Why understanding project costs is important
Understanding the costs to develop and deliver a product are an essential input to understanding the
level of commercial risk. These costs are also an important factor in determining an appropriate
pricing strategy for the product to enable a profitable return on investment over an acceptable
timescale. A breakdown of project costs normally has to be provided as part of funding applications
and maybe required by investment organisations.
Identifying project costs
A button is provided on the “Planning” worksheet to generate either a simplified costing table,
incorporated as part of the planning worksheet to the right end of the activities table, or a separate
more detailed costing worksheet. If the detailed costing worksheet is used, then this will automatically
populate the alternative detailed costing table on the planning worksheet.
How to use the simple costing table
The simple costing table is located to the right of the main “Planned Activities” table on the “Planning”
worksheet. For each task in the activities table, columns are provided to identify required people to
support the task, the number of man-days required for the task, any required suppliers / sub-contractors
as well as any necessary materials or equipment that needs to be purchased. Based on the identified
required resourcing and supplies for each task, the overall task budget should be estimated and entered
into the budget column. The detailed costing worksheet guidance below provides more details on types of
costs to be considered.
How to use the detailed costing worksheet
At the top of the RAPAT “Project Costing” worksheet, the “Costing Sheet Completion Status” will initially
be set to “Not started”. Use the dropdown list to change this to “In progress”, “Completed” or “Updated”
as appropriate.
The worksheet uses a number of different cost categories to help identify the project costs. These are
based on typical funding application requirements and include:
- Labour costs for employees: these typically include salary, employer national insurance contributions
and contractual benefits such as pension and life insurance
- Overhead costs: these cover the administrative overheads associated with the labour costs
- Material costs: these include consumable items required for the project such as materials and parts
for manufacturing and testing activities
- Capital costs: these cover the capital expenditure for large equipment items required for project
(e.g. testing equipment, manufacturing equipment, computers)
- Sub-contractor costs: these include the costs for any contractors and sub-contractors supporting the
project
- Other costs
For funding and investment applications, it is important to check the relevant guidance in relation to
allowable costs in each category.
The worksheet includes a separate section for each cost category. The dashboard at the top of the
worksheet will then be automatically populated with the total cost for each category. In addition,
all costs will be automatically populated in the “Costing” table on the “Planning” worksheet and
allocated to relevant tasks.
Labour section:
- At the top of the labour section, enter the employee resources required for the project in the
“Labour Resources” table. Employees can be referred to by name or grade (e.g. Senior Engineer).
The specific project role can also be added if required (e.g. Project Manager). The day rate for
each employee should then be entered in the table - this will normally be based on PAYE records
and typically includes salary, employer NI contributions, and contractual benefits such as pension,
life insurance, medical insurance. The day rate should reflect the available working days per year
(e.g. 232 days) taking account of annual holiday entitlement. The “Add Row” button can be used to
add more employees to the table if required.
- In the “Labour Costs” table, first select a project task for allocation of labour costs. All tasks
for which costs are required will need to already be included in the “Planned Activities” table on
the “Planning Worksheet”. The Task ID can be selected using the drop-down list and the task description will be
automatically populated. For each task, identify the number of employees involved - this will then automatically create
a row for each employee for that task; employees included in the “Labour Resources” table can then be selected for each row
using the drop-down list. Enter the man-days for each employee and the associated costs will auto-populate from the “Labour
Resources” table. An additional row for further tasks will automatically be added to the table each time the bottom row is
populated.
Overheads section:
- Overhead costs include both administrative and direct overheads associated with the labour costs,
for example office rent and running costs, IT support, payroll administration. For many funding
applications, there is an option to base these on a fixed percentage of labour costs, typically
20%, with no further supporting evidence required. Alternatively, the costs can be itemised
separately for each relevant overhead cost.
- At the top of the overheads section, use the drop-down box in the “OVERHEADS CALCULATION” entry
cell to specify if overheads are to be based on a fixed percentage or itemised.
- For the fixed percentage option, enter the percentage amount to be used in the overhead calculation
and the overhead costs will be automatically calculated based on the labour costs.
- For the itemised option, a table is created to enable each overhead item to be separately identified
with the associated cost. The “Add Row” button can be used to add more items to the table if
required. These overhead costs will then be automatically allocated to tasks based on the percentage
distribution of labour costs allocated to each task.
Materials section:
- Material costs relate to consumable items purchased for the project, typically for manufacture
and testing. This may also include purchases that are not considered to fall under capital
expenditure for accounting purposes e.g. software purchases.
- List each consumable item in the “Material Costs” table using the “Add Row” button if required.
- As for the labour costs, the related Task ID for the consumable should be selected using the
drop-down list. There is also an option to identify what the consumable will be used for e.g.,
prototype, production, etc.
- For each consumable, identify the quantity required and the price per unit item - this will then
automatically populate the consumable cost. There is also a column to identify whether the cost is
an estimate or based on a supplier quotation.
Capital section:
- This section includes items that would be treated as capital expenditure for accounting purposes
and depreciate in value over a number of years. Typical items might include equipment, tools, and
computers purchased for use on the project.
- List each item in the “Capital Costs” table using the “Add Row” button if required.
- As for the labour and material costs, the related Task ID for the item should be selected using
the drop-down list.
- Identify whether the item will be a new purchase for the project and, if so, the purchase costs.
Alternatively, if the item is already an existing purchase that will be used for the project, enter
the value of the item at the start of the project.
- Based on your accounting policies, enter the residual value of the item at the end of the
project.
- Estimate the percentage usage of the item over the project duration e.g. 50% for an item that is
used for 6 months of a 12 month project, 40% for an item that is typically used 2 days per week
for this project and 3 days per week elsewhere.
- The net cost to the project will then be automatically calculated. There is also a column to
identify whether the cost is an estimate or based on a supplier quotation.
Sub-contractors section:
- The section includes costs for other organisations supporting the project e.g. contractors,
sub-contractors, consultants.
- List each organisation to be used in the “Sub-Contactor Costs” table using the “Add Row” button
if required.
- As for the other sections, the related Task ID for the task being supported by this organisation
should be selected using the drop-down list and the role or service they are providing identified.
The number of man-days required can also be identified.
- Identify the cost for the service provision. There is also a column to identify whether the cost
is an estimate or based on a quotation.
Other section:
- Other costs not included above can be added here, for example travel expenses, hiring of test
facilities.
- As for the other sections, identify the relevant items of expenditure together with the related
task and cost and whether the cost is an estimate or based on a quotation.
Updating the project costs
The project costs should be reviewed on a regular basis as part of proactive project management and
updated if required.
