project identifying; costs and benefits

8/3/2019 Project Identifying; Costs and Benefits

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Sherko Soltanpanahi

[email protected]

Project Identifying; Costs andBenefits


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Definition of Cost and Benefit

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cost ; is the value of money that has been used up toproduce something, and hence is not available for use

anymore.

The sum total of all funds required to complete a businesspurchase transaction

an alternative that is given up as a result of a decision

benefit : A positive outcome of a project or program.

The term outcome can be used to include.

the positive contribution to gross national product (or other

measure of value) from an economic activity or project.


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1-Direct Costs

direct costs are those costs that can be specifically identified with an activity or

project. The current trend is to assign as much as possible, if not all costs to

direct costs, because direct costs can be budgeted, monitored and controlled far

more effectively than indirect costs.

Direct management costs refer to the project office running costs. Salaries for

the project manager, project engineer, planner, accountant, etc.

Direct labour costs refer to the people working on an activity, e.g. boilermakers,

welders, fitters, computer programmers, etc.

Direct material costs are for the materials, consumables, components which

are used for completing an activity and an allowance for scrap and wastage.Direct equipment costs refers to machinery, plant and tools.

Direct expenses include bought-in services that are specific to the project,

for example, plant hire, surveyor, designer and sub-contractor fees.

The distinctive nature of direct costs is that the total expense can

be charged to an activity or project.5


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2-Indirect Costs

Indirect costs, also called overheads, are those costs which cannot be

directly booked to an activity or project, but are required to keep the

company operational.

Indirect management costs refer to senior managers, the estimating

department, sales and marketing, general office staff, secretarial,administration and the personnel department.

Indirect labourcosts refer to the reception, maintenance, security and

cleaners. Basically it includes all the employces who are required to

keep the company functioning.

Indirect materials include stationery, cleaning materials and

maintenance parts.

Indirect equipment includes computers, photocopiers and fax

machines.

Indirect expenses include training, insurance, depreciation, rentand rates.

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3-Time Related Costs

Critical path method(CPM) was originally developed to address the time / cost

tradeoff. If a project's duration is reduced or extended how will the costs

change? To do this calculation you need to determine how costs are affected by

time. Consider the following:

Rent increases with time.

Running costs - water, electricity and gas would increase with time.

If the project's duration is reduced, employee labour rate will increase

if theworkers have to work overtime.

Contract labour on a fixed rate is not affected by time, but their

productivitymay reduce if they work long hours.

Fixedprice contracts may not be affected by time.

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4-Labour Costs

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This section will explain how to determine your labour charge-out rate.

The labour costs considered here are for the project workforce and thus

a direct cost. Although the salaries of a workforce may be clearly

identified there are also a number of other associated costs which form

part of the labour rate.

The labour rate is calculated by aggregating the various costs anddividing them by the number of man-hours worked. This process is

explained in the following worked example. Here the costs have been

subdivided into four main headings:

Salary

Associated labour costs

Contribution to overheads

Contribution to company profit.


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Table 1: labour cost

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Main Purpose


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Procurement Costs

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This section will determine the procurement costs to acquire all the required bought-

in goods and services. The simplest method is to add a percentage to the buying

price to cover all the procurement costs, consider the following (table 2):


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6-Transport Costs

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It is important to appreciate the additional costs that may be incurred delivering the

goods from the suppliers factory to client's premises or site, consider the following

terms:

Ex-Works: It is the purchaser's responsibility to organise and pay for delivery,

loading, transport and insurance from the factory gate.

FOB (Free on Board): The supplier will arrange for the goods to be loaded on

board - - a ship, plane, train or truck at an agreed place. The supplier will pay for the

port duties and export clearances, while the client is responsible for the transport,

insurance and any import duties.

CIF (Cost, Insurance and Freight): The supplier pays for the delivery of thegoods to their final destination plus the insurance. The client pays for import

duties.

DDP (Delivered Duty Paid): The goods will be delivered to the purchaser's front

door. All the risks and costs relating to transport, insurance and duty will be the

suppliers responsibility.


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7-Project Office Costs

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The project office costs orproject management fee are

often separated out and may form a separate contract within

the total project.

The project office costs not only include the management

fee, but also many other associated costs. Many of the costs

vary as the project passes through the project hases, there

may be a number of part time team members either on

contract or seconded from another department.

Once you have a data base of historical costs you may beable to relate this project management fee as a percentage

of the project's value, about 6% to 10% would be typical.


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Project Office Costs (Table 3:project office cost)

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Benefits

The following lists some of the benefits which have to be considered, from which it will be

apparent that some will be very difficult to quantify in monetary terms.

