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Issues in Costing of contracts with public fund Kumar Bijoy Chartered Financial Analyst 09810452266

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Presentation on theme: "Issues in Costing of contracts with public fund Kumar Bijoy Chartered Financial Analyst 09810452266"— Presentation transcript:

1 Issues in Costing of contracts with public fund Kumar Bijoy Chartered Financial Analyst

2 FINANCIAL MANAGEMENT CYCLE FM Budgeting Flow of Funds Accounting/ Internal Controls Reporting, including claims AuditCorrective Action

3 Issues… 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

4 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”

5 Cost and Finance issue…why? 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”

6 Examples of Cost Drivers… 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.

7 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”

8 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”

9 Cost savings…How? Never delay the project because every delay is a cost Have a holistic approach of cost reduction through: –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”

10 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.

11 BUDGET CALENDER Rs. In Lakhs Year 1Year 2Year 3Year 4Year 5 Activity 1 Activity 2 Activity 3 Total

12 Target Costing… LIFE CYCLE COSTS CROSS FUNCTIONAL CUSTOMER FOCUSED PRICE LED DESIGN DRIVEN VALUE CHAIN

13 Target Costing… Global competitiveness requires balancing quality, cost, and time Quality Cost Time

14 Target Costing… Target costing focuses on all three dimensions of the strategic triangle –Price-led –Customer-focused –Design-centered –Cross-functional –Life cycle oriented –Value Chain-based

15 TARGET COSTING... Managing committed costs PRODUCT CONCEPT DESIGN AND DEVELOPMENT PRODUCTION P R O D U C T D E V E L O P M E N T C Y C L E Costs Committed Costs Incurred Costs DISTRIBUTION SERVICE DISPOSITION

16 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

17 LCC Steps Steps: –Establish Design Alternatives –Determine Activity Timing –Estimate Agency and User Costs –Compute Life-Cycle Costs –Analyze the Results

18 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”

19 Alternate Sources Foreign Issues FDI & FII ECB Private Equity Hedge Fund Securitization PPP Venture Capital / Incubation Fund Franchising

20 Integration Project System Material & Contract management - PO and Contracts - Goods receipt & Work completion - Inventory, Material Valuation and transfer -Rejections and returns -Spares Mgmt Material & Contract management - PO and Contracts - Goods receipt & Work completion - Inventory, Material Valuation and transfer -Rejections and returns -Spares Mgmt Financial Assets -Receipt of Asset -Capitalization -Depreciation/Gross block -Transfer -Retirement Financial Assets -Receipt of Asset -Capitalization -Depreciation/Gross block -Transfer -Retirement Quality -Material testing Quality -Material testing DMS -Document monitoring DMS -Document monitoring Billing -Bill Generation -Bill Tracking Billing -Bill Generation -Bill Tracking Finance (FI) - Revenue Accounting -Budgeting -Cost Planning (non-project) -Expense booking P rofitability - Advances -Trial Balance - Payable - Receivable -Taxation -Banking Finance (FI) - Revenue Accounting -Budgeting -Cost Planning (non-project) -Expense booking P rofitability - Advances -Trial Balance - Payable - Receivable -Taxation -Banking Human resource -Assignment to project Human resource -Assignment to project Assets (P&M) -Procurement -Assignment -Utilization -Breakdown -Maintenance Assets (P&M) -Procurement -Assignment -Utilization -Breakdown -Maintenance

21 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

22 Thank you –Any question-


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