METHODOLOGICAL

GUIDE FOR COSTING OF

GOVERNMENT STRATEGIES

With Examples from

Public Administration
Reform Strategies

ReSPA activities are

funded by the EU
 ANALYTICAL PAPER
ON MANAGING PROCESS OF IMPLEMENTATION
ANALYTICAL PAPER Dece
PUBLIC ADMINISTRATION REFORM STRATEGIES D
D
ON MANAGING PROCESS OF IMPLEMENTATION
IN ReSPA MEMBERS
F PUBLIC ADMINISTRATION REFORM
ANALYTICAL STRATEGIES
PAPER
December 201
IN ReSPA MEMBERS
ON MANAGING PROCESS OF IMPLEMENTATION Decembe
December
PUBLIC Gordana
ADMINISTRATION REFORM STOJANOVIC,
DJUROVIC, Blaženka STRATEGIESMemet MEMETI
1
METHODOLOGICAL GUIDE
IN ReSPA MEMBERS
Gordana DJUROVIC, Blaženka STOJANOVIC, Memet MEMETI 11
FOR COSTING OF GOVERNMENT ANALYTIC
Gordana DJUROVIC, Blaženka STRATEGIES
STOJANOVIC, Memet MEMETI
ON MANAGING PROCESS OF IMPLEME
OF PUBLIC With
ADMINISTRATION
Examples from PublicREFORM ST
Administration Reform Strategies
IN ReSPA

Authored by
Gordana DJUROVIC, Blaženka STOJANOVIC, Me
Zuhra OSMANOVIĆ-PAŠIĆ

ReSPA Activities are

Financed by the EU

ReSPA activities are

December 2016 financed by the EU
December 2016
December 2016
1
11
The Regional School of Public Administration (ReSPA) is an inter-governmental
organisation supporting regional cooperation of public administrations in the
Western Balkans. Its activities are supported by the European Commission
(EC), and co-funded through annual contributions of the ReSPA Members.
ReSPA Members are Albania, Bosnia and Herzegovina, Macedonia,
Montenegro and Serbia, while public servants from Kosovo*1 participate in
ReSPA activities funded by the European Commission. The Purpose of ReSPA
is to support governments in the Western Balkan region develop better public
administration, public services and overall governance systems for their citizens
and businesses, and prepare them for membership in the European Union.

LEGAL NOTICE
This document has been produced with the financial assistance of the European
Union. The contents of this document can under no circumstances be regarded as
reflecting the position of the European Union.
The views expressed in this publication are those of the author and do not necessarily
reflect the official views of Regional School of Public Administration on the subject.
Neither the Regional School of Public Administration nor any person acting on its
behalf is responsible for the use which might be made of the information contained
in the present publication. The Regional School of Public Administration is not
responsible for the external web sites referred to in the present publication.

COPYRIGHT
© Regional School of Public Administration, 2018.
This publication is the property of ReSPA. Any unauthorized reprinting or use of
this material is prohibited.

CONTACT
Regional School of Public Administration
Branelovica P.O. Box 31,
81410 Danilovgrad,
Montenegro
Telephone: +382 (0)20 817 200
Internet: www.respaweb.eu
E-mail: respa-info@respaweb.eu

1 * This designation is without prejudice to positions on status, and is in line with UN-
SCR 1244 and ICJ Advisory Opinion on the Kosovo Declaration of independence
Table of Contents

ABBREVIATIONS.......................................................................................... 8

INTRODUCTION........................................................................................... 9
1.1. Problem Statement......................................................................... 9
1.2. Objectives..................................................................................... 10
1.3. Scope.............................................................................................11
1.4. Methodological Approach.............................................................. 12
1.5. Structure and Contents................................................................. 13

2. COSTS AND COSTING....................................................................... 15

2.1. Cost Definition and Concepts........................................................ 15
2.1.1. Definition............................................................................. 15
2.1.2. Financial and Economic Costs............................................ 15
2.1.3. Cost Perspective................................................................. 16
2.1.4. Cost Objects and Cost Drivers............................................ 17
2.2. Cost Classifications....................................................................... 18
2.2.1. Cost Items........................................................................... 18
2.2.2. Budget Classifications......................................................... 19
2.2.3. Recurrent and Capital Costs............................................... 19
2.2.4. Full and Incremental (Additional) Costs.............................. 20
2.2.5. Total, Average and Marginal Costs...................................... 21
2.2.6. Fixed, Variable and Mixed Costs......................................... 22
2.2.7. Direct and Indirect Costs..................................................... 23
2.3. Costing.......................................................................................... 24
2.3.1. Definition and Importance................................................... 24
2.3.2. Applications of Cost Analysis.............................................. 25
2.3.3. Key Principles..................................................................... 26
2.4. Costing Methods........................................................................... 28
2.4.1. Bottom-up Costing.............................................................. 28
Methodological guide for costing of government strategies

2.4.2. Top-down or Parametric Costing......................................... 29

2.4.3. Analogy Costing.................................................................. 30
2.4.4. Expert Opinion.................................................................... 30
2.4.5. Advantages and Disadvantages of Different Methods........ 31

3. GUIDE TO COSTING PROCESS........................................................... 33

3.1. Overview of the Costing Process.................................................. 33
3.2. Defining Purpose and Objectives.................................................. 34
3.2.1. General Guidelines............................................................. 34
3.2.2. PAR Examples.................................................................... 35
3.3. Defining Scope.............................................................................. 36
3.3.1. General Guidelines............................................................. 36
3.3.2. PAR Examples.................................................................... 40
3.4. Developing Costing Plan............................................................... 44
3.4.1. General Guidelines............................................................. 44
3.4.2. PAR Examples.................................................................... 46
3.5. Identifying Cost Objects................................................................ 47
3.5.1. General Guidelines............................................................. 47
3.5.2. PAR Examples.................................................................... 49
3.6. Selecting Costing Methods........................................................... 54
3.6.1. General Guidelines............................................................. 54
3.6.2. PAR Examples.................................................................... 59
3.7. Developing Data Management Plan............................................. 62
3.7.1. General Guidelines............................................................. 62
3.7.2. PAR Examples.................................................................... 66
3.8. Estimating Resource Requirements.............................................. 67
3.8.1. Identifying Types of Resources........................................... 67
3.8.2. Estimating Quantities of Resources.................................... 69
3.8.3. PAR Examples.................................................................... 73
3.9. Assigning Monetary Values to Resources..................................... 76

4
 With examples from public administration reform strategies

3.9.1. General Approaches to Cost Measurement........................ 77

3.9.2. Estimating Costs of Different Items..................................... 81
3.9.3. Allocating Overheads.......................................................... 85
3.9.4. Implications of Long-term Planning..................................... 87
3.9.5. Economic Costing – Key Considerations............................ 88
3.9.6. PAR Examples.................................................................... 90
3.10. Producing and Verifying Cost Estimates................................... 101
3.10.1. General Guidelines......................................................... 101
3.10.2. PAR Examples................................................................ 105
3.11. Using the Cost Information........................................................ 106
3.11.1. General Guidelines.......................................................... 106
3.11.2. PAR Examples................................................................. 108

ANNEXES .............................................................................................. 111

Annex 1 – References.........................................................................112
Annex 2 – Stakeholders Consulted.....................................................114
Annex 3 – Cost Calculation Tool (provided in a separate MS Excel
document)

5
 With examples from public administration reform strategies

Foreword

By Ms. Ratka Sekulović

ReSPA Director
Implementation of any government program or strategy requires adequate
resources and costs money. To implement programs and strategies
effectively, responsible institutions must know the costs associated with
their implementation. In addition, the government requires reliable cost
information to estimate strategies’ financial impact on budget and ensure
efficient management of public funds. Provision of cost information also
strengthens the quality of strategic documents, as well as transparency
and managerial accountability in public sector as a whole. Nevertheless,
in practice we often experience implementation failures and budget
overruns resulting from poorly costed strategies in different sectors.
Costing of government strategies means estimating physical resources
required for their implementation (labour, materials, services, capital items),
and valuing these resources in monetary terms. As such, costing is an
integral part of strategic planning process, and cost estimates are normally
part of action plans supporting the strategy implementation. Costing is the
first and most important step in strategy financial management cycle, and
also the most important part of strategy fiscal impact assessment.
Recognizing the importance of proper costing for implementation of
government strategies, and based on consultations with governments’
and donors’ representatives, ReSPA has decided to develop this Guide.
The Guide provides standardized methodological guidelines for costing
of government strategies based on previously developed action plans
or similar operational documents. It describes the standardized costing
process applicable to any government program or strategy, and illustrates
it using examples based on Public Administration Reform (PAR) strategies
of countries in the region. A cost calculation tool provided in a separate
document enables easy and efficient practical use of the Guide.
ReSPA strongly believes that this Guide will reemphasize the importance
of costing in government policy making and strategic planning processes,
and provide a valuable reference for future strategy costing exercises in
different countries and different sectors. I am particularly pleased to see
that this Guide presents relatively complex financial topics in a way that
can be easily understood and applied by all civil servants, regardless of
their professional background. I wish to express my gratitude to the author
for the great work and my appreciation to all stakeholders who provided
valuable input for this document.

Foreword 7
Methodological guide for costing of government strategies

Abbreviations

BiH Bosnia and Herzegovina

DEU Delegation of the European Union
EC European Commission
FIA Fiscal Impact Assessment
HRM Human Resources Management
HRMIS Human Resources Management Information System
IPA Instrument for Pre-Accession Assistance
LSG Local Self-Government Unit
MoF Ministry of Finance
Ministry of Public Administration and Local Self-Govern-
MPALSG ment of the Republic of Serbia
Organization for European Co-operation and Develop-
OECD ment
PAR Public Administration Reform
PARCO Public Administration Reform Coordinator’s Office in BIH
PFM Public Finance Management
SBS Sector Budget Support
Sida Swedish International Development Agency
SIGMA Support for Improvement in Governance and Management
UNDP United Nations Development Program
WB Western Balkans

8 Abbreviations
 With examples from public administration reform strategies

Introduction
1.1. Problem Statement
Implementation of PAR strategies in the Western Balkans (WB) countries
is being severely hampered as a result of their inadequate costing. The
strategies are often not supported with well-developed and properly
costed action plans indicating funding required for implementation of
programs and activities, and financing sources. Lack of sound financial
frameworks is also a characteristic of government strategies in general.
This results in reduced efficiencies and effectiveness, and ultimately
implementation failures. It also has a negative impact on the overall fiscal
discipline, because budgets are affected by unexpected expenditure
increase or revenue decrease caused by implementing poorly costed
programs.
One of the causes of poor costing of government strategies is lack of
institutional capacities for developing and implementing sustainable
financial frameworks, including capacities for producing cost estimates,
identifying financing sources, defining and putting in place functional
financing mechanisms, and financial monitoring and evaluation. Lack of
coordination among the stakeholders is also an issue. The crosscutting
nature of strategies requires involvement of a number of stakeholders
in the process of their development and implementation, including
government institutions and donors. Relationships among these
stakeholders and their roles and responsibilities are often unclear. A
more careful analysis of government policy cycle shows that problem
is actually more complex and relates to insufficient quality of policy
development and strategic planning systems and processes in general.
Costing is only one of the elements of these systems, and its quality
depends on the quality of other related elements, including primarily
planning of programs and activities.
One of the key obstacles to proper strategy costing is lack of written
guidelines provided by governments or international organizations.
The ReSPA Members and Kosovo* have adopted or are in the process
of developing the regulation on strategic planning and conducting
fiscal impact assessment (FIA), which defines requirements related
to strategic planning process, structure and contents of strategic
documents, and assessment of their fiscal impact. This regulation also
defines requirements for costing, as one of the key elements of strategic
planning and FIA. However, it provides little or no guideline on how
the costing process should be organized, what specific steps should
be taken, which stakeholders should be involved and data sources
consulted, or which costing methods should be applied and how.

Introduction 9
Methodological guide for costing of government strategies

Recognizing this problem, several studies conducted by ReSPA

recommended producing standardized methodological guidelines for
strategy costing2. Specifically, the Analytical paper on managing the
process of implementation of PAR strategies in RESPA Members notes
that “…one of the most prevalent barriers to PAR implementation is the non-
alignment of sectorial planning and the medium-term financial planning
and a lack of relevant methodology for this process” and recommends
to ReSPA to strengthen the models for management of strategies by
“developing specific manuals, including the manual on costing of sector
strategies”. The Optimization of Public Administration in the Western
Balkans Region notes that one of the main public administration
process weaknesses is “lack of consistency in sectoral planning and
mid-term financial planning, and a lack of relevant methodology for this
process” and recommends to ReSPA and its members to establish a
unified methodology for preparation of sector strategies that includes
costing of activities for the sector strategies implementation. One of the
proposed cooperation modes is preparation of national and regional
guidelines. A need for developing written methodological guidelines for
PAR strategies costing was also recognized by ReSPA Members and
Kosovo* representatives at the PAR Network meeting organized by
ReSPA in January 2017.

1.2. Objectives
The purpose of this Guide is to contribute to developing more sound
financial framework for implementation of government strategies in
ReSPA Members and Kosovo*. This is expected to be achieved by
providing standardized methodological guidelines for costing strategies
in general, and PAR strategies in particular. Application of these
guidelines should contribute to producing more consistent, reliable and
verifiable cost estimates that could serve as a basis for effective and
efficient strategy implementation and planning of government and donor
support.
Improved quality of cost information is expected to contribute to quality
of strategic documents and facilitate the process of their FIA, thus
strengthening the overall fiscal discipline and budget management.
Improved costing of PAR strategies in particular should enable their
better alignment with the Principles of Public Administration published
by SIGMA, which serve as a “soft acquis” for PAR3. These Principles
among other require that financial sustainability of PAR strategies is
2 http://www.respaweb.eu/11/library#respa-publications-2016-7
3 The Principles of Public Administration, SIGMA (Support for Improvement in Gov-
ernance and Management). SIGMA a joint initiative of the OECD and the European
Union that aims to strengthen the foundations for improved public governance. 

10 Introduction
 With examples from public administration reform strategies

ensured and define key requirements that governments need to meet

in this area.
Provision of reliable information on funding requirements for
implementation of programs and activities in strategic and operational
documents will also increase transparency of public spending. This
will strengthen managerial accountability for results achieved with
government and donor funds spent, thus contributing to better internal
financial controls and overall accountability of the public sector.

1.3. Scope
This Guide focuses on costing, as one element of strategy financial
management cycle. At the strategy planning stage, costs are assigned
to activities and sources and mechanisms of financing are identified.
At the implementation stage, funds are allocated based on priorities
and financial gap is managed. Spending is then monitored against the
plan, and the value achieved for the money spent is evaluated. These
other elements of strategy financial management (i.e. prioritization of
programs and activities based on their costs, identification of financing
sources and mechanisms, management of financial gap, and financial
monitoring, reporting and evaluation) are not addressed in details by
this Guide. However, the costing guidelines are provided taking into
consideration potential implications on these issues, as appropriate.
Costing guidelines provided in this document are based on the
assumption that a high-quality action plan indicating programs, activities,
timelines and implementation responsibilities has been developed to
support strategy implementation. The Guide is therefore not suitable for
costing strategies which are not supported by an action plan or a similar
operational document.
The Guide provides generic guidelines for costing of government
strategies, as well as additional guidelines for costing of PAR strategies.
Both are highly standardized and do not account for differences between
sectors or countries. Costing of PAR strategies is affected by differences
between the countries institutional set-up, strategic framework and
implementation arrangements for PAR, and the countries’ overall
budget management systems and processes. Differences between
PAR functional areas pose an additional challenge. These differences
are illustrated using country-specific examples. To meet specific
requirements of individual countries, options, rather than directives for
addressing particular issues are provided. Several more sophisticated
issues are also addressed.

Introduction 11
Methodological guide for costing of government strategies

The guidelines for costing of PAR strategies are consistent with those
provided by SIGMA, and complement them by addressing additional
relevant issues and providing examples. They are also consistent with
the countries’ existing methodologies on FIA and strategic planning
embedded in the relevant regulation, and complement them by providing
detailed guidelines on costing process and cost calculations.
Target audience of this Guide are employees in government institutions
responsible for coordinating and conducting strategy costing process.
These include both financial staff who have the relevant knowledge
in this area, as well as technical experts who do not necessarily have
financial background. To enable practical application of the Guide by the
target audience, key theoretical concepts are first explained, followed by
practical guidelines and examples for conducting the costing process.

1.4. Methodological Approach

The process of developing the Guide involved several stages, including
desk research, consultations with stakeholders, and drafting and
finalizing the document based on the stakeholders’ feedback.
Desk research focused on analysing relevant scientific, academic
and non-academic literature, as well as relevant regulation and PAR
documents of ReSPA Members and Kosovo*. The list of reference
documents is provided in Annex 1 – References. Internet search of
available literature, including databases of several organizations sharing
best practices, shown very few research papers or guidelines on costing
of government strategies. No specific PAR-related research or guidelines
on costing were found. Several guides on costing specific government
services or types of projects were analyzed from the perspective of
general approach to the costing process.
Analysis of financial information in PAR strategies, action plans and
implementation reports of ReSPA Members and Kosovo* shown variations
among the countries. Some of these documents contain very little or
no financial information at all, whereas others provide a comprehensive
information on resource requirements, costs and financing sources. The
quality and comprehensiveness of cost information is generally not at high
level. Cost estimates are often incomplete or not based on actual resource
requirements, recurrent costs expected to be generated after the strategy
implementation period are not clearly indicated, and anticipated sources of
financing are not always identified. Significant improvements were noted as a
result of technical support provided by SIGMA on a country-specific basis. No
comprehensive methodological guidelines for estimating costs of strategies
are provided by governments. The regulation on FIA and strategic planning

12 Introduction
 With examples from public administration reform strategies

generally defines requirements for the contents of strategic documents and

type of financial information to be included, but provides little or no guideline
on how the costing process should be organized and the cost calculated.
A range of relevant stakeholders from ReSPA Members and Kosovo*
were consulted, including representatives of line ministries and
institutions responsible for PAR coordination, and representatives of
budget departments of ministries of finance, as institutions responsible
for providing budget guidelines and verifying cost estimates. Several
members of ReSPA Working Group for Better Regulation and FIA were
also consulted. The consulted donor representatives primarily included
PAR program managers/advisors at the Delegations of the European
Union (DEU), as the key PAR donor. The consultations have greatly
contributed to transparency of the process, better coordination and
government ownership, as well as the quality of the Guide. The list of
stakeholders consulted is provided in Annex 2 – Stakeholders Consulted.
All government and DEUs representatives consulted strongly supported
development of this Guide, recognizing the importance of adequate costing
for financial sustainability of strategies and overall budget management,
as well as challenges resulting from insufficient capacities and lack of
guidelines. They urged for coordination and consistency with initiatives
and guidelines provided by SIGMA, as well as with the governments’
existing regulation. Given the differences in the countries’ budget
management systems and quality of strategic financial management,
the stakeholders had different recommendations with regard to scope
and level of standardization of methodological guidelines, varying from
basic standardized guidelines to more sophisticated and comprehensive
country-specific guidelines.
As the key EC organization developing and sharing best practices and
evaluating the countries’ progress towards the EU integrations in the
area of PAR, SIGMA was consulted to ensure a coordinated approach
and consistencies with the PAR Toolkit currently being developed by
SIGMA. SIGMA also provided valuable recommendations on specific
technical issues.

1.5. Structure and Contents

The Guide contains this introductory chapter and two additional chapters.
Chapter 2 – Costs and Costing provides theoretical background on
key conceptual issues. It explains the concept, different perspectives,
classifications and types of costs; the concept and basic principles of costing
and applications of cost analysis; and different costing methods that can be
used in the costing process, their advantages and disadvantages. The aim

Introduction 13
Methodological guide for costing of government strategies

of this chapter is to increase the general knowledge of target audience in

the relevant areas, so that they can be able to apply it in practice.
Chapter 3 – Guide to Costing Process provides generic guidelines
for designing and implementing a strategy costing process. It describes
the process step-by-step, including planning and preparation phase
(defining purpose, objectives and scope of costing, developing costing
plan, identifying cost objects, selecting costing methods and defining
data management plan), and implementation phase (identifying types
and quantities of resources required, estimating their costs, and
producing and verifying the cost estimates). Each step is illustrated using
examples based on PAR strategies and action plans of ReSPA Members
and Kosovo*, as well as other examples developed for the purpose of
this Guide. Additional PAR-specific guidelines are also provided and
different options and approaches discussed where applicable. The aim
of this chapter is to increase practical skills of target audience for costing
of strategies based on action plans.
To make the costing process more efficient, cost calculation tool
suitable for costing strategies based on action plans is also developed
and provided in a separate MS Excel document as Annex 3 to this
Guide, together with instructions for use.

14 Introduction
 With examples from public administration reform strategies

2. Costs and Costing

2.1. Cost Definition and Concepts

2.1.1. Definition

The term “cost” has several different meanings and can be used
differently both in literature and everyday language. Cost can be defined
as resources used or required for implementation of a particular project,
program or activity or delivery of a product or service, expressed in
financial terms. There are two main components of costs – the type and
quantity of resources used or required, and their value.
Costs are not the same as prices. Some government services do not
have prices, because they are provided for free, but still have costs
because they require resources for their provision. Also some services
may have prices that do not fully reflect their costs. The terms “cost” and
“expenditure” are often used interchangeably. However, in some cases
this is misleading. Expenditure of an activity or program relates to the
amount of financial resources spent and may not necessarily reflect its
full costs.

