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Cost Estimation Strategies for Project Budgeting Success

Learn about direct and indirect project costs, labor and material estimations, and how to develop accurate cost projections for your projects. Document your data sources and bases for cost estimates.

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Cost Estimation Strategies for Project Budgeting Success

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  1. Budgeting and Cost Estimation Objective: • Introduce some simple concepts regarding developing project budgets and cost projections

  2. Total Project Costs Total Project Cost = Direct Costs + Indirect Costs

  3. Project Cost Components • Direct Costs • Costs that are directly related to producing specific goods or services • Labor costs for project staff (including benefits) • Physical materials for project (supplies, equipment, etc.)

  4. Project Cost Components • Indirect Costs (Overhead Costs) • Costs for activities that benefit more than one project on an indeterminate basis • Facility costs (utilities, office computers, furniture, etc.) • Clerical staff • Administrative staff • General office supplies

  5. Estimating Project Cost Components • Direct Costs • Generally estimated and charged on an item by item basis • Indirect Costs • Generally estimated as a percentage of the direct costs

  6. Total Project Costs Total Project Cost = Direct Costs + Indirect Costs = Direct Costs + (Overhead Rate as %/100)*Direct Costs Or Total Project Costs = (1 + OH Rate%/100)*Direct Costs

  7. CDR - Budgeting Deliverable • You will evaluate two situations: i) Production of ‘to be assembled’ kits ii) Production of ‘fully assembled model’ kits • Both kits require the same parts and materials but different amounts of labor. i) Sorting parts into a kit ii) Sorting parts into a kit and assembling vehicle • The total anticipated cost for the assembly of 1,000 of each of these kits is to be estimated

  8. CDR-Budgeting Deliverable DOCUMENT YOUR DATA SOURCES AND/OR THE BASES FOR YOUR ESTIMATES

  9. Cost Estimation Data is On-line Labor (Sorting and Assembly) Costs • Determining Labor Costs for Sorting and Assembly: • Estimate the amount of labor (time) required to sort the parts into one kit (document how this number was obtained) • Estimate the amount of labor (time) required to assemble one kit (document how this number was obtained) • Determine: Pay-scale ($10/hr) and wages paid to employees • Add additional costs to the employer • Federal taxes (Social Security and Medicare) – 7.65% • Workmen’s compensation – 4.66% • Unemployment insurance - 0.1% • Long term disability insurance – 0.55% • Life insurance – 0.3% • Retirement contribution (401K) – 5% • Labor is a direct project cost

  10. Cost Estimation Data is On-line Materials (Parts) Costs • Parts Base Costs • K’Nex Parts (K’Nex web-site: http://www.knex.com/Shop) • Handout • Discount Rates • (% discount for quantity purchases of individual parts): • (100 pcs. - 5%), (500 pcs. - 10%), (1,000 pcs. - 15%), (5,000 pcs. - 20%) • Shipping and Handling • 5% of the total parts bill • Parts and Supplies are direct project costs

  11. CDR - Budgeting Deliverable • ‘To be assembled’ Project Cost • Parts + Labor + Indirect Costs • Indirect Costs = 1.25*(Parts + Labor) • ‘Fully assembled model’ Project Cost • Parts + Labor + Indirect Costs • Indirect Costs = 1.25*(Parts + Labor)

  12. CDR-Budgeting Deliverable DOCUMENT YOUR DATA SOURCES AND/OR THE BASES FOR YOUR ESTIMATES

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