Lecture -Price Breakdown and cost Estimation (1).pdf

Introduction to Management,
Practice and Law
(AR-444)
Dr. Eng.
Abdelkader Ahmed Elbadry

Price Breakdown &Cost Estimation
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By:Dr. Eng. Abdelkader Elbadry

▪ Project Cost Management. A subset of project management
that includes the processes required to ensure that the project
is completed within the approved budget.
Price Breakdown & Cost Estimation
Project Cost Management
RESOURCE PLANNING
COST ESTIMATING
COST BUDGETING
COST CONTROL
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Project Cost Management: The process involved in estimating,
budgeting, and controlling cost so that the project can be
completed within approved budget.
Life cycle costing
Looking at the cost of whole life of the product (include
maintenance).
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Budget:
▪ Budget is the estimate of the total number of resource units or
costs required by an activity (or project).
Cost Budgeting:
▪ Allocating the overall cost estimate to individual work items
to establish a baseline for measuring performance.
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▪ Cost control: Controlling changes to the project budget.
▪ Cost estimating: Developing an approximation or estimate of
the costs of the resources needed to complete a project.
▪ Profits: are revenues minus expenses.
▪ A cost management plan : is a document that describes how
the organization will manage cost variances on the project.
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Components of a Budget:
▪ Direct labor costs
▪ Subcontractors
▪ Overheads (Site, Management)
▪ Fringe benefits
▪ Consultant fees
▪ Travel
▪ Profit
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Managing Project Budget:
▪ Look at history of similar projects
▪ Determine internal resources
▪ Determine external resources
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1. Variable Costs
▪ Change with the amount of production/work
▪ e.g. material, supplies
2. Fixed Costs
▪ Do not change as production change
▪ e.g. set-up, rental
Types of Cost
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3. Direct Costs
▪ Directly attributable to the work of project
▪ e.g. team travel, recognition, team wages
• Total Materials cost
• Total Labor cost
• Total Equipment cost
• Total Sub-contract
Types of Cost
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4. Indirect Costs
▪ overhead or cost incurred for benefit of more than one
project
▪ e.g. taxes, fringe benefit, janitorial services
▪ Project (job or site) overhead (5 to 15 %)
▪ Office (management) overhead (2 to 5 %)
▪ Value Add taxes (14%)
▪ Insurance
▪ Risk contingency
▪ Markup (profit)
Types of Cost
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▪ Project (job or site) overhead (5 to 15 %)
The costs of salaries of on-site contractor's staff
personnel,storage, site utilities, supervisors, housing and
feeding of project staff, parking facilities, offices, workshops,
stores, first aid facility ,project insurance, permits, access
roads, fence, furniture, site security, etc.
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▪ Office (management) overhead (2 to 5%)
These costs cannot be charged to any specific project.
They represent the cost of the head-office expenses, mangers,
directors, design engineers, schedulers, , office rent, utilities,
furniture, computer, legal expense, marketing, insurance, taxes,
and others.
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Markup (or Margin)
▪ An allowance for profit, and risk contingency (in some
literature markup can include office overheads).
▪ Many factors must be considered in deciding a markup figure
and each can have an influence on the figure chosen.
▪ Risk contingency is used to provide a safeguard against
uncertain circumstances that are anticipated to affect the
project such as weather, labor problems, soil conditions,
changes,…etc.
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Factors affecting Profit Margin
➢The contactors’ competition to win a project.
➢A contractor’s desirability for work.
➢Volume of work that the contractor has at a certain time.
➢Size of the project and it complexity.
➢Identity of the client and the engineer.
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By:Dr. Eng. Abdelkader Elbadry 16
▪ Risk contingency estimates according to Time plans:
Risk 15 to 25%
2 to 10 y
Long term
Risk 7 to 10%
6m to 1 y
Medium term
Risk 3 to 5%
1w to 3 m
Short term

Finalizing a Tender Price
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Balanced bid (straight forward method)
In this method the indirect cost and the markup will be
distributed among different items based on their direct cost;
i.e., the more the direct cost of an item, the more its share from
indirect cost and markup.
The resulting bid price is called a balanced bid.
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Balanced bid (straight forward method)

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Assume that the direct cost for an item (a) is LE 400,000 and that item is included in a
contract whose price is LE 3,500,000 and its total direct cost is LE 2,800,000. Calculate
the price for item (a) considering a balanced bid.
Solution
Bid price = direct cost + indirect cost + markup
Indirect cost + markup (for the whole contract) = Bid price - direct cost
= 3,500,000 - 2,800,000 = LE 700,000
Then, Indirect cost + markup for activity (a)
= 400,000
2,800,000
x 700,000 = LE 100,000
Example:
Activity price = 400,000 + 100,000 =500,00 L.E
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Thanks

Lecture -Price Breakdown and cost Estimation (1).pdf

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