2.1.2. Financial and Economic Costs

Depending on the scope of resources used for a program, activity,

product or service, and the way these resources are measured, costs
can be viewed as financial or economic.
Financial costs represent actual expenditure of implementing a
program or activity, or producing a good or service. They are described
as financial outlays, or the amount of money paid or expected to be paid
for the resources used. Calculating financial costs of a program or activity
requires identification of quantity and price of all resources needed for
its implementation, or estimating the level of their expenditure in another
way. The concept of financial costs is typically used by accountants.
Economists observe costs in a broader way. In addition to financial
outlays made for provision of resources, economists also consider usage
of resources for which no money is paid (for example using volunteers
to implement activities, or using facilities, equipment or other assets free
of charge). Although they are provided for free, these resources have
their value because they can be used for alternative purposes (e.g. a
volunteer can work on a paid job, a free space can be rented out). Costs

Costs and costing 15

Methodological guide for costing of government strategies

of these alternative uses of resources that have been foregone by using

them for a particular purpose are referred to as opportunity costs (for
example, a salary that a volunteer would earn if he or she worked for
money). Economic costs therefore also include the estimated value
of resources for which no financial transactions are made or for which
the price paid is below the cost of using them productively elsewhere.
Economists argue that real costs to society of resources used for
implementation of a program are their economic costs, and the benefits
that could have been obtained from the next best use of resources.
Calculation of economic costs cannot replace calculation of financial
costs – it can only supplement it with additional information needed for
decision making. Selection of approach in terms of using financial or
economic costs depends on the purpose and objectives of cost analysis.
If the objective is to calculate how much money is needed to implement
a program or activity, then only financial costs should be calculated.
If the objective is to assess a program’s sustainability, chose between
alternative implementation options, or assess its economic impact,
then all costs should be considered, including those that are not paid
for. Economic cost considerations are especially important in valuing
different policy initiatives. Government resources are scarce, and tying
them up in implementation of a selected policy initiative makes them
unavailable for other initiatives that may be of higher priority.
While financial costs can be calculated either for programs or
activities already implemented (retrospectively) or those planned to be
implemented (prospectively), calculation of economic costs is typically
forward-looking (prospective).

2.1.3. Cost Perspective

Costs of government services, activities, programs or strategies

can be analyzed from different perspectives. The perspective of cost
analysis is about “whose costs” should be considered. Understanding
the perspective is important because different perspectives require
analyzing different items for the purpose of different decision problems.
Costs of a government strategy or program can be viewed from three core
perspectives – societal, public and private. The societal perspective is
the broadest and includes all strategy or program-related cost, incurred
by all stakeholders including public sector, private sector, households
and individuals, and any other group that is incurring the cost. Public
perspective provides a narrower view taking into account only the
cost incurred by the public sector or government. These are costs of
implementation of programs and activities by responsible institutions,
although these institutions may not finance entire costs of these

16 Costs and costing

 With examples from public administration reform strategies

programs and activities. For example, from a public perspective, a cost of

establishing a system for providing electronic services to citizens would
comprise all the cost borne by the government, including personnel costs,
software, materials, equipment etc. In lack of government funding, some
of these costs could also be financed by donors. Private perspective
includes the costs of individuals and households incurred as a result
of strategy implementation. For example, individuals may be providing
funds directly through payment for user fees for using government
electronic services. These fees can be viewed as a contribution to
recovery of cost borne by the government.
Economic evaluation of strategy is typically concerned with the
strategy impact on society as a whole and therefore based on a societal
cost perspective. According to economic theory, calculation of strategy
costs should be inclusive, taking into account all costs generated by
all stakeholders, including those that will be generated in the long
run. Such broad perspective also ensures that alternative options for
using resources (opportunity cost) are considered in a way that yields
maximum benefits for society as a whole. On the other side, financial
evaluation of strategy is concerned with the strategy impact on public
budgets and therefore based on government or public cost perspective.
This Guide looks at strategy costs from the public perspective.

2.1.4. Cost Objects and Cost Drivers

A cost object is any unit for which the cost is measured or estimated. A
cost object may be an input, activity, project, program, output, result, or
any other component whose cost needs to be estimated for the purpose
of decision making. The following elements are typically viewed as cost
objects:
• A project or program composed of several activities can be
viewed as cost object in the broadest sense (e.g. “establishment
of legal and institutional framework for integrated strategic
management”);
• An activity, as a component of a program or project is a more
narrowly defined cost object (e.g. “delivering training program on
public policy development” or “drafting legislation”);
• An output of activity (e.g. “training delivered to 100 participants”
or “the law produced”);
• An input required for implementation of activity (e.g. “expert-
day”).

Costs and costing 17

Methodological guide for costing of government strategies

Cost objects should be selected based on the available information and

the purpose of costing. A balance between usefulness of cost information
and the cost of obtaining it must be made.
A cost driver is closely related to cost object. A cost driver drives the
amount of cost of a particular cost object. It can be defined as any factor
a change in which causes a change in the level of cost of a particular
cost object. A cost object may have several cost drivers. In the example
of public policy development training activity, cost driver may be the
number of trainings provided, or the number of participants trained,
because costs increase with this number. Cost drivers can also be
related to different approaches to implementing activity. Analysis of cost
objects and cost drivers enables better understanding of cost behavior.
Information on cost objects and cost drivers can therefore be used to
improve program’s efficiency.

2.2. Cost Classifications

2.2.1. Cost Items

Costs can be classified in different ways, depending on the purpose of

cost analysis. Each classification is useful for different decision making
problems. The most common cost classification is by type of physical
resources (inputs) consumed for the purpose of delivering a product or
service, or implementing a program or activity. The following broad cost
categories can be defined:

• Cost of personnel (salaries, fringe benefits, taxes and other

expenses related to human labor);
• Cost of materials and services (office supplies, communication,
fuel, accommodation, utilities, maintenance, rent, other services,
and any other recurrent input); and
• Cost of capital assets (land, building, equipment, vehicle,
software).

This classification is also known as classification by line-item and is

used by governments for planning and recording financial transactions.
Line items are determined by the government’s chart of accounts.

18 Costs and costing

 With examples from public administration reform strategies

2.2.2. Budget Classifications

In addition to line-item classification, government expenditures are also

classified by:
• Organization or institution that generates them (also referred to
as “budget user”). Expenditures of each budget user are further
classified by line item. Because of their cross-cutting nature and
complex implementation arrangements, costs of government
strategies are reflected in budgets of several budget users
(institutions).
• Government function or area of work, such as general public
services, health, education etc., each involving several budget
users. Functions are defined using the COFOG classification4.
Costs of sector strategies can be assigned to one particular
function, whereas costs of national development strategies are
cross-functional.
• Program, representing a group of activities that have the same
operational goal(s). Programs and subprograms can be defined
horizontally across budget users, or vertically within a budget user.
The overall program budget structure should be defined based on
the relevant strategic framework so that costs of strategies can
be easily linked to budget. Program budgeting is therefore the
government’s key tool for linking strategies with budgets.

• Source of financing from which the money for financing of

expenditures is secured. These include government mainstream
revenues, earmarked revenues, and other sources such as
donations, contingencies or own revenues of budget-users.
Costs of strategies can be financed from one or all of these
sources. A combination of sources is typically used.

2.2.3. Recurrent and Capital Costs

Different types of inputs or resources can be categorized as recurrent

or capital items. Recurrent items are those that are consumed in the
course of one year. Capital items have useful life of more than a year
and a value over a certain threshold, as defined by relevant accounting
policy. Costs of salaries, materials and services are recurrent costs,
whereas costs of capital items (building, land, vehicles, equipment,
software) are considered capital costs.

4 COFOG – The Classification of the Functions of the Government, published by the United
Nations Statistics Department

Costs and costing 19

Methodological guide for costing of government strategies

Distinction between recurrent and capital cost is important for two main
reasons. First, costs of capital items are spread over their estimated
useful life. This is because capital items are gradually “used up” during
each year of program or strategy period. This is known as depreciation.
If useful life of a capital item is longer then the programme or strategy
period, then the item will have a resale value at the end of the period.
Cost of program or strategy during a specified time period includes only
the amount depreciated over this period. However, cost of investment
(purchase cost) of new items should be calculated to estimate financial
impact.
Secondly, maintenance of capital items (buildings, vehicles, software)
requires purchase of new recurrent items (services, materials, spare
parts) on a regular basis. This means that capital items will generate
additional recurrent costs which must be taken into consideration in
costing and budgeting processes.

2.2.4. Full and Incremental (Additional) Costs

Based on the approach to measuring the scope of resources employed

to implement a project, program or strategy, costs can be classified as
full or incremental (or additional). Incremental (additional) cost are
costs of additional inputs or resources that need to be added on top of
existing infrastructure to implement a project, program or strategy. These
are for example costs of new staff that needs to be employed, costs of
additional materials and services that need to be consumed (trainings,
publications, travel), or cost of additional capital items that need to be
procured (equipment, software). Existing cost of a project, program or
strategy are costs of existing infrastructure that will continue to be used
for the purpose of implementation. These are for example salaries of
existing staff who will be engaged in implementation, costs of general
administrative support and overheads (communications, utilities, office
supplies), and costs of using existing capital items (depreciation). Full
costs of a project, program or strategy are the existing costs plus the
incremental (additional) costs. Full costs of strategy are therefore costs
of all resources employed for the purpose of its implementation.
Incremental costing is more simple then full costing and provides
information on direct financial impact of a program or strategy. The
government needs this information for the purpose of conducting FIA and
budget planning. The major downside of incremental costing however is
that it underestimates the cost of existing infrastructure. It also assumes
that the existing infrastructure will be available throughout the strategy
implementation period, and sufficient to meet the desired results, which
may not be the case. On the other side, full costing enables estimating

20 Costs and costing

 With examples from public administration reform strategies

costs of government reforms in a comprehensive way. This information

is required for development planning and negotiating external support,
which is very important for transitional countries. However, the downside
of full costing is its complexity and implementation cost. The decision
between full or incremental costing of strategies should be made based
on the purpose of costing and availability and ease of data collection.

2.2.5. Total, Average and Marginal Costs

Based on their relation to cost object, costs can be classified as total,

average (unit) or marginal costs. This classification is used for analyzing
costs of quantities of outputs of a program, project or activity. The total
cost is the cost of all resources required for producing a quantity of
outputs. Depending on the costing approach, the total costs can be
calculated as full or incremental (additional). The average or unit cost is
calculated by dividing the total cost (full or incremental) with the number
of units of outputs. The marginal cost is the additional cost generated
as a result of producing one more unit of output. Marginal cost is often
confused with incremental cost. Both refer to cost of producing additional
output. Incremental cost is the additional cost resulting from output
increase calculated at program or activity level, whereas marginal cost
is the additional cost calculated at the unit of output level.

Average (unit), Incremental and Marginal Costs

Total cost of a training program is 1,000 EUR. Its outputs are 10 trained par-
ticipants. Average (unit) cost per participant is calculated as 1,000 EUR / 10
participants = 100 EUR. If the number of participants increase by 3, total cost
will increase by 3 x 100 EUR = 300 EUR. These additional program costs
are called incremental costs. Marginal cost are additional costs per one new
participant. They are calculated by dividing incremental cost with the number
of new participants: 300 EUR / 3 = 100 EUR. In this case, marginal costs are
equal to average (unit) costs.
Assume that a number of participants increases significantly, for example by
8, and additional rent of training premises or engagement of trainers is need-
ed. Because of this new investment, incremental costs will increase more
than proportionally, for example by 900 EUR rather than 800 EUR. Additional
cost per one new participant would then be 900/8=113 EUR, and not 100
EUR. In this case marginal cost is higher than average cost.

Costs and costing 21

Methodological guide for costing of government strategies

Depending on the purpose of cost analysis, marginal or average cost

is analyzed. Marginal cost is analyzed when deciding about potential
expansion of existing programs or activities. Average (unit) cost is used
to estimate future costs. Depending on the “unit” or object of costing, a
number of unit costs can be defined for a program or activity, such as:

• Unit costs of inputs or resources needed for its implementation,

such as salaries, cost of materials, services or capital items;
• Unit costs of immediate outputs of activities, such as cost of
training, cost of training day per participant, cost of study tour
per participant, etc.
• Unit costs of intermediate outputs or results, such as cost of
completing a regulatory reform, cost of introducing electronic
system for information sharing etc.

The units above are shown in the hierarchy order – unit cost of input feed
into unit cost of immediate output, and the latter feed into unit cost of
intermediate output or result. It is therefore relatively easy to calculate unit
cost of inputs (for example based on accounting data or market prices), but
progressively difficult to make calculations as we move to the next level.

2.2.6. Fixed, Variable and Mixed Costs

Based on changes in their behavior resulting from changes in the scope of

a program or activity over a period of time, costs can be classified as fixed,
variable or mixed costs.
A fixed cost of a program, project or activity includes all costs that remain
constant in the short run, despite changes in the scope of a program, project
or activity. These costs are fixed for the relevant range of output, and must
be paid regardless of the level of output and the resources used. If a training
program from our example is being provided by a government agency, its
fixed costs would be costs of permanently employed staff, utilities or any
other cost that does not change with the number of training participants.
A variable cost is one that varies with the changes in scope of program,
project or activity in the short run. A change in cost driver will create a
change in these costs. If the training is provided to an increasing number of
participants (which is the cost driver), then costs of participants’ travel and
accommodation and training materials will increase. These are variable
costs of the training program. The assumption is that they increase linearly
in respect to volume change, but this may not be the case for all variable
costs. Fixed costs and variable costs make up the total cost.

22 Costs and costing

 With examples from public administration reform strategies

Mixed costs are those that cannot be classified as fixed or variable,

and include semi-variable and semi-fixed costs. Semi-variable
costs are those that have both variable and fixed component. For
example, cost of telephone has a fixed monthly fee and a variable
component linked to number and cost of phone calls. Semi-fixed
costs are those fixed costs that remain constant for a particular
range of output, but start to increase when this range is exceeded.
As the volume increases, additional investment in expansion of
capacities is required. In our example, fixed cost of training will
remain fixed only for a limited range (number) of participants. As this
number increases, additional investment in new staff or premises
will probably be needed.
Time horizon is critical for classifying costs as fixed or variable.
This is because there are many costs that are fixed in the short-run
but variable in the long-run (salaries, maintenance, depreciation).
Essentially, in the long run, all costs are variable. Analysis of costs
from the perspective of how they change relative to the changes
in volume of activity is useful for making decisions on expansion
or reduction of existing programs and activities. Information on
variable costs is used for planning and budgeting.

2.2.7. Direct and Indirect Costs

Based on their traceability to cost objects (programs, projects,

activities, products or services) costs can be classified as direct
and indirect. The total cost of a cost object is comprised of its direct
costs and indirect costs.
Direct costs of program, activity or output are those which can be
directly linked to the use of particular resources and traced to a
program, activity or output in an economically feasible way. This is
direct labour, materials, services or capital expenses. For example,
direct costs of conducting a policy analysis are costs of external
experts engaged to produce the analysis, or costs of related
meetings.
Indirect costs (also referred to as overheads) have no direct
relationship to cost object, although they must be incurred for the
purpose of implementation. They can therefore not be traced to
cost object in an easy or economically feasible way. Indirect costs
can also be labor, materials, services or capital expenses. In our
example of conducting a policy analysis, salaries of staff who
provide administrative support, cost of utilities, communication,
rent, or usage of joint vehicles or equipment (depreciation) would
be indirect costs. Indirect costs are allocated to cost objects using

Costs and costing 23

Methodological guide for costing of government strategies

different allocation basis and methods. For example, indirect

salaries can be allocated based on time worked, utility costs based
on number of square meters occupied, depreciation based on the
usage of capital items etc.
Usually, direct costs are variable costs, while indirect costs are
fixed costs, although this does not need to be the case. A cost
that is direct to one cost object may be indirect to another cost
object. For example, the cost of a computer purchased for the
purpose of implementing a two-year training program is direct cost
of this program, but its depreciation is indirect cost of training per
participant.
To calculate full costs of strategy, both direct and indirect costs
need to be estimated. However, for indirect costs this requires extra
effort. Economic feasibility of cost traceability is a critical factor to
consider in this classification system. Therefore, when deciding
whether to treat a cost as direct or indirect, several factors should
be considered, including primarily the importance of cost item (its
amount) and possibility and ease of data collection for indirect cost
allocation.

2.3. Costing

2.3.1. Definition and Importance

Costing is the process of assigning monetary values to inputs, which

are required to deliver a particular output. Inputs can be different
types of resources, such as labour, materials, services, or capital
items. Outputs can be defined as products, services, activities,
projects or programs. Strategies are composed of several projects
or programs. The total cost of any object is determined by two key
components – the resources needed for its implementation, and the
costs of these resources. Costing therefore involves two distinctive
activities: (a) measuring types and quantities of resources needed
for delivery of a particular output, expressed in physical units; and
(b) valuation of these resources in monetary terms.
From the time perspective, costing can be retrospective, when
resources have already been used and costing is done for the
purpose of estimating their actual costs; and prospective, when
resources have yet to be used and costing is done for the purpose
of estimating their future costs over a defined time period. This
Guide focuses on prospective costing.

24 Costs and costing

 With examples from public administration reform strategies

Costing is important because it provides a quantified basis for defining

programs and strategies and helps understanding financial impact of
government decisions. This contributes to better budget management
by forecasting future resource requirements and potential funding gap.
Costing also provides a credible basis for mobilisation of funds from
budget and donors to ensure sustainable strategy implementation.

2.3.2. Applications of Cost Analysis

Cost analysis involves various activities related to accumulating,

examining and manipulating cost data for the purpose of making
comparisons or projections. The term “cost analysis” is broader then
“costing”. Costing or cost estimating essentially involves collecting and
analyzing historical data and applying different methodologies to predict
future cost. Costing may not be the only purpose of cost analysis. A
comprehensive cost analysis can be used as a tool to help governments
better understand various financial aspects of their programs.
Governments can use cost analysis for the purpose of:

• Fiscal impact assessment, by analyzing incremental costs

resulting from implementation of new programs or strategies,
or regulatory or policy changes, to assess impact on budget
expenditure;
• Assessing efficiencies of existing programs and strategies, by
analyzing which programs have high or low costs relative to their
outputs;
• Assessing sustainability of existing programs and strategies, by
analyzing costs for the purpose of better planning and budgeting,
to ensure financial sustainability;
• Making modifications to existing programs and activities,
including their expansion, downsizing or replication at other
locations or levels;
• Pricing of services, in cases when government programs or
strategies involve providing services at charge;
• Choosing between alternative options of service provision, e.g.
by private sector, by analyzing economic costs of services;
• Making capital investment decisions, such as procurement
or upgrade of capital assets, by analyzing cost of acquisition,
maintenance, operating and disposal cost.

Costs and costing 25

Methodological guide for costing of government strategies

Cost information is also used for the purpose of economic evaluations

of programs or strategies. While cost analysis looks only at the
costs of a program or strategy, economic evaluations consider the
relationship between the cost and the effect of a program or strategy.
One of the most common approaches to economic evaluation is cost-
effectiveness analysis. It is used to measure and compare the costs
and consequences of various interventions so that their relative efficiency
can be assessed and decisions on resource allocation made. Costs and
effects of different alternatives (e.g. programs or projects) that all work
to meet the same result or objective are first analyzed. Cost per unit of
effectiveness is then estimated for each alternative, by dividing its cost
by the unit of effect. Results of different alternatives are finally compared
and the alternative with the lowest cost per unit of effect is selected as
the most cost effective.

2.3.3. Key Principles

To ensure producing reliable cost estimates, costing of programs and

strategies should be based on several key principles as outlined below.
Clear identification of purpose: Cost information must be analyzed and
used to serve a particular purpose. Before starting a costing exercise, the
parties involved need to define why the costing is being conducted, and
what decisions will be made based on the results of costing. Different
purposes require different information on cost and resources, and
application of different costing methods. For example, assessment of
fiscal impact of a government reform strategy requires only information on
incremental (additional) strategy costs, whereas estimating cost of reform
requires information on full strategy cost.
Realism: A starting point for costing strategies is a clear definition and
understanding of programs and activities that need to be implemented
and their outputs. Before even starting the costing process, responsible
parties should ensure that programs and activities are realistic and
feasible. If the activity cannot be implemented with available resources
and it is not likely that the necessary resources will be secured, the activity
should be revised, postponed or eliminated.
Efficiency: Efficiency relates to the use of all inputs in producing a given
output and can be measured by determining the ratio of useful output
to total input. Activities should be implemented with available resources
whenever possible. Additional resources should be planned only when
this is absolutely necessary and should be used in most productive way.
Efficiency is important because of scarcity of government resources.

