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:
For
inquiries, please contact info@montydimkpa.com or visit http://www.montydimkpa.com/Small+Business+Tools
Follow @MontyDimkpa on Twitter for more business tips and information. Read our blog regularly to stay informed!
