5. project financing & budgeting pm0003 sem-3

Sikkim Manipal University Project Financing & Budgeting PM0003

PROJECT FINANCING & BUDGETING - PM0003MBA SEMESTER 3

ASSIGNMENT (SET – 1)

Q1. Detail the top down and bottom up approach of cost estimation

Ans: There are three main cost estimating approaches which can be summarized as

1. Top-down,2. Bottom-up, and3. Sideways (comparative).

Top DownTop-down estimating takes a description of the

needs/requirements(the ‘top’) and produces directly an estimate of the effort/material or cost to achieve the solution.

For example to estimate the cost of a new office building you might decide the floor area needed, based on the number/size of rooms wanted and multiply that by a construction cost per square meter to arrive at the estimated building cost.

This approach can sometime used to estimate the cost of IT projects if:• The size and complexity of requirements can be described

in a quantifiable way

• There is a recognized formula to translate requirements

into effort or cost.

The most common technique is based on Function Points, a

measure of the amount of functionality or complexity in a

LEARNING CENTRE JEDDAH of 10 MBA III Semester Assignment


system requirement. A formula translates this into effort

based on a number of driving parameters. Whilst the

approach appears scientific, the formula is often empirical

(i.e. without any (analytical basis) and the parameters

require subjective judgments such as degree of

complexity).

Once a total effort or cost estimate is obtained this can be

partitioned using typical proportions. For a software

development project typical proportions are Requirements

20%, Design 20%, Development 40%, Test 20%. If you do

this remember everything is driven by the original estimate

and partitioning is not improving that estimate.

The top-down technique is useful in the early stages of

a project to provide indicative estimates, once requirements

have been captured. It goes directly from requirement to

solution, so estimates are quick to produce, little design

work is needed and the formula based approach facilitates

what-if analysis. The technique can only be used however if

a proven algorithm is available, is highly sensitive to the

parameters used and gives no insight into the solution

needed.

Bottom UpBottom up estimating involves taking the

requirements, producing an initial design, identifying the



work (and materials) needed to realize each component in

the design (the ‘bottom’) then summing these up.

Using the previous example, to estimate the labour cost of

the new office building, identify all the work components

(build walls, paint walls, fit windows etc.) work out a cost for

each one and sum them to get a total cost.

The design can be broken down to increasing levels of

detail to improve confidence. There is no rule on how far to

go; more effort is needed to develop a detailed design but

this yields more information resulting in a more accurate

estimate.

The bottom-up technique can be applied in almost any

situation, the basis of the estimate is clear and can be

refined to clarify uncertainties or increase accuracy.

The main disadvantages are that it requires the design to

be available and it needs the most information and effort to

produce.

Q2. Explain the various key determinants of Cost:

Ans: No two infrastructure projects will cost the same

amount of money no matter how similar they are. Apart

from basis technical factors, the wide range of how

economic and institutional conditions in different Member

States will itself always lead to variations. Nevertheless, the

fundamental project costs are based on the actual cost of

the land, materials, equipment and labor in the region



where the project is being procured. These basic costs will

vary depending upon a number of factors which are

discussed below.

KEY DETERMINANTS OF COSTS

The Project Specifications:

The specifications define the physical attributes of a

project. With a road, for e.g., given levels of forecast traffic

will lead to specification of the required length, depth and

width of the road pavement, the material to be used for

surfacing, the number of lanes, bridges and junctions etc.

for buildings, the required function and expected occupancy

rate will lead to a specification of total floor space and floor

plate size, height , internal and external appearance, floor

loading, heating and lighting requirements etc. Generally,

the more detailed the specification and the larger the

project, the more expensive it will be.

Location:

Location affects project costing via institutional factors



and through geographical realities. Institutional factors can

affect initial project cost estimates in a number of ways.

Consents procedures in particular may be more arduous in

some countries affecting the time in will take to

successfully implement a project. Allowance for the costs

involved in sustaining a long public consultation exercise in

an example. Where major projects are likely to be strongly

opposed on environmental grounds, more cost may have to

be allowed for environmental mitigation measures.