26 Costs and costing

 With examples from public administration reform strategies

Conservativism: Conservativism is closely linked to efficiency and

means making well-justified and prudent, rather than over-estimated
cost estimates. However, conservativism does not mean deliberately
under-estimating costs. Over-conservative estimates can lead to initiating
programs and activities that are otherwise unaffordable by making them
look cheaper. This can affect budgets, especially when significant cost
items are under-estimated (e.g. cost of new staff in public administration).
When the level of uncertainty is relatively high, contingencies should be
planned to mitigate risks associated with conservative estimates.
Consistency: Assuming the cost information will serve the same purpose
and that circumstances are similar, costing should be done consistently
for all programs and activities. This means that basic assumptions,
approaches and costing methods used should be consistent. This will
ensure comparability of results.
Participation and consultations: Government programs and strategies
are typically cross-cutting and affect several institutions or government
levels. Costing cannot be done in isolation. Participation and consultations
of all institutions responsible for financing and implementation are
needed. The process is often iterative and involves multiple rounds of
consultations. Ministry of finance (MoF) should play the central role in the
costing process by providing overall guideline and relevant cost data.
Availability of valid data: The quality of input data used in the costing
exercise directly affects the quality of output information used for decision
making. Input data relates to types and quantities of resources and their
costs. Data need to be accurate, consistent, realistic and practical. MoF
should advice on data sources to be used, based on purpose of costing
and availability of data.
Documenting details and assumptions: Cost calculations are usually
done under certain assumptions, such as those on availability of specific
resources, inflation trends, implementation and financing options etc.
These need to be realistic and explicitly stated. All calculation details such
as those on unit costs and quantities of resources need to be properly
documented. This will enable better understanding of cost information by
decision makers and facilitate future revisions of cost calculations.
Benefits outweighing cost: Costing requires resources, including staff
time and potentially external support. Due to complexity and cross-cutting
nature of strategies, resource requirements are usually high. When
deciding about costing methodology, institutions must balance factors
such as timeliness, accuracy or level of details with the cost of costing.
The investment made in costing should enable institutions to meet their
needs, but in a sustainable way.

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Methodological guide for costing of government strategies

2.4. Costing Methods

Based on the level of detail, accuracy and their intended use, cost
estimates can generally be classified as rough order of magnitude
estimates, which are used when little details on programs are available,
and more detailed (budget) estimates, which are used when programs or
projects are in their conceptual design stage and activities and outputs
can be identified. There are several methods or approaches used for
costing government programs and strategies, each involving a different
level of accuracy and details. The most commonly used are bottom-up,
top-down (or parametric) costing, analogy costing, and costing based
on expert opinion.

2.4.1. Bottom-up Costing

Bottom-up costing, also referred to as an engineering approach, is

based on detailed analysis of resource requirements and their costs
to determine the estimated cost of a project or program. Application of
this technique requires breaking down of a project or program into its
smallest components typically called activities or actions. Resource
requirements (labor, materials, capital items) and their cost is estimated
at this lowest level. Cost is calculated by multiplying quantities of
resources with their unit cost. The total estimate is built by summing
up detailed estimates done at lower levels. Typically, this approach
requires a cost analyst to work with the relevant program and finance
staff in line ministries and the MoF to obtain details on resource
requirements and costs. Since the design is built from scratch, the
approach is called bottom-up.
This technique is considered to be the “golden standard” of costing,
because it provides the most detailed estimate customized to a
specific cost object. It is applied when the estimators know in sufficient
details what needs to be done to achieve the desired results, and the
information on resource requirements and unit cost can be obtained
at reasonable cost. Bottom-up costing allows analytical insight into
different components of costs and helps understanding the effects of
change (for example, what would happen with the cost of training if it is
delivered by an alternative provider).
However, this technique has several drawbacks. First, it is expensive and
time consuming. A lot of time often needs to be spent for defining details
at the lowest (activity) level. Secondly, an analyst needs to understand
each specific activity and tradeoffs in the activity and program design.
Next, since there is very little space for unknown factors, it is difficult
to use this technique for costing activities or projects where the level

28 Costs and costing

 With examples from public administration reform strategies

of uncertainty is high. Finally, this technique requires availability or

development of an extensive and detailed cost database for different
types of programs.

Activity-based costing (ABC)

ABC is a special form of bottom-up approach used for costing of government
services. The costs are first assigned from resources to process activities (as
fundamental cost objects), and then from activities to their outputs (products
or services). The key difference between the ABC and traditional bottom-up
costing is in the allocation of indirect costs. In ABC indirect costs (such as
indirect labor, utilities etc.) are allocated to outputs through activities that con-
sume them. This gives much more precise results then in traditional costing,
where indirect costs are allocated to outputs directly, based on some general
allocation basis (for example a percentage of direct cost).

2.4.2. Top-down or Parametric Costing

With parametric costing, also referred to as top-down costing, the cost of

a new program is estimated based on a validated relationship between
historical cost and technical characteristics of similar programs. This
relationship is determined based on the analysis of historical data for
several similar programs. For example, cost of new training program is
estimated based on technical characteristics and costs of previous similar
trainings. Technical characteristics may relate to program’s volume, scope
or complexity (e.g. number of participants and institutions; geographic
coverage, complexity of training etc.). It is important to identify those
technical characteristics that most influence or drive the program cost (e.g.
number of trainings directly affects the cost of program, but complexity of
training may not be relevant). The assumption is that the same factors
that affected cost in the past will continue to affect future costs.
Parametric relationship can be defined as simple rates (e.g. cost of
training is 1,000 EUR/participant) or factors (e.g. travel cost is 10% of
total training cost), but also as more complex mathematical expressions,
formula or regression equations. Whichever is the case, the goal is
always to create a statistically valid cost estimating relationship using
historical data. This relationship is then used to estimate the cost of the
new program by entering its specific characteristics into the parametric
model or formula.
Parametric costing is normally used when activities or resource
requirements cannot be defined in details to use the bottom-up
approach. It is also used for estimating costs of standardized activities
or outputs, and for allocation of indirect costs. Its major advantage is

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Methodological guide for costing of government strategies

that it is reasonably quick and easy to apply and clearly shows main
cost driver(s). The main disadvantage is that it lacks details. Also,
establishing a credible cost estimate relationship requires access to
relevant historical data for several activities or programs, which may be
difficult to obtain. Confidence in results therefore depends on how valid
the relationships are between cost and the physical attributes.

2.4.3. Analogy Costing

Analogy costing, or estimate by analogy is based on the assumption that

new programs or projects are evolved from those already implemented,
but have different features or components. The costs of new programs
or their components are therefore estimated based on actual costs of a
similar program, with adjustments to account for differences between
the requirements. For example, if the previous project in amount of 1 mil
EUR involved construction of a 500 m2 building and the new project will
involve construction of similar building of an area of 800 m2, the cost of
the new project can be roughly estimated as: 1 mil EUR / 500 x 800 =
1,6 mil EUR, assuming linear relationship between the projects.
Analogy costing often relies on expert opinion. However, adjustments
should be based on quantitative rather than qualitative inputs as much
as possible. The method is similar to parametric (top-down) costing. The
main difference is that parametric costing is based on historical data of
several previously implemented projects, whereas the analogy costing
is looking at only one highly similar project.
This method is often used as a cross-check for bottom-up method.
Its main advantage over the bottom-up costing is that it looks only at
differences between projects, which saves time. It can also be used
before detailed project requirements are known. The main disadvantages
are that it relies on a single data source and can be used only when
a similar program was implemented. Also, there is a tendency to be
subjective in making adjustments, without a rational justification.

2.4.4. Expert Opinion

Costing based on expert opinion or expert judgement is not really a

calculation technique. Typically, the cost analyst interviews several
experts independently, reviews results and combines them into a single
best estimate. Since it is not backed up with supporting data, this
approach is considered to be too subjective. Objectivity can be improved
if cost analyst checks and documents data obtained from experts. This
approach is used in absence of other valid data to make a cost estimate
– for example in costing completely new types of projects. Its main

30 Costs and costing

 With examples from public administration reform strategies

advantage is that it accounts for differences and special circumstances,

as well as impact of different variables. The key downsides are lack
of objectivity and difficulties in documenting factors. Because of these
downsides, this approach should be used occasionally, ideally to
complement other methods or to cross-check their results.

2.4.5. Advantages and Disadvantages of Different Methods

Each of the costing methods has its own advantages and disadvantages,
requires availability of specific data, and involves different level of detail
and accuracy. While some methods are relatively cheaper and result
in rough estimates (such as analogy costing), others are more detailed
and costly (such as bottom-up). In principle, bottom-up and top-down
costing should be considered as the main costing methods. Analogy
costing should be used when these two methods cannot be properly
applied, and expert opinion should be used to supplement the results of
all methods. Key advantages and disadvantages of different methods
and their application is summarized in Table 1.
Table 1: Advantages, Disadvantages and Application of Different Costing
Methods5

Method Advantages Disadvantages Application

Bottom-up Detailed estimate Expensive Distinct activities
Enables easy trail Requires details for which resource
Flexible in assigning Requires cost data requirements can be
costs estimated in details
Top-down Relatively quick Lacks details The main program/
(parametric) Supports discipline Requires historical activity characteristics
Objective data are known and data
Clearly indicates cost Credibility of on several similar
drivers parametric programs/ activities
relationship are available

Analogy Relatively quick Tendency to Program details are

Few data required subjectivity unknown but data on
Questionable similar program are
accuracy available;
Unclear cost drivers Cross-checking
Expert Accounts for Not documented Program details are
opinion differences and special unknown and no
circumstances Tendency to data on previous
Captures impact of subjectivity program(s) are
different variables available
Complementing and
cross-checking

5 Adjusted based on “Cost Estimating and Assessment Guide”, Unites States Government
Accountability Office, 2009

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Methodological guide for costing of government strategies

Selection of costing methods requires a thorough consideration of costs

and benefits associated with using them. The selected methods should
enable the government to meet the costing objectives, with the benefits
of costing outweighing its cost. Factors to consider include:

• The objective of costing - costing for the purpose of budget

planning requires higher level of accuracy then costing for the
purpose of producing a project fiche.
• Availability of data and resources - methods that provide higher
level of detail and accuracy require much more high-quality data
and human and financial resources then methods that provide
less precise estimates.
• The time available - even if high level of accuracy is required and
data and resources are available, short deadlines can sometimes
push for quick and rough estimates.

Different methods are not mutually exclusive and can all be used together
in one costing exercise. Costing government strategies in fact requires
a combination of methods. For example, bottom-up costing can be used
for distinct activities with clear outputs; parametric costing for programs
or activities for which less detail is available; and analogy costing for
replication of similar programs. Expert judgement should be used for
programs that are first of their kind or to complement other methods.

32 Costs and costing

 With examples from public administration reform strategies

3. Guide to costing process

3.1. Overview of the Costing Process
In order to ensure that costing exercise generates the necessary information,
it is important to follow a clear plan. The costing process involves a number
of steps, each requiring specific information and resulting in specific outputs.
These steps can be summarized in two major phases:

• Planning phase, which involves defining purpose, objectives and

scope of costing, developing costing plan, identifying cost objects,
selecting costing methods, and developing data management plan.
• Implementation phase, which involves estimating types and
quantities of resources required and their costs, based on data
collected, and producing and verifying cost estimates.

The costing process is illustrated by graph 1. Although the steps are

presented sequentially, in practice the process is dynamic and involves many
iterations. For example, depending on the availability of data and resources
(step 6), it may be necessary to redefine costing objectives, the scope, cost
objects and costing methods (steps 1-5). The process is described in a very
comprehensive way. However, the steps are not prescriptive. Depending
on the objectives of costing and resources available for the specific costing
exercise, the process should be adjusted and simplified as needed.

Graph 1: Strategy Costing Process6

PLANNING PHASE COST ESTIMATE USED
FOR:
STEP 1: STEP 6:
STEP 3: STEP 4: STEP 5:
Define STEP 2: Develop data
Develop Identify cost Select costing
purpose and Define scope management • Identifying sources of
costing plan objects methods
objectives plan financing
• Define purpose and • The basis for costing • Identify key • Activities • Bottom-up • Minimum data set • Producing funding
specific objective(s) • Cost perspective stakeholders • Outputs • Top-down • Level of proposals
of costing • Relevant costs • Establish costing • Projects or • Analogy disaggregation
team • Planning and
• Time horizon programs • Expert judgement • Data sources
budgeting
• Vertical scope • Develop work plan • Data collection
instruments • Prioritizing and
managing financial
gap
IMPLEMENTATION PHASE • Deciding on program
changes
STEP 7: STEP 8: STEP 9: • Future revisions of
Estimate resource requirements Assign monetary values to resources Produce and verify cost estimates cost estimates
• Financial monitoring
• Identify types of resources needed • Estimate costs of resources • Produce the estimate and reporting
• Classify the resources • Allocate overheads • Document rules and assumptions • Other costing
• Define units of measurement • Validate the estimate exercises
• Estimate quantities

6 Adjusted, based on “Costing of Health Services for Provider Payment”, Özaltin, A.,
and C. Cashin, Joint Learning Network for Universal Health Coverage, 2014

Guide to costing process 33

Methodological guide for costing of government strategies

The following sections describe individual steps of the process in

more details. General guidelines applicable to all strategies are first
provided, followed by examples based on PAR strategies as well as
additional PAR-specific guidelines where applicable. The last section
discusses possible uses of the resulting cost information in the
context of strategy’s overall financial management.

3.2. Defining Purpose and Objectives

3.2.1. General Guidelines

The first step in conducting the costing exercise is identification of

decision problem and decision makers’ objectives. The purpose of
the costing exercise is the overall reason for conducting the costing
from the perspective of policy-makers. Specific objectives describe
what exactly the costing exercise needs to deliver in order to help
the policy making process. The purpose and objectives in fact define
how the cost information will be used and whether this will be for an
ad-hoc or ongoing decision making.
Cost estimates of government programs and strategies may have
two broad purposes:

• To support resource allocation as part of budget management

process, by providing estimates of funding needed to
implement programs or strategies; and
• To assist in making selection between alternative programs
and activities, and evaluating affordability of programs and
their performance against plans.

Specific objectives defined to support these broad purposes may include:

• Assessing how the implementation of new programs or strategies
will affect budget expenditures over a medium-term period, to
support budget planning (as part of FIA);
• Assessing financial gap for implementation of existing or new
programs or strategies, to secure the necessary funds from
budget or donors;
• Estimating full cost of government reforms or other initiatives
for the purpose of better development planning or negotiating
external donor support;

34 Guide to costing process

 With examples from public administration reform strategies

• Assessing efficiencies of ongoing initiatives, to identify potentials

for cost reductions and savings;
• Deciding on modification, extension, scope reduction, or
replication of ongoing initiatives;
• Choosing between alternative ways of program delivery to meet
the desired results (cost effectiveness analysis).

Costing and Fiscal Impact Assessment

Estimating costs of strategy is not the same as conducting its FIA. Costing
is only one segment of FIA and relates to assessing the strategy’s impact
on budget expenditure increase. FIA also includes assessment of impact on
expenditure decrease, as well as on revenue increase and decrease.

Understanding the purpose and objectives of costing is important,

because it influences the rest of the steps in the costing process,
including the cost perspective, types of cost to be estimated, time
horizon of costing, data requirements including the level of details and
accuracy, and costing methods to be used. Different stakeholders,
including government and donors, may have different policy and
programmatic requirements for costing approaches. Defining the
costing purpose and objectives is an opportunity to communicate and
align different interests, and understand how the results will meet the
different needs.

3.2.2. PAR Examples

According to PAR strategies and action plans of ReSPA Members

and Kosovo*, costing is generally done for the purpose of government
budget planning and ensuring sustainable implementation. Specific
objectives are focused on estimating the strategy’s mid-term financial
impact on government budget, estimating financing gap, and obtaining
the necessary additional funds from donors and budgets.

Example of Costing Objective

To estimate the amount of additional funds that need to be secured from gov-
ernment budget and donors during the period 2018-2020 for implementation
of all programs and activities defined in Action Plan for implementation of the
state-level PAR Strategy 2018-2022.

Guide to costing process 35

Methodological guide for costing of government strategies

In principle, the decision on the purpose and objectives of PAR strategy

costing should be made by the government, based on the intended use
of cost information. In addition to estimating financial impact of PAR
strategy, the government’s objective may also be to estimate its full costs.
This information is often required for the purpose of obtaining external
donor support or using specific financing modalities, such as IPA II Budget
Support. Other donors also sometimes require information on government
co-financing when making their financing decisions. Information on full
costs of strategy also helps institutions responsible for implementation to
understand total resource requirements and plan accordingly. Finally, this
information may be needed for the purpose of development planning.

Fiscal Impact of PAR Strategies

Implementation of PAR strategies may also result in budget expenditure de-
crease in mid to long run. The public administration “rightsizing” initiatives
are expected to have such impact. In long-term PAR strategies are expected
to contribute to government revenue increase, through increased efficiency
of public services, improved business environment and enhanced economic
activity. These considerations are part of PAR strategies’ FIA and go beyond
costing.

3.3. Defining Scope

3.3.1. General Guidelines

Defining scope of strategy costing means deciding on several key parameters,

including basis for costing, cost perspective, relevant costs, time horizon, and
vertical scope.
Basis for Costing
Basis for costing is the relevant strategic document which will be costed.
Government strategic documents can be analysed from several different
ways:

36 Guide to costing process

 With examples from public administration reform strategies

• Based on hierarchy, they can be classified to strategies (the highest

level and most complex documents), plans (medium level) and
programs (lower level).
• Based on their horizontal scope, they can be country-wide, setting
the country’s development goals for all sectors; sector-specific,
setting a reform agenda for a particular sector (e.g. transport, justice);
or multi-sectoral, addressing a cross-cutting policy issue (e.g. gender
equality).
• Based on their vertical scope, strategic documents may involve one
or more government levels.

Strategic documents are normally accompanied with operational or action

plans to support implementation. A well-designed action plan that clearly
indicates programs or projects, expected results, activities, outputs, timeframe
and responsibilities should be the basis for costing. The likelihood of producing
reliable cost estimates is proportional to the quality of this information.
Strategies not supported with adequate action plans are at implementation
risk, because they lack a solid basis for operational and financial planning by
responsible institutions.
Depending on complexity of strategy, several mutually aligned action plans
may need to be developed to address different horizontal areas or government
levels. In such cases, each action plan needs to be costed separately, ensuring
there is no double-counting or omissions. A clear indication of implementation
and financing responsibilities in all action plans is of critical importance in
this process. This Guide assumes that a single high-quality action plan for
strategy implementation is in place.

Cost Perspective
This is about whose costs will be estimated – that of the society as
a whole, the public (government), private sector or individuals. This
depends on the purpose and objectives of costing. If the objective is
to assess financial impact of strategy on budget or to estimate its total
cost for the purpose of government resource planning, the cost will be
calculated from the public or government perspective. If the objective is
to conduct economic evaluation for the purpose of analysing the impact
of strategy on economic welfare, costing will be done from a broader
societal perspective. In the latter case, the cost of private sector,
individuals and households will also need to be calculated. Because
strategies are most commonly costed for the purpose of government
resource planning, this Guide is based on the public cost perspective.

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Methodological guide for costing of government strategies

Relevant Costs
This is about which costs will be calculated. This depends on
purpose and objectives of costing and cost perspective. Costing
from the public perspective normally requires estimating financial
cost, i.e. financial outlays for resources that will be consumed for
the purpose of implementation. Either full or incremental financial
cost can be estimated. For example, if the objective is to estimate
the strategy impact on budget (as in the example of PAR Strategy
from the previous section), only incremental cost will be estimated.
This is the cost of additional resources required for implementation,
such as salaries of additional staff or cost of materials, services and
capital items. If the objective is to estimate total cost of strategy as a
government reform initiative, full costing is required. In this case costs
of existing resources that will be used to support the implementation
will also need to be calculated, although additional funds will not be
required for these resources (e.g. costs of existing staff who will work
on implementation and related overheads, including depreciation of
capital assets). Costing from the societal perspective is even broader
and requires calculation of economic cost. In this case, opportunity
cost of resources used for free would need to be calculated in addition
to full financial cost. In line with the common objectives of strategy
costing, this Guide is focused on financial costs.

Time horizon
Time horizon in strategy costing is the period of time for which the cost
is estimated. Strategies are normally produced for mid to long-term
period ranging from three to five, sometimes to ten years. Because
of uncertainties associated with long-term planning, costing can be
done accurately and meaningfully only within short to mid-term.
It is normally not possible to provide reliable long-term estimates.
However, rough long-term estimates are needed when assessing
economic impact of strategies or estimating full costs of government
reforms. They are also useful for synchronisation of government and
aid planning with national and sector long-term development goals.
Action plan for strategy implementation should ideally cover the
period of three years, to enable better linking of strategy cost estimate
with government mid-term and annual budgets and work plans. Cost
estimates should be provided by fiscal year, with the first year ideally
being most detailed, to feed into annual budget. Revisions of cost
estimates should ideally be made annually, on a rolling basis. Action
plans may also be developed and costed for a period longer than
three years, for example to match the strategy period. This enables
making more comprehensive cost estimates for the strategy, but it

38 Guide to costing process

 With examples from public administration reform strategies

also raises uncertainties in planning and thus affects the credibility of

estimates. A balance between comprehensiveness and credibility of
cost estimates is therefore needed.
Time-horizon in costing is associated with several important cost
considerations. Inflation impact is one of them. Implications on
recurrent costs of strategy, costs of capital items and unit costs
should also be considered, as explained below.
Given that strategies have long-term impact on budgets, it is important
to distinguish their one-off (temporary) and recurrent (permanent)
costs7. One-off costs of strategy are related to resources consumed
only once during the implementation. Recurrent costs of strategy are
related to resources that will be consumed periodically over a period
of time after the implementation. For example, procurement of capital
assets such as computers or software will generate one-off purchase
cost, but also recurrent cost of maintenance and licenses over the
period of their useful life. A certified training program will generate
one-off cost of training delivery (trainers’ fees, materials, participants’
costs) and potentially recurrent recertification costs. Employment
of new staff for an indefinite period of time will generate recurrent
cost of salaries (compared to budget baseline), whereas salaries
of temporarily engaged staff will be one-off cost. Recurrent costs of
strategies are often overlooked in practice, which results in budget
overruns and implementation failures. Annual amount of these costs
should be estimated, along with indication of time period over which
they are expected to occur.

