Cost and Scheduling Basic

Posted: October 17th, 2013

Cost and Scheduling Basic

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Cost and Scheduling Basic

Overheads are part of the company and must be fulfilled for operations to be complete. Despite being indirect, they play a crucial role. Therefore, while estimating cost and scheduling projects, overheads should be considered. From the table above, the overhead costs of labor are equal to direct labor, meaning that both work at the regular time and the overtime will have no difference. Thus, this comes as an advantage since the company can increase overtime hours without incurring extra costs with overheads or even labor (Kerzner, 2009). Labor and overheads are the biggest costs for the project, considering materials needed are just minimal.

To reduce prices on direct labor, the customer could use some pricing strategy such as pricing labor at the department level. However, all billing is taken back to the overall project level. This will help to bill the actual work when it is priced at every department. However, for this project, it would be better to price the labor according to the actual salaries that will be paid to the employees for the work they perform. For this project, the total cost at the end is $1,900,000 without considering the termination liabilities that would arise in case of withdrawal or termination of any contract with material suppliers and employees. Labor takes up $800,000, the same with labor overheads, which is almost 85% of the total costs. Thus, pricing labor needs to be at the actual salaries that will be paid to the employees (Kerzner, 2009).

From the pricing schedule, it is obvious that terminating the project would cost the outside customer a lot of money due to the termination liability expenses he would incur. For instance, if he decided to terminate the first materials the fourth month, he would have to pay the same amount he was supposed to get the materials at to the supplier. This would be the same if he terminated the contract for the second materials after the second month since the termination liability rate is 100% after 60 days. Direct labor and overheads would come in lower at 80% of the costs of the following month, meaning that terminating the contract would incur an amount of $160,000 every month. The biggest termination liability cost would occur at the sixth month, since the labor would incur an expense of $160,000 and $200,000 with the materials. Therefore, terminating the project would cause a massive expense to the outside customer. Winning such a strategy requires keen estimation of the costs. The biggest cost would be the labor termination liability that would be incurred every month after the termination until the project time ends. Materials would only be incurred once. Therefore, terminating the project after commencing would mean a liability of $1,120,000 as labor termination liability (Kerzner, 2009).

Wrong estimation could cause problems to the whole project, and probably cause huge losses to the outside customer (Hulett, 2011). Professionals can be consulted on the estimates for verifying the costs through using methods such as historical data from previously conducted projects for comparison. This will provide a reasonable basis for verifying the project estimates through comparison to ensure nothing is exaggerated. Computer estimating can also be done as well as use of performance factors to take care of uncertainties. This ensures that all possible uncertainties within the project are considered (Hulett, 2011).

References

Kerzner, H. (209). Project Management: A Systems Approach to Planning, Scheduling, and Controlling. Ney York, N.Y: John Wiley & Sons.

Hulett, D. (2011). Integrated Cost-Schedule Risk Analysis. New York. N.Y: Gower Publishing.