Financial

Statutory

Economy

Riskreduction

Productivity

Reliability

Staffmorale

Cost reduction

Safety

FlexibilityQuality

Delivery

Social.

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Tangible Benefits of Agricultural Projects

Tangible benefits of agricultural projects can arise either from an increased value of

production or from reduced costs. The specific forms in which tangible benefits appear,

however, are not always obvious, and valuing them may be quite difficult.

Increased production

Increased physical production is the most common benefit of agricultural projects.

Ex: An irrigation project permits better water control so that farmers can obtain higher

yields.

. Quality improvement

In some instances, the benefit from an agricultural project may take the form of an

improvement in the quality of the product. For example, the analysis for the Livestock

Development Project in Ecuador, which was to extend loans to producers of beef cattle,

assumed that ranchers would be able not only to increase their cattle production but also to

improve the quality of their animals so that the average live price of steers per kilogram

would rise fromS

/5.20 toS

/6.40 in constant value terms over the twelve-year developmentperiod.

Change in time of sale

In some agricultural projects, benefits will arise from improved marketing facilities that

allow the product to be sold at a time when prices are more favorable. A grain storage

project may make it possible to hold grain from the harvest period, when the price is at its

seasonal low, until later in the year when the price has risen. The benefit of the storage

investment arises out of this change in "temporal value." 16


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Change in location of sale

Other projects may include investment in trucks and other transport equipment to carry

products from the local area where prices are low to distant markets where prices are

higher. For example, the Fruit and Vegetable Export Project in Turkey included provision

for trucks and ferries to transport fresh produce from southeastern Turkey to outlets in the

European Common Market. The benefits of such projects arise from the change in

"locational value."

Changes in product form (gradingand processing)

Projects involving agricultural processing industries expect benefits to arise from a change

in the form of the agricultural product. Farmers sell paddy rice to millers who, in turn, sell

polished rice. The benefit to the millers arises from the change in form. Canners preserve

fruit, changing its form and making it possible at a lower cost to change its time or location

of sale.

Cost reduction through mechanization

The classic example of a benefit arising from cost reduction in agricultural projects is that

gained by investment in agricultural machinery to reduce labor costs. Examples are tube

wells substituting for hand-drawn or animal-drawn water, pedal threshers replacing hand

threshing, or (that favorite example) tractors replacing draft animals.

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Reduced transport costs

Cost reduction is a common source of benefit wherever transport is a factor. Better feeder

roads or highways may reduce the cost of moving produce from the farm to the consumer.

The benefit realized may be distributed among farmers, truckers, and consumers.

Losses avoided

In discussing with-and-without comparisons in project analyses earlier in this chapter, we

noted that in some projects the benefit may arise not from increased production but from a

loss avoided. This kind of benefit stream is not always obvious, but it is one that the with-

and-without test tends to point out clearly.

Other kinds of tangible benefits

Although we have touched on the most common kinds of benefits from agricultural

projects, those concerned with agricultural development will find other kinds of tangible,

direct benefits most often in sectors other than agriculture. Transport projects are often

very important for agricultural development. Benefits may arise not only from cost

reduction, as noted earlier, but also from time savings, accident reduction, or development

activities in areas newly accessible to markets. If new housing for farmers has been

included among the costs of a project, as is often the case in land settlement and irrigation

projects, then among the benefits will be an allowance for the rental value of the housing.

Since this is an imputed value, there are valuation problems that will be noted later.

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Secondary Costs and Benefits

Projects can lead to benefits created or costs incurred outside the project itself. Economic

analysis must take account of these external, or secondary, costs and benefits so they can

be properly attributed to the project investment.

Intangible Costs and Benefits

Almost every agricultural project has costs and benefits that are intangible. These may

include creation of new job opportunities, better health and reduced infant mortality as a

result of more rural clinics, better nutrition, reduced incidence of waterborne disease as a

result of improved rural water supplies, national integration, or even national defense

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Reference

1. Eur Ing Albert Lester, CEng, FICE, FIMechE, FIStructE, FAPM, .2003,ProjectPlanning and Control, Fourth edition, Elsevier Butterworth-Heinemann,Oxford.

1. Pandey, Devendra Prrasad .2008,Ru

ral PROJE

CT MANAGE

ME

NT ,N

ew AgeInternational (P) Ltd., Publishers, New Delhi - 110002

2. Gittinger,J. Price. 1984, ECONOMIC ANALYSISOFAGRICULTURALPROJECTS,Economic Development Institute, The World Bank ,London.

3. http://www.googlesearch.co.in/4. http://www.wikipedia.org/.

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project identifying; costs and benefits

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