing the processes involved in planning, estimating, and controlling costs

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 Functions…
Cost Estimating
Cost Budgeting
Cost Control

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 1.
Cost Estimating

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 Developing an approximation

Estimate of the costs of the resources needed

Identifying and considering various costing alternatives

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 Cost Estimation Factors
● Labor The cost of team members wages and time working on the project

● Materials and equipment Physical tools, software, legal permits

● Facilities The use of external workspaces
● Vendors Third-party vendors and/or contractors
● Risk Contingency plans to reduce risk

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 Cost
Budgeting

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 Budgeting
Allocation of overall cost estimates to individual work items

To establish a cost baseline for measuring project performances

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 Controlling changes to the project
budget
Influencing the factors creates
changes to the cost baseline
Ensuring that changes are beneficial
Changes with in acceptable units

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 Cost Control Techniques
Types

Planning the Project Keeping a Track of Effective Time

Project Change Control
Budget Costs Management

Use of Earned Value

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 Planning Construction Costs

Cost accounting

An internal accounting system designed for managing costs

Cost plan INCLUDES

Planning,
1.costing techniques and
2.accounting discipline

for developing

standard costs,
financial forecasts, achieving project profit/cost
ultimate goal objectives
project budget And
cost control measures

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 CLASSIFICATION OF CONSTRUCTION COSTs

cost of a work-unit activity,

work item/ work-package cost elements

include labour costs, generally referred as

material costs, production costs
cost elements Plant and machinery costs,
administration costs and
other expenses

production costs categorized into

Direct costs and Indirect costs or overheads

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 Production cost = Direct cost + Indirect cost

Costs that can be correlated to a specific activity or a work-

Direct costs item which is being done or produced

Indirect costs All other costs that cannot be correlated directly, fall in the category of
indirect costs

Breakdown of the construction cost elements and their interrelationship

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 Construction Costs Breakdown
Direct Costs Breakdown Indirect Costs Breakdown Total Costs Breakdown

Direct material costs + In Direct material costs = Material costs

Direct labour cost + Indirect labour cost = Production Labour Cost

Direct Expenses + InDirect Expenses = Other expenses

Direct costs + Indirect Costs = Total costs

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 Cost Elements Amount

● i) Direct material costs A

● ii) Direct labour costs B

● iii) Direct other expenses C

● iv) Direct Costs (A + B + C) D

● v) Indirect Costs E

● (vi) Total Production Costs (D + E) F

● Production costs are initially estimated for each item of work as stated in the scope of the
project work.
● These are listed under bill of quantities

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 Direct materials cost

Purchase costs, ex-factory or specified delivery location.

Transportation costs including freight by rail, road, ocean, custom clearance, insurance and handling
charges till arrival at site, as applicable

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 Direct labour costs

It covers net expenses for procurement, maintenance, and wages of foremen and
all category of workers employed at the work site for the execution of an item of
project. These expenses include:

● Basic wages

● overtime and allowances.

● Procurement expenses including recruitment and conveyance at site

● Benefits and statutory regulation compensation expenses such as earned leave,

provident funds, gratuity, bonus. insurance, medical, etc It also covers expenditure
on accommodation and mess amenities if these are not covered under overheads.

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 Other direct expenses
● These include all other expenses can be directly attributed to and clearly identified with the execution of an
activity or work-item.

● Examples of such expenses are,

● Special purpose plant and machinery costs, such as owning and operating costs of ready-mix concrete production,
transportation and placing equipment.

● Sub-contracted activities

● Hired resources costs for execution of specified permanent work

● Temporary activity required for a specific work like erecting a scaffolding platform for plaster work.

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 ● Special technical consultant services for architecture, designing, investigation, ete.
when these are designated as separate activities.

● Investigation trials necessary to establish procedures for undertaking the construction of

a given work or activity, such as driving of foundation piles.
Indirect Costs

In other words, all costs other than direct are covered under indirect costs.

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 ● In general from a performance consideration indirect costs can be broadly divided as
follows.

