Installation cost estimation in a power plant construction project by activity-based costing

Abstract

To develop a cost estimation methodology using Activity-Based Costing or ABC approach for the mechanical installation works of a power plant construction project. The first phase of the study is to perform activity analysis by using IDEFO technique and analyse the direct and indirect cost of the organisation and gather resource driver information. The second phase is to develop a conceptual framework model to attribute costs to activities or activity cost pools and perform cost object analysis. The last phase is the gathering activity driver information and identifying activity cost driver to attribute activity costs to cost objects. The study found that the operational function of the case project consisted of 5 macro activities and its 21 micro activities, whereas the supporting function comprised 5 macro activities and its 11 micro activities. The captured overhead costs are allocated to the entire activities and the 20 cost objects or work packages by its corresponding 25 activity cost drivers. Having compared the cost per cost object under the traditional and the ABC estimating method to evaluate the extent of cost distortion caused by the traditional method, it was quantitatively found that 18 out of all packages or 90% were significantly deviated, while the qualitative evidence illustrated that 13 out of all packages or 65% were distorted by more than 20% of cost variance. This means that the ABC approach could not only be usefully applied to estimate the installation cost of the mechanical work, but it also provides more reasonable and clearer cost information than the traditional system. Nevertheless, the ABC requires far more time and resource than the existing system in terms of its information acquisition and investment. Therefore, in order to enhance the effective use of the two systems where possible, the traditional system should be considered as the estimation method when time is the constraining factor, while the ABC should be required when accuracy is the limiting factor within the maximum 20% of cost variance.