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Basics of a cost planning process
International Project Management (BTCM4580)
Northern Alberta Institute of Technology
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Basics of a cost planning process o As a process, cost planning resembles the iterative steps of the time planning process
a. The role of costing o Price=cost + profit cost= price-profit profit=price-cost o in the first case, the price is fixed through legislation, or in the case of a target costing system o in the second case, the cost is fixed through contract purchase which guarantees that goods will be supplied to you at a particular price o in the third case, the profit is fixed through what the company is allowed to make through the system known as cost-plus or reimbursable pricing
b. Approaches to costing o ground-up costing: the estimates of each level in the WBS are compiled and added together by each level of supervision in the project hierarchy, as would be the case for reimbursable contracts WBS o top-down costing: you are allocated a certain amount of money to complete the project activities and this has to be split between the sub- projects senior management
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c. Elements of costs o Time- direct input of labor into activities o Materials- consumables and other items used o Capital equipment- purchase of the means of providing the conversion process against activities o Indirect expenses o Overheads- provision of an office, financial and legal support, managers and other non-direct staff o Contingency margin/allowance
d. Estimating techniques o Parametric estimating o Provides a means to estimate costs from knowledge of the work being undertaken and can be used at different levels in the product breakdown o As.....
o Where you and your organization has experience of doing a similar job previously o Forecasts o Degree of uncertainty (parametrics or proxies) o Synthetic estimation o Using learning curve o When repetitive actions aoccured, the time taken each time for the task will decrease as the person becomes familiar with the methods o Yx = Kxn o Wishful thinking o Causes for “costing by whisful thinking” are: Optimism bias Politics Improper use of estimates Failure to be systematic about planning
e. Cost build-up
o Use of cost estimates o At the outset of the project initial cost plans will provide a rough idea as to whether the project is viable o As the project progresses estimates have to be revised to show the increased level of consideration
Basics of a cost planning process
Course: International Project Management (BTCM4580)
University: Northern Alberta Institute of Technology