Capital items purchased to support the implementation may not

be fully depreciated and have resale value at the end of strategy
implementation period. Only the amount depreciated represents the
cost of strategy during this period. However, the total cost of new
capital items (i.e. the cost of investment) should be calculated to
estimate the strategy’s financial impact.
Time can impact unit costs. Over a longer time period unit cost may
change as a result of different factors. For example, they can be
higher during the learning curve phase, and then decrease as a result
of learning effect or greater efficiencies. Technological development
can also reduce some costs in the longer run (such as software,
equipment etc.).

7 The term “recurrent costs” is generally used for all non-capital costs (salaries, materials and
services).

Guide to costing process 39

Methodological guide for costing of government strategies

Vertical scope
Action plan may be implemented at several government levels. This
means that activities are implemented and cost generated by institutions
at central and lower levels. Different implementation arrangements
affect the cost estimate:
• Some programs or activities may be implemented independently
at each level using the same approach. Costs are calculated
independently for each level and summarized for the total costs.
• Other programs may operate directly from the field, through
municipalities up to the central-level. In such cases the lowest
level (municipality) is usually the point of service delivery where
data on resource requirements and cost should be obtained.
Moving up to the higher levels makes it increasingly difficult to
make cost estimates, because these levels typically provide
administrative, logistic or technical support. Direct costs are
therefore calculated at the lowest (service delivery) level and
costs of higher levels added as overheads, if applicable.

Decision makers need to decide which costs at each organizational level

will be included. This depends on responsibilities of decision-makers
and the way in which the results of costing will be used. For example,
if activities will be implemented at both central and lower government
levels and the government wants to estimate their total budget impact,
cost requirements at all levels should be calculated. If, however the
central government wants to estimate only the cost impact on central
budget, costs to lower levels can be ignored for the purpose of specific
costing exercise.

3.3.2. PAR Examples

The WB countries cost their PAR strategies based on action plans. PAR
is a complex process that involves different institutions from different
government levels. This horizontal and vertical complexity affects both,
strategy development and implementation. Several distinct strategies
and accompanying action plans are therefore often developed under the
PAR umbrella to ensure more efficient implementation.

40 Guide to costing process

 With examples from public administration reform strategies

Examples of PAR Strategies’ Scope

 Being under direct jurisdiction of the MoF, public financial management

(PFM) is addressed by a separate strategy in all WB countries. The PAR
strategies of Serbia and Montenegro contain objectives related to PFM,
but refer to separate strategic and operational documents. A need for
developing a separate PFM reform strategic document also stems from
the EU criteria for provision of Budget Support under IPA II assistance.

 In Serbia, PAR strategy is an umbrella strategy based on which sever-

al sub-sectorial strategies and action plans are developed. Apart from
the PFM Reform Program, Decentralization Strategy and E-Government
Strategy which are explicitly envisaged by the PAR Strategy, similar sta-
tus among other have the strategies on professional development of em-
ployees in PA and the Public Procurement Development Strategy. The
PAR Strategy Action Plan 2015-2017 includes activities and costs related
to development of some sub-sectorial strategies. Costs of their imple-
mentation are included in the respective sub-sectorial action plans.

 In Kosovo*, PAR framework includes three pillars which fall under re-
sponsibility of three institutions. The Strategy on Modernisation of Public
Administration 2015-2020 relates only to the pillar for which the Minis-
try of Public Administration is responsible and includes the areas of civil
service and human resource management (HRM), service delivery and
accountability. The remaining two pillars (policy and legislation develop-
ment and coordination and PFM) fall under responsibility of the Office of
Prime Minister and the MoF, respectively. These are addressed by sepa-
rate strategies and costed action plans.

For the purpose of government resource planning, costs are estimated

from the public sector perspective. This also includes the donor
perspective, because the funding gap is usually covered by donors.
All the WB countries estimate only incremental financial costs of their
PAR strategies. These are costs of additional resources required for
implementation (e.g. additional staff to be employed, travel, rent, expert
support, other external services, capital items). Costs of activities for
which no additional resources are required are marked as zero. This
approach is generally in line with the stated objectives of costing.
However, it does not always enable meeting specific information
requirements. For example, information on full costs is required by
DEUs for the purpose of defining the amount of Sector Budget Support
(SBS) through IPA II. Also, this approach is based on the assumption
that the existing resources will be sufficient and available to support the
implementation (e.g. existing staff will provide the necessary support
using the existing infrastructure). In practice this may not always be the

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Methodological guide for costing of government strategies

case, and existing human resources may be insufficient to reach the

targets.

Examples of Costing Scope

 When planning the costing exercise, Serbia intended to calculate full

costs of its PAR Action Plan 2015-2017. However, this was not possible
due to lack of resources and data available for costing. In order to pro-
vide at least a rough estimate of total resources required for implemen-
tation, the Ministry of Public Administration and Local Self-Government
(MPALSG) collected information on estimated number of staff in respon-
sible institutions who will be fully engaged in implementation of reform
activities. According to the data collected, at least 179 employees from
four institutions directly responsible for implementation and several line
ministries and other state administration bodies will be engaged. This
number does not include two institutions that did not provide the request-
ed data. The equivalent cost amount was never calculated.

 Incremental costs of Montenegro PAR Action Plan 2016-2017 were es-

timated at approximately 8,7 mil EUR (also including the cost impact in
2018-2020). In the process of SBS negotiations it was concluded that
this amount was underestimated. The Government was requested to es-
timate costs of existing contribution through salaries and other costs. In
absence of formal guidelines and resources for the costing exercise, this
contribution was roughly estimated at 6 mil EUR in 2017, and includes
salaries of all staff working in institutions responsible for implementation.
The cost of staff employed in line ministries, administrative bodies, ad-
ministration with public powers and self-government units involved esti-
mated at 483 mil EUR was also considered. The SBS amount was set at
15 mil EUR, including 3 mil EUR technical assistance.

Action plans and corresponding cost estimates are developed for a

period ranging from two to five years. Annual cost estimates are rarely
provided, and recurrent costs of strategies are generally not clearly
indicated. Table 2 summarizes different approaches applied by the
countries.

42 Guide to costing process

 With examples from public administration reform strategies

Table 2: Time Horizon for Costing of PAR Strategies of the WB Countries

Coun- PAR Strategy Action plan for Implementation of Annual Planned

try PAR Strategy estimates Revisions
provided
ALB Crosscutting Action plan 2015-2017 is annex to No Annually
PAR strategy the Strategy and contain rough esti-
2015-2020 mates for 2018-2020. These will be
revised during the mid-term evalua-
tion in 2017, when new Action Plan
will be developed.
BiH Draft Strate- Action plan 2017-2020 is to be No Not de-
gic Frame- developed and adopted after the fined yet
work for PAR strategy adoption. A separate Action
2017-2022 plan for 2021-2020 is planned to be
produced.
KOS* Draft Strategy Implementation Plan 2015-2017 Yes Bi-annu-
for modern- is part of the Strategy. It is to be ally
ization of PA reviewed and updated every two
2015-2020 years.
MKD Draft PAR Action plan 2017-2022 is part of the No Data not
Strategy Strategy. It is not fully costed. Cost- available
2017-2022 ing and defining of financing mech-
anisms are activities envisaged by
the Action plan.
MNE PAR Strategy Action plan 2016-2017 is part of the For the to- Bi-annu-
2016-2020 Strategy. Implementation of some tal amount ally
activities is tentatively planned for only
2018-2020 and indicative estimates
are provided. Action plan 2018-2020
is being developed as part of mid-
term evaluation in 2017.
SRB PAR strate- Action plan 2015-2017 is annex to No Every
gy adopted the Strategy and matches budget three
in 2014, no and IPA programming cycle. Action years
specified time plan 2018-2020 is being developed
period as part of mid-term evaluation in
2017.

In all the countries, PAR action plans assume implementation of

activities at all government levels. In BiH the implementation status of
cantons and local self-government units (LSGs) is still unclear. Although
cost estimates account for expenditures at all levels, financing sources
generally reflect only amounts expected to be secured from the central
level budget and donors. Only in Montenegro the Action plan indicates
the amount of expected financing from LSGs’ budgets.

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Methodological guide for costing of government strategies

3.4. Developing Costing Plan

3.4.1. General Guidelines

Before starting the costing exercise, responsible institution should

identify key stakeholders that will be involved in the process, establish
the costing team, and develop a work plan with schedule of activities.

Relevant Stakeholders
The costing process should be initiated and led by the ministry or other
government institution or body responsible for strategy development.
This institution should engage other relevant stakeholders, in line with
the objectives of costing and horizontal and vertical scope of strategy.
The process should be organized in close collaboration with the MoF.
Given the complexity of government strategies, a range of stakeholders
need to be engaged. As a minimum, all institutions directly responsible for
implementation (as per the action plan) should be involved. Institutions
responsible for development planning, non-governmental organizations,
donor or development organizations and academia should be involved
as needed. If activities will have cost implications on lower government
levels, these levels should also be involved. If the lead institution lacks
capacity to carry out the process, it should engage external experts.
The relevant stakeholders should principally be involved in all phases
of the costing process. Although involvement of all stakeholders at
the planning and preparation phase may provide better results, it can
sometimes make the process of designing the costing exercise more
complicated.

Costing Team
Costing should be conducted by a multidisciplinary team or working
group composed of representatives of relevant stakeholders. The team
may be formal or informal, bigger or smaller. It should be flexible, to
enable establishment of sub-teams and engagement of additional
members on as-needed basis. This body should be responsible for
collecting and analysing data and producing the cost estimates.
The composition and skills of costing team depend on the type and
purpose of cost estimate and quantity and quality of data. More complex
and detailed estimates require larger teams and more time and effort.
Since the cost estimates are developed with limited knowledge of what
the final outcomes will be and based on a number of assumptions, the
costing team will be dealing with a great level of risk. The members

44 Guide to costing process

 With examples from public administration reform strategies

should therefore include both technical experts with skills in relevant

technical areas, and financial experts with cost analysis skills. Technical
experts from institutions responsible for implementation should provide
information on type and quantity of resources needed for implementation
of programs and activities. Financial staff from these institutions
should provide information on institution-specific costs and assist in
calculations. Representatives of the MoF budget department should
provide the overall guidance and verify unit costs, as well as the final cost
estimate. Ideally, the team should include persons who have experience
and skills in estimating all cost elements of the strategy. Since this is
rarely possible, external technical or financial experts usually need to
be engaged.
Centralisation of the costing process through the costing team represents
the best practice because it facilitates the use of standardized processes,
supports consistencies and independence of cost estimates, easier
identification of experts and more efficient and effective use of resources
and skills. On the other side, “decentralised” process where individual
stakeholders provide own estimates for programs and activities they are
responsible for can result in ad-hoc processes and inconsistencies. The
major advantage of a decentralised process however is better access to
technical expertise.

Work Plan
At its initial session the costing team should discuss the purpose,
objectives and scope of the costing exercise and estimated available
data and data gaps. This will enable effective communication of what
the costing exercise aims to achieve and identification of roles and
responsibilities of individual members. An analytical approach to costing
typically involves development of a costing work plan, detailing specific
tasks, responsibilities and due dates. Whether a costing team is big
and formal or smaller and less formal, a coordinated approach of all
stakeholders and clear definition of responsibilities is needed.
Strategy costing process usually requires holding a number of
consultative meetings. Separate meetings should ideally be held
with institutions responsible for implementation, or working groups
responsible for different functional areas, if applicable. The process is
often iterative and requires several revisions until the final estimate is
produced. It is important to ensure that consistent approach is applied
by all the groups. This can be achieved by providing guidelines and
ensuring participation of the members of lead institution at all meetings.

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Methodological guide for costing of government strategies

3.4.2. PAR Examples

The countries use different approaches to organizing the PAR strategy

costing process. As a rule, costing is done as the last step in action
plan development process. It is coordinated by institution responsible
for action plan development and normally conducted by government
technical and financial experts with the assistance of external experts.
The quality of consultations varies among the countries. Involvement of
MoF is generally insufficient. Approaches applied by different countries
are summarized below.

Examples of Costing Process Organization

 In Kosovo*, the costing process was characterized by strong leadership of
the Ministry of Public Administration as the coordinating institution, active en-
gagement of institutions responsible for implementation, and commitment of
the MoF. Once the activities and other action plan elements were finalized,
the Ministry of Public Administration engaged external expert to assist in cost-
ing and assigned a three-member team from the Department of PAR Man-
agement to work directly with the expert throughout the process. This greatly
contributed to ownership and sustainability of results. The team held sepa-
rate working sessions with technical staff from each institution responsible
for implementation. Finance staff was invited on as-needed basis to consult
on institution-specific costs. Representative of the MoF Budget Department
also participated at some meetings. Feasibility and realism of each activity
was scrutinized in details prior to costing. The final estimate was thoroughly
reviewed by the working group responsible for PAR strategy drafting and com-
mented by the MoF before being approved.

 Albania had the similar approach like Kosovo*. However, the MoF involve-
ment was insufficient and the costing process took more time.
 In Montenegro, the Ministry of Interior responsible for PAR at the time of
costing coordinated the costing process. SIGMA primarily assisted with iden-
tification of priority activities and developing other action plan elements. The
Ministry of Interior produced cost estimates for activities that fall under its
responsibility, consulting the MoF on as-needed basis. Other institutions re-
sponsible for implementation were requested to provide their own estimates
of additional funding needed. No particular costing guidelines were provided
to these institutions and the estimates received were not further scrutinized by
the Ministry of Interior.

 Serbia had the similar approach like Montenegro. Assessing financial impact
of strategies was not obligatory at the time of Action Plan costing, as it is now.
Institutions responsible for implementation produced own cost estimates and
submitted them to the responsible MPALSG. The MPALSG also relied on cost
estimates for some strategic measures that already existed in separate oper-
ational documents.

46 Guide to costing process

 With examples from public administration reform strategies

 In BiH, the process of drafting and costing of Draft PAR Action Plan is still
ongoing, coordinated by the Public Administration Reform Coordinator’s Of-
fice (PARCO). Preliminary estimates were produced by technical experts from
PARCO and external experts provided by donors. SIGMA was consulted on
the costing methodology. The preliminary estimates are to be revised following
the finalization of the Action Plan, and reviewed by the Joint Working Group
responsible for the Strategy drafting.

 In Macedonia, Draft PAR Strategy and Action Plan 2017-2022 was recently
produced under coordination of the responsible Ministry of Information Society
and Public Administration. The costing process is still ongoing.

Since PAR activities are largely funded by donors, it is important to

consult major donors on the scope and amount of their ongoing and
anticipated support. Consultations with the DEUs are especially
important, due to significant share of IPA support. Other relevant
agencies and organizations (such as SIGMA or ReSPA) should also be
consulted on their financial or other support.

3.5. Identifying Cost Objects

3.5.1. General Guidelines

Cost objects are units the cost of which needs to be estimated. Adequate
identification of cost objects is important because it influences selection
of costing methods.

Understanding the Action Plan

Proper definition of cost objects requires comprehensive understanding
of programs and activities to be implemented. Action plan deconstructs
a strategy as the highest level end product into successive lower levels
with smaller elements, until the work is segmented to a level that enables
management control. Breaking down the work into smaller elements
enables easier planning, implementation and assigning responsibilities.
Hierarchical structure of action plan shows how elements relate to one
another, as well as to the overall strategy as an end product. According
to best practice, a sum of lower level elements should represent 100%
of work applicable to the next higher level8. This ensures that each lower
level element (“child”) is fully assigned to its respective higher level

8 Cost Estimating and Assessment Guide, Unites States Government Accountability

Office, 2009

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Methodological guide for costing of government strategies

element (“parent”) and not shared across several higher level elements.
Action plan elements may have different names (e.g. strategic and
operational goals, results, programs, projects, measures, activities,
actions, outputs) and involve different number of vertical levels. A typical
action plans includes at least three levels, as illustrated by Graph 2.
Action plan should be expanded to a level of detail sufficient for resource
planning. The less details are provided, the more assumptions will need
to be made, increasing the risk associated with the estimate.

Graph 2: Action Plan Elements

Improving public
Level 1: Strategic goal satisfaction with
government
services

Instruments for
Needs assessment
Level 2: Operational goal / result measuring public
mechanisms
satisfaction
introduced
introduced

Level 3: Activity / output Developing

Staff training System promotion System design
System
methodology development

Activities, Outputs and Projects/Programs as Cost Objects

The primary cost objects should be the lowest level elements of action
plan, typically called activities. The costs of individual activities are
added up to calculate costs of their respective higher level elements
(objectives, results). The aggregation of the highest level elements’
costs represents the cost of strategy.
Action plans may include some unnecessary or unrealistic activities.
The costing process should reveal such activities, which may result in
recommendations for changes to the action plan. Before even starting
estimating the costs, the costing team should carefully inspect each
activity to make sure that: (a) the activity is necessary for achieving
the desired results and objectives, (b) its implementation is realistic and
feasible, and (c) the resources for implementation are available or it
can be reasonably expected that they will be secured. By asking these
questions the costing team will conduct a sort of action plan “reality
check” and potentially recommend deletion or changes to some activities.
To properly estimate costs, the costing team needs to have a
comprehensive understanding of processes and outputs associated
with each activity. Only when processes and outputs are clear, the
necessary input requirements can be accurately defined. For example,
activity called “Developing standardized methodology for assessing

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 With examples from public administration reform strategies

user requirements for public services” has a clearly defined output - “the
methodology developed”. The costing team should be able to identify
input requirements based on their common knowledge and other data
available. If activity has only one unique output (as in this example)
the cost of activity is the cost of its output. If activity is more complex
and has several unique outputs (e.g. software installed, legal framework
drafted and training delivered) each output should be costed separately
and cost of activity calculated as the sum of the outputs’ costs. Outputs
are therefore the ultimate cost objects.
Programs and activities are usually very distinct. However, some
activities are similar in terms of resource requirements, processes and
outputs. These are usually implemented across different programs
and result in multiple units of a homogenous output. For example,
outputs of a training program are the trained participants or the training
days delivered. For such activities, cost of one unit of output can be
calculated by dividing the cost of activity with the number of output units.
For example, cost of one training day can be calculated by dividing the
cost of training program with total number of training days. This unit cost
can be used for future cost estimates, e.g. for estimating costs of future
similar trainings9.
Clear identification of activities and outputs is not always possible
because of uncertainties associated with long-term planning or lack
of resources for costing. In such cases costs must be estimated at
project or program level, based on broadly defined scope of work and
anticipated results. Projects or programs are then essentially treated
as cost objects. For example, the government may plan to implement
digitalization of public registries in a number of institutions. Since detailed
activities and their outputs will be known only when the feasibility study
is produced, the cost will be estimated at project level.

3.5.2 PAR Examples

To identify cost objects and conduct costing, it is important to understand

how a PAR strategy functions. Public administration relates to the
management and implementation of a broad range of government
activities, including implementation of legislation and provision of
public services. The scope of PAR strategies involves six horizontal
reform areas as outlined by the EC: strategic framework of PAR, policy
development and coordination, public service and HRM, accountability,
service delivery, and PFM. The Principles of Public Administration
published by SIGMA outline the main requirements to be met in each

9 To be reliable, unit costs of outputs should be estimated based on historical data on sever-
al similar activities/outputs.

Guide to costing process 49

Methodological guide for costing of government strategies

reform area10. Typical objectives and related programs and activities in

five reform areas are summarized in Table 3, based on the countries’
PAR strategies and accompanying action plans . 11

Table 3: Typical Objectives, Programs and Activities per Reform Area

Reform Key Objectives Typical Programs Typical Activities

Area
Strategic Comprehensive Conducting analysis
Strengthening capacities
frame- management of of relevant institutions to
and needs assessment
work of PAR, with estab- manage PAR; of existing structures
PAR lished leadership, and arrangements;
Improving existing imple-
clear and financially Legislative drafting and
mentation arrangements,
sustainable stra- coordination and financing
amendments to reor-
tegic framework, mechanisms; ganize existing and/or
determined ac- Designing specific PAR
create new structures;
countabilities and policies, programs and
Producing methodologi-
implementation activities cal guidelines;
capacities in place. Trainings, workshops,
study tours;
Database development;
Promotional activities
Policy Effective, consis- Improving legal and in- Conducting analysis
Develop- tent and competent stitutional framework for and needs assessment;
ment and policy making sys- policy development and Legislative drafting and
Coordina- tem at the center of coordination; amendments;
tion government; Strengthening capacities Producing rulebooks
Participatory and of center of government and methodological
evidence-based and other institutions; guidelines;
policy making Harmonizing strategic Producing reports and
aligned with stra- planning with budgeting; publications;
tegic and financial Strengthening monitoring Trainings, workshops,
planning; and evaluation systems; study tours;
Transparent, com- Strengthening e-govern- Development of infor-
pliant, clear and ment; mation and data man-
accessible govern- Developing tools for trans- agement systems;
ment decisions; parent, participatory and Establishment and sup-
Effective parliamen- evidence-based policy port to working groups
tary scrutiny making

10 The Principles of Public Administration, SIGMA

11 The list of relevant PAR strategies and Action Plans is provided in Annex 1. Although it is an
integral part of PAR, the PFM reform area is normally addressed by a separate strategy and
action plan, and is therefore not included in the table.

