Cost of Project
The Cost of Project represents the total of all items of outlay associated with a project which are supported by long term funds. It is crucial that the Cost of Project is accurately estimated as under estimation of costs will lead to shortage of funds. In case of over estimation of costs there will be idle funds that will be invested elsewhere by the promoter which will effect the speed of the project.
It is the sum of the outlays on the following →
(i) Land and site development → It includes :-
- Basic cost of land and conveyance charges
- Premium payable on lease hold and conveyance charges
- Cost of leveling and development
- Cost of laying roads and internal roads
- Cost of gates, tube-wells etc.
It varies from location to location and depends upon the topography of the land.
(ii) Building and Civil Works → It includes cost of :-
- Building for main plant and equipment
- Building for auxiliary services, water supply, laboratory, workshops etc.
- Godowns, warehouses and open yard facilities
- Non factory buildings like factory, guest houses, time office, excise house etc.
- Quarters for essential staff
- Silo’s tanks, wells, chests, bins etc.
- Garages, Sewers, drainage etc.
- Other civil engineering works depend upon kind of structure required
- Buildings to fulfill requirements of manufacturing process
(iii) Plant and Machinery → It consists of :-
(a) Cost of imported machinery –
- FOB(free on board) Value
- Insurance cost
- Import duty
- Clearing loading, unloading and transportation cost
(b) Cost of indigenous machinery –
- FOR cost (free on rail)
- Sales tax and Octroi tax
- Railway freight and transportation charges
(c) Cost of stores and spares
(d) Foundation and installation charges
(iv) Technical Know-how and Engineering Fees → Costs involved in :-
- Recruitment of technicians in India or abroad
- Training of employees of production process
- Procuring technology
- Royalty fees to technology provider
(v) Expenses on foreign technicians and training of Indian technicians abroad
(vi) Preliminary and capital issue expenses →
Preliminary expenses are expenses incurred in :-
- Identifying the project
- Conducting market research
- Preparing feasibility report
- Drafting Memorandum and Articles of Association
- Incorporation of company
Capital issue expenses are expenses borne in connection with raising capital from the public. It includes expenses incurred in :-
- Fees to managers and registrars
- Printing and postage
- Advertising and publicity
- Listing fees and stamp duty
(vii) Electricals → Cost of cables, panel boards, voltage stabilizers
(viii) Transportation cost
(ix) Pre operative Expenses →
These are expenses incurred till the commencement of actual production of product. It includes :-
- Traveling expenses
- Interest on borrowings
- Insurance and mortgage
- Start up and establishment expenses
(x) Provision for contingencies →
Funds for contingencies must be kept to provide for unforeseen expenses and price increase over the normal inflation rate. These situations may arise due to deviation between estimated cost and actual cost. Therefore, 5% – 15% margin is kept on cost of projects.
(xi) Margin Money for working capital →
The principal support for working capital comes from commercial banks and trade creditors. A certain part of working capital is required to come from long term sources. It is used for meeting overruns in capital cost. To mitigate this problem Financial Institutions stipulate a portion of loan amount, equal to margin money for working capital.
(xii) Initial Cash Losses → Most projects incur cash losses in initial year. Yet promoters do not reveal losses to make the project appear attractive to financial Institutions and the investing public. Failure to make provision for initial cash losses may affect the financial position of the company and impair the project.