Developing and allocating costs

Introduction

This Information Sheet provides information on Topic 2: Developing and allocating costs.

The following information sheets are part of this series:

  • Introduction to the module
  • Topic 1: Defining adaptation objectives and activities
  • Topic 2: Developing and allocating costs
  • Topic 3: Defining benefits and effectiveness
  • Topic 4: Calculating and comparing costs and benefits
  • Topic 5: Using project implementation tools
  • Topic 6: Using project closure tools

By the end of this topic you will understand the following:

  • How to identify potential costs associated with an intervention
  • How to categorise costs for an intervention

The Golden Triangle – time, cost and quality

A key consideration in project planning is time, cost and quality, referred to as the golden triangle. This is a triangle of balanced requirements – a change in one element could affect the others. So, if the climate change project is undertaken hastily, the allocated budget may not be spent but at the same time, but the quality could be compromised because of the rush to finish. Or, a project could meet the highest possible standards but overrun on cost and time. The ideal is for all three components to be kept in balance.

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  • Cost: Project cost is determined by the budget set for the project. In the project preparation stage, you will need to prepare a budget that is in line with the amount of funding that is provided. A budget that is simply a thumb-suck or broad estimation of costs is less likely to be realistic than one based on the activities to be undertaken, resources required and person days necessary.

This means when preparing costs, you need to know what activities will be required to achieve the project goal, and what resources will be required to complete these activities. Using existing / historic data (e.g. budgets from previous projects) and data-driven estimates is often the most accurate way to obtain a realistic budget.

  • Time: Time in a project is about the person hours or days that are required for activities to be accomplished, as well as the lapse of time over a calendar period. Project time thus takes into account the amount of effort from human resources required to accomplish the job, and also the amount of calendar days that elapse from the start of the project to its conclusion. If you are partnering with donors/funders, these timeframes may have already been set for various outcomes and outputs and it is important that you adhere to these targets.

For example, the target for Output 3 is to have at least 50,000 Ha of land under climate-smart LRP by 2020[6]. This means that the intervention selected must be projected to be complete by this time.

When planning around time, you would typically use a Gantt chart. This would not only detail the start and end date of the project but also the activities that make up the project.

  • Quality: Quality standards in a project are usually expressed as indicators of success and achievement. These are clearly articulated in the RVCC Integrated Project Monitoring and Evaluation System, which sets out the objective, outcomes, outputs, indicators, baselines & targets for adaptation interventions.
    • The quality indicator is a crisp statement that describes a valid and reliable variable that measures achievement, assesses performance, or reflects changes that result from an intervention. It may specify numbers, or a percentage improvement or reduction. For example, ‘% of community members who say climate-driven vulnerabilities information is used in planning and implementation of Land Rehabilitation Programmes’ is the indicator of success for the project’s overall objective. Note that for the RVCC project, national level indicators measure outcomes and impact, while district or community council level indicators measure outputs.
    • The quality target represents the specific desired value for an indicator that the intervention is working to achieve.

For example, for the indicator about, the target is ‘83 % of community members say climate driven vulnerabilities information is used in LRP by
2020’.

Of course, delivering project quality is related to how resources are used in the project, as well as how well the planning has been thought through, funds utilised, and people managed.

In the planning stage, you have looked at three key components – cost, time and quality. Another important component you should consider during the planning stage is related to managing risks.

Determining project costs – budgets

Compiling and managing a budget is one of the most critical activities for a climate change project manager. It is especially important as donors for this type of project might have stringent requirements about expenditure and the reporting thereof. These requirements must be studied carefully before the budget is drawn up.

See the table below for an explanation of different methods of budgeting:

Zero-based budgeting Zero based budgeting is very suitable for use in projects as each project is unique. It assumes no previous history or knowledge of costs. Each line item is costed from scratch, bearing current prices and context in mind.
Incremental budgeting Incremental budgeting is used when it is difficult to identify the number of units or volumes of individual items and the budget is based more on an increased rand value than on the actual number of items.

There may be a temptation to base a project budget on a previous, similar project. In such a case, the projected amount budgeted in the current year will be increased by a predicted price increase. The danger is that the activities may differ, or the context may be different as well.

Activity-based budgeting Activity-based budgeting is like zero-based budgeting but is based on planned activities for a given year. So, the Work Breakdown Structure provides the source of activities to be costed. Added to this are expenses such as equipment and so on.

Principles to consider in the preparation of the budget:

  • The budget must be realistic – so do not ‘pad’ items;
  • A deficit (loss) budget will be unacceptable as the donor funds are fixed;
  • All available sources of income must be considered, as well as donor stipulations about line items, expense reporting, and so on;
  • All possible expenses must be considered;
  • A separate budget preparation form should be completed for each category of income and expenditure;
  • The budget should consider aspects such as contingencies;
  • Consider how stakeholders should be involved in the budget process – what is wise to disclose?;
  • The budget must recognise the need for adequate working capital (funds for day to day expenses);
  • Consider how to factor in currency exchange fluctuations;
  • Equipment or assets control and maintenance needs to be considered;
  • Assets purchased, such as equipment, need to be treated as expenses. The project needs to clarify how asset/ equipment expenditure will be reported.

Project budgets typically include costs over the duration of the project and include:

  • Labour costs – this includes the costs of project team members working in the project, as well as external consultants/service providers.
  • Equipment – this includes supplies required to implement the project, for example, set-up costs in an income generation project (such as beekeeping equipment).
  • Operational – this includes costs to implement the project, for example transport, daily subsistence allowances, catering, research costs, training, etc.

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It is important to accurately cost projects and link to the broader programme budgets. A Resource plan will help you think about all the resources that you will need to cost for.

 

References

Burke, R. 2017. Fundamentals of Project Management: Tools and Techniques. Everbest, HK/China: Burke Publishing.

Burke, R. (2010) Project management techniques (college edition).Everbest, HK/China: Burke Publishing

Corporate Finance Institute, n.d. What is the Statement of Cash Flows? [Online] Available at: https://corporatefinanceinstitute.com/resources/knowledge/accounting/statement-of-cash-flows/

Ebbesen, J.B., Hope, A.J. 2013. Re-imagining the Iron triangle: embedding sustainability into project constraints. PM World Journal. II (III) pp. 1-13.

Orotin, P. 2017, December. Reducing vulnerability from climate change in Foothills, lower Lowlands and Senqu River Basin in Mohale’s Hoek District in Lesotho, 2015-2020.

Roberts, Alexander & Wallace, William. 2004. Project Management. Edinburgh:
Edinburgh Business School.

UNAIDS, n.d. Glossary: Monitoring and Evaluation Terms [Online] Available at: http://www.unaids.org/sites/default/files/sub_landing/files/11_ME_Glossary_FinalWorkingDraft.pdf

United Nations Framework Convention on Climate Change, 2011. Assessing the costs and benefits of adaptation options: An overview of approaches [Online] At: https://unfccc.int/resource/docs/publications/pub_nwp_costs_benefits_adaptation.pdf

Key terms

Cash flow This refers to how much cash flows into or out of a project’s account, i.e. how much cash is received and used over a given period of time.
Costs The costs of planning, preparing for, facilitating, and implementing adaptation interventions / projects / measures, including transition costs.
Expenditure The money spent in order to deliver the climate change adaptation interventions.
GANTT chart A Gantt chart (named after the creator Henry Laurence Gantt) is a tool commonly used in project management to show the duration of tasks in a project, measured against real time.
Income The funding / money coming in.
Indicator A quantitative or qualitative variable (factor) that provides a reliable and valid measurement of achievement or reflects performance or changes from the current state.