Do your costing before you reject a profitable project

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Costing – and you may know it as relevant costing, economic costing, or opportunity costing – is very often what makes or breaks a project.

You need to have a clear idea of costs going forward so that you can plan and report correctly, and of course decide profitably! Have a look at our short case study to get an idea of what is needed for success.

Project Evaluation

You are about to decide whether you will accept and approve a certain training programme for a large number of your employees. 

The training is very well thought out, well-structured, with all details explained clearly.

Here is a small detail extracted from your report on this, referring to the costing part of the project:

Extract from the costing table

Training of 100 staff in a residential course

Do you see anything wrong with the costing of the Internal trainers and that of the training participants’ time off work during the course? Would you as a Director or owner of a business “accept” those numbers of EUR 6,000 and EUR 60,000 as relevant?

The answer to the above question is: it depends! Let’s take the internal trainers first.

Presumably these people that are assigned to train others, must be experienced and therefore valuable to the firm. Valuable means they bring value through their work. Hopefully this value is much higher than their monthly salaries.

So if during the time of the training these two senior people are not needed to work on client jobs then their cost is in fact…zero! They would be sitting idle contributing nothing to the business if they were not at training. 

However, if they are taken off jobs to be sent to train staff, then their cost would be NOT the salaries they earn but the loss of the client work.

In other words, when costing, we are looking to find the next best alternative use of a resource. That will be the cost to the project.

We leave the discussion open and invite thoughts as to whether and at what value to cost the attendance of the trainees.

Please remember: The cost of a resource that is to be included in project evaluation is the next best alternative use of that resource, i.e., if not used in the project, then what will this resource contribute alternatively?

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