2021
Financial Management
Theo
[Link]
1/18/2021
Contents
Estimating............................................................................................................................................................................ 2
Duration and Cost .......................................................................................................................................................... 2
Accuracy............................................................................................................................................................................ 2
Ballpark Estimating .................................................................................................................................................. 2
Rough Order of Magnitude ....................................................................................................................................... 2
Detailed Estimating ................................................................................................................................................... 2
Cost Management............................................................................................................................................................... 3
Labour Cost...................................................................................................................................................................... 3
Material Cost ................................................................................................................................................................... 3
Equipment and Tool Cost ............................................................................................................................................. 3
Cost of Consumables ...................................................................................................................................................... 4
Overheads ........................................................................................................................................................................ 4
Profit .................................................................................................................................................................................. 4
Managing Actual Cost and Forecasting ........................................................................................................................ 6
Planned Budget............................................................................................................................................................... 6
Actual Cost ....................................................................................................................................................................... 6
Forecasting....................................................................................................................................................................... 6
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Estimating
Duration and Cost
Using the work breakdown structure, the project is divided into smaller tasks that in total make
out the entire project. The duration of the activities is calculated using the technical method
statement.
Increasing the duration of a task will increase the cost of that activity.
The duration and the cost of the project must be calculated together, and all relevant
stakeholders must understand the importance.
Accuracy
Ballpark Estimating
The ballpark estimating is hardly an accurate estimating tool, the method is used to give an estimate when doing a
feasibility study for a project to determine if the project will go forward.
Management will determine a ballpark estimate based on experience and data from previous project.
Rough Order of Magnitude
This method is a bit more accurate than the ballpark method; more accurate historical data is used to price the project
on similar project completed. Based on experience the duration and cost is calculated by management.
This is still not accurate but can also give a good indication of the project cost before allocating resources for a more
accurate estimation.
Detailed Estimating
Estimates are calculated for each activity in detail.
Duration and cost for each activity including all resources allocated to the activity are specified
and quantified.
This is an accurate estimation method and will require time and effort.
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Cost Management
Labour Cost
Allocate internal employees working on a project to the activities of the project for accurate costing.
For example, you have the labour calculated for a specific activity including the amount of time the
employees will spend to complete the activity…
Skilled Labour 2 Weeks @ $ 1,500 / Week Qty 1 = $ 3,000
Semiskilled Labour 1 Week @ $ 900 / Week Qty 1 = $ 900
Normal Labour 3 Weeks @ $ 550 / Week Qty 3 = $ 4,950
Subcontractor 3 Weeks @ $ 750 / Week Qty 1 = $ 2,250
Total = $ 11,100
Labour cost to complete the activity totals at $ 11,100
Material Cost
All the material used to complete a task must be accurately calculated and specified.
Material specified 1 @ $ 100 Qty 5 = $ 500
Material specified 2 @ $ 50 Qty 10 = $ 500
Material specified 3 @ $ 500 Qty 1 = $ 500
Total = $ 1,500
Material cost to complete the activity totals at $ 1,500
Equipment and Tool Cost
Rental and internal equipment and tools used by the employees are allocated to each activity for accurate
costing.
Laptop 2 Weeks @ $ 200 / Week Qty 1 = $ 400
Cellphone 1 Week @ $ 100 / Week Qty 1 = $ 100
Vehicle 3 Weeks @ $ 500 / Week Qty 2 = $ 1,500
Tool 1 3 Weeks @ $ 250 / Week Qty 1 = $ 750
Equipment 1 3 Weeks @ $ 350 / Week Qty 1 = $ 1,050
Total = $ 3,800
Equipment and tool cost to complete the activity totals at $ 3,800
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Cost of Consumables
All consumables used to complete a given task are calculated and specified.
Fuel @$3 Qty 50 = $ 150
Electricity @$1 Qty 100 = $ 100
Water @ $ 0.5 Qty 50 = $ 25
Total = $ 275
Consumables cost to complete the activity totals at $ 275
Overheads
Overheads are calculated and divided into projects and activities, depending on the size of the project and
the activities that make out the project.
Office Usage @ $ 500 Qty 1 = $ 500
Senior management @ $ 500 Qty 1 = $ 500
Office Insurances @ $ 250 Qty 1 = $ 250
Total = $ 1,250
Overheads cost to complete the activity totals at $ 1,250
Profit
Profit is calculated as a percentage of the activity:
Labour = $ 11,100
Material = $ 1,500
Equipment and tools = $ 3,800
Consumables = $ 275
Overheads = $ 1,250
Total = $ 17,925
15 % Profit = $ 2,688.75
Grand Total = $ 20,613.75
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Managing Actual Cost and Forecasting
Planned Budget
During the planning phase of the project, we produce an accurate bill of quantities and cost the project.
Once the project starts the bill of quantities is used to manage the budget, it is a live document and is
updated as the project progresses, this is especially important to prevent going over budget.
Actual Cost
The actual cost is the live costing updates as activities progresses, no activity will ever be exactly as planned.
During the execution of an activity, we find that the following factors will influence the costing and must be managed
according to the planned documentation:
- Activity duration
- Procurement of material
- Labour required to complete the task
- Logistics
- Workmanship and quality issues
- Equipment and tool usage
- Accidents and incidents (Health and Safety)
Forecasting
Forecasting is extremely important, once you compared the planned cost with the actual cost and
you find that you went over budget with an activity, you can plan future activities to reduce
costing and prepare the damage done to the budget.
Planned Costing – Actual Costing = (Loss or Profit)
(Planned cost of an activity $ 5,000) – (Actual cost $ 6,500) = (Loss of $ 1,500)
The most important thing about forecasting is that you will go over budget on some activities,
how you communicate and manage this change is what must be completed and shared with
relevant stakeholders.
Steps taken when going over budget on an activity:
- Identify reasons for going over budget
- Report to all relevant stakeholders
- Identify actions on future activities to rectify budget
- Complete a report and share with relevant stakeholders
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