Project costs should be prudently made along with a conservative cash burn plan. Two versions are essential in a project proposal:
- Project Owner’s Version
- Project Company’s Version
Cost Structure – Project Owner’s Version
It is the official version that will appear in the financial bid. The Project Owner will allow a budget for the project based on a feasibility study on whether the project’s cost can be recovered during business operations once the project is completed. Bidders will usually bid low or sometimes bid high on the allotted budget.
Many solutions to a particular problem that the project will address or many options to an opportunity that the project may cover and maximize
Cost Structure – Project Company’s Version
The project company’s version will usually be made based on two approaches:
- Down – Up Approach
- Up – Down Approach
In the Down – Up Approach, the traditional project manager will require key project staff to make a costing based on their assessment of the Terms of Reference or TOR of the project owner’s Request for Proposals or RFP. Next, these costs will be aggregated. After the profit margin and corporate income tax are factored in the aggregated cost, the final version of the price will be the project company’s financial bid, whether it falls within or over the allotted budget.
In the Up – Down Approach, the prudent project manager will immediately deduct 10% to 20% on the project’s allotted budget. His/her purpose is to win the financial bid. Next, he/she will deduct 30% to 40% on the remaining amount to represent the project company’s operating margin. What will be left is the project implementation budget.
So if the project budget is $100 million, the project implementation budget will be in the range of $48 million to $63 million.
The project manager then meets up with the key project staff to determine the best approach or methodology to meet the TOR’s specifications with the project implementation budget. Now, his/her purpose is to win the technical bid with an innovative approach, setting the project company apart from the competition technically and financially.
If the vital project staff cannot develop an approach that fits the project implementation budget, the projects company should not engage in the bid. This decision will save bid expenses for a project that is likely to be unprofitable based on the project’s company’s capability.
Significantly, in the Up-Down Approach, a project company’s bid will usually be 10% to 20% lower than the allotted budget of the project owner. The prudent cost structure approach immediately ensures that the financial offer of the project company is very competitive.
Prudent Cost Structure of a Winning Project Proposal
A project proposal usually wins based on the merits of its technical and financial bids. An innovative approach backed up with a team of specialized experts and a sound, a comprehensive plan will usually standout versus traditional techniques. Moreover, innovative approaches tend to be more efficient and hence will typically cost less than conventional approaches.
A prudent cost structure will have the following major categories:
- Personnel Costs
- Administrative and/or Out-of-Pocket Costs
- Equipment Costs
Personnel costs should include these four main items:
- Key Staff
- Support Staff
- Total Remuneration plus taxes such as Value-Added-Tax
- Field Expenses which cover per diem and transportation expenses
Administrative and/or Out-of-Pocket Costs
These pertain mainly to head office costs and should include these four main items:
- Head office support expenses related to the project
- Office space, equipment, furniture, and fixture expenses for the on-site project management office
- Reporting expenses
- Seminar costs
All equipment used for the project should have reasonable costs, whether via lease, rental, or purchases. For instance, project company equipment used for other projects should reflect a rental or lease rate.
Why Prudence is Essential in Project Cost Structures
Sufficient operating margins are significant in project management due to the uncertainty of first-time projects. In comparison, management expertise and technical expertise can reduce such risks and ensure the completion of projects. A sufficient financial buffer guarantees that the projects company will continue to operate and provide ample post-project support to make the project succeed.
A winning project proposal does not win just the contract but also delivers the project’s satisfactory completion at a profit.