Project Feasibility & Planning

Organization & Overhead Costs

Session- 12

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 Effective Handover of Projects to Operations Teams

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 Organization
• The preceding sessions have explored and described;
 the problems of product marketing
 providing the necessary material inputs
 locating the plant at the optimal site
 preparing the engineering design.

• This present session deals with the development and design of the
organization needed to manage and control the entire operation of the factory,
and with the related overhead costs.

• Project engineering and organizational planning are closely related, and should
therefore be undertaken jointly in a series of feedback operations.

• The aim of this session is to describe the process of organizational planning,

which can be decisive for the financial feasibility of the project.
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 Organization
• A division of the company into organizational units in line with the marketing, supply,
production and administrative functions is necessary not only from the operational point
of view, but also during the planning phase, to allow the assessment and projection of
overhead costs.

• Furthermore, it is essential for the feasibility of a project that a proper organizational

structure should be determined in accordance with the corporate strategies and policies.

• The recommended organization will depend on the social environment as well as on

techno-economic necessities.

• The organizational set-up depends to a large extent on the size and type of the industrial
enterprise and the strategies, policies of those in a position of power in the organization.

• It should also be borne in mind that organizations are not static but develop with the
project (pre-investment and investment phases, start-up and operation).

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 Plant organization and management
• Organization is the means by which the operational functions and activities of the enterprise are
structured and assigned to organizational units, represented by managerial staff, supervisors and
workforce, with the objective of coordinating and controlling the performance of the enterprise and the
achievement of its business targets.

• The organizational structure of an enterprise indicates the delegation of responsibilities to the various
functional units of the company, and is normally shown in a diagram, often referred to as an
organogram.

• Usually, the organization is designed primarily in line with the different functions in the enterprise, such
as finance, marketing, purchasing and manufacturing. However, there is no unique organization pattern.

• It is also possible to base organizational structures on production lines, or on geographical areas or

markets; the latter are typical for marketing organizations.

• The problem of structuring and organizing the work and the delegation of executive responsibilities
must not be seen only from the functional point of view, because various sociocultural factors may
influence against the mere copying of such organizations in other countries.

• This aspect is also very important in developing countries, when special organizational structures are
required for the optimal use of imported technologies.

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 Organizational functions
The organizational functions are the building blocks of the company. As
reflected in example figure below , they may be grouped into the
following organizational units in line with the specific requirements of
the individual company:
* General management of the enterprise
* Finance and accounting
* Personnel administration
* Marketing, sales and distribution
* Supplies, transport, storage
* Production:
Main plant
Service plants
Quality assurance /control
Maintenance and repair
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 Example of an organization chart for an
industrial enterprise

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 Organizational structure
The organizational structure of the company can take a number of shapes, the
most common being the pyramid shape, which has the following three
organizational levels:

• Top management, normally entrusted with long-term strategic planning,

budgeting, coordination and control

• Middle management, normally entrusted with the planning and control of the
organizational functions, such as sales, production, purchasing and finance

• Supervisory management that plans and controls the day-to-day operations

and activities within the organizational units under its supervision

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 Organizational design
Usually the design of the organizational set-up of a project is covered in the feasibility study. The
organizational design for both the construction and the operating phase depends on internal and
external project requirements and conditions, and is prepared for the following two reasons:
• First, the organization of the project and enterprise should aim at the optimal coordination
and control of all project inputs, which make it possible to implement the project strategies
economically.
• Secondly, the organizational set-up serves to structure the investment and production costs
and to determine the costs linked with the corresponding organizational units.
• For accounting purposes these costs are treated as overhead costs, unless they can be
directly related to a specific product.

• The design of the organization usually includes the following steps:

 The goals and objectives for the business are stated;
 The functions that are necessary to achieve the goals are identified;
 The necessary functions are grouped or related;
 The organizational framework or structure is designed;
 All key jobs are analysed, designed and described;
 A recruiting and training programme is prepared.

