Issues in Costing
of contracts with public fund
Kumar Bijoy
Chartered Financial Analyst
09810452266
kumarcfa@yahoo.com
FINANCIAL MANAGEMENT
CYCLE
Budgeting
Corrective
Action
Flow of
Funds
FM
Accounting/
Internal
Controls
Audit
Reporting,
including
claims
Issues…
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Estimation…in inflationary market
Cost control… during time over-run
Costing approach…infrastructure projects
Costing objective…customer’s need
Cost savings…source of financing
Costing manual…reliability
Cost driver…handy tool
Value engineering…scope
Facility assessment…alternatives
Costing types…Quality costing, life cycle costing
Cost … Issues
• Cost is the monetary value of the resources consumed
• Every event of a project is a cost
• Frequent cost and time overrun is a great concern for the
project managers
• Time overrun itself translates into cost overrun
• Cost saving is an essential requirement for competitive
success of any project
• Cost saving is different from cost cutting
• Cost cutting is a negative approach where cost saving is
smart approach
• A combination of Cost cutting and savings could be
better tool to make the project very cost effective
“Cost is Prime Concern for Customer”
Cost and Finance issue…why?
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Increased competition
Customer focus
Target costing
Life cycle costing
Private participation (PPP/BOT etc)
Commitment charges
Higher inflation level
Greater environmental concern
“IF you will not do it your competitor will do”
Examples of Cost Drivers…
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Number of purchase orders for purchase department
Number of despatch orders for the despatch department
Number of Inspections
Number of Customers orders processed.
Number of employees.
Number of machine hours used.
Number of material handling hours.
Number of labour transactions.
Cost management…steps
• Identify the different types of cost and their relationship
with time
– Two types of relationship
• Directly proportional
• Inversely proportional
• Directly proportional will be taken care by time reduction
whereas inversely proportional will be trade-off between
time and cost
• All indirect costs like HQ’s costs, financial charges etc
are directly proportional to the time
• The delay in the project tends to increase the indirect
costs making project financially unattractive
“Save time-Save Cost”
• Direct costs like labor wages or material price
etc may also increase because of inflation with
time overrun
• Some costs like legal fee, project consultancy
charges etc are time independent. They
depend on the project itself.
• so, delay means cost overrun, financially
unattractive and heavy social cost etc
“Delay means cost overrun”
Cost savings…How?
• Never delay the project because every delay is a cost
• Have a holistic approach of cost reduction through:
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Cost Budgeting & Monitoring
Alternative sources of financing
Enhancing the skill of the labor
Adopting advanced technology
Proper disclosure
Effective Reporting system
Reducing wastage
Streamlining the operation
Respect for people
Quality at source
“Quality is free, it is the defect which has cost”
Cost Budgeting….
• Budgeting is an essential tool in cost
management; we make use of several kinds
depending on the client and their needs
• At the time of budgeting extra care is required to
integrate the cost saving strategy in the basic
planning
• Orientation of the project can be directed
towards Target costing or Life cycle costing at
the time of planning itself.
BUDGET CALENDER
Rs. In Lakhs
Year 1
Activity 1
Activity 2
Activity 3
Total
Year 2 Year 3 Year 4 Year 5
Target Costing…
$
Target Costing…
• Global competitiveness requires
balancing quality, cost, and time
Time
Target Costing…
• Target costing focuses on all three dimensions
of the strategic triangle
• Target costing focuses on all three dimensions
of the strategic triangle
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Price-led
Customer-focused
Design-centered
Cross-functional
Life cycle oriented
Value Chain-based
TARGET COSTING...
Managing committed costs
100
Committed Costs
Costs
80
60
40
Incurred Costs
20
0
PRODUCT
CONCEPT
DESIGN AND
DEVELOPMENT
PRODUCT
PRODUCTION
DISTRIBUTION
SERVICE
DISPOSITION
DEVELOPMENT CYCLE
LCC costing
Economic assessment of
alternatives that
considers all of the
significant costs of
ownership over the
useful life expressed in
equivalent dollars.
– initial costs
– financing costs
– operational costs
LCC Steps
• Steps:
– Establish Design Alternatives
– Determine Activity Timing
– Estimate Agency and User Costs
– Compute Life-Cycle Costs
– Analyze the Results
Alternative source of financing…
• Traditional Sources
– Own Fund (Equity Fund)
– Borrowed Fund
• (Debenture/Bond or Term Loan)
– Hybrid Fund (Preference Shares,
Convertibles, perpetual debts)
• Alternate Sources
“Interest rate, tenure and convenience
of funding-critical for source determination”
Alternate Sources
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Foreign Issues
FDI & FII
ECB
Private Equity
Hedge Fund
Securitization
PPP
Venture Capital / Incubation Fund
Franchising
Integration
Financial Assets
-Receipt of Asset
-Capitalization
-Depreciation/Gross block
-Transfer
-Retirement
Material & Contract
management
- PO and Contracts
- Goods receipt & Work
completion
- Inventory, Material
Valuation and transfer
-Rejections and returns
-Spares Mgmt
Assets (P&M)
-Procurement
-Assignment
-Utilization
-Breakdown
-Maintenance
Human resource
-Assignment to project
Finance (FI)
- Revenue
Accounting
-Budgeting
Project System
-Cost Planning
(non-project)
-Expense booking
Quality
Profitability
-Material
- Advances
testing
Billing
-Trial Balance
-Bill Generation - Payable
- Receivable
-Bill Tracking
DMS
-Taxation
-Document
-Banking
monitoring
Financial Management –
Key Points
 Adherence to Legal Covenants for Financial
Management as per Financing Agreement
 Accurate and Timely Preparation of Plans and Budgets
 Timely and Sufficient Flow of Funds to implementing
agencies at all levels
 Regular Maintenance of Project Records and Accounts
 Regular and Accurate Financial Reporting at all levels of
the Project
 Regular Monitoring of Project Budgets at all levels
 Strong Internal Control System in the project
 Adequate delegation
 Adequate staffing for finance function
 Adherence to FM aspects of Disclosure Management
Framework
Thank you
– Any question-