Learn how to create Project Cost Breakdown
One of the most essential part for completing a project is to estimate time and resources and create work scope. Carefully planning a project before launch of any project is important. It is true that creating an absolutely accurate cost breakdown is difficult but by preparing a detailed project cost breakdown it can be achieved. By maintaining accuracy level, a detailed project cost breakdown will be useful for different steps of project planning ranging 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 final price approved.
While making the cost breakdown it is important to maintain clarity and logical structure. Even though structuring a cost breakdown might be a tedious job yet it is important for future communication with the clients so as to maintain a clear understanding regarding how cost will be maintained during the course of the project.
How to structure project cost?
Identifying key components is the first step to creating a structured project cost. The key components are follows:
- Cost drivers: units, specific works or services, items, etc.
- Overhead, or hidden costs: costs that might not bring direct value but it does influence the project indirectly.
- Amounts: number of items, total amount of work and amount of materials used.
You can group the cost data by different parameters, depending on the purpose of the project cost breakdown:
- By time periods: This can be used to group data according to monthly, weekly, quarterly etc. costs. It is usually combined with grouping of workflow steps and including a total for the whole project.
- By cost types: Structuring cost data by cost types in usually used when time breakdown is not required. This process helps in identifying key cost drivers and their influence on the final figure.
- This approach is helpful if you want to define manageability of specific cost components and figure out a way to decrease the total cost.
The following list is of the costs that are most commonly used for structuring the components that make up the final cost of the project:
- Labor cost which is also called direct costs are basically the costs of employees’ time spent on the services and also the time taken to perform the manufacturing works within the project. They receive payment based on specific pay rate or even on the basis of a fixed cost per item, unit, or service.
- At times subcontracting or outsourcing costs are treated as direct costs, at times it is also treated as a separate category altogether. The cost can be calculated as work time spent by outsourcing team and their pay rates, or as a fixed cost for certain services or products.
- The costs of raw material or material costs are the expense of parts and supplies purchased to use in project works. At times it also includes insurance, custom clearance and various other costs related to purchasing goods and materials.
- Logistic costs include storing and moving purchased materials which also includes subcomponents such as transportation, storage, distribution, etc.
- Even though overhead costs do not create profit and it cannot be allocated to a specific cost driver, it indirectly influences the outcome of the project by making business activities possible by increasing efficiency.
Mistakes commonly made during project cost calculation
Since the structuring of project costs is a tedious job it is affected by human error. Such errors are common and can highly effect costs in an unexpected way. Here is a list of mistakes commonly made which you must keep in mind and avoid:
- Omitting cost drivers: It often happens that during structuring of project costs some cost drivers are omitted by mistake. This mistake happens in the cost that is allocated for different categories or overhead costs.
- Exclusion of routine works like communication, organizational and administrative works into the final cost estimate.
- Since these costs are hard to estimate it is often not considered as direct costs but that does not mean they should not be included in the cost structure. A better way to handle such costs is by including them in the rough estimate and by adding a comment stating that the final cost will depend on time spend on these works.
- By not including non-billable works if cost breakdown is used for internal reference.
- To analyze profitability of a project it is important to include 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 final figures in various project estimations. By taking a look at the following list you will have an idea of how project cost breakdown can be applied to project planning:
- Expert Judgement: By using experts’ opinion on the existing cost breakdown clarity can be attained with regards to influence of cost drivers. Even though this method comes up with accurate estimates it can also show significant difference between the planned figure and the final figure.
- Analogous estimation: By comparing the estimates based on previous projects’ cost breakdown with the new similar project it can help you improve your estimation technique and can also help you get more accurate assessment of project costs, profitability and general outcome.
- Bottom-up analysis: By taking all cost drivers into account high accuracy can be achieved. All cost drivers include cost of routine works, overhead and possible additional costs.
- Top-down analysis: To come up with the ballpark estimate of the final figure a top-down cost structure can be used. It is important to include various additional costs which might not have been included in the initial estimate.
- Parametric estimation: This method is used when the cost drivers are predictable and measurable. By using existing data, different parameters can be estimated with a much 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 on the nature of projects, on common practices in certain fields and industries, and the market environment. With any pricing type, it is vital to get accurate project cost breakdown for the perfect project outcome and customer satisfaction.
- Cost charged for providing services and materials: a proper cost breakdown- both estimated and final- it is extremely helpful for communicating with customers, as it is the best way to explain to the customer what exactly they are paying for.
- Cost per package: This pricing method is used when the customers pay fixed price for a specific set of works, services and/or products. Which is why it is important to provide them with a clear picture of billable works for each package offered to them, and cost breakdown is the most efficient way to show there the billable cost goes. The cost breakdown structure for each package can be used internally as well for adjusting current package price.
- Fixed price: In the very beginning your customers only knows the final cost, so it is advisable to prepare a cost breakdown for them. A well-made cost breakdown helps you customer understand what they are paying for and if your cost is high then the reason for it will also be clear. Cost breakdown is also helpful for internal analysis of project profitability. The cost breakdown must be centered around pay rates, business costs, operational/ administrative costs and also include all non-billable works.
The project cost breakdown is one of the most important part of project planning. The form of cost breakdown and the data included in it depends on the purpose, project step when it is prepared and the accuracy of available data.