Project Identifying; Costs and Benefits

Sherko Soltanpanahi


Definition of Cost and Benefit 
cost ; is the value of money that has been used up to
produce something, and hence is not available for use anymore.  The sum total of all funds required to complete a business purchase 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.

Project Costs
A project estimate can be sub-divided into a number of different costs, consider the following:

1. 2. 3. 4. 5. 6. 7. 8.

Direct costs Indirect costs Time related costs Labour costs Material and equipment costs Transport costs Preliminary and general (P&G) costs Project office costs

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 5 be charged to an activity or project.

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 labour costs 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, rent
and rates. .


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. ‡Fixed price contracts may not be affected by time.


4-Labour Costs
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 and dividing 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.


Table 1: labour cost

Main Purpose


Procurement Costs
This section will determine the procurement costs to acquire all the required boughtin 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):


6-Transport Costs
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 the goods 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 supplierµs responsibility. 11

7-Project Office Costs
The project office costs or project 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 be able to relate this project management fee as a percentage of the project's value, about 6% to 10% would be typical.


Project Office Costs

(Table 3:project office cost)


8-Preliminary and General (P&G) Costs
If the project requires work on site, on location, or away from your office, these costs are often separated out and called P&G's . A typical construction project would use the following headings: (Note, many of these headings have been identified already under indirect costs). ‡ Site establishment and dis-establishment. ‡ Site supervision. ‡ Insurances and performance bonds. ‡ Plant-hire, equipment, carnage, tools, vehicles and generators. ‡ Site establishment, huts, toilets and fencing. ‡ Site security which would include the night watchman and guard dogs to protect the project from theft and vandalism. ‡ Site services which include telephone, electricity and water. ‡ Temporary access roads and sign posts. ‡ Scaffolding and ladders. ‡ Temporary Lights and power supply. ‡ Accommodation for the workforce. ‡ Special travelling expenses to site. ‡ Special training and testing of tradesmen. ‡ Material handling which would include receiving inspection, off-loading, storage and inventory control. ‡ Removal of rubbish, waste and scrap. The costs assigned to these headings should include the normal recovery percentage for overhead costs and profit. Check that these costs are not being recovered elsewhere in the estimate, for example, site services and security may be provided for by the client.

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 Risk reduction Productivity Reliability Staff morale Cost reduction Safety Flexibility Quality Delivery Social.

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 from S/5.20 to S/6.40 in constant value terms over the twelve-year development period. 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."


Tangible Benefits of Agricultural Projects
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 (grading and 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.


Tangible Benefits of Agricultural Projects
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 withand-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.

Tangible Benefits of Agricultural Projects
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


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


Pandey, Devendra Prrasad .2008, Rural PROJECT MANAGEMENT , New Age International (P) Ltd., Publishers, New Delhi - 110002


Gittinger,J. Price. 1984, ECONOMIC ANALYSIS OF AGRICULTURAL PROJECTS ,Economic Development Institute, The World Bank ,London.

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