Principal Methods of Estimating Costs

Principal Methods of Estimating
Costs

Various methods are available for estimating the cost of projects. Some of these are discussed as follows:

1. Reference to Similar Projects – This is the sim-
plest method of estimating the costs. Under this method, cost is estimated by referring to similar projects previously carried out by the enterprise promoting the new project or promoted by other enterprises in the same industry. However, the basic condition is that the new project should be similar to the previous one in every aspect. This method has the advantage of providing a realistic basis for costing. However, caution should be taken to ensure that the costs indicated are still valid. Capacity variation, cost inflation index and other factors that cause prices change should be given due consideration.

2. Method of Extrapolation-Extrapolation method is used when the capacity of the plant under consideration differs from that of the comparable previous projects. It has to be kept in mind that:

(i) Investment and operating costs increase more slowly than capacity.

(ii) Some expenditure e.g. design costs, civil engineering, buildings, transport networks etc, is to a large extent independent of the scale of production.

(III) Equipment costs do not vary in proportion to the production capacity. Hence, adequate care is to be taken for extrapolating the costs. A simple logarithmic calculation may provide an initial idea of the investment cost for the project considered.

3. Enquiries from Suppliers-Enquiries can be made to the suppliers for obtaining the latest prices of the equipments or the prices of the latest equipments. This estimate however relates to the cost of equipment only, it does not take into account the cost of related facilities, transport and assembly. The initial cost sometimes increases manifold in order to arrive at the cost of equipment erected or installed on site and in working order.

4. Published data, Surveys and Government Regulations- Official regulations lay down some costs related to water or electricity rates, guaranteed minimum wages, salaries, rates of taxation etc. Surveys may provide information about the real level of wages and salaries and other expenditure items.

5. Technical Advice- Taking technical and professional advice may be the only solution sometimes. The nafure of their work puts them in a better position than any body else for assessing prices which depend on the characteristics of materials and equipment.
of Financing