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 Organizational design
The organizational planner will then have to consider some of the fundamental aspects of optimal
organization. These may include:
* The span of control, that is, the numbers of employees reporting to a supervisor
* The number of organizational levels
* A subdivision of activities by function, process, equipment, location, product or classes of
customers
• The distribution of responsibilities and authority
Later, once the project is approved, all information applicable to the
organization will be collected in an organization manual, which may include:

* An overall description and identification of the strategic objectives and policies of the company
* A description of the various functional units, sections or divisions of the company, specifying the
main tasks to be performed by the individual units
* Job descriptions for at least all key personnel
* Administrative procedures according to which communications are to be carried out, both
internally and externally, and covering all functions and all levels of the company
Other descriptive material may be included according to the local conditions and the way in which
the company operates.

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 General management
• Depending on the type and size of an enterprise, the general manager with his
office is responsible for the business functions. These are management functions
that are fundamental for the existence of an enterprise and may not be delegated.

• Often, especially in the case of medium-sized industrial plants, the general manager
is also in charge of general administrative functions, such as personnel and finance.

• In cases where technological aspects are essential for the enterprise, the
production manager could be in charge of the enterprise.

• The feasibility study should determine the staffing requirements for the office of
the general manager in order to allow estimates of personnel and other overhead
costs related to this office.

• Cultural and social aspects should be considered, and the study team should not try
to blindly copy organizational patterns that have proven successful in other
countries.
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 General management
• An administrative unit or department has to be planned to provide the
management with the financial and accounting information required for the
efficient and economic operation of the enterprise.

• National business laws and economic regulations also require that the
financial situation of the enterprise should be reported regularly and in line
with standards determined by the authorities.

• Specialized staff is required for cost accounting, bookkeeping, calculation of

salaries and wages, budgeting etc. Again the number and qualifications of the
required staff have to be determined to allow the projection of personnel
costs.

• Estimated office overhead costs for materials, services and communications

must be included in the projection of administrative overhead costs.

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 Marketing organization
• The marketing department is the organizational unit carrying out the marketing functions
.

• Usually it has an independent line function, but the individual structure of the unit varies
according to;
 type of customer
 the nature of the product
 its geographical distribution and the sales and distribution pattern.

• Establishing a marketing organization for a new project (or product) requires the prior
careful determination of both the marketing objectives and the means required and
available.

• Sales and distribution of a product in a country where the infrastructure and the means
of communication are limited may also require a more costly marketing organization, and
seriously restrict the competitiveness of the company in some cases.
 There are many examples of production plants that could not compete with the local
traditional suppliers, owing to a large and costly sales and distribution system.
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 Organization of supplies
• The supply system includes the provision of inputs of materials and services, shipping of the
goods, storage and inventory control.

• A number of placements within the organization are possible. Some companies may have a
central purchasing department and stores attached to the production units.

• The purchasing department may be an independent line function.

• If a company is divided into production plants that are geographically separated, it may be
practical to attach a small decentralized purchasing unit to each of these production plants.

• In some large companies the entire supply system is entrusted to a purchasing or supplies
department.
 Its purpose is to purchase goods and services from selected suppliers according to
approved specifications and bills of quantity, and to place them at the disposal of the
production plant according to a supply schedule derived from the production programme.
 In some cases it may be necessary to include in the duties of the purchasing department
the transport of goods from suppliers.

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 Organization of supplies
• It is the responsibility of the purchasing department to contribute to the overall profit generation of the
company ;
 by obtaining the best possible prices
 while avoiding the storage of larger quantities of input materials, except the required for reasonably
safeguarding the production requirements.

• In developing countries procurement can be critical because of various infrastructural and other socio-
economic constraints.
 Supply stocks must therefore often be considerably higher than in industrialized economies.

• Purchasing will normally cover the provision of both goods and services from domestic and overseas
suppliers.

• Typical tasks will therefore include:

 Selection and evaluation of suppliers
 Requesting bids or arranging international competitive bidding
 Ordering and dispatch
 Shipping and clearing, quality control of incoming goods
 Warehousing
 Invoice control and payments of suppliers

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 Organization of storage
• The flow of materials, from the moment of purchasing through the entire
manufacturing process until the point of selling or delivery of the products, needs to be
organized in order to secure the undisturbed operation of the factory.

• Stock control must aim at;

 keeping stocks of materials and products low to avoid unnecessarily high net working
capital requirements
 while maintaining the minimum stock required for safe and uninterrupted operation.

• Often the control of the entire material and product flow, including storage, remains
within the production department.