(a) Production overheads

● These include all indirect materials manpower, and other indirect expenses incurred
by each production responsibility centre.

● Nature of costs Examples

1. Indirect manpower cost Salary and wages of supervisors and other indirect workers

2. Indirect material costs Tradesmen's tools, minor equipments and consumable materials.

3. Indirect other expenses General purpose plant hiring costs.

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 (b) External support services costs

● These cover all indirect manpower, indirect materials and other expenses of
the functional set-ups concerned with providing technical and logistic support
to the production centers.

● Examples are as follows:

(1) Technical design and quality control services

2) Materials-at-site manufacturing services
(3) Equipment supply
(4) Personnel and security services
5) General services including temporary works and camp utility Services.

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 (c) Administration overheads

These contain indirect manpower, indirect materials and other expenses incurred by the
project management for the direction, control and administration of the project. The costs
covered under this head include

● (1) office management costs.

● 2) Planning and coordination management costs.

● (3) Technical management costs

● 4) Marketing, costing and contract management c08te.

● (5) Resources management costs,

● 6) Finance and risk management costs.

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 (d) Home office overheads

● These overheads represent the expenses relating to the operations and services rendered by the home-office. These costs
include the consultant's fee, legal expenses, licensing charges, visits, entertainment taxes, insurances and a share of the
Home-office running expenses. Home-office overheads are specified by the corporate management.

● The above functional grouping and its breakdown are not rigid. These are guidelines and can be suitably modified in line
with corporate policy and project characteristics

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 Budgeting

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 Index

 Introduction
 Objectives
 Advantages
 Components of Budgetary Control System
 Types of Budget
 Zero Base Budgeting

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 Budget
Budget refers to an estimated statement. It is
prepared by companies as well as government.
It is for the purpose of attaining some goal.
It may include income, expenditure
and employment of capital. It is often used for
control purpose.

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 Budget
Budget can be defined as a financial and / or
quantitative statement prepared and approved
prior to a defined period of time of the policy
to be pursued during that period for the
purpose of attaining a given objective.

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 Budgetary Control

It is a process in which budget is set, actuals are

compared with budget to analyse variances and
corrective action is initiated.

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 Budgetary Control
It means the establishment of budgets relating the
responsibilities of executives to the prerequisite of policy
and the continuous evaluation of actual budgeted results
either to secure by individual action the objective of that
policy or to provide a base for its revision.

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 Objectives of Budgeting
 Planning:
A set of targets/goals is often essential to lead and focus
individual and group actions. Planning not only motivates
the employees but also improves overall decision making.

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  Directing:
Business is very complex and requires more formal
direction and coordination. Once the budgets are in
place they can be used to direct and coordinate
operations in order to achieve the stated targets.

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  Controlling:
The actual performance can be compared with the
planned targets. This provides prompt feedback about
performance. budget also prevents unplanned adhoc
expenditure.

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 Advantages of Budgetary Control System

 Better planning
 Improved allocation of Resources
 Proper Communication of goals, targets and deliverables
 Enables the managers/ administrators to conduct activities in
efficient manner.
 Provides yardstick for measuring and evaluating the
performance of individuals and their departments.

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  Reveals the deviations, from the budget by comparing
with actuals; Helps in prompt review process
 Creates suitable conditions for the
implementation of standard costing system

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  Acts as systematic base for framing future policies and
targets
 Inculcates the feeling of cost consciousness
and goal orientation
 Leads to effective utilization of various resources, as
the activities are planned and executed effectively.

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 Components of Budgetary Control System

The policy of a business for a defined period is

represented by the master budget, the details of which
are given in a number of individual budgets called
functional budgets.

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 Types of Budgets

● Fixed Budget Vs. Flexible Budget

● Functional Vs. Master Budget
● Long-Term Vs. Short-Term
● Budget/ Current Budget
● ZBB

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 Fixed Budget

A fixed budget is the budget designed to remain

unchanged irrespective of level of activity actually
attained. Such budget is suitable for Fixed Expenses.
It is also known as Static budget.