50 Guide to costing process

 With examples from public administration reform strategies

Reform Key Objectives Typical Programs Typical Activities

Area
Public An effective and Establishing legislative Legislative drafting and
Service efficient public ser- and policy frameworks for amendments;
and HRM vice system; modern HRM; Trainings, workshops;
HRM policies and Establishing fair and trans- Development of infor-
strategies con- parent system of work mation systems;
sistently applied relations and wages; Organization of special
based on principles Implementing HRMIS and pilot projects (e.g.
of professionalism, systems; electronic assessment);
merit-based recruit- Strengthening capacities Developing training
ment and promo- of HRM functions; strategies and web
tion, transparency, Strengthening monitoring platforms;
fairness and effi- and evaluation systems; Developing methodolo-
ciency Strengthening oversight gies, guidelines, manu-
als, standards
Service Good and citi- Developing policy, strate- Conducting analysis,
Delivery zen-oriented ad- gic and legislative frame- needs assessment,
ministration that works for service delivery; feasibility studies;
provides effective, Strengthening institutional Legislative drafting and
reliable, accessible, capacities and mecha- amendments;
predictable and nisms for planning, deliv- Developing strategies
customer-friendly ery, monitoring and evalu- and programs;
services that meet ation of services; Organizational restruc-
the citizens’ needs, Reengineering services; turings;
also using the Developing electronic Developing interoper-
means of electronic systems based on interop- ability platforms and
delivery. erability framework; system integration;
Developing single point of Developing e-portals;
contacts for service pro- Implementing one-stop-
vision; shops;
Awareness raising and Trainings, workshops,
measuring satisfaction Developing methodol-
ogies, manuals, stan-
dards;
Information campaigns

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Methodological guide for costing of government strategies

Reform Key Objectives Typical Programs Typical Activities

Area
Account- Transparent and Better application of ethics Conducting analysis
ability accountable public and integrity principles and feasibility studies;
administration sys- and implementation mon- Legislative drafting and
tem with functional itoring; amendments;
legislation, admin- Strengthening public ac- Organizational restruc-
istrative structures cess to information; turings;
and control mech- Strengthening public par- Developing methodol-
anisms in place, ticipation; ogies, standards, con-
enabling access Strengthening mecha- cept papers;
to information and nisms for protection of Trainings, workshops;
protection of citi- citizens’ rights; study tours;
zens’ rights. Strengthening oversight Developing IT systems
and control and e-portals;
Media campaiagns;
Monitoring enforce-
ment;
Pilot projects (e.g. dele-
gating decision making)

The structure of PAR action plan varies among the countries. Objectives
or results are generally first defined based on PAR reform areas, and
then broken down to activities. All countries attempted to assign costs
to the lowest level action plan elements, typically called activities or
outputs. However, this was not always feasible. For example, in Serbia
the PAR Action Plan 2015-2017 was costed at the result level because
its structure was such that a number of activities were cross-cutting and
led to achievement of multiple results.
Clear identification of activities and their outputs is also a challenge
because of uncertainties related to long-term planning horizon or lack of
resources for producing a detailed estimate. Some activities can simply
not be defined until their predecessors have been implemented. For
example, requirements for implementation of the new wage structure
can be defined in details only after a comprehensive evaluation of
the existing wage system has been conducted – and this evaluation
is planned as a separate activity. Similarly, provision of infrastructure
for service delivery can be defined in details only after the feasibility
study (a separate activity) has been produced. Table 4 summarizes how
different countries have structured their PAR action plans and defined
cost objects, providing examples of clearly defined and broadly defined
activities (the latter essentially representing projects or programs).

52 Guide to costing process

 With examples from public administration reform strategies

Table 4: Structure of Action Plans and Examples of Cost Objects in

Western Balkans Countries

Coun- Action Plan Struc- Cost Examples of clear activi- Examples of com-
try ture Object ties/ outputs plex “activities”
ALB Strategy pillars to: Outputs Drafting of training pro- Development and
gram on developing consolidation of an
→ Objectives policy and strategic doc- integrated ICT sys-
uments for all policymak- tem (based on the
→ Actions
ing staff in line ministries requirements of the
→ Activities/Out- (policy and coordination services re-engi-
puts departments) neering process)
BiH Strategic goal to: A c t i v i - Carrying out the analysis
Implementation of
ties of the Law on administra-
the Centers of Gov-
→ Specific objec- tive disputes, with recom-
ernment functions
tives mendations for improve-related to govern-
ment ment sessions, le-
→ Measures
gal harmonization,
→ Results identification and
approval of strate-
→ Activities gic priorities and fi-
nancial feasibility
KOS* Strategic objec- Outputs Developing the new mod- Finalization of job
tives to: ules to HRMIS software classification in civil
(Personnel Planning and service and
→ Specific objec- Online Application), and
tives recruitment procedures implementation of
for senior managerial new salary system
→ Activities
level
→ Outputs
MKD Specific objectives Sub-ac- Defining and establishing Adjustment of insti-
to: tivities unique methodological tutional structures
rules for organizing the for PAR and train-
→ Results structure of draft laws ings based on the
and processes in the findings and rec-
→ Activities
Rules of Procedures of ommendations of
→ Milestones/ the Assembly the previous needs
Sub-activities analysis
MNE Specific objectives Sub-ac- Conduct public consul- Establishment of
to: tivities tations on draft Law on e-services in
Free Access to Informa-
→ Activities tion Educational institu-
tions
→ Milestones/
Sub-activities

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Methodological guide for costing of government strategies

Coun- Action Plan Struc- Cost Examples of clear activi- Examples of com-
try ture Object ties/ outputs plex “activities”
SRB General goal to: Results Preparation of the fea- Strengthening
sibility study for prepa- LSGs development
→ Specific objec- ration of registers and and financial man-
tives its adoption by the PAR agement capacities
Council by the MPALSG
→ Measures
(activities to be de-
→ Results fined in 2015 in co-
operation with the
→ Activities Permanent Confer-
ence of Cities and
Municipalities)

3.6. Selecting Costing Methods

3.6.1. General Guidelines

Prior to starting data collection and assigning costs to selected cost

objects, the costing team needs to select the costing methods that
will be used. Depending on the comprehensiveness of action plan
and level of details, rough order of magnitude estimates or more
detailed budget estimates can be produced for different programs and
activities. As discussed in section 2.4, a combination of several costing
methods is normally used in one costing exercise. The methods
should be selected based on objectives of costing, availability of data
and resources for the costing exercise, and timeframe or deadline for
completing the process. The cost of selected approach should not
outweigh its benefits.

Bottom-up Costing
Bottom-up costing is the recommended approach, assuming the resources
are available to apply this method in an economically feasible way. Cost
objects are activities or their outputs, as the lowest level elements of
action plan. Cost of each activity or output is estimated based on two key
elements for which the information is required: (a) types and quantities of
resources needed for its implementation, and (b) costs of these resources.
Cost is calculated by multiplying quantities of resources with their unit
cost, and adding them up. Costs of higher level elements (programs) are
calculated by summarizing costs of lower level elements (activities). The
cost of strategy is the sum of costs of the highest level elements. Example
of bottom-up costing is provided in Table 5.

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Table 5: Bottom-up Costing Example

Activity: Conducting needs assessment for capacity development in the

Ministry of Planning.
Output: Needs assessment analysis produced, outlining the current
state of play and specific capacity building requirements.
Input data:
Resources Quantities Cost per Unit EUR Total
Cost
EUR
Civil ser- 5 work days of senior advisor 100 EUR per day 500
vants’ labor
External 20 days 500 EUR per day 10,000
expert
Accommo- 2 nights for 20 participants 50 EUR per participant 2,000
dation
Printing 100 copies of the 50 pages 5 EUR per copy 500
document
Total Cost:
13,000 EUR
If the bottom-up approach cannot be applied because the activity is too
complex or uncertainties related to its scope and outputs are high, other
methods should be used.

Top-down Costing
Top-down or parametric costing should be used when details of
activities, resource requirements and/or unit costs are not available
to apply bottom-up approach. Cost of project, activity or output is
basically calculated based on the established relationship between its
characteristics and historical costs of previous similar projects, activities
or outputs. Examples are provided in Table 6 and Table 7.

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Methodological guide for costing of government strategies

Table 6: Top-down Costing Example 1

Activity: Implementing training program in the area of strategic plan-

ning for additional civil servants in partner institutions.
Output: A standard 2-day training program delivered to approximate-
ly 50 new participants.
Input data: Based on historical data on previous trainings, an average
cost of a 2-day training is 500 EUR per participant. This
amount includes all direct training cost (trainers, materials,
travel, accommodation). Travel cost is approximately 10% of
training cost. The new training will have the same scope as
the previous trainings, except that no travel will be required.
Cost estimating Cost per participant = average cost per participant from pre-
relationship: vious trainings, reduced by 10%
Total cost = no. of participants x cost per participant
Calculation: Total cost = 50 x (500 EUR x 0,9) = 22,500 EUR

Table 7: Top-down Costing Example 2

Activity: Development of software to support the government’s cen-

tral planning system within the Ministry of Planning
Output: Software developed and installed
Input data: Based on historical data on previous projects, cost of soft-
ware development is determined as a function of the num-
ber of software lines of code. Unit cost per line of code is
0.5 EUR. New software will have approximately 1 mil lines
of code. Start-up costs in amount of 100,000 EUR will also
be needed.
Cost estimating Total cost = Start-up cost + (no. of lines of code x cost per
relationship: line of code)
Calculation: Total cost = 100,000 + (1,000,000 x 0.5 EUR) = 600,000
EUR

The key issue in establishing the parametric relationships is defining

a credible cost driver that generates cost (e.g. the number of training
participants in the first example and the number of software lines of
code in the second example). It is also important to make sure that
cost driver falls within the relevant range. If the new software from the
second example is expected to contain one million lines of code and the
unit cost of 500 EUR was based on programs with lines ranging from
10,000 to 250,000, it would be inappropriate to use this relationship to
estimate the new software cost. It is therefore important to periodically
revisit once established cost estimating relationship, so that it is kept
accurate.

56 Guide to costing process

 With examples from public administration reform strategies

Top-down costing is also used for allocation of indirect costs (overheads).

Indirect costs are allocated to activities or outputs based on a certain
percentage or rate (e.g. cost of office supplies are estimated as a
percentage of salary costs). They are discussed in more details in
section 3.9.3.

Top-Down Allocation of Overheads

Assume that conducting needs assessment from Table 5 above will require
use of the Ministry’s utilities and communication resources. The costs of
these resources are indirect to the training and cannot be estimated using
the bottom-up approach because no quantities and unit costs can be defined.
Based on the Ministry historical expenditure data, average costs of utilities
and communication represent 20% of direct labor cost. Direct labor cost allo-
cated to this activity is 500 EUR. The cost of utilities and communication will
therefore be calculated as 500 EUR x 20% = 100 EUR. This amount will be
added to direct activity costs of 13,000 EUR to calculate total costs.

Analogy Costing
Analogy costing is applied when activity, project or program cannot
be defined in sufficient details (because it is in early design stage, or
the planning horizon is too long), but the information on similar activity,
project or program previously implemented in a different setting is
available. The cost is calculated by adjusting the cost of previous activity,
project or program to account for differences in technical characteristics.
Example is provided in Table 8.

Table 8: Analogy Costing Example

Activity/ Building state level institutions capacities for strategic planning

Project:
Output/re- Technical assistance provided to 8 beneficiary institutions, in-
sult: cluding trainings and study tour for relevant staff, development
of bylaws, and procurement of equipment.
Input data: A similar project in amount of 1 mil EUR was implemented 3
years ago. It provided the same type of assistance to 4 benefi-
ciary institutions, of which 2 will be included in the new project.
Calculation: Total cost = 1 mil EUR / 4 institutions x 8 institutions = 2
mil EUR
Adjustments should be made objectively, by using factors that represent
differences in size, volume or complexity. Analysts need to determine
key cost drivers and understand how they impact total cost. In our
example, the assumption is that the relation is linear, and that the new

Guide to costing process 57

Methodological guide for costing of government strategies

project will have the same characteristics as the previous one. However,
a more detailed analysis is needed to understand the true cost drivers
and make the adjustments. The following questions could for example
be asked:

• Will the two “old” institutions that participated in the previous

project have the same or reduced requirements comparing to
six “new” institutions? They may not need new equipment, or
the same type of training. If this is so, relevant cost should be
reduced based on specific requirements of the “old” institutions
and cost structure of the previous project.
• Are the six “new” institutions of similar size as the two “old”
institutions? If not, the cost should be adjusted because the
number of staff drives training and equipment costs. The
percentage of adjustment should be estimated based on number
of staff in the “new” institutions and cost structure of the previous
project.
• Will all types of assistance (training, legislative drafting and
equipment purchase) be equally required by all institutions?
Legislative drafting may be a joint activity, which may reduce
costs.
• Since the old project was implemented three years ago, what is
the impact of inflation? Inflation index should be used to adjust
costs.

Expert opinion
Expert opinion should be used to estimate costs of new programs or
projects for which the level of uncertainty is so high that none of the
other methods can be applied at reasonable cost (e.g. a pioneering
capital investment project that needs to be implemented at different
geographic locations). This method can also be used for estimating
costs of projects the scope of which depends on results of other projects
or activities which are yet to be implemented. Finally, it should be used
to complement and validate results of other costing methods. In the
example from table 8 above, experts may provide additional inputs
related to specific requirements of institutions, based on which the
estimate can be adjusted.

58 Guide to costing process

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3.6.2. PAR Examples

The countries use different methods in costing their PAR action plans. As
a rule, the recommended bottom-up approach is properly applied only
for clearly defined activities. In the example below, cost of each output
of the activity is calculated by multiplying the quantities of resources
needed with their unit costs. The cost of activity is then calculated by
adding up the costs of its outputs.

Bottom-up Estimate – Developing methodology for assessment of cor-

ruption proofing in Albanian legislation
To contribute to a transparent, policy-based and inclusive system of legislative
drafting aligned with acquis, Albania supports conducting systematic evaluation
of corruptive opportunities in legislation (corruption proofing). One of the activities
in PAR Action Plan is development of methodology for assessment of corruption
proofing in legislation. The activity has three specific outputs:
1. The methodology document developed;
2. Trainings on the methodology application delivered to approximately 25
persons from 20 ministries, Parliament and Office of the President; and
3. Study tour to an EU country organized for 8 persons from relevant insti-
tutions.
Approach to cost estimate was as follows:
1. Types of resources needed for delivery of each output were identified
(external experts for developing the methodology document and delivery
of trainings; training premises, materials and meals for participants; and
travel and accommodation for the study tour)
2. Physical units of measurement for each resource type were identified
3. Quantities of each resource type were estimated (number of expert days;
number of training days and participants; number of study tour days and
participants)
4. Unit costs of each resource type were estimated (expert’s daily fee; rent
of premises per training day, training materials per participant, meal per
participant; air ticket and per diem per study tour participant)
5. Unit costs of resources were multiplied with their quantities, for each re-
source type, and added up to calculate the cost of each output
6. Costs of outputs were added up to calculate the cost of activity

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Methodological guide for costing of government strategies

Methodology
Activity for Corruption
Proofing

The
Outputs Methodology Training Study Tour
document

no. of no. of no. of

Resources and no. of expert
participants x participants x
no. of training no. of
participants x
days x gross days x rent per participant x
unit costs meal per materials per per diem x no.
daily fee day flight ticket
participant participant of days

Top-down or parametric estimates are rarely used due to diversity of

PAR activities and outputs, and lack of historical data needed to establish
a credible parametric relationship. This approach should be used for
activities with homogenous outputs and similar resource requirements and
implementation arrangements (such as trainings, workshops, producing
simple guidelines etc.). Unit cost of output should be calculated based on
historical data, and multiplied with the number of outputs. For example,
historical cost of training per participant can be used as a parameter for
estimating costs of future trainings. If variations between the outputs
and resource requirements are high, this method will not yield accurate
results. For example, average cost of a training day calculated based on
a series of HRM trainings provided by local experts is not a good proxy for
calculating cost of policy development training delivered by international
experts. Top-down approach should also be used for allocating indirect
costs, especially if full costs of PAR strategy are calculated.

Top-down (parametric) estimate - Policy development training in BiH1

To strengthen policy development functions and capacities at the state and
entity level institutions, the draft action plan envisages implementation of stan-
dard policy development training for all civil servants engaged in policy analy-
sis and planning. The trainings would be delivered by the civil service agencies
using sub-contracted certified experts. Expected output of the activity is one
trained civil servant per institution. Since the agencies already delivered sim-
ilar trainings using the same implementation arrangements, data on average
costs per participant could be made available by government level. Total cost
of activity would therefore be estimated by multiplying the cost of training per
participant with the number of participants from each government level.

Analogy method was commonly used to estimate costs or complex activities

(essentially representing projects), such as capacity building or infrastructural
projects in different reform areas. Costs should be estimated by adequately
adjusting costs of previous similar project, as illustrated in the example below.

60 Guide to costing process

 With examples from public administration reform strategies

Analogy estimate – Capacity building on good administration in BiH2

As part of the improvement of administrative framework for service delivery,
the BiH Draft PAR Action Plan envisages a capacity building activity focused
on improved application of good administration principles and one-stop
shops. The activity should involve trainings to minimum 1,500 civil servants
and inspectors at three government levels and developing a comprehensive
Training Manual. Detailed requirements and outputs can be defined only
based on a needs assessment. A similar 18-month capacity building activity
was implemented in 2014-2015, providing training on administrative proce-
dures to 1,500 participants from 8 institutions. The previous activity budget
and final report were used to estimate costs:

Characteristics Old activity New activity

Activities Trainings Trainings and Manual (based on experts’
opinion)
Beneficiary 184 194 (based on institutional responsibilities
institutions and staff numbers)
Trained 1,500 Old activity: 1,500 / 184 = 8 per institution
participants New activity: 8 per institution x 194 institu-
tions = 1,552
Training days / 6 8 (based on experts’ opinion)
participant
Participant 1,500 x 6 = 1,552 participants x 8 training days/ partici-
days 9,000 pant = 12,416
Expert days 779 12,416 participant-days / 11,6 expert days/
particip. days = 1,070
Expert days/ 9,000 / 779 = 11,6 (assume the same input require-
participant day 11,6 ments)
Budget Experts: Cost per expert day: 570,050 / 779 = 732
570,050 EUR EUR
Incidentals: Trainings: 732 EUR x 1,070 days =
130,000 783,240 EUR
Total: 700,050 Manual: 732 EUR x estimated 30 addition-
EUR al days = 21,960 EUR
Total experts: 783,240 EUR + 21,960 EUR
= 805,200 EUR
Incidentals rate as per old activity: 23%
(130,000 / 570,050 EUR)
Incidentals: 0,23 x 805,200 EUR = 185,196
EUR
Total budget: 805,200 EUR + 185,196
EUR = 990,396 EUR

Due to lack of readily-available data on PAR activities, their historical

costs and outputs, expert opinion should principally be used to

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Methodological guide for costing of government strategies

supplement other methods whenever possible. Experts should

particularly be consulted on complex activities that are first of their kind,
such as complex ICT projects etc. International experience and making
analogies with similar projects abroad may be useful.
A combination of methods should be used in costing complex activities.
For example, in a capacity building activity, the bottom-up method can be
used for estimating costs of equipment and trainings, the top-down method
for estimating indirect costs of labor, and expert opinion to verify the results.
Costing based on donor’s estimates is a common practice in PAR
strategies’ costing. When information on the amount of existing or
anticipated donor support for a particular program or activity is provided
by donor, this amount is taken as the cost of program or activity. In this
way the countries rely on estimates produced by donors, as defined
in their project fiches, project budgets or financing plans. Assuming
the donors’ estimates are comprehensive, accurate and credible,
this “costing method” is acceptable because it reflects the most likely
expenditure scenario. However, donors’ budgets may overestimate or
underestimate the cost of activity, especially if they relate to several
activities (which may be part of different programs or even strategies) or
include irrelevant overheads or other costs. A careful analysis of budgets
and scope of donor-funded projects is needed to ensure that these
estimates are reliable and that relevant costs are properly allocated to
activities.

3.7. Developing Data Management Plan

3.7.1. General Guidelines

Application of any costing method requires availability of adequate data.

The data needs to be collected, analyzed and adjusted so that they can
be used for costing. Data management requires developing a plan that
identifies the minimum data set required for the costing exercise, the
necessary level of data disaggregation, the sources from which the data
will be collected, and data collection instruments.

Minimum Data Set

Minimum data set should be defined based on the objectives of costing,
the cost objects, and the selected costing methods. Given that data
collection and analysis are time-consuming and require a lot of effort,
a guiding principle should be to use the minimum data set needed to
produce valid estimates and to use readily available data sources.

