Oliver 175 - 75th Question

[jyotimayank]

Question 75

The sales representative of your company recently contacted you. You made some estimates on direct costs for an offer on a firm fixed-price contract. According to company policies, indirect costs (overheads) are to be calculated as a percentage of the direct costs, the sum of both cost types caused him to calculate a far too high price. How should you not react?

A. You reduce your direct cost estimates by reducing the amount of work and the rates allocated to them. This allows a reduction of the overhead costs and a lower price.
B. Calculating overheads as a percentage of direct costs is just a model to simplify calculations. A more specific analysis of these costs may lead to a more realistic project price.
C. Cost estimates are quantitative assessments of the probable costs required to complete project work. These are made by the project team. It is the sales person’s job to make the price.
D. You make the sales person aware that a reduction of direct costs may reduce the numbers for overhead cost allocation, but will not influence the actual overheads.

[sarthy]

Between A and C, I go with A

[jyotimayank]

Yes the correct answer is option A.

Refer to page 202, 207-208 of PMBOK® Guide 5th Edition

Basis of estimates is an output of the Estimate Costs process and contains all the supporting detail regarding the estimates. You should consider assumptions regarding indirect costs and whether they will be included in the project budget. Indirect costs cannot be directly linked to any one project. They are allocated among several projects, usually
within the department or division in which the project is being performed

Actual costs might include direct and indirect costs but must correspond to what was budgeted for the activity. If the budgeted amount did not include indirect costs, do not include them