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 A fixed budget is not suitable in dynamic environment and
for a longer period because of its rigidity. It is not suitable
where labour cost, material cost and other factors are
constantly changing.

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 Flexible Budget

Flexible budget show the expected results of

responsibility centre for several activity level.

Flexible budget is the series of static budgets for different

level of activity.

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 While preparing flexible budget the
revenues and expenses are classified
Into Fixed, Variable and Semi-variable categories.

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 In most cases, the level of activity during the period varies
from period to period due to change in demand or seasonal
nature or changing circumstances. In such industries/
government organisations flexible budget is suitable.

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 Functional Budget
Budgets which relate to the individual function/task in an
organisation are known as Functional Budgets.

For example, purchase budget, sales budget, production

budget, plant utilization budget, cash budget.

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 These functional budgets are broadly
grouped as physical, cost and profit
budgets.

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  PhysicalBudgets- Those budgets which contains
information in terms of physical units about sales,
production etc.

 For example, quantity of sales, quantity of

production, inventories and manpower budgets
are physical budgets.

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 Cost budgets- Budgets which provides cost
information in respect of manufacturing, selling,
administration etc.

For example, manufacturing cost, selling cost,

administration cost and research and development cost
budgets are cost budgets.

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  Profit budgets- Budgets which enables in the
ascertainment of profit, for example, sales budget,
profit and loss budget, etc.

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 Master Budget
It is a consolidated summary of the various functional
budgets. It is based on goals set. It serves as the basis
upon which budgeted P & L A/c and forecasted Balance
Sheet are built up.

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 Long-Term Budget

The budget which are prepared for periods longer than a year
are called long-term budget. Such budgets are helpful in
business forecasting and strategic planning.

E.g. Capital expenditure budget, Research and Development

budget.

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 Short-Term Budget

Budgets which are prepared for periods less than a year are
known as short term budgets.

E.g. Cash Budget. Such budgets are prepared regular

comparison and action to bring variation under control.

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 Current Budget
A budget which is established for use over a short
period of time and is related to the current conditions
is called current budget.

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Zero Base Budgeting (ZBB)

It refers to budgeting from scratch.

 ZBB

ZBB is a method of budgeting which requires each cost element to

be specifically justified, as though the activities to which the
budget relates were being undertaken for the first time.

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  To receive funding during budgeting process, each
activity must be justified in terms of continued
usefulness.
 Under ZBB, the budget for virtually every activity is

initially set to zero.

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 Advantages
 Provides a systematic approach for evaluation
of different activities and ranks them in order
of preference for allocation of scare resources.

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  Ensures that the every activity/ function undertaken is
critical for the achievement of objectives.

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 Provides an opportunity to allocate resources for various
activities / functions only after having a thorough cost benefit
analysis.
Wasteful expenditure can be easily identified and eliminated.

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 Process costing is suitable for ________.
A. hospitals
B. oil refining firms
C. transport firms
D. brick laying firms
Basic objective of cost accounting is ________
A. tax compliance.
B. financial audit.
C. cost ascertainment.
D. profit analysis.
Cost classification can be done in ________.
A. two ways
B. three ways
C. four ways
D. several ways
The cost which is to be incurred even when a business unit is closed is a _____.
A. imputed cost
B. historical cost
C. sunk cost
D. shutdown cost

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 Wages paid to a labour who was engaged in production activities can be termed as _______.
A. direct cost
B. indirect cost
C. sunk cost
D. imputed cost
A budgeting process which demands each manager to justify his entire budget in detail from
beginning is
A. Functional budget
B. Master budget
C. Zero base budgeting
D. None of the above
In fixed budgets costs are classified according to their nature.
a. True
b. False
_______ provides an estimate of the capital amount that may be required for buying fixed assets
needed for meeting production requirements.
a. Production budget
b. Cash budget
c. Capital expenditure budget
d. None of the above

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