Estimating Project Costs

Like benefits, the costs of a project can also be defined as primary and secondary. However, cost estimation is relatively more accurate and easy. Estimates of costs should represent reality as closely as possible; otherwise a distorted picture of a project is likely to emerge which could result in a wrong choice. For structural flood management projects, construction quantities and their prices are at the core of cost analysis. Care, therefore, should be taken that their estimates are as accurate as possible.

One method for estimating costs is to proceed step-by-step from the beginning to the end of the activity process of the project and identify the cost components at each step taking due care of the subtleties involved. A schematic representation of these steps, in the form of a flow chart describing the operations performed at each step, helps in giving a definite shape to the underlying cost elements.

Another way is to make use of a comprehensive checklist of cost items—there are readily available in the professional literature (see link on the right side).

The cost estimates thus made are based on actual market prices even if these are distorted and not suitable for CBA. These prices, which vary from year to year, include indirect taxes, such as excise duties, VAT and import duties, as well as subsidies. Actual wages are taken into account. The cost items included are only those which require payment by the project authorities. In other words, the amount of finance needed for any project is determined by the costs estimated through financial analysis rather than economic analysis. Further, these estimates are made with reference to current prices and not constant prices.

Previous experience in many countries indicates that initial cost estimation for projects is often not realistic even for the financial or direct costs. Upward revision of costs is quite usual due to reasons such as a lack of adequate surveys and investigations and unreliable data etc. Sometimes costs may be deliberately underestimated to get the project cleared by showing a favourable benefit-cost ratio (BC ratio).

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Further information

Financial Management and Analysis of Projects (external link)