Thursday 9 May 2013

New Entrepreneur's Guide to Basic Project Costing




What is a Project?

A project involves the creation of a useful product through the application of materials, processes and a plant.

Materials

These include any raw materials that go into the creation of a product and attract cost.

Processes

These are the various stages in the development of a project. Each process adds its own unique times and costs to the project.


Plant

A plant is the sum of labor and machines available for the execution of a project. Plant costs are expressed in terms of labor costs and machine costs. Labor costs are wages paid per hour while machine costs include fuel/power costs per hour, maintenance costs per hour and rental costs per hour.

Types of Project Costs

There are 2 types of project costs: production costs and non-production costs. Production costs relate to the production aspects of your project, while non-production costs are other miscellaneous (or one-time) costs you have to bear such as tax, insurance or transportation.

How are Project Costs Estimated?

Project costs are a function of time. In other words, the cost of your project depends on the duration of your project. The longer it takes to get your project done, the more costly it will be. Actual project costs are estimated using the project cost equation. While the project cost equation is not complex, it is usually more feasible to use project costing software to arrive at more accurate and reliable estimates of project costs. Let’s take a closer look at the project cost equation.

The Project Cost Equation







While the NPC aspect of project cost is easily calculated by itemizing and summing all non-production costs related to a project, the PC aspect is more involved and requires the following:

i.)            Estimate of project duration
ii.)           Estimate of total material costs for the project
iii.)         Estimate of total process times for the project
iv.)         Estimate of total wages per hour for the project
v.)           Estimate of total machine costs per hour for the project

Case Study: Costing a Software Development Project   
   
We will look at 2 ways of costing this project: manually, and by using software. Naturally, the manual way will take a longer time and may be less accurate, but it is always nice to have the know-how.

Manual Method

Step 1: Prepare list of processes and estimated times for the project

For a software development project, the following processes are typical:
a.) Logical design stage – where the most efficient logic for the software is developed

b.) Requirements analysis – the second stage, where the coding requirements for the software are determined

c.) Coding – where the program is actually written

d.) Debugging – extensive testing to reveal bugs or errors in the code

e.) Final coding – rewriting the code to reflect error corrections

f.) Software packaging and deployment – the software is prepared in its final form and packaged or deployed as necessary.

So that makes 6 processes. Time requirements can vary, but for a medium-scale software development project we can assume:

a.) Logical design stage – 5 days

b.) Requirements analysis – 3 days

c.) Coding – 1 month (30 days)

d.) Debugging, final coding, packaging and deployment – 1 month (30 days)

That gives a project duration of 68 days, which at 8 hours a day means 544 real hours of project work. 

So project duration = 544 hours.

Step 2: Production cost analysis

Since there are no raw material costs for this type of project, we calculate only labor costs and machine costs.

Labor costs – we assume a team of 10 programmers working on the project, and a wage rate of $12 per hour, this gives a total labor cost of $120 per hour.

Machine costs – we will break this into fuel/power cost per hour, maintenance cost per hour and rent per hour. Assume 10 computers are in use. Assume a power rate of 12 cents per kW. 

Assume 130W or 0.13kW per hour per computer. This is a combined 1.3kW per hour for all computers and $ 0.16 per hour for all computers in use (this is the machine power cost).

Let’s assume 50% of the computers (5 workstations) need to be maintained during the project at a rate of $1 per hour. This amounts to $5 per hour for maintenance costs.

Finally, let’s also assume that all the computers are rented at a rate of $5 per hour.

Total production cost per hour is therefore:

TPC per hour = $120 + $0.16 + $5 + $5 = $130.16 per hour. For 544 hours, this comes to $ 70,807.04 for total production cost.

Total production cost = $ 70,807.04

What about non-production costs? Let’s look at the processes again. There isn’t likely to be any tax, insurance or transportation requirements for this project.

So at this stage, we can cost the project at $ 70,807.04 for the software development.

Now that wasn’t so hard, but could have been done a whole lot faster by software.

There are a lot of capable software packages for project costing, but I recommend Optimize 1.5 – a powerful, easy-to-use project and product costing application for small business projects.

Download 72-hour Free Trial - http://goo.gl/aJ7Gn
Watch YouTube Tutorial Video - http://youtu.be/zjDJrLiUU0Y

Now let’s look at how this project costing case study could have been done easier and completed faster by software:

Case Study Using Optimize 1.5 Software for Project Costing

Total time duration: 5 minutes.

It took 5 minutes to enter values and get results. Calculated profiles (with results and a printable HTML report) can be saved for easy reference any time.

Here is a snapshot:




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