How to create Project Cost Breakdown
TweetOne of the foremost essential part for completing a project is to estimate time and resources and make work scope. Carefully planning a project before launch of any project is vital . it's true that creating an absolutely accurate cost breakdown is difficult but by preparing an in depth project cost breakdown it are often achieved. By maintaining accuracy level, an in depth project cost breakdown are going to be useful for various steps of project planning starting from a ballpark estimate to a reliable forecast of the resulting cost.
The various purposes for using project cost breakdown includes:
- For estimating work costs, calculation of project profitability, etc.
- To coordinate estimated project costs with clients and getting the ultimate price approved.
While making the value breakdown it's important to take care of clarity and logical structure. albeit structuring a price breakdown could be a tedious job yet it's important for future communication with the clients so on maintain a transparent understanding regarding how cost are going to be maintained during the course of the project.
How to structure project cost?
Identifying key components is that the initiative to making a structured project cost. The key components are follows:
Cost drivers: units, specific works or services, items, etc.
Overhead, or hidden costs: costs which may not bring direct value but it does influence the project indirectly.
Amounts: number of things , total amount of labor and amount of materials used.
You can group the value data by different parameters, counting on the aim of the project cost breakdown:
By time periods: this will be wont to group data consistent with monthly, weekly, quarterly etc. costs. it's usually combined with grouping of workflow steps and including a complete for the entire project.
By cost types: Structuring cost data by cost types in usually used when time breakdown isn't required. This process helps in identifying key cost drivers and their influence on the ultimate figure.
This approach is useful if you would like to define manageability of specific cost components and find out how to decrease the entire cost.
The following list is of the prices that are most ordinarily used for structuring the components that structure the ultimate cost of the project:
Labor cost which is additionally called direct costs are basically the prices of employees' time spent on the services and also the time taken to perform the manufacturing works within the project. They receive payment supported specific rate of pay or maybe on the idea of a hard and fast cost per item, unit, or service.
At times subcontracting or outsourcing costs are treated as direct costs, sometimes it's also treated as a separate category altogether. the value are often calculated as time period spent by outsourcing team and their pay rates, or as a hard and fast cost surely services or products.
The costs of staple or material costs are the expense of parts and supplies purchased to use in project works. sometimes it also includes insurance, custom clearance and various other costs associated with purchasing goods and materials.
Logistic costs include storing and moving purchased materials which also includes subcomponents like transportation, storage, distribution, etc.
Even though overhead costs don't create profit and it can't be allocated to a selected cost driver, it indirectly influences the result of the project by making business activities possible by increasing efficiency.
Mistakes commonly made during project cost calculation
Since the structuring of project costs may be a tedious job it's suffering from human error. Such errors are common and may highly effect costs in an unexpected way. Here may be a list of mistakes commonly made which you want to confine mind and avoid:
Omitting cost drivers: It often happens that in structuring of project costs some cost drivers are omitted by mistake. this error happens within the cost that's allocated for various categories or overhead costs.
Exclusion of routine works like communication, organizational and administrative works into the ultimate cost estimate.
Since these costs are hard to estimate it's often not considered as direct costs but that doesn't mean they ought to not be included within the cost structure. a far better thanks to handle such costs is by including them within the rough estimate and by adding a comment stating that the ultimate cost will depend upon time spend on these works.
By not including non-billable works if cost breakdown is employed for internal reference.
To analyze profitability of a project it's important to incorporate both billable and non-billable works as non-billable works often define profitability.
Project cost breakdown and estimation techniques - Project cost breakdown provides a more accurate estimate of ultimate figures in various project estimations. By taking a glance at the subsequent list you'll have a thought of how project cost breakdown are often applied to project planning:
Expert Judgement: By using experts' opinion on the prevailing cost breakdown clarity are often attained with regards to influence of cost drivers. albeit this method comes up with accurate estimates it also can show significant difference between the planned figure and therefore the final figure.
Analogous estimation: By comparing the estimates supported previous projects' cost breakdown with the new similar project it can assist you improve your estimation technique and may also assist you get more accurate assessment of project costs, profitability and general outcome.
Bottom-up analysis: By taking all cost drivers under consideration high accuracy are often achieved. All cost drivers include cost of routine works, overhead and possible additional costs.
Top-down analysis: to return up with the ballpark estimate of the ultimate figure a top-down cost structure are often used. it's important to incorporate various additional costs which could not are included within the initial estimate.
Parametric estimation: This method is employed when the value drivers are predictable and measurable. By using existing data, different parameters are often estimated with a way higher degree accuracy.
Project cost breakdown in various pricing types
There are various ways to approach the pricing of projects and services. The pricing types depend upon the character of projects, on common practices in certain fields and industries, and therefore the market environment. With any pricing type, it's vital to urge accurate project cost breakdown for the right project outcome and customer satisfaction.
Cost charged for providing services and materials: a correct cost breakdown- both estimated and final- it's extremely helpful for communicating with customers, because it is that the best thanks to inform the customer what exactly they're paying for.
Cost per package: This pricing method is employed when the purchasers pay fixed price for a selected set of works, services and/or products. Which is why it's important to supply them with a transparent picture of billable works for every package offered to them, and price breakdown is that the most effective thanks to show there the billable cost goes. the value breakdown structure for every package are often used internally also for adjusting current package price.
Fixed price: within the very beginning your customers only knows the ultimate cost, so it's advisable to organize a price breakdown for them. A well-made cost breakdown helps you customer understand what they're paying for and if your cost is high then the rationale for it'll even be clear.
Cost breakdown is additionally helpful for internal analysis of project profitability. the value breakdown must be centered around pay rates, business costs, operational/ administrative costs and also include all non-billable works.
Conclusion
The project cost breakdown is one among the foremost important a part of project planning. the shape of cost breakdown and therefore the data included in it depends on the aim , project step when it's prepared and therefore the accuracy of obtainable data.
