Cost Overruns in Infrastructure Projects
The risk involved in an infrastructure project does not remain the same throughout the life of a project. Instead, the risk varies depending upon the stage in which the project is. The construction phase is supposed to be the riskiest phase of an infrastructure project. This is also the phase where investors demand the highest […]
Why do Retail Restructurings Fail?
The retail sector has been under significant financial distress in the recent past. An alarmingly large number of retail companies are facing bankruptcy proceedings in courts across the world. However, it needs to be understood that bankruptcy proceedings and liquidations are not a preferred solution for creditors either. Before creditors initiate bankruptcy, they generally try […]
Financial and Economic Models used in the Equity and Currency Markets
We often read about how electronic and software based trading is the norm in stock or equity markets as well as currency and other financial markets. Indeed, anyone who is remotely connected with the stock market or for that matter any financial market would know that there are trading systems and trading software that help […]
Pre Money and Post Money Valuation
Startup valuation is one of the most important issues faced by startup companies in their earlier years. On the one hand, these startup companies are trying to maximize their valuation while giving over a minimum amount of ownership to the investors. Investors on the other hand want to obtain the maximum stock possible. The interests […]
Infrastructure Finance Projects: Major Sources of Funding
It is a known fact that the world is in great need of infrastructure projects and, therefore, infrastructure finance. Developing countries need to build their infrastructure for the first time. This needs to be done in order to attract more investments. However, even developed countries need to build more infrastructure projects. This is because the […]
The first four stages are done before the job is being performed. The final purpose of this is to give a quotation to the clients. The calculation is done based on very little information. However, it needs to be precise. Here is the procedure:
Stage 1: List the Cost ObjectsAt the first stage, organizations need to identify all the possible cost objects that will be affected by taking this job. The idea is to get as close as possible to the perfect estimate
Stage 2: Estimate The Direct Costs:At the second stage, cost objects are segregated into direct and indirect costs. Direct costs are easy to estimate. The company needs to be aware of the amount of material and labour that the job will consume. Once these facts are known, it is easy to determine the amount of direct costs that will go into a job. These estimates are very accurate and seldom need to be revised.
Stage 3: Use Pre-determined Overhead:In the third stage, companies estimate the amount of overheads that will be incurred in the particular job. This estimate is done based on the information that is empirical. This can be contrasted with the direct costs which are estimated based on prevailing market rates. Hence these overhead estimates are almost never accurate. They need to be adjusted at later stages. However, companies try to make the estimates as accurate as possible. This helps them in the next stage.
Stage 4: Give QuotationThe direct and indirect cost estimates are collated. Companies then bid for the job with their quotation. The costs need to be accurate to ensure that the contract is won and also that the company makes a decent profit out of doing so.
When the job is being performed, companies maintain job sheets. They track whether the actual material and labour used as per the quotation. If they are not as per the quotation, then it is an anomaly. Companies can easily trace out the cause. It is either incorrect implementation or incorrect estimation.
After the job is completed, companies check the actual overheads with the estimated overheads. They, then remove the effect of over and under applied overheads to arrive at the final cost of performing the job.
This is quite a lengthy procedure. However, it creates control within the organization and helps ensure that resources are not wasted.
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