• In this case the production programme as well as products in stock would be;
 planned jointly with the marketing department.
 and supplies would be ordered through the purchasing department.
• The stock of spare parts is usually controlled by the maintenance unit.

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 Organization of production
• The organization of the production plant is designed in accordance with the
production process, and in line with the availability of human resources.

• Like the other organizational units, the production department causes indirect
costs, such as costs of plant management, general supplies and services,
which have to be assessed in the feasibility study.

• These costs are subsumed under factory overheads.

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 Organization of quality assurance
• The quality assurance department is responsible for the total quality of a product from its conception to its
delivery to the end-user.

• The type and scope of quality assurance depends, however, on the type of the industry.

• Its placement in the organization often reflects the wish that the quality assurance department must be
independent of other departments, whose activities it monitors and evaluates (engineering and research,
production, after sales service etc.).

• Labor and skills requirements vary in accordance with the level of quality assurance, and with the extent to
which the department will be responsible for quality monitoring of research, engineering, production and
perhaps also service.

• Inputs required for the activities of a quality assurance department also vary in accordance with the
responsibilities of the department.
 A fully integrated department will need almost all technical documentation from functional specifications to
the final production and works specifications, and in addition engineering schedules, production plans and
copies of orders to suppliers.

• Output material from the same department will include design reviews, quality control reports and
recommendations and quality statistics.

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 Organization of maintenance
• The maintenance function is often placed within the production department. However, the
placement of the maintenance unit within the individual company organization depends on where it
can best fulfil its main objective of ensuring that plant equipment is ready and functioning as
required in accordance with the production programme.

• The structure of the maintenance unit also depends on the maintenance policy that is adopted by
the individual company.
 In a highly industrialized environment where equipment suppliers or their agents are at hand, and
where maintenance contractors can be easily found, the unit may only have to deal with preventive
maintenance and emergency repairs.
 As the environment becomes less industrialized, more maintenance operations will have to be
undertaken by the maintenance unit.

• If a maintenance unit is wholly dependent on its own resources it will be responsible for both
preventive and corrective maintenance of all plant equipment, auxiliary equipment and buildings.

• Consequently, a complicated manufacturing plant will require a highly developed, well-staffed

maintenance organization.
 It will probably also need a vast amount of imported spare parts and materials that will increase the
foreign exchange and working capital requirements of a project.

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 Organization of personnel
• The personnel unit deals with all subjects related to human resources, such as
recruitment and training of personnel and updating and developing skills and
knowledge.

• If management of the company staff and workforce is relatively simple, there

may be no need for a separate personnel unit.
 In that case personnel matters may be placed as a staff function or could be
incorporated in the administrative department.

• Human resource development may be an important task of a personnel

department. Training may have to be organized to increase skills of staff and
workers, to secure or increase the quality of products etc.

• Other important subjects could be training related to health protection, the

introduction and maintenance of safety measures, and the operation of
machinery and plants in accordance with environmental protection measures.
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 What is Project Overhead?

• Project Overhead refers to the costs of a project that a company incurs indirectly –
also called indirect costs. These expenses cannot be directly attributed to one
project, but instead are costs related to running the company and therefore apply
to all projects the company completes.

• Project Overhead refers to the costs of a project that a company incurs indirectly –
also called indirect costs. These expenses cannot be directly attributed to one
project, but instead are costs related to running the company and therefore apply
to all projects the company completes.

• Project Overhead is applicable mostly to project business, or project-based

companies. If your company delivers projects as its business (e.g. architecture,
construction, engineering, ETO manufacturing, professional services), then Project
Overhead is a useful concept and metric you should be tracking.

• Project Overhead is not included in a project’s Cost Breakdown Structure but

instead may be calculated and accounted for in the company’s month-end process.

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 Project Overhead Examples

• Project Overhead costs may include expenses such as;

 office space,
 utilities,
 director and executive level employees,
 benefits,
 insurance,
 taxes, etc. These costs are generally treated as fixed costs and apply
universally to all projects across the company.
• Contrastingly, expenses directly allocated to a project include items such
as;
 material for the project,
 resources and labor,
 and equipment rental. These expenses may be billed directly to the client
on a particular project and they are included in the project profit and loss
statement as costs of goods/services sold.

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 Accounting for Project Overhead

• Project Overhead costs are generally included in your financial statements as

selling and administrative expenses. However, there are ways to calculate
overhead for project business management purposes.