62 Guide to costing process

 With examples from public administration reform strategies

Focusing on essential data that are feasible to collect will minimize the
burden on all stakeholders. The attention should be paid to capturing
large expenditure items, instead of focusing on data that are likely to
have negligible impact on the results. If the data is not readily available,
using proxies or assumptions should be considered, assuming that
validity will not be compromised.
Types of data needed can be classified to resource utilization data and
cost data. Data on types and quantities of resources should be provided
by technical experts based on activities being costed and information on
previous similar activities. Data on costs of resources should be provided
by responsible institutions’ finance staff, the MoF budget department and
donors, based on budget documents, expenditure records, inventory lists,
invoices, suppliers’ offers, contracts, market prices and various analyses
and studies. Examples of data elements and how they can be used are
provided in Table 9. The list is not prescriptive, and should be adjusted
based on the type of strategy and objectives of costing.

Table 9: Examples of Data Elements

Data Elements How Data is Used

No. of staff by type or category To measure the amount of personnel time
of personnel and amount of used
time used by staff for imple- To use as an allocation statistic for some
mentation of activities costs (e.g. allocating overheads based on
headcount)
Salaries, benefits, allowances, To assign value to the amount of personnel
and other payments to person- time used for activity implementation
nel
No. of units of materials and To measure the volume of materials and
services consumed (such as services
no. of trips, supply items, expert
days)
Cost of materials and services To assign value to the volume of materials
consumed and services
To calculate unit costs of materials and
services
No. of immediate outputs of activ- To measure the volume of outputs
ities – products or services (these To calculate unit cost of outputs
vary broadly depending on type To use as an allocation statistic for some
of strategy and sector (trainings cost items (e.g. allocate communication
delivered, buildings constructed, costs based on number of documents pro-
documents produced, applica- duced or travel cost based on number of
tions processed etc.) participants etc.)
Inventory data To identify capital assets used
Depreciation schedules To calculate the value of capital asset used

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Methodological guide for costing of government strategies

Floor area (square meter) To use as an allocation statistic for some

cost items (e.g. allocating cost of rent or
utilities)

Level of Disaggregation
The desired level of aggregation primarily depends on the cost object
and the costing methods selected. For example, in a bottom-up costing,
measuring time the staff works on activity implementation may be done
using detailed estimates of days or weeks worked by each employee,
which is highly disaggregated data. With top-down approach, staff time
can be measured based on an estimated percentage of total staff time
dedicated to activity, which is much more aggregated data.
The available level of disaggregation of cost data depends on
sophistication of accounting and information systems of data providers.
Data is rarely available at the desired level of details, and further
disaggregation is needed. Experts or finance staff from relevant
institutions should be consulted to analyze and disaggregate data.
Institutions should gradually modify the way they track and record data
to ensure that data is available in the right format for future costing
exercises.

Disaggregating data based on accounting records - example

Assume an institution is purchasing a new piece of equipment which costs
1,000 EUR and needs to estimate its annual maintenance costs. The insti-
tution already has 5 similar equipment items for which it paid a total of 6,000
EUR. According to budget execution report, total annual maintenance costs
amount 500 EUR. According to detailed expenditure data and invoices, only
200 EUR of this amount relates to the five equipment items, whereas the
rest relates to building maintenance. Rough estimate of annual maintenance
cost for the new item can be made as follows:
• Average ratio of maintenance cost to purchase costs of existing
equipment: 200 EUR / 6,000 EUR = 3%
• Annual maintenance cost of new equipment item: 0,03 x 1,000 EUR
= 30 EUR.

Data Sources
Data sources are institutions, databases, reports or other systems
that contain the required data. Data for strategy costing is typically not
centrally available, and a number of sources (including government
institutions, independent experts, donors) need to be contacted. Data
should be sought from primary (original) sources whenever possible,

64 Guide to costing process

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because they are considered the best in quality and ultimately the most
useful. Secondary data are derived from primary data and changed,
and therefore their overall quality is lower. Examples of potential data
sources are provided in table 10.

Table 10: Examples of Data Sources

Government Sources External Independent Donors

Sources
Budgets and expenditure Statistical Bureau Project documents and
reports Published studies and reports
Work plans and reports analysis Work plans and reports
Accounting records Databases maintained by Project budgets and
Inventory lists, procurement independent service pro- expenditure reports
reports, invoices viders and organizations Projects’ databases
Supplier’s contracts Experts
Donation reports/memos/
contracts
Databases and other reports

Data Collection Instruments

Extracting data from existing reports and databases is in principle very
time consuming. Some sort of prior analysis or modification is needed
before the data can be used. Costing team should therefore develop
adequate instruments to facilitate data collection, such as data collection
sheets, interviews, surveys, questionnaires, focus groups etc. These
instruments should ideally integrate both primary and secondary data
requirements in one form. Selection of instruments depends on type and
availability of data. A simple sheet may be sufficient to obtain data on
budget expenditures for several line items, but an interview will probably
be needed to define the way in which indirect costs should be allocated.
There are many challenges related to data collection. An inevitable
challenge is associated with the quality of data obtained, including
their reliability, accuracy, relevance, completeness, consistency and
timeliness. Additionally, some stakeholders may hesitate to disclose
data which they consider confidential and sensitive. Data management
plan should therefore be realistic and feasible.

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Methodological guide for costing of government strategies

3.7.2. PAR Examples

In the example of “Developing methodology for assessment of corruption

proofing in Albanian legislation” from the previous section, data on types
and quantities of resources relate to number, origin and level of effort of
external experts, number of trainings and study tours, their duration and
location, and number of training and study tour participants, whereas
data on costs relate to experts’ daily fee, daily rent of training premises,
cost of training materials per participant, cost of meal per participant, air
ticket and per diem rates. Sources of these data and collection methods
are shown below.

Data Sources and Collection - Methodology for assessment of corrup-

tion proofing in Albanian legislation
Data Source Collection Method
Number of experts’ days Technical experts from Consultative meet-
Number of training days responsible institutions ings with external ex-
and participants Experienced external ex- pert
Number of study tour days pert
and participants
Expert daily fee Standard EU rates Information request
Rental of training premises Government expenditure Consultative meet-
Training materials reports ings with finance staff
Meal for participants Donor reports and external expert
Air ticket Market prices Market research

Data collection and analysis is generally the most time consuming step in
PAR strategy costing process because the countries lack comprehensive
databases. Data needs to be collected from several sources, including
government institutions, donors and external agencies. Furthermore,
data is normally available in aggregated form and needs to be
disaggregated. If similar activity has never been implemented before,
experiences of other countries may need to be analyzed. Because of
lack of readily-available data, the countries rely a lot on data provided by
experienced external budget experts. To ensure long-term efficiencies
in conducting the costing exercises, the governments should strive
to develop internal processes and systems that enable effective and
efficient data collection and analysis. Among other, this requires
development of comprehensive databases on resource utilization and
costs of typical PAR activities. This cost data can also be valuable for
costing other government programs and strategies.

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3.8. Estimating Resource Requirements

Whichever costing method is used, one of the two key elements of the
costing process is estimating types and quantities of resources required,
in physical units. The next key element is assigning monetary values to
these resources, which is discussed in the next section.

3.8.1. Identifying Types of Resources

Resource requirements should be estimated at cost object (activity) level.

Since programs and activities are usually very diverse, resource requirements
need to be estimated for each activity separately. If activities and their
outputs are clear, this should be straight-forward and easy. However, it can
sometimes be problematic. Significant and direct inputs (such as time of key
staff, equipment, direct materials and services) are relatively easy to estimate.
On the other side, estimating minor or indirect inputs (such as time of support
staff, use of shared facilities etc.) can be quite difficult.

Level of Comprehensiveness
The level of comprehensiveness in estimating resource requirements
primarily depends on the objectives of costing. Costing for the purpose
of economic evaluations may require assessment of all resources
provided by all stakeholders, including government, private sector,
individuals and households. Costing for the purpose of budget planning
is focused on resources provided by government and donors. If
incremental costing is done, only additional resources needed should
be estimated. If full costing is done, existing resources that will be used
for implementation of activities should also be added. Another factor that
impacts comprehensiveness is the availability of data and feasibility of
data measurement. Due to practical problems and potentially high cost
of data analysis, collecting detailed information about small resource
items and their utilisation may not be worth of effort.

Classifications
Before estimating quantities, all resource items should be accurately
classified, and their relation to cost object established. Resources can
be classified based on different criteria, and this usually depends on the
objectives of costing. Different resource classifications are the basis for
subsequent cost classifications.
Primary classification is by resource item. Resource items should
correspond to main budget line items (labour, materials and services,

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Methodological guide for costing of government strategies

capital assets) to enable linking the cost estimate with budget planning.
It is particularly important to distinguish capital items from recurrent
items. Capital items have a useful life of one year or longer and a
purchase price above a certain threshold. They are annualized over the
number of years that the items are expected to last. Based on their
frequency of utilisation, resource items should be classified as one-
off or recurrent. One-off items are consumed only once during the
strategy implementation. Recurrent items are consumed periodically
over a period of time as a result of stratgy implementation. Distinction
between one-off and recurrent items is required for identification of one-
off and recurrent costs. Based on their relation to cost object (activity),
resource items can be classified as direct or indirect. Direct items are
used solely by the activity and can be assigned to it entirely and in an
economically feasible way. Indirect items cannot be easily assigned to
the activity, but must be consumed in order for the activity to happen. In
a simplified approach, incremental costing is focused on identification
of direct resources, whereas full costing also requires identification of
indirect resources.

Direct and Indirect Resources

Implementation of a public information campaign within a ministry’s department

will require engagement of staff on a full-time basis, design and printing of pro-
motional materials and purchase of office supplies. These are all direct items.
However, the campaign will also require the ministry’s management oversight
and usage of common facilities and utilities. These items are indirectly consumed
by the campaign and cannot be easily traced to it, because they are shared by
different programs and activities implemented within the ministry.

Since strategy costs are estimated for a period of several years in

future, resource requirements should also be planned by year of
implementation. This will facilitate linking with multiannual and annual
budgets and work plans. The assumption is that resources will be paid
(i.e. the cost generated) in the fiscal year they are consumed.Table 11
shows examples of resource classifications.

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Table 11: Examples of Resource Classifications

Activity: Expanding capacities of IT department within the Ministry of Planning to

support implementation of electronic planning system
Relation to ac- Frequency of occur- Year
Resource Item tivity rence
Direct Indirect One-off Recurring 1 2 3
Permanently employed x x x x x
staff, full-time
Temporarily employed x x x x x
staff, full-time
Management oversight, x x x x x
part-time
Materials and Services:
Travel x x x
Accommodation x x x
Office supplies x x x x x
External expert support x x x
Communication x x x x x
Repairs and investment x x x
maintenance
Software licences and x x x x
maintenance
Office maintenance x x x x x
Rent and utilities x x x x x
Capital Assets:
Computer equipment x x x
Furniture x x x
Software x x x
Building reconstruction x x x

3.8.2. Estimating Quantities of Resources

Defining Unit of Measurement

The quantities of each resource item should be estimated in physical
units of measurement. These units should be selected based on type
and characteristics of resources. This should be a matter of common
sense and relatively easy. However, availability of data also has to be
taken into consideration, and alternative units selected if the necessary
data is not easily obtainable. For example, quantity of labor time should
be measured in weeks only if it is necessary and feasible to obtain such
a detailed estimate (e.g. for measuring engagement of short-term or
temporary staff). Otherwise, a month would be more appropriate unit to

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Methodological guide for costing of government strategies

use (also because salary is normally expressed as monthly amount).

Table 12 shows typical units of measurement for different resource
types.

Table 12: Examples of Units of Resource Measurement

Resource Item Commonly used units

Labor Per year, per month, per week
Travel - fuel Per kilometer, per trip
Travel - accommodation Per overnight, per day
Office supplies Per item, per staff
External expert support Per man-day
Communication Per item, per staff
Repairs and investment maintenance Per capital item
Office maintenance Per square meter
Rent and Utilities Per square meter
Capital assets Per item

Approaches to Estimating Quantities

Estimating quantities of physical resources should ideally be
comprehensive, reliable, valid and representative. The quantities of all
relevant resource elements should ideally be estimated. However, this
is not always possible because it requires resources and availability
of data from multiple sources. Different approaches can be applied,
depending on costing methods selected and data availability.
With bottom-up approach, the number of units of each resource item is
precisely estimated (e.g. number of computers, number of work months
etc.). This number is multiplied with unit cost to calculate total costs of
a resource item. With this approach, estimating quantities of resources
and estimating their costs are two clearly separated steps.

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Table 13: Example of Bottom-up Approach to Estimating Quantities of

Resources
Resource Item Unit No. of Data Sources
units
Direct labor – month Work plans and reports; Interviews, surveys
12
associate
Direct labor – weeks Questionnaires;
expert advisor 5 Self-recorded activity logs from similar activ-
ities
Travel - fuel kilometer Work plans and reports;
5,000
Vehicle logbooks, travel reports
Travel - accom- day Work plans and reports; Travel reports
70
modation
External ex- man-day Work plans and reports
40
perts
Printing copy 100 Work plans and reports
Rent of office m2 Work plans, staffing plan
200
space
Computers piece Work plans and reports
5
Inventory lists

With top-down approach, resource items are grouped into bigger

components and these components are then estimated (e.g. use of
utilities or use of office supplies). Estimating quantities is essentially
done together with estimating costs, and these two steps are part of
an integrated process (e.g. costs of office supplies are estimated as a
percentage of labor cost, rather than by identifying individual units of
supply items and multiplying them with their unit costs).

Table 14: Examples of Top-up Approach to Estimating Quantities of

Resources

Resource Item Quantity / Cost Data Sources

Indirect labor – 10% of his/her total Work plans and work reports
assistant worktime
Indirect labor – 10% of direct activ- Work plans and work reports
manager ity cost
Budget plans and expenditure reports
Office supplies 5% of direct labor Budget plans and expenditure reports
cost
Supply records, utilization logbooks

Expert opinion

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Methodological guide for costing of government strategies

Communication 10 EUR per full- Budget plans and expenditure reports

time staff
Invoices, inventory list, expert opinion
Rent, mainte- 20% of direct activ- Budget plans and expenditure reports
nance, utilities ity cost
Rental contracts, maintenance re-
ports, invoices
Vehicle mainte- 10% of fuel costs Expenditure reports; Vehicle logs
nance
The bottom-up approach gives more precise results. However, it requires
resources and access to primary data sources (including interviews,
reports, expenditure records etc.). It also involves the tendency to
overestimate. The top-down approach is simple, less costly and can
be based on secondary data (such as published budget documents).
However, the level of preciseness is much lower. A mixed approach is
typically used in practice. The bottom-up estimates should be made for
large resource items where the level of variation is relatively high and
quantities can be easily determined. These items form the largest part of
activity cost and represent cost drivers. The top-down approach should
be used for small resource items where the level of variation is relatively
low and units of measurement and/or quantities cannot be determined
in an economically feasible way.
Resource requirements can sometimes be estimated based on
normative costing, using specific norms and guidelines. The first
step is identifying these input norms for implementing a particular
activity or delivering an output (e.g. the amount of materials needed
for a particular training, or the number of consultancy days needed
to produce an analysis of average complexity). The norms should be
established in consultations of relevant institutions and experts, based
on historical information and the strategy requirements. Once the norms
have been established, standard unit cost for each input is calculated
(typically using market prices or benchmarks). Standard overheads
can then be added (for example, a pre-defined percentage of utility
costs). Using norms is a good cost control mechanism. It encourages
discipline in planning, reduces tendency to overestimate, increases
consistency of cost estimates and efficiency of the costing process.
However, this methodology is applicable only when norms can be easily
defined and activities or outputs being costed are homogenous. It is
not recommended for heterogeneous activities and outputs, because it
is difficult to produce exhaustive and valid set of norms. Also, defining
norms may be time consuming and stakeholders may hardly reach an
agreement. Finally, normative costing defines “what it should be” rather
than “what it is”, which is challenging in environments where typical
practice varies from what is recommended.

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If economic evaluation of strategy is conducted, resources provided

free of charge should also be estimated. These may include voluntary
labor or use of different services, premises, or capital items at no
charge. At this stage types and quantities of these resources should be
identified, so that their opportunity costs can be estimated at the next
stage (see section 3.9.5).

3.8.3 PAR Examples

With the recommended bottom-up costing approach, types and

quantities of resources required should be estimated and adequately
classified for each activity (i.e. output) separately. Table 15 summarizes
typical resource items based on typical PAR activities.

Table 15: Typical Resource Items

Category Sub-category
Labor • New staff to be employed for an indefinite period of time (to
carry out the activity, or as a result of activity implementation)
• New staff to be employed for a limited period of time (to carry
out the activity)
Materials • Travel and fuel, per diem (related to trainings, meetings, con-
and ferences, study tours)
services • Accommodation (related to trainings, meetings, conferences,
study tours)
• Meal and refreshment (related to trainings, meetings, confer-
ences, study tours)
• Rent (training premises, additional office space, other space)
• Supplies and materials (office supplies, training materials, oth-
er special materials)
• International expert services
• National expert services
• Other contractual services (e.g. media campaigns, translation,
printing and publishing, organizing study tours, developing
feasibility studies etc.)
• Building, vehicles and equipment maintenance
• Software licenses and maintenance
Capital • Stationary (item with useful life of more than one year and
items value above a certain threshold)
• Computer and other equipment, office furniture
• Software
• Vehicles
• Buildings

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Methodological guide for costing of government strategies

Although vast majority of PAR strategies’ costs are one-off costs, in

practice budgets are often affected by unexpected recurrent costs. These
are for example new staff that need to be employed on a permanent
basis, software licenses and maintenance, and building, vehicle and
equipment maintenance12. These items should be clearly indicated. This
is also an explicit requirement of the PAR Principles13.

Quantities of resources should be estimated by technical experts, as

follows:
• New staff – based on additional workload requirements, legal
requirements and limitations, existing capacities of responsible
institutions and their experience in implementing similar activities.
Adherence to formal staffing requirements defined in the institutions’
rulebooks on systematization of posts may lead to overestimating.
• Travel and fuel – based on number and location of events (trainings,
meetings, conferences, seminars, study tours), number and location
of participants, and transportation mode. Shared transport will
reduce resource requirements and costs.
• Accommodation, meal and refreshment – based on number and
duration of events, number and location of participants, and their
overnight requirements.
• Office rent – based on additional workload requirements and
available infrastructure. Reorganization or reconstruction of existing
space may reduce requirements for additional space.
• Rent of training space – based on number, location and duration
of events. Rent is not paid if events are organized at government
premises. Hotels normally provide free space for group
accommodation.
• Provision of training materials – based on number of participants
and means of distribution. Electronic distribution eliminates these
costs.
• Office supplies – based on number and complexity of outputs
(documents, meetings, other events), and administrative
requirements of responsible institutions.

12 Comparing to the base year budget, salaries of new staff are treated as recurrent
costs. In the subsequent year’s budget, they will become part of the budget base-
line.
13 One of requirements of the Principle 3 (“Financial sustainability of PAR is ensured”)
in order to ensure that actions and reform measures are sustainable, is that addi-
tional expenditure needs are broken down into temporary and permanent costs.

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• External experts – based on number and complexity of outputs and

previous experience with implementing similar activities. Complex
outputs normally require international or regional expertise.
• Other service providers (e.g. producing feasibility studies,
implementing media campaigns, organizing study tours) – based on
scope and complexity of output and availability of in-house expertise
or other support. Building in-house expertise and using support of
partner organizations will reduce requirements for external service
providers.
• Software – based on software size (measured in number of source
lines of code, functions, objects, feature points etc.), number of
interfaces, platforms etc. Possibility of using off-the-shelf solutions
may reduce resource requirements. Licenses and maintenance
should be planned on a recurrent basis.
• Computer equipment – based on the number of users, locations,
infrastructure and end-user hardware requirements, and facility
requirements. Regular maintenance should be planned.
• Buildings – estimates should ideally be based on feasibility studies or
technical specifications. If these are not available, specific workload
requirements, experience from previous similar projects and expert
opinion should be considered. Regular maintenance should be
planned.
• Vehicles – based on anticipated amount of travel and existing
capacities available. Using alternative transportation options such
as taxi services may be more cost effective if travel is mainly in-
town. Regular maintenance should be planned.

Table 16 shows how types, units and quantities of resources were

estimated in the example of “Developing Methodology for assessment
of corruption proofing in Albania legislation”.

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Methodological guide for costing of government strategies

Table 16: Resource Types, Units and Quantities - Methodology for

Assessment of Corruption Proofing in Albania

Resource Type Physical Number of units (quantity)

Unit
Training premises Training 2 trainings x 2 days each = 4
Day
Meal and refresh- Participant 25 participants x 4 training days = 100
ment for participants Day
Training materials for Set 25 participants x 2 trainings x 1 set = 50
participants
National experts Day 10 (based on workload and previous ex-
perience)
International experts Day 45 (based on workload and previous ex-
perience)
Flight tickets for Piece 8 participants x 1 ticket = 8
study tour partici-
pants
Per diem and related Day 8 participants x 5 days = 40
study tour costs

Since quantities of resources directly affect their cost, they should be

planned cautiously to ensure efficient and productive use of scarce
government and donor resources. Because of diversity of PAR outputs,
norms can be defined only for a limited number of homogenous outputs
or activities, such as typical trainings, analysis, methodologies, study
tours, etc. For greater accuracy, outputs can be broken to categories of
complexity and norms defined for each category. For example, norms
for the number of expert days can be defined separately for producing
analysis paper of low, medium or high complexity. Similarly, norms for
the number of working group meetings can be defined separately for
legislation of different complexity. Norms depend on country-specific
setting. For example, making specific legislative changes in BiH will
probably require much more expert days and roundtables then doing
the same thing in Serbia, because of different number of government
levels involved.

