1. Project Costing
Hitesh Gupta
11/09/2012

2. Direct Costs Indirect Costs
Can be identified specifically with a Incurred for common or joint objectives &
particular sponsored project can’t be identified readily & specifically
with a particular sponsored project
E.g if company produces artisan
furniture, cost of wood & cost of
craftsperson
Can be controlled by efficient
engineering, proficient staff, construction
Can be controlled by good supervision and
time, etc
job control
Costs like
advertising, depreciation, general supplies
Includes Direct labour, Repair labour,
for firm, accounting services, Office
Operating costs of equipments, Supplies,
Payroll and expense, Property taxes etc
Permanent materials, Subcontract costs

3. 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

4. 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

5. 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

6. 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

7. Process followed for selecting method of
excavation
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 affect degree of protection (watertight sheet piling or dewatering
condition may required.)
Surrounding condition impose certain restrictions and precautions (eg. diversion of
government drain, or underpinning work to nearby building
foundation)

8. Deciding Mark-Up
Project 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)

9. 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

10. 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

11. 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

12. 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

13. 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

14. Thanks