Notes on Project costing

1. Project Cost Management
(Module II: Project Management)
MBA(N) 3rd Semester
General Paper
Code: MB 301

2. What is ‘Project Cost Management’?
Project Cost Management is the process of planning and controlling
the project cost effectively. It defines what costs are required for each
deliverable.
The cost of the project can be estimated from various process sources
like
• Creating WBS
• Develop Schedule
• Plan human resources
• Identifying risks
The inputs of Project Cost management include,
• Project management plan
• Project charter
• Enterprise environmental factors
• Organizational process assets
While, the output of this is
• Cost Management Plan.

3. Project Cost Estimation
The Project Cost Estimation is the process of approximating the total
expenditure of the project. To estimate the cost of project you have to
categorize various cost types into categories like
• Labor cost
• Equipment cost
• Cost of supplies
• Travel cost
• Training cost
• Overhead cost, etc.
Techniques used to estimate Project Cost
Analogous Estimating: This estimating technique is based on expert
judgments and information based on similar previous projects. Where
previously done similar project cost is considered with plus or minus of 20%
for existing project.
Parametric estimating: Past data or record is used to estimate cost for the
current project.
Bottom-up estimating
Once you have defined the scope of the project, it is the most reliable form of
technique. In this technique, based on WBS, you estimate the cost for each
resource or deliverables.

4. Project Budget Planning
The main purpose of this activity is to allocate and authorize the monetary
resources required to complete the project. The main output for determining
the budget includes cost performance baseline. It not only specifies what cost
will be incurred but also when costs will be incurred.
The inputs for determining Project Budget includes
• Activity cost estimates
• Basis for estimates
• Scope baseline
• Project Schedule
• Resource calendars
• Contracts
• Organizational process assets
The output of this Project Budgeting process is
• Cost performance baseline
• Project funding requirements
• Project document updates
The project budgeting is performed in parallel with the project scheduling
process. It is highly dependent on three components -
• Cost estimation
• Task durations
• Allocated resources

5. During project budgeting, project manager communicates with different
people responsible for managing the work efforts as well as estimating
project costs. He will use various project prospects like WBS of the project, the
Cost Estimates, Historical Data and Records, Resource Information, and Policies.
Without risk assessment, the budgeting process is not completed. Risk
assessing process considers factors like time shortage, availability of
resources, development team experience, the technology used, etc. The risk
assessment can be an amount between 25 and 30 percent of the overall
project cost.
Types of Project Contract
Most of the contractual relationships are broadly categorized as either:
• Fixed-Price contract
• Cost reimbursable
• Time & Materials Contract
The third type of contract is seldom used.
1. Fixed Price Contracts:
In this category, the contract involves a fixed price for a defined product or
service or the result to be supplied/provided. These types of contracts are
recommended when the scope of service is completely defined and final.

6. Different Types Of Fixed Price Contracts Used In Managing Projects:
Firm Fixed Price (FFP):
The prices of the goods and services are set and are never subjected to change
unless the scope is changed and agreed mutually. This type is favorable mostly
to the buying organizations. Because the extent of buying the goods remains
unchanged and recurring buying happens.
Fixed Price Incentive Fee (FPIF):
The price ceiling is set, and the seller needs to perform and fulfill the contract
requirements within that price. All the costs above the price ceiling are the
responsibility of the seller. This type gives both the buyer and the seller some
flexibility for performance with technical incentives. The incentives are tied to
achieving agreed upon metrics such as cost, schedule and technical expertise of
the seller.
Fixed Price with Economic Price Adjustments (FPEPA):
It is suitable when the contracts are executed in different countries and
payments are made in a different currency. Also, if the seller’s work lasts for a
few years (3-5 years generally) this contract is fitting. This contract gives an
option to make adjustments in the predefined final payment as agreed to in the
contract. It can be due to changed conditions such as inflating rates (may
increase or decrease) on specific commodities.

7. 2. Cost Reimbursable Contracts:
This type of contract involves cost reimbursement (payments to the work done)
for the costs incurred during completion of the contractual job. It is along with a
pre-defined fee representing seller profit. It is recommended if the scope of the
work is expected to change during the contract period.
This type of contract includes:
Cost Plus Fixed Fee (CPFF): The seller gets all the allowable costs agreed in the
contract. The seller also receives a fixed fee payment, which is calculated as a
percentage of initial estimated project costs. Unless the project scope changes,
this fee remains unchanged.
Cost Plus Incentive Fee (CPIF): The seller gets the reimbursements for all the
costs incurred on performing the work agreed in the contract. Based on the
final costs incurred (greater or lesser than the initial planned cost), both the
buyer and the seller share their expenses. The sharing is based upon a pre-
negotiated cost-sharing formula. Generally, it is an 80/20 split over the target
costs based on the actual performance of the seller.
Cost Plus Award Fee (CPAF): In this type, the seller gets his/her legitimate
reimbursements. But a majority of the fee is received upon meeting some
technical/subjective performance that is pre-set in the contract. This solely
depends on the buyer’s determination and the seller’s performance.

8. 3. Time & Material Contracts (T&M):
This a hybrid type of contract combining the features of Fixed as well as Cost
Reimbursable contracts. This is often used when contractual requirements
(scope) is not known/ prescribed. Also, this type of contract is suitable for
acquisition/hiring of experts, project staff required for a particular period. It is
largely used when:
• Moderate level of certainty in the project
• Reasonable visibility towards effort and type of resources required
• Limited predictability of amount of resources required
• Moderate variability as the process, material, people required are predictable
Type of work best suited for Time & Material contract type:
Customized Software Development and staff augmentation requiring labor hire
for specific time periods.
Type of work best suited for Cost Reimbursable contract type:
Creative or innovative projects such as event décor, where you expect the
organizer to decide on the purchases and you are willing to pay for it. Media
Campaigns could also fall under this category.
Type of work best suited for Fixed Price Contract type:
Purchasing an apartment or a holiday package, off-the shelf software packages,
construction of road, etc.