3.9. Assigning Monetary Values to Resources

Once the types and quantities of resources have been estimated,
monetary values should be assigned to resources. Assigning monetary
values means calculating unit costs and total costs of resources. The

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sum of the costs of all resources required for activity implementation will
be the cost of activity.

3.9.1. General Approaches to Cost Measurement

In practice, costing studies use several general ways and data sources
to measure costs. These can be broadly classified as (a) direct cost
measurement approaches, and (b) cost accounting methods.

(a) Direct Cost Measurement Approaches

Direct measurement approaches can be applied in both, retrospective
costing (when resources have already been used and cost generated)
and prospective costing (when resources are yet to be used and cost
generated). Costs of resources can be estimated using bottom-up, top-
down or mixed approach. With the bottom-up approach, unit costs
of different resource items are first estimated and multiplied with the
number of units to calculate the total cost of each resource element.
Table 17 expands on table 13 from the previous section, illustrating the
calculation.

Table 17: Examples of Bottom-up Approach to Assigning Monetary Values

to Resources
Resource Unit No. of Unit Cost Total Data Source for Unit Cost
Item Units (EUR) Cost
(EUR)
Direct labor month 12 1,000 12,000 Payrolls, budgets and ex-
– associate penditure reports
(full time)
Direct labor weeks 5 800 4,000 Payrolls, budgets and ex-
– expert penditure reports
advisor
Travel - fuel kilome- 5,000 0,2 1,000 Official organization’s pol-
ter icy
Travel - day 70 50 3,500 Average market price,
accommo- expenditure reports, suppli-
dation er’s offers
External man- 40 200 8,000 Donor project budgets and
experts day reports, supplier’s offers,
market prices
Printing copy 100 5 500 Supplier’s offers, expendi-
ture reports

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Methodological guide for costing of government strategies

Rent of of- m2 200 3 600 Market prices, existing rent-

fice space al contracts
Computers Piece 5 700 3,500 Supplier’s offers, market
prices, expenditure reports,
invoices
Total EUR:
29,950
EUR

With the top-down approach, total cost of a resource or a group of

resources is first calculated, and then this total is allocated to individual
items to estimate their costs. This can be done through multiple steps
(e.g. allocate total costs of institution to individual departments, and then
allocate cost of departments to resources consumed). Table 18 expands
on Table 14 from the previous section, illustrating the calculations.

Table 18: Examples of Top-up Approach to Estimating Quantities of

Resources

Resource Item Quantity / Cost Calculation

Indirect labor – 10% of his/her Monthly salary: 500 EUR (for example)
assistant total worktime
per month Calculation: 0,1 x 500 EUR x 12 months
= 600 EUR
Indirect labor – 10% of direct Direct activity cost: 29,950 EUR (from ta-
manager activity cost ble 17)

Calculation: 0,1 x 29,950 = 2,995 EUR

Office supplies 5% of direct la- Direct labor cost: 16,000 (from table 17)
bor cost
Calculation: 0,05 x 16,000 = 800 EUR
Communica- 10 EUR per full- Number of full time staff: 1 (from table 17)
tion time staff per
month Calculation: 1 x 10 EUR x 12 months =
120 EUR
Rent, mainte- 20% of direct Direct activity cost: 29,950 EUR (from ta-
nance, utilities activity cost ble 17)

Calculation: 0,2 x 29,950 = 5,990 EUR

Vehicle mainte- 10% of fuel costs Fuel cost: 1,000 EUR (from table 17)
nance
Calculation: 0,1 x 1,000 EUR = 100 EUR

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Like with estimating quantities of resources, the approach will depend on

costing methods selected, the impact of a particular cost item on total activity
cost, and data availability. The bottom-up approach provides most accurate
estimates. However, it is expensive and cannot be applied to all types of
costs (such as overheads). The top-down approach is relatively quick, and
allows inclusion of all relevant costs. However, the accuracy is relatively low
and detailed insight into cost structure cannot be made. A mixed approach
is mostly used in practice. The bottom-up approach is used for major cost
items and direct costs of activities, when unit cost data can be obtained.
The top-down approach is typically used for calculation of indirect costs and
overheads (e.g. indirect labor, office supplies, utilities, rent, depreciation etc.).

Using Standard Costs

Standard costing is a form of bottom-up approach based on pre-defined
or “standard” unit costs. Standard costs of resources are estimated in
advance based on historical data, market prices or benchmarks. Since
these are the “expected” costs, they may or may not coincide with
normal or actual costs. Standard costs are typically used in normative
costing (see section 3.8.2), and serve as a benchmark for cost control.
They are compared to actual costs and adjusted over time. Similar to
defining norms for resource use, defining standard costs is challenging,
especially in situations where cost depend on a number of internal and
external factors, including implementation and financing arrangements.
For example, defining a standard consultancy fee for external expert
is difficult if donors’ policies significantly vary. Using market prices or
budget data is more appropriate in such situations. However, in cases
where standard cost can be defined more confidently, their use can
make the costing exercise more efficient and consistent. MoF should
ideally approve standard costs used in strategy costing process.

Using Market Prices

Market prices are one of the key data sources for estimating unit costs
in a prospective costing exercise. Using market prices is particularly
recommended when the anticipated future prices significantly differ from
the current prices and using historical data would not provide accurate
estimates. Market prices are also used for estimating opportunity costs
(e.g. valuing resources used for free), because in a “perfect market”,
market prices are a good proxy for these cost. However, markets may
often not be perfect and prices may be distorted, such as at monopolistic
or oligopolistic sub-markets, or when subsidies are provided for some
products/services etc. Using market prices for estimating opportunity
costs may therefore require adjustments (see also 3.9.5).

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Using Estimates and Extrapolation

Estimates or extrapolation based on expert opinion or available studies
can also be used to assign monetary value to resources. In some cases,
when similar services or activities have already been valued and the unit
costs calculated, information can be extracted from published studies,
reports or analysis. This information should be taken with caution,
because these unit costs may include non-relevant and exclude some
relevant costs item. Expert opinion is generally seen as the least reliable
source of cost information. However, costing studies often have to rely
on multiple sources when assigning monetary values to resources, and
expert opinion is used to supplement other sources.

(b) Cost Accounting Methods

Cost accounting methods are used only in retrospective costing, when the
resources have already been used and cost generated. These methods
rely on the institutions’ cost accounting data and require adequate cost
accounting systems. They can be broadly classified as follows:

• Specific order costing is used for estimating costs of distinct

“orders” or activities that have distinct outputs (e.g. piloting
electronic system for recruitment and promotion). The cost
object is the “job order” or activity itself. The objective is to
charge all costs to the activity. Using this approach requires
detailed information on resource utilization, appropriate system
for overheads allocation and in-house expertise.
• Process or unit costing is used for very similar or identical
activities that require identical inputs, have similar processes
and deliver a number of virtually identical outputs (e.g. delivery of
standard trainings). For such activities it is possible to calculate
unit (average) cost of output by dividing the total activity cost
with the number of output units (e.g. cost per training or cost per
participant).

Although cost accounting methods are retrospective in nature, their

results can be used for future cost estimates. For example, cost of training
per participant calculated based on several previously implemented
trainings can be used to estimate costs of future trainings. Also, the cost
of piloting an electronic system from the above example can be used for
making analogy estimates for similar systems.

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3.9.2. Estimating Costs of Different Items

Labour Costs
Salaries, contributions, allowances and other expenses associated with
personnel are frequently one of the largest cost items in government
strategies. If the purpose of strategy costing is to estimate its financial
impact on budget and only the incremental cost is calculated, then
only the cost of additional staff that needs to be employed should be
calculated. If the objective is to estimate full strategy costs, the cost of
staff already employed should also be added.
Labor cost should include gross earnings, including the net salary,
contributions to health insurance, social security and pension plans,
tax, and any incentive payments such as overtime, hardship bonuses,
holiday and sick pay, and allowances for meal, travel, housing, uniform
etc. If the worker receives any additional non-monetary benefits (e.g.
housing), their value should also be estimated, using the prevailing
prices of similar items (e.g. the current market rent for similar housing).
The main data sources are expenditure records and payrolls in line
ministries and other institutions where the personnel work. Depending
on the country’s institutional set-up, it may be necessary to look for some
data from external agencies. Market data can help in the valuation of
non-monetary benefits. Depending on the available resources and the
required level of precision in costing, calculations can involve different
level of details. With smaller-scale activities, costs can be calculated by
staff name and salary grade. In larger-scale activities, staff categories
should be defined and average salary added to each category. Multiplying
average salary with the number of staff per category will show total salary
cost. A rough estimate of allowances can then be made by assuming
that the average ratio between salaries and allowances for the whole
institution (or a relevant sub-group) can be applied to each individual.
For example, if the ministry’s payroll and budget execution data shows
that total allowances are about 10% of total salary costs, then 10% can
be added to each individual’s salary, or to the total salaries.
Both full-time and part-time staff should be included in calculation.
With full costing, staff indirectly supporting the activity (e.g. managers,
maintenance staff, guards, drivers) should ideally be added. These are
typically shared among several activities and a portion of their costs
should be allocated. The cost allocation should be made based on time
allocations. Information on time anticipated to be spent for implementation
of activity should ideally be obtained directly from staff. The staff (or
their department heads) should be asked to provide a breakdown of
their estimated weeks or months worked on the particular activity, or an

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Methodological guide for costing of government strategies

estimated percentage of their total working time dedicated to activity.

This information can be provided through interviews or questionnaires.
If the time allocation data cannot be obtained from staff, the costing
team should make the best estimate based on the total staff costs of the
institution or the relevant department (taken from the budget documents)
and estimated level of effort.
Additional employment is normally accompanied with additional costs
of materials and services, including travel, communication, utilities etc.
These are typically calculated as a percentage to salaries, based on
the institution’s expenditure data. For example, if costs of materials and
services normally represent 20% of costs of salaries and allowances,
then 20% should be added to new staff costs.

Supplies
The term “supplies” is used for all materials that are used up during the
period of a year. Supplies can also include items that can last longer than
a year if their purchase price is below a certain threshold specified by
the relevant accounting policy. The cost of supplies should also include
the cost of transport to the point of use, and these may be significant if
supplies are imported.
Cost of supplies can be estimated for all categories of supplies together,
or separately for major categories or categories of particular interest
(e.g. office supplies, maintenance materials, special materials used to
produce a particular output etc.). A bottom-up approach can be used
for major categories, by multiplying their estimated quantities with unit
costs. The quantities of these items often depend on the estimated level
of output (for example the quantity of training materials depends on the
number of participants). The information on cost can be obtained from
invoices, order forms, price lists or catalogues.
Most of supplies are shared between several activities and don’t
represent major cost items. Because these items are typically consumed
by staff, their cost can be allocated to activity based on the number of
staff involved in the activity or the staff cost. Average cost of supplies per
person can be calculated from budget expenditure data at the institution
level, and multiplied with the number of staff expected to be involved in
the activity. Alternatively, average proportion of total supply cost to total
staff cost at the institution level can be calculated, and this percentage
multiplied with costs of staff involved in the activity.

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Vehicle Operation and Maintenance

These costs are among the most difficult to measure. They include
materials, such as fuel, lubricants, insurance and registration fees,
tyres, batteries and spare parts. The costs of drivers are recorded under
salaries. The source of information are expenditure records, vehicle
logbooks and interviews with drivers. Information on fuel consumption
for each vehicle, anticipated number of kilometers and market prices
are used to estimate the fuel costs. Drivers can estimate total annual
cost of operating and maintaining each type of vehicle. Maintenance
cost can also be estimated simply as a percentage of fuel costs. If no
reliable information can be obtained from expenditure records, logbooks
or interviews, the standard government mileage rate should be applied
to the number of kilometers. These mileage allowances are used to
reimburse staff for official use of private vehicles and they cover running
costs plus depreciation.
If the vehicle will be shared between several activities, its operation
and maintenance cost should be apportioned based on the anticipated
mileage for the activity as the proportion of total mileage. Alternatively,
the allocation can be made based on the number of days to be used for
the activity, as a proportion of total days used. This information should
be obtained from logbooks and interviews.

Rent and Building Operation and Maintenance

The cost of rent can be estimated either on the basis of expenditure
records (if the same premises will continue to be used for the activity
implementation) or market prices (if new premises will be rented).
Costs of operation and maintenance (lighting, water, heating, cleaning
materials, painting, repairs) typically do not form a large proportion of
activity costs and they can be roughly estimated as a proportion of
annual rent, based on the expenditure data.
If the space is shared with other activities, the costs should be allocated
to the activity based on the floor area used as a proportion of total floor
area. Alternatively, they can be allocated based on time the space is
used for the activity, as a proportion of total time used.

Consultancies
Many government strategies are supported externally with consultancy
inputs provided through various technical assistance from both national
and international organizations. Consultancies services are provided
by international or local experts. If an activity is partially or fully donor-
financed, different types of consultancies may be provided. Costing

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Methodological guide for costing of government strategies

should generally include the consultancies that form an important part

of activity support. Those provided for the purpose of satisfying donor
administrative requirements (e.g. project monitoring or evaluation
mission) should not be included.
Consultancy costs may be quite high, and often financed in foreign
currencies. The costs of a consultancy package usually comprise salary
or consultancy fee, international and/or local travel, and subsistence
allowance and various reimbursements. Unit cost is referred to as
consultancy daily fee, and normally includes a share of all these costs.
Consultancy inputs may considerably vary in terms of the number and
origin of experts involved, the duration of assistance and its purpose.
Costs of international and local consultants should be planned
separately, because the unit costs (fee) significantly differ. A distinction
between long-term and short-term assignments may also be needed,
since long term assignments may be accompanied with lower fees. The
anticipated source of financing is also an important cost factor, because
different donors have different pay policies. Source of information for unit
cost estimate include donor official rates, project proposals and reports,
budget plans and execution reports from previous similar projects/
activities, market prices, or quotes obtained from consultants.
If the consultancy input will be shared between the activity and other
work, the costs of the input should be allocated based on the proportion
of the consultants’ time spent on each type of work.

Other recurrent costs

Depending on the type and scope of activities, a number of other inputs
may be required, including travel and accommodation (apart from fuel
and other vehicle costs), communication, printing, photocopying, other
contractual services etc. Cost information can be obtained from budgets,
expenditure records, work reports, or market prices.
The bottom-up approach based on unit costs and quantities should be
applied for major items. For example, the cost of engagement of media
house for the purpose of public information can be estimated based
on the amount of media time, frequency, and media rates. If details of
service provision cannot be estimated, cost should be estimated based
on supplier’s quotes. Several quotes should be sought for more credible
estimates. The top-down approach should be used when quantities and unit
costs cannot be established. For example, costs of office communication
such as Internet, telephone or postage are usually estimated based on
expenditure records as a percentage of staff costs, staff numbers, or total
direct activity costs. If the inputs are shared between several activities,
cost allocation should be based on the anticipated resource use.

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Capital costs
Implementation of almost any activity requires using existing or
purchasing new capital items. Since capital items have useful life of
more than one year, they are annualized over the number of years that
they are expected to last. This is called depreciation. The cost of using
a capital item is the amount of depreciation. There are different methods
used for calculating depreciation. The simplest is the straight-line
depreciation method, where the annual depreciation is calculated by
dividing the current cost of a similar capital item with its estimated useful
life. For example, if the machine has current market value of 10,000
EUR and a useful life of five years, annual depreciation is 10,000 EUR /
5 = 2,000 EUR. If this machine is used to support implementation of the
activity during the three-year period, the depreciation cost assigned to
the activity is 3 x 2,000 EUR = 6,000 EUR.
If full costing is done, depreciation should be calculated for use of
existing capital items. The two key components needed to calculate
depreciation are the value of capital item and its useful life. The value
can be estimated as market (replacement) value, as in our example,
or as purchase price. Using market value is recommended, because
purchase price may not adequately reflect the value when inflation is
high. Estimates of useful life should be appropriate to the country context
and official accounting rules, if available. In the absence of official policy
on useful life of capital items, experts should provide estimates. If a
capital item is shared among several activities, the depreciation costs
should be allocated based on the proportion of time that the item is used.
If the activity requires purchase of new capital items, their costs should
be calculated by multiplying unit costs with quantities. This is called
cost of investment. Unit costs can be estimated based on market
prices or supplier’s quotes. The new items purchased for the purpose
of strategy implementation may have a resale value at the end of
strategy implementation period. However, cost of investment should be
calculated to account for long-term financial impact.

3.9.3. Allocating Overheads

Allocating indirect costs (overheads) to activities is one of the key

practical challenges in costing. Indirect costs must be calculated
if full costing is done. However, they should also be considered with
incremental costing. A new activity implemented by an institution will not
generate only incremental direct costs (e.g. new staff, new equipment),
but also incremental indirect costs through increased use of support
staff, utilities, materials etc.

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Methodological guide for costing of government strategies

Since indirect costs cannot be traced to activities in an economically

feasible way, the question is what proportion of overheads should be
allocated to a particular activity and what is the most appropriate method
to do it. The general principle is that indirect costs should be assigned on
a cause-and-effect basis and in a reasonable and consistent way. The
selection of allocation base should therefore be guided by the existence
of a strong cause-and-effect relationship, and is a matter of judgement
and common-sense. Examples of the most common allocation bases
and methods are provided in Table 19.

Table 19: Examples of Overhead Cost Allocation Methods14

Allocation Allocation Method Use Advantages and disad-

Base vantages
Flat rate Overheads shared Suitable for activities Simple and transparent,
equally between of similar resource but may be unfair because
activities requirements and di- allocation is not based on
rect costs anticipated utilization of
overheads
Floor area Proportion to the Suitable for costs of Simple and transparent,
(m2) number of m2 occu- rent or maintenance but suitable for limited
pied by activity types of overheads
Direct staff Proportion to num- Suitable for over- Simple and transparent,
number ber of direct staff heads driven by peo- but may not be a good
engaged on activity ple (office supplies, proxy for anticipated use
stationaries, com- of overheads, especially
munication, costs of when the activity has sig-
support staff) nificantly different human
resource requirements
Direct staff Proportion to the Suitable for over- Simple and transparent,
costs cost of direct staff heads driven by peo- but may not be a good
engaged on activity ple (office supplies, proxy for anticipated use
communication, of overheads, especially
costs of support staff) when the activity has sig-
nificantly different direct
staff costs
Output Proportion to the Suitable for activities Strong link between over-
units of activity that have a number heads and productivity,
output of homogenous out- but suitable for a very lim-
puts ited number of activities;

If the output is low, adjust-

ments are needed to ab-
sorb all overheads

14 Adjusted based on “Managing the Devolved Budget”, Bean and Hussey, 1996

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Allocation Allocation Method Use Advantages and disad-

Base vantages
Direct Proportion to the Suitable when no Simple and transparent,
activity data and resources and could also be seen as
costs direct activity cost are available for oth- equitable, but direct cost
er methods may not be a good proxy
for anticipated use of over-
heads
Machine Proportion to the Suitable to overheads Problematic if equipment
hour working time of related to equipment is old and requires more
equipment use time

Accuracy of allocation depends on the availability of resources and data.

The allocation process can be simplified if the overheads are grouped
into categories that have a similar relationship to activity, called indirect
cost pools. All overheads from one pool are allocated based on the
same allocation base. For example, indirect costs of management labor
and other support staff, communication, office supplies and materials
can all be grouped into one pool and allocated based on the number of
direct staff engaged in activity. Sometimes when limited resources are
available for costing, all overheads are grouped together and allocated
based on a single most appropriate allocation base, such as total direct
activity costs or number of direct staff.

3.9.4. Implications of Long-term Planning

Annual Estimates
In order to better link the strategy cost estimate with government mid-term
and annual budget planning, but also with the donors’ financing plans,
cost estimates should be produced by fiscal year. If a single activity is
implemented over several years, its costs should be apportioned to years
in which it is implemented. For greater accuracy, resource requirements
and their costs should be planned on a year-by-year basis, and these
annual estimates should then be summarized to calculate total activity
cost. For rough estimates, total cost of activity can be calculated first, and
then apportioned to years of implementation based on best estimate.

Inflation
Budgeting for multiannual period requires adjustment of cost information
for inflation. Inflation reflects the fact that the cost of an item usually

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Methodological guide for costing of government strategies

continues to rise over time. If inflation is not accounted for, the implicit
assumption is that the purchasing power of the currency of denomination
will remain the same over the period of implementation. If inflation is
accounted for, the base-year amounts should be converted to then-
year amounts using the adequate inflation indexes. Inflation indexes or
similar guidelines for cost adjustments should be provided by relevant
authorities, preferably by MoF in the annual budget circular. If this
information is not available, the index that most closely matches the
activity or cost category should be selected. For example, consumer
price index may be good for costs of materials and consumables, but
not for software costs. Costs of salaries are usually subject to special
regulation. Some costs may not be affected by inflation because they
are fixed by long-term contracts with suppliers. Inflation indexes used
and other potential adjustments made should be documented.
Inflation should also be considered in analyzing historical cost data.
For example, when calculating average costs based on several years’
expenditure data, inflation indexes should be used to convert a cost
from its current year (when the cost was incurred) into a constant
base year (when the average cost is calculated), so that the effects of
inflation are removed. To convert cost incurred in year “X” to the prices
of the selected base year, it should be multiplied by the consumer price
index (or another adequate index) for the base year and divided by the
consumer price index for year “X”.