• For practical analysis of your project overhead costs, you may want to analyze
overhead as a percentage of project sales.

 To calculate the overhead rate, divide the total overhead costs of the business
in a month by your project monthly sales/revenue. Multiply this number by 100
to get your overhead rate.

• Example: say your business had Rs.50,000 in overhead costs in a month and
Rs.1,000,000 in sales.
• Overhead Rate = Overhead Costs / Sales
• The overhead rate is Rs.50,000 / Rs.1,000,000 = .05 or 5%

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 Accounting for Project Overhead
• This means that the business spends five .05 Rupees on overhead for every
rupee that it makes. This number also gives you a full picture of your project
expenses and the margins you need to target in your projects to be successful
as a business.

• Also, this metric is useful to track to measure performance over time and to
see if your fixed cost can stay the same while your revenue grows, showing
that you can increase profit by scaling and taking on more projects.

• Example: Let us say that the overhead cost of a company is Rs.1200 and the
total labor cost is Rs.10,000. The labor cost percentage will be
Rs.1200/Rs.10,000 x 100 = 12%

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 Overhead Costs

Overhead Costs Definition;

• Overhead costs are the continuous business expenses that are not
directly related to manufacturing a product or creating a service.

• It is an important part of the budgeting process and also

determines how much a company will charge for a product or
service for profit.

• Simply put, an overhead meaning can be any expense a company

incurs to support the core business activities, while not being
directly related to the business’ products and services.

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 Overhead Functions Costs
When it comes to functions, overhead costs are categorized into the following types:
1. General and administrative overhead costs:
• These generally include costs related to the overall management and administration of an
organization, like the need for accountants, human resources, receptionists, task runners, and
other administrative staff.

2. Selling overhead costs:

• These are related to activities that are a part of marketing and are fundamental to the sales of
the goods or services. It may include printed material and television advertisements, as well as
the commissions/incentives offered to the sales team. Depending on the nature of the business,
there can be other categories as well, like research overhead, manufacturing overhead,
maintenance overhead, warehousing overhead, sales point overhead, or transportation
overhead.

3. Production overheads:
• These are incurred for production activities. Some examples would be electricity bills, raw
materials packaging, repair costs for machinery and, spare parts.
4. Distribution overheads:
• These are required to deliver and transport products and services to customers. Some examples
of distribution overhead costs would be rent for godowns, packaging charges, delivery vehicle
fuel costs, etc.
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 Calculate What The Overhead Rate Would Be;

• The overhead rate or the overhead percentage is the amount your

organization spends on manufacturing a product or providing services to
their customers.

• To calculate the overhead rate, we divide the indirect costs by the direct
costs and multiply by 100.

• For example: If the overhead rate is 20%, it means that the business spends
20% of the revenue on manufacturing a good or providing its services. A
lower overhead rate indicates business efficiency and higher profits.

• Example: Let us say that the overhead cost of a company is $1200 and the
total labor cost is $10,000. The labor cost percentage will be
$1200/$10,000 x 100 = 12%

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• What are Overhead Costs?
• Overhead costs, often referred to as overhead or operating expenses, refer to those
expenses associated with running a business that can’t be linked to creating or
producing a product or service. They are the expenses the business incurs to stay in
business, regardless of its success level.
• Overhead costs are all of the costs on the company’s income statement except for
those that are directly related to manufacturing or selling a product, or providing a
service. A potter’s clay and potting wheel are not overhead costs because they are
directly related to the products made. The rent for the facility where the potter creates
is an overhead cost because the potter pays rent whether she’s creating products or
not.
• Overhead Cost Examples
• A company’s overhead costs depend on the nature of the business. A retailer’s
expenses will be different from a repair shop or a crafter’s. Typical examples include:
• Rent
• Utilities
• Insurance
• Salaries that aren’t job- or product-specific
• Office equipment such as computers or telephones
• Office supplies
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• Overhead costs refer to those expenses that
are required by the organization to run its
operations and they do not cover any
direct expenses of project activities. However,
they still form a part of many project budgets.
• Project Overhead refers to the costs of
a project that a company incurs indirectly –
also called indirect costs.
These expenses cannot be directly attributed to
one project, but instead are costs related to
running the company and therefore apply to
all projects the company completes
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