Identification and estimation of costs

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The identification of the various costs is closely related to the resource requirements of the project (refer to, since the greatest percentage of the project’s overall cost consists of the costs of the resources needed to complete the project activities. When developing a Cost Plan, apart from the costs of all resources that will be charged to the project, you should also take into account travel costs, administrative costs and contingency costs. More specifically, the basic types of costs, which are usually incurred in a project, are the following:

Costs of resources: This type of costs include the following subcategories:
Labour costs: They are costs associated with labour resources (both internal and external ones). They include salaries, wages or any other kind of remuneration provided to people who are assigned to perform one or more activities of the project.
Equipment costs: They are costs associated with the purchasing, renting or leasing of equipment, as well as with the operation/ using and maintenance of the equipment (operating costs). In case that the equipment resources are internal, there are no purchasing, renting or leasing costs, but only operating and maintenance costs.  
Materials costs: They are costs associated with the purchasing or usage of materials.
Travel costs: They are costs associated with any travelling that may be required in the scope of the project. They include transportation costs (e.g. flight tickets, taxi fees, car fuel, parking fees, etc), accommodation costs (e.g. hotel rooms, apartments, etc.) and any daily allowances (e.g. lunch/ dinner, entertainment).     
Administrative costs or overheads: They are costs associated with the performance of administration and coordination activities. Examples of such costs are: office supplies (e.g. printing paper, envelopes, labels, etc.), postage or delivery costs, costs for utilities (e.g. electricity, water, telecommunication), clerical and administrative salaries and wages, legal and insurance fees, memberships in technical and professional organisations.
Contingency costs: They are costs which, based on past experiences, are known to be regularly encountered but difficult or impossible to estimate at the time the plan is prepared. These costs may result from incomplete design, unforeseen and unpredictable conditions, risks or uncertainties within the defined project scope. The reason that they are included in the Cost Plan is to reduce the risk of budget overrun. Contingency costs may be either built into the above costs or listed as a separate category.  

After identifying the various costs it is time to estimate the value of each cost. Depending on the way that they are estimated/ calculated the resource costs can be distinguished into three categories:

Rate-based costs: They are costs of resources that depend on the amount of work to be done (in case of labour or equipment) or on the consumption quantities (in case of materials). In order to estimate the rate-based resource costs you should first estimate the cost per unit and then multiply it by the number of units to calculate the total value of each cost. In case that unit rates (e.g. staff cost per hour or per day, rent cost of facility per day or per month, bulk material cost per kg or per m3) are not known or predetermined, then they have to be estimated. The estimation of unit rates can be made using historical information like records of previous projects, commercial cost-estimating databases and project team knowledge, but in order to be more realistic and accurate they should be based on recent data.
Per-use costs: This category applies mainly for equipment costs and circumstantially for material costs. The per-use costs are one-time costs that are assigned each time the resource is used and do not depend on the amount of work to be done. For example, rental equipment might have a delivery or setup charge every time it is used, in addition to an hourly charge. Another example of per-use cost is the amount that has to be paid to the licensor of a material (e.g. specialized software with per-use license) each time the material is used. 
Fixed costs: They are costs that remain constant regardless of the task duration, the work performed by a resource, or the number of assigned resource units. A rate-based resource cost may increase when a task takes more time, but a fixed cost does not. For example, if a consultant is paid hourly and is scheduled to complete a task in five days, but the task takes seven days, the consultant will be paid more than planned. If the consultant is paid a fixed amount for the work, then the cost will be the same no matter how long the task takes.

Fixed costs can be assigned to a task in addition to rate-based resource costs. For example, if the performance of a task requires a machine that has to be purchased, the cost of purchasing that machine is a fixed cost, while the operating cost of this machine is a rate-based cost.

For the estimation of the rest costs (except from the costs of resources) you can apply the following general guidelines:

Travel costs consist of a fixed part (transportation costs) and a variable part (per-diem costs i.e. accommodation, lunches/ dinners, etc.). So, in order to estimate the total cost of a travel you need to know the exact destination in order to estimate the transportation costs and its duration in order to estimate the per-diem8 [ If you want to have an indication of per diem rates (cost/day) you can visit the website of European Commission http://ec.europa.eu/comm/europeaid/perdiem/index_en.htm where you can find an updated a list of maximum per diem rates per country. The list has been developed to be used in the framework of EC-funded external aid contracts and in case of missions requiring an overnight stay away from the base of operations for Europeaid contracts. ] costs. The estimation of the travel costs is not always an easy exercise and requires experience from previous projects in order to be in a position to predefine how many travels and of what duration will be necessary in the scope of a particular project. For this reason, you should always reserve an amount in the contingency costs in order to cover unscheduled travels.  
Administrative costs or overheads (facilities and administration, rent, electricity, depreciation, telephone, etc.) are indirect costs that cannot be identified to a specific project or function. However, these are actual costs that are incurred by an entity. They are usually determined as a percentage of salaries and wages or as a percentage of total direct costs. A commonly used method to estimate the overheads is by dividing the yearly sum of all administrative costs with the yearly sum of the “productive time”9 [The “productive time” is the days or hours spent by the employees on production work, excluding any non-working time (holidays, weekends, regular leave, sick leave, etc.). ] of the entity’s employees. In this way you can calculate an administrative cost rate (€/hr or €/day) specific for your entity, which can then be multiplied by the scheduled labour time (hours or days) for the particular project in order to calculate the total administrative cost of the project. Another method that will lead to more accurate results but is more difficult to apply, is to estimate the administrative costs that are expected to be incurred during the project period and then apportion them to the project by taking into account the number of employees and the amount of facilities that will be engaged in the project. 
Contingency costs: The traditional method to estimate contingency costs is to consider them as percentage (%) of the total cost based on experience and past data. Another method which is more rational and reliable is to determine the contingency costs as alternative/ different percentages (%) to each major element of cost (e.g. labour, equipment, material, travels), based on the concept that each element has its own uncertainty. These deterministic methods work effectively for simple projects under stable conditions. For more complex projects that involve great uncertainties, more advanced methods of calculation should be used, such as quantitative risk analysis, method of moments, Monte Carlo Simulation, etc.

Once all elements of costs have been estimated, you can easily estimate the overall cost of the project by summing up all the individual costs.

It should be noted that the estimated overall cost of the project should not exceed in any case the approved budget. Any refinements of the budget as a result of the cost estimating process are allowed only if they don’t cause an overrun of the budget. For example, the review of cost estimates may bring up the need to make adjustments to the cost totals or/and reallocations of costs between activities. These adjustments of cost estimates should be done with respect to the overall budget of the project.


© 2007 Republic of Cyprus, Treasury of the Republic, Public Procurement Directorate
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