Project costing and

pricing
Basic of project costing
1. Define the project scope of work
2. Retrieve and organize the available historical data
3. Develop the estimating methodology
4. Develop, adjust and support the cost estimates
5. Develop the cost schedule
6. Conduct risk analysis and prepare the contingency plan
7. Document and present the cost estimates
Cost
Costs
⚫ Anything incurred during the production of the good
or service to get the output into the hands of the
customer
⚫ The customer could be the public (the final consumer)
or another business
⚫ Controlling costs is essential to Project success
⚫ Not always easy to pin down
where costs are arising!
Direct/Indirect cost
⚫ Direct costs are “those costs that can be identified
specifically with a particular project, an instructional
activity or any other institutional activity, or that can be
directly assigned to activities relatively easily with a high
degree of accuracy.”
⚫ Indirect costs are “those [costs] that are incurred for
common or joint objectives and therefore cannot be
identified readily and specifically with a particular project,
an instructional activity, or any other institutional
activity.”
Costing objectives
⚫ To ensure viability:
⚫ Feasibility study
⚫ Resources planning
⚫ Cost/benefit analysis
⚫ Provide input for pricing (including bidding, negotiations
etc.)
⚫ To serve as a management tool:
⚫ Cost control and management
⚫ Risk management
⚫ Budget planning
⚫ What else?
Criteria for good project costing
⚫ Accurate
⚫ Realistic (good procurement and engineering practice)
⚫ Consistent
⚫ Transparent
⚫ Cost-effective
⚫ Good documentation
Develop the cost estimates (1)
⚫ For every work package:
⚫ Labor cost = labor hours x hour rate
⚫ Equipment cost = equipment time x equipment
rate
⚫ Material cost = amount x unit rate
⚫ Other direct costs:
⚫ travel, accommodation, and per diem for staff
⚫ utilities
⚫ delivery costs etc.
⚫ Distribute into activities using cost drivers (ABC approach)
Develop the cost estimates (2)
⚫ For the whole project:
⚫ Total direct cost = sum of work packages’ direct
costs
⚫ Indirect cost: 3 options
⚫ As fixed multiplier of direct personnel cost
⚫ As a fixed multiplier of the total direct cost

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Setting the price objectives (1)
⚫ Possible pricing objectives:
⚫ To generate enough revenue to enhance financial
sustainability and self-reliance
⚫ To cover part of the cost and thus reduce the budgetary
burden for the Government
⚫ To generate optimum profit return to the Institute
⚫ To contribute to the mission of the institute and to comply
with the Government policies and regulations (by subsidizing
the products and services provided to government agencies
and other public organizations)
⚫ To ensure the commitment from the client in the project, and
to motivate the client to improve operation efficiency
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Setting the price objectives (2)
⚫ Factors with impacts on the pricing objectives
⚫ Financial situation, technical capability and
production capacity, and overall business strategy
⚫ Market acceptance of the institute’s products and
services in terms of competition, of substitute
products and services, bargaining powers, and
barriers of entry
⚫ The mission of the institute and other government policies and
regulations

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Market analysis
⚫ Demand identification: Develop the list of clients that also includes
⚫ Types of products and services already provided
⚫ Past prices charged (with the methods and data used for pricing)
⚫ Policies and regulations to be applied to each group of clients
⚫ Market analysis:
⚫ Bargaining power, buying power and price sensitivity of clients
⚫ Competitions and substitutes: quality, reputation, quantities and
prices
⚫ Barriers of entry
⚫ Other factors with impacts on prices: Partners, licensees, J.V….

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Selecting the pricing method (1)
⚫ Purposes:
⚫ Meet the price objectives for the clients
⚫ Narrow down the range for final price
⚫ Input:
⚫ Cost estimates
⚫ Market analysis
⚫ Policies and regulations involved

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Selecting the pricing method (2)
⚫ Possible methods:
⚫ Mark-up pricing (or cost plus)
⚫ Perceived value pricing
⚫ Going rate pricing
⚫ Break-even point pricing

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Setting the final price
⚫ Factors influencing the final price:
⚫ Possible impacts of prices on the clients and
other parties
⚫ Psychological factors
⚫ Possible other venues: negotiations, (open or
closed) bidding etc.

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