Form of Procurement / Contract:

As explained earlier the form of procurement and

contract used by the project sponsor can alter the

estimated cost of a project. Cost savings may be made by

means of lump sum contracts although these are usually

marginal in relation to the total project costs.

Site Characteristics:

A site can be affected by soil and drainage conditions

and access restrictions which can affect the original cost

estimates. The amount of excavation, piling and foundation

activities required are particularly affected by poor ground

conditions. Where there is uncertainty about ground

conditions, accurate project costing cannot be achieved

unless a soul survey in undertaken. This may require the

sinking of boreholes to obtain soil samples at different



levels beneath the surface.

New Build or Improvements:

Generally, the construction of new infrastructure is

more expensive than improvements to existing

infrastructure, or the refurbishment of building. This is

primarily because the “non –building” costs such as land

purchase, foundations, services provision etc. do not have

to be included when simply upgrading existing structures.

Tax Liabilities:

An organization will be liable to pay tax on its

purchases. Some organizations and types of project are not

liable to pay taxes, or else these can be reclaimed. Local

government projects and infrastructure for public use are

examples. Some public or quasi –public sector companies,

voluntary and private sector organizations can be liable and

these tax costs can have a significant impact on gross

construction costs.

Timescale:

Generally, the longer a project takes, the greater the

project costs will be. Project timescales are dependent on

the specification of a project. Usually, the larger a project is

the longer it will take to implement. This is not always the

case; if substantial additional resources are used, project



may take a lot longer than expected because it’s phasing is

dependent upon other, linking projects or public finance

programmes. A project which involves non –continuous

phases is usually more expensive than one undertaken

without interruption because of the additional costs

involved in re-mobilizing plant and contractors.

Q3. What are the various advantages of ratio analysis?

Ans: Ratio analysis is one the techniques of financial

analysis to evaluate financial condition and performance of

a business concern. In finance, ratio analysis is carried out

to judge the liquidity of the organization. It helps the

analysts to find if a company is capable enough to pay its

liabilities. Moreover it also helps to show the operating

efficiency and internal return of an organization. Keep in


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mind that the ratio is good or bad only if it is compared to

the industry in which the organization is operating in.

According to Myers “ Ratio analysis of financial statements

is a study of relationship among various financial factors in

a business as disclosed by a single set of statements and a

study of trend of these factors as shown in a series of

statements.”

Advantages and Uses of Ratio Analysis:

There are various groups of people who are interested in

analysis of financial position of a company. They use the

ratio analysis to work out of particular financial

characteristic of the company in which they are interested.

Ratio analysis helps the various groups in the following

manner:-

1. To workout the profitability: Accounting ratio help to

measure the profitability of the calculating the

various profitability ratios. It helps the management

to know about the earning capacity of the business

concern. In this way profitability ratios show the

actual performance of the business.

2. To workout the solvency: With the help of solvency

ratios, solvency of the company can be measured.



These ratios show the relationship between the

liabilities and assents. In case external liabilities are

more that of the assets of the company, it shows the

unsound position of the business. In this case the

business has to make it possible to repay its loans.

3. Helpful in analysis of financial statement: Ratio

analysis help the outsiders just like creditors,

shareholders, debenture holders, bankers to know

about the profitability and ability of the company to

pay them interest and dividend etc.

4. Helpful in comparative analysis of the performance:

With the help of ratio analysis a company may have

comparative study of its performance to the previous

years. In this way company comes to know about its

weak point and be able to improve them.

5. To simplify the accounting information: Accounting

ratio are very useful as they briefly summarize the

result of detailed and complicated computations.

6. To workout the operating efficiency: Ratio analysis

helps to work out the operating efficiency of the

company with the help of various turnover ratios. All

turnover ratios are worked out to evaluate the

performance of the business in utilizing the

resources.



7. To workout short-term financial position: Ratio

analysis helps to work out the short – term financial

position of the company with the help of liquidity

ratios. In case short-term financial position is not

healthy efforts are made to improve it.

Accounting ratios indicate the trend of the business. The

trend is useful for estimating future.


5. project financing & budgeting pm0003 sem-3

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