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Home > Operations Management Checklists > Costing a New Project

Operations Management Checklists

Costing a New Project


Checklist Description

This checklist provides advice on how to estimate the cost of a new project.

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Definition

Before launching any new project, you need to determine its total cost. To ensure that all costs are covered, the first step is to break down all costs into direct and indirect costs. Direct costs include materials and labor that are directly involved in the project. Indirect costs cover operating expenses, such as administrative labor, marketing, office supplies, utilities, and rent.

It is then necessary to estimate each element of direct and indirect costs to obtain the total cost of the project. Some costs, such as labor, or products and services that are bought regularly, are easy to estimate. However, other costs may be more uncertain. You may, for example, have to include a new service or product with unusual specifications. The project budget should then include a design allowance to cover cost overruns. It is also wise to include a contingency sum to cover unexpected events such as unusual weather or problems with suppliers—always a possibility on large projects. So the budget for any new project should contain figures for the estimated cost, plus a contingency fund and design allowance, and any profit. The project manager’s role is to keep the actual cost at or below the estimated cost, to use as little of the design allowance and contingency as possible, and to maximize the profit earned from the project.

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Advantages

  • Good information is crucial to managing a project well. Understanding the costs of a new project and how they break down is critical in determining whether the project will be profitable or not.

  • Producing a detailed project costing enables the project manager to ascertain whether a project is proceeding according to schedule. He can quickly identify areas where costs are running out of control and take steps to rectify these problems.

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Disadvantages

  • If the project is relatively small, the fees involved in costing the project may be excessive.

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Action Checklist

  • Draw up a detailed list of all the elements and costs involved in the project. Make sure that you include indirect as well as direct costs.

  • Find out whether project management software could assist in managing project costs.

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Dos and Don’ts

Do

  • Talk to all the staff involved in the project to make sure that you have a complete breakdown of costs.

  • Talk to suppliers to obtain an idea of the costs of the products and services involved in the project.

  • Set aside a contingency fund and a design allowance.

Don’t

  • Don’t assume that the cost of a particular service or input will remain constant over the lifetime of a project.

  • Don’t guess the costs of certain elements of a project.

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Further reading

Books:

  • Baker, H. Kent, and Gary E. Powell. Understanding Financial Management: A Practical Guide. Malden, MA: Blackwell Publishing, 2005.
  • Bandler, James. How to Use Financial Statements: A Guide to Understanding the Numbers. Burr Ridge, IL: Irwin, 1994.
  • Dickie, Robert B. Financial Statement Analysis and Business Valuation for the Practical Lawyer. 2nd ed. Chicago, IL: American Bar Association, 2006.

Articles:

  • Akintoye, Akintola. “Analysis of factors influencing project cost estimating practice.” Construction Management and Economics 18:1 (2000): 77–89. Online at: dx.doi.org/10.1080/014461900370979
  • Munns, A. K., and B. F. Bjeirmi. “The role of project management in achieving project success.” International Journal of Project Management 14:2 (April 1996): 81–87. Online at: dx.doi.org/10.1016/0263-7863(95)00057-7
  • Raz, Tzvi, and Dan Elnathan. “Activity based costing for projects.” International Journal of Project Management 17:1 (February 1999): 61–67. Online at: dx.doi.org/10.1016/S0263-7863(97)00073-2

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