Sunday, May 4, 2008

Three Inputs to Cost Estimating

Resource requirements, resource rates, and the chart of accounts are three important inputs to project cost estimating. Details about these three closely linked inputs to cost estimating are provided below.

1. Resource requirements
A project's resource requirements come in the form of a list of items needed to complete a project. The list is produced during the resource planning phase.

Resource requirements refer to the types and quantities of resources needed to complete each activity listed in a work breakdown structure (WBS). Resource types, and the quantities needed to complete an activity, help determine project costs.

Project managers obtain the necessary human resources through staff acquisition and obtain materials through procurement. Typically, a project's resource requirements fall into five categories.
  • Labor. Labor includes all of the human resources needed for a project, such as receptionists, computer programmers, engineers, and managers.
  • Materials. Materials include the inputs you need for production or for delivery of a service. You will usually purchase materials from an external supplier, or from another division of your firm if it owns the raw resources you need for production.
  • Equipment. Equipment includes machinery, hardware, software, and methods of transportation you need in order to complete the work. When estimating costs, consider how long equipment will be useful before it must be replaced.
  • Overhead costs. Overhead costs can include costs associated with the facilities in which your project is carried out and interest payments on loans or leases.
  • Contingency costs. Contingency costs are allowances made for risk and uncertainty. A project budget should contain a buffer to allow for unexpected costs, such as those that can result from natural disasters, computer viruses, accidents, strikes, or unexpected increases in the cost of supplies.
2. Resource rates
Another input to cost estimating is resource rates. Resource rates refers to the per-unit cost for each resource required to complete a project. If exact rates are not known, the rates themselves may have to be estimated.
Cost estimating is virtually impossible without the unit rates for each resource required. Examples of resource rates are staff costs per hour, printing costs per copy, lease costs per day, interest costs per year, utilities costs per month, and component costs per part. You will benefit from having accurate cost estimates based on accurate resource rates early in the project.

3. The chart of accounts
When calculating your cost estimates, you should allocate resources to the project based as closely as possible on your organization's chart of accounts. This is a table that contains the coding or numbering system that is used by the accounting department to monitor expenses. Categories of expenses can include staffing costs, office supplies, equipment, rent, and insurance costs.

Divide your project costs into categories that match the categories in your company's general ledger. This will save you time during your cost management efforts later in the project, especially if you use project management software that is integrated with your company's accounting system.

Perhaps part of your performance reporting efforts and postmortem analysis for your project will involve comparing the cost performance of different projects. This will be much easier if all projects use the same coding system.

You will need your company's accounting codes, as well as your project's WBS, resource requirements, and resource rates, to calculate cost estimates. Remember, determine resource requirements and resource rates before you begin estimating project costs to ensure the accuracy of your estimates. Integrate cost estimates with your company's chart of accounts to simplify cost control.

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