Estimating Project Proposal Costs

We will get into cost estimations in much more detail later in the course, but for now we would like to introduce you to a few concepts that will help with the preparation of your project proposal.

Project Proposals

When preparing a project proposal, you will need to provide a detailed budget estimate to the customer.

When estimating project costs, you cannot simply include the hourly wages for your employees; there are many more costs associated with an employee, and your budget estimate should capture those costs.

The following are some terms related to employee expenses and budgets.

Direct Costs

Direct costs can easily be tied to the project, such as

• hourly pay/salary (this is the base pay for an employee),
• cost of materials, and
• cost of equipment usage.

Indirect Costs

Indirect costs include additional costs related to an employee's benefits or other costs related to running a business that are shared across the organization and cannot be easily tied to a specific project. Organizations determine a percentage to add on to budgets to capture these costs:

• Fringe benefits: Costs related to employee benefits, such as health care, retirement contributions, paid time off (vacation and sick leave), workers' compensation, and so on.
• Overhead: Overhead includes the business expenses that are not project-specific, such as rent, heat and air conditioning, electricity, office supplies, phone and internet, computer equipment, web hosting, and so on.
• General and administrative (G&A): G&A includes other general expenses related to running your business, such as salaries for executives and administrative staff that would not be directly assigned on a project, legal fees, accounting fees, and so on.
• Facilities and administrative (F&A): This would be equivalent to combining overhead and G&A and at Penn State include research facilities, utilities, administrative salaries, and general office expenses.

These indirect costs typically have a rate assigned to each category, and that rate is applied to the estimated direct costs. A 2017 Government Contractor Survey by Grant Thornton (2018) reported the following rates for companies that conducted business with the U.S. federal government in 2017:

• Fringe: 36% (median rate excluding the effect of bonuses)
• Overhead: 50% (based on median on-site rate) and 33% (average off-site, customer location)
• G&A: 13% (using a total cost input [TCI] base) and 15% (using a value-added cost input)

Example: Penn State

Penn State's rates in 2021 for government grants and contracts—Penn State uses F&A and fringe rates to add on to project budgets to capture these costs:

• F&A: Rates vary based on location, type of work (research or instruction), and whether it is on or off campus and range from 26% to 60% at University Park. F&A is applied to modified total direct costs:

Modified total direct costs (MTDC) includes all direct salaries and wages, applicable fringe benefits, materials and supplies, services, and travel. MTDC excludes equipment, capital expenditures, charges for patient care, rental costs, tuition remission, scholarships and fellowships, and participant support costs.

• Fringe benefits: Fringe rates vary based on the type of employee—salaried employee (34.88%), graduate assistant (12.35%), hourly wage payroll (7.94%), student hourly wages (0.31%), and postdoc (23.88%).

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