3.9.5. Economic Costing – Key Considerations

When costing is done for the purpose of economic evaluations, such

as conducting cost-benefit or cost effectiveness analysis, estimating
financial cost is not sufficient. Opportunity cost of resources, i.e. the cost
of their next best alternative use, should also be estimated. Financial
and opportunity cost together represent economic cost. There are three
main areas in which economic costs differ from financial costs:

Donated resources
Donated goods and services should always be valued in economic cost
estimates. This is most easily done by estimating their equivalent market
prices. For example, the cost of volunteer labor can be estimated as the
salary that this person would earn if he or she worked elsewhere. The
cost of office space provided for free can be estimated as the amount
of rent normally paid for a similar space. The cost of free media time
can be estimated as the amount that the media house would normally
charge for the specific slot, etc.

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Resources the price of which is distorted

Some of the resources may have market prices that do not reflect their
true value. For example, prices may be too low due to subsidies provided
by government, or too high due to inclusion of transfer taxes (such as
gift or estate), or distorted due to government-set foreign exchange rates
(for imported resources). In such cases it may be needed to replace
the stated prices with the so-called “shadow prices” for the purpose of
economic analysis. “Shadow price” is the price adjusted for whatever
reason in order to reflect economic cost. Estimating shadow price
depends on the nature of good or service. For example, a shadow price
of government-subsidized rent of space is the normal market rent for a
similar space. If an imported resource is paid at distorted exchange rate,
a shadow price may be calculated using the black market rates. Shadow
prices should be calculated only for the major cost items.

Capital Items
A simple straight-line depreciation of capital items is suitable for
estimating their annual financial cost, but is inadequate for economic
cost. Economic cost estimate should also take into account the value of
alternative opportunities for using resources tied up in the capital items.
The interest rate (of the national bank) is used to estimate what could
have been earned by alternative use of money. However, this approach
has been criticized, because public sector may not have the opportunity
or right to choose between these investment options.

Example - Opportunity Cost of Capital

Annual financial cost (depreciation) of equipment with a market value of

10,000 EUR and useful life of 5 years is calculated simply as 10,000 EUR / 5
= 2,000 EUR. To calculate economic cost, standard annualization tables are
used to estimate annualization factor for a given discount rate and useful life
of an item3. For example, for the discount rate of 10% (based on depreciation
rate and interest rate), the annualization factor for an item with useful life of
5 years is 3,791 (based on standard annualization table). Economic cost is
calculated by dividing the equipment value with annualization factor: 10,000
EUR / 3,791 = 2,638 EUR. Note that it is higher than financial cost because
it includes earnings that could have been realized if the resources tied in
equipment were invested.

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3.9.6. PAR Examples

Typical Costs
Before estimating PAR costs, it is important to understand them. PAR
activities are generally labor-intensive because they require significant
human resources. These are normally provided through existing
institutional infrastructure, and no additional investment is needed.
Incremental costing distorts labor-intensity of PAR because incremental
costs mainly relate to materials, services and capital investment. While
most of activities are “soft” (trainings, drafting legislation, guidelines etc.),
some are capital-intensive (investment in IT infrastructure, buildings
etc.). Incremental costs depend on implementation and financing
arrangements. For example, a training program can be implemented by
government agency at government-owned premises at no extra cost, or
by an external service provider at rented premises. Similarly, an analysis
paper may be drafted by civil servants already employed (at no extra
cost), or by external experts engaged by government or donors. Different
donor implementation and financing modalities (i.e. technical assistance
projects, direct expert support, twinning projects, budget support), which
are often unknown at the time of costing, also impact costs. All relevant
factors should be carefully considered. Table 20 summarizes costs of
typical PAR activities and factors influencing them.

Table 20: Typical Costs of PAR Activities and Factors Influencing Them

Activities Typical Costs Typical Factors Influencing the Cost

Conducting Salaries and al- Horizontal and vertical scope (num-
analysis, needs lowances of civil ber of institutions and government
assessments, servants levels involved) and geographic cov-
feasibility stud- Fees of external erage
ies; experts Complexity of topic
Developing pol- Fuel, travel and Number of individual and group con-
icies, strategies, accommodation sultations needed
programs; Rent Number and origin of external ex-
Legislative draft- Meal and refresh- perts (local or international) and other
ing; ment, service providers, their level of effort
Developing Printing and pub- and way of engagement
methodologies, lishing Means and scope of distribution
guidelines, man- (electronic or hard copies)
uals, standards Implementation arrangements (e.g.
usage of own or rented premises or
government or private service provid-
ers)

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Activities Typical Costs Typical Factors Influencing the Cost

Organizational Salaries and allow- Scope of restructuring (intra or in-
restructurings ances of new civil ter-institutional)
servants Number and types of new positions
Related additional required
costs of materials Possibilities of internal reorganiza-
and services tions
Computer, office Availability and requirements for ad-
equipment and ditional office space and equipment
vehicles
Building (re)con-
struction and main-
tenance
Organizing train- Salaries and al- Number, duration and location of
ings, workshops, lowances of civil events
conferences, servants Number of participants and their
seminars, Fees of external specific travel and accommodation
roundtables and experts requirements
study tours Services of exter- Number and origin of external ex-
nal agencies perts (local or international) and other
Fuel, travel and service providers, their level of effort
accommodation and way of engagement
Rent Type and scope of training materials
Meal and refresh- and means of distribution (electronic
ment vs hard copies)
Printing and pub- Implementation arrangements (e.g.
lishing usage of own or rented premises, or
government or private service provid-
ers)
Economies of scale (larger events
have smaller cost per unit)
Implementing Salaries and al- Number and types of promotional
media cam- lowances of civil activities
paigns and servants Amount and type of materials pro-
promotional ac- Fees of external duced or purchased
tivities experts Type of media (broadcast, print)
Services of exter- Intensity of media use (frequency,
nal agencies duration, time)
Rent of media Media rates (commercial, sponsored
space by private sector, subsidized by gov-
Printing and pub- ernment)
lishing Economies of scale (larger cam-
paigns have smaller unit costs)

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Methodological guide for costing of government strategies

Activities Typical Costs Typical Factors Influencing the Cost

Developing Fees of external Software size (measured in number
e-portals, da- experts of source lines of code, functions,
tabases, web Services of exter- objects, feature points etc.)
platforms and nal agencies Development effort and number of
information sys- Software develop- productive hours needed
tems; ment, testing and Number of users, interfaces, plat-
Developing installation forms and locations
interoperability Software licenses Infrastructure and end- user hard-
platforms and and maintenance ware requirements
system integra- Infrastructure and Facility requirements (power, cooling)
tion hardware (building, Possibility for using commercial off-
equipment, furni- the-shelf solutions
ture) Requirements for help-desk function
Replacement, upgrade and mainte-
nance policies
Training strategy
Planning, moni- Salaries and al- Number and composition of working
toring, reporting lowances of civil groups
and evaluation servants Number of participants
Travel, fuel and Frequency of meeting, monitoring
accommodation and reporting
Communication Means of communication (electronic
vs physical)

Cost Calculations
Costs of each activity (i.e. output) should ideally be calculated based
on quantities of resources needed (estimated in the previous step) and
their unit costs. Unit costs should be estimated as follows:
• Salaries and allowances – based on relevant legislation, separately
for different categories of staff. Averages should be used for variable
elements (such as travel or accommodation allowances, bonuses,
supplements based on years of experience etc.).
• Travel and fuel – official mileage rate for private use of vehicle, taxi
or bus ticket cost for average trip, average flight ticket cost to an EU
country, average EU per diem rate for study tours.
• Accommodation, meal and refreshment – average price of hotel
overnight in towns where events are typically held, average meal
and refreshment cost per participant.
• Office rent – average commercial rent per m2 for the anticipated
office size and location.

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• Rent of training space – average daily cost of using a typical

conference room.
• Office supplies and materials – average cost per item (for relatively
significant items); average cost per person based on institution’s
budget and expenditure data (for minor items); or average cost per
output (for items driven by outputs, i.e. cost of training materials per
participant).
• External experts – average gross EU daily fees for international
experts, average market rates for national experts.
• Other external service providers – average costs of outputs of different
types and complexity (i.e. printing and publication, media campaign,
translation, feasibility study) based on previous expenditures, market
research, suppliers’ quotes and expert opinion.
• Stationary, computer equipment and vehicles – average market
price per unit.

Costing team should collect data on unit costs of typical resource items
prior to starting calculations. This may include average salaries by grade
and average allowances by type; official mileage rate for vehicle use;
average costs of hotel accommodation, rent of training space, meal and
refreshment per person, and computers and office equipment. Based
on this information, “standard” unit costs can be produced for some
items and used consistently in all calculations. This will ensure greater
cost control and process efficiencies. Representative of the MoF budget
department should ideally approve the standard costs. This would also
facilitate verification of final cost estimate. Standard costs should be
used only for standard resource items. If additional information on costs
is available, it should be used for more precise estimate. For example,
if the institution already knows where the study tour or training will be
held; or a supplier has already provided offer for a particular service; or
a donor has committed funding for a particular expert; then the cost of
flight ticket to the specific country; the amount from the supplier’s quote,
and the amount of expert costs provided by the donor should be used,
respectively.

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Methodological guide for costing of government strategies

 In Albania, costing of the PAR Action Plan 2015-2017 was based on

following standard costs:

• Salaries – as per the official government policy

• Rent of premises for trainings and similar events: 300 EUR / day

• Meal and refreshment at trainings and similar events: 20 EUR / day

• Training materials: 20 EUR / participant

• International expert: 1,250 EUR / day (includes all taxes, travel and
per diem allowances and overheads)

• National expert: 350 EUR / day (includes all taxes, travel and per
diem allowances and overheads)

These were defined by responsible institutions’ finance staff with assis-

tance of experienced external expert.
 Kosovo* had a similar approach. Standard costs were approved by the
MoF representative.

Unit costs should be multiplied with quantities of resources and added

up to calculate costs of outputs. Costs of outputs should all be added
up to calculate costs of activity. Table 21 shows the example of cost
calculation for “Developing methodology for assessment of corruption
proofing in Albania legislation”.

Table 21: Cost Calculation - Methodology for Assessment of Corruption

Proofing in Albania Legislation
Element Resource Type Quantity Unit Cost Total Cost
EUR
Output 1: National expert 10 350 3,500
International expert 45 1,250 56,250
Methodology
Total Output 1: 59,750
document
Output 2: Meal and refreshment for 100 20 2,000
participants
Trainings Rent of training premises 4 300 1,200
Training materials 50 25 1,250
Total Output 2: 4,450
Output 3: Flight tickets 8 500 4,000
Per diem and related costs 40 99 3,960
Study tour
Total Output 3: 7,960
Total Activity (outputs 1-3) 72,150 EUR

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In the above example, activity and its outputs were clearly defined
and it was possible to easily estimate unit cost and number of units
for each resource type. However, this is not always possible because
of uncertainties and lack of information. Sometimes, outputs can be
specified in details, but unit costs and quantities cannot be clearly
established for all types of resources. Costs of some resources must
therefore be estimated as a share or proportion of other category, as
illustrated in the example below.

Example - New employment and incremental overheads

Implementation of many reform activities requires employment of new staff on
a permanent basis. This obviously generates costs of their salaries and allow-
ances, which can be easily estimated based on the number and category of
staff and government salary policy. Assume that, based on a needs assess-
ment, 5 associates and 2 advisors need to be employed at the Department for
Development Programming in 2018 on a permanent basis, to build its capac-
ities for strategic planning. Gross annual salary and allowances can be calcu-
lated as follows:

Taxes Average Salary

Net Gross Total
and con- allow- & allow- Posi-
Position salary salary Months annually
tributions ances ances tions
monthly monthly EUR
(45%) monthly monthly
  1 2=1*0.45 3=1+2 4 5=3+4 6 7 8=5*12
Associ-
600 270 870 100 970 5 12 58,200
ate
Advisor 700 315 1,015 100 1,115 2 6 26,760
Total: 84,960

Net salary, taxes, social and health contributions are calculated as 45% to
net salary, based on the government’s policy (columns 1,2,3,). Average allow-
ances of 100 EUR/person include a fixed part for meal and travel (70 EUR/
per person) and estimated additional 30 EUR for variable elements, such as
overtime and hardship bonuses (column 4). Annual salary increases should
be considered for the subsequent years. Other potential costs should also be
considered (such as uniforms, professional development etc.).

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Methodological guide for costing of government strategies

Employment of new staff will also generate additional costs of office sup-
plies, communication, utilities etc. These incremental indirect costs will
impact the institutions budget and should be accounted for. However, they
cannot be estimated by multiplying unit costs with quantities, because
it is impossible to know how much of supplies or utilities each staff will
use. Instead, a percentage should be added to costs of new salaries and
allowances, based on the institution’s expenditure data. Assume in 2014-
2016 costs of office supplies, communication, utilities, maintenance etc.
amounted about 10% of total staff costs. Incremental overheads resulting
from employment of 7 new staff would then be calculated as 84,960 x 0,1
= 8,496 EUR annually. Total long-term financial impact of the new employ-
ment would therefore be: 84,960 + 8,496 = 93,456 EUR annually. These
costs are recurrent impact of strategy implementation comparing to 2017
budget baseline. In 2018, they will become part of the baseline.
To ensure that incremental overheads are not overestimated, only costs of
those materials and services that are affected by new employment should
ideally be considered (for example, new staff may not need to travel).

Sometimes neither outputs nor inputs can be clearly identified and

activities essentially represent smaller or larger scale projects.
Capacity development projects and capital investment projects are
typical examples. A previous needs assessment or similar analysis is
needed for more detailed estimates. Rough estimates can be made
using previous experience and expert advice. Contingencies in
amount of 10-20% to total costs should be planned when uncertainty
is high, to mitigate the risk of unexpected cost increase.
Estimating costs of major ICT systems, including software and
hardware is a special case of cost estimation. Acquiring these
systems is very complex and expensive. Ideally, cost estimate should
be based on a previously conducted feasibility study or a similar type
of analysis. If this is not available, IT experts should be consulted
on the basic system’s characteristics and costs. If possible, several
suppliers’ quotes should be obtained for more reliable estimate.
Some basic cost considerations are provided below.

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Software

Since software is not tangible like hardware, understanding resource requirements is

very difficult. In addition, software technology changes constantly, making it difficult
to collect good data for cost estimate. The two key factors that drive software costs
are its size and complexity. Since software is very labor intensive, cost estimating has
two basic elements:

• Estimating software size – how big will the application be? This depends on
many factors, such as complexity; number of functions the program can per-
form, their scope, complexity and interactions; safety and reliability requirements
etc. There are special methods to measure software size in a quantitative way,
though software “size” is an abstract concept.

• Estimating development effort – based on its estimated size, how many produc-
tive hours are needed to develop the software? More complex system programs
require more effort than web programs of the same size. Size can be converted
to hours using productivity factors such as number of source lines of code or
number of function points developed per work month.

Once the software has been developed, it must be tested, installed and maintained.
All these costs must also be accounted for. There are different types of maintenance,
such as fixing defects not discovered in the testing stage (corrective); modifications
to changes in physical or technological environment (adaptive); or adding new func-
tionalities to respond to user requirements (perfective). When new functionalities are
added, the cost is similar as in the development stage. Maintenance costs depend
on software complexity, quality and the degree to which it meets user requirements.
Rigorous testing will prevent major maintenance costs. Software licenses are an im-
portant recurrent cost.

IT Infrastructure

Apart from software development and maintenance, costs of hardware, help desk,
upgrade installation and training must be estimated. These often make up a majority
of system costs. Estimating these costs should be easier then estimating software
costs, because IT infrastructure and services are more tangible. Some factors to
consider include number of users and locations; amount of interfaces needed to run
the infrastructure, requirements for helpdesk support, facilities physical requirements,
end-user hardware requirements etc. Supplier’s quote should address costs of in-
stallation, maintenance, repair, and employee’s training. Sometimes IT infrastructure
may be leased or operated by a supplier under the contract with government. This
usually does not eliminate the costs of ongoing IT support to employees, setup train-
ing etc.

Just like software, IT infrastructure requires maintenance and other recurring oper-
ations costs. These are facilities costs (such as power, security, and general sup-
port), trainings, technical refreshments etc. Finally, since the cost of hardware and
technical requirements change daily, planning contingencies of up to even 30% is
recommended.

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Full Costing
If the government wants to do full costing, costs of existing infrastructure
(labor and other resources) should also be estimated. Sum of incremental
(additional) costs and existing costs will make full financial cost of the
reform to the government. Since the government will in any case need
the information on incremental costs of strategy, i.e. its financial impact
on budget, existing costs should be estimated and presented separately.

Theoretically, the same approach can be used as with incremental

costing – identify and classify all existing resources needed, estimate their
quantities and unit costs, and multiply them to calculate total existing costs.
However, this is almost impossible in practice because governments
lack budget and accounting systems and processes to produce such
sophisticated estimates, and also to track actual expenditures. In lack of
such systems, there is a huge risk of overestimating or underestimating
the existing contribution. Moreover, even if reliable estimates can be
made, this information is of limited use, because actual expenditures
cannot be adequately monitored against the plan.

Full costing of PAR strategies should therefore focus on major cost

items for which data can be collected in a relatively easy and reliable
way. The main cost item is salaries of staff in government institutions
who will be directly engaged in implementation of activities, either full-
time or part-time. Other resources that are shared between the activities
being costed and other work carried out by institutions, or indirectly
consumed by the activities, should be estimated only if they are relatively
significant and if data can be obtained to produce a reliable estimate.
This may include indirect labor (such as salaries of senior management,
legal, personnel, finance or support staff), materials and services (costs
of communication, office supplies, utilities) or usage of capital items
(depreciation of equipment, buildings, vehicles).

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Costs of PAR – Public Administration Reform Coordinator’s Office

(PARCO) in Bosnia
Sometimes the government’s existing contribution to PAR can be clearly iden-
tified but cannot be easily linked to activities. The PARCO was established
to coordinate implementation of PAR. Apart from the overall reform coordina-
tion, PARCO also provides support to operational management of PAR Fund,
a mechanism of pooled funding used to support reform activities. PARCO’s
operations, including salaries of about 35 staff and related operating expens-
es are fully financed from the state budget in amount of approximately 0,72
mil EUR annually.

Given the institution’s mandate, this amount can be almost entirely treated
as the government’s financial contribution to strategy implementation. If full
costing of PAR Strategy was done, this amount would need to be accounted
for. However, allocating it to relevant activities from the Action Plan would be
difficult, because (a) these costs are indirect to activities, and (b) activities
financed from the PAR Fund absorb much more of PARCO’s resources then
activities financed through other mechanisms.

Like with the incremental costing, existing costs should be estimated

by activity and by year of implementation, to ensure comparisons. To
estimate costs of staff directly engaged on activity implementation, two
elements are needed: (a) estimated amount of time the staff will work
on the activity, and (b) salary cost. This information should be collected
from institutions responsible for implementation using pre-defined
data collection sheets. Time should ideally be estimated in weeks
rather than months, to stimulate more thorough analysis. Depending
on time and resources available for the costing exercise, time and cost
can be estimated by staff position (no. of weeks each staff works on
activity multiplied with his/her salary); by staff category (no. of weeks
each category of staff works on activity multiplied with average salary
for the category); by organizational unit or by institution as a whole (no.
of weeks the organizational unit/institution will dedicate to the activity,
multiplied with the average salary of staff involved). The latter gives
least precise estimates but is most efficient.
Estimates of time invested in PAR activities should be verified by
supervisors because they have better insight into relative weigh of PAR
activities in the institution’s overall work. Total time assigned to PAR
should be cross-checked against the total staff working time, to make
sure the estimates are reasonable and not overestimated.
Estimating indirect contribution through materials, services and use
of capital assets is tricky, because these resources cannot be directly
linked to activities. The simplest way is to add a conservative percentage
of overheads to previously calculated salary costs. This percentage

Guide to costing process 99

Methodological guide for costing of government strategies

should be calculated based on the institution’s expenditure data. For

example, if materials and services (including depreciation) represent
approximately 10% of institution’ staff costs, then 10% should be added
to the estimated salary amount. However, only costs of materials and
services driven by the activities being costed should be considered.
For example, some services, travel or similar may be totally irrelevant
to the activity. More accurate allocation of overheads can be made by
using different allocation basis for different cost items. For example,
communication costs can be allocated based on the number of staff
engaged in activity, depreciation costs based on equipment items used
and depreciation schedules etc. Obviously, estimating costs of materials
and services, including depreciation, requires a lot of data and effort,
and balance between the costs and the benefits of analysis must be
made.
Information on costs of salaries, materials and services should be based
on official budget data, signed-off by responsible institution’s finance
staff, and collected together with information on anticipated work effort.
Example of data collection sheet and cost calculation is shown in table
2215.

Table 22: Example of Data Collection Sheet for Estimating Costs of

Existing Contribution
2018 2019
Activity / Staff Weeks Total Average Total Staff Other Total Staff Weeks Total Average Total Staff Other Total
Output engaged per work gross Cost EUR relevant 2018 engaged per work gross Cost EUR relevant 2019
staff weeks weekly overheads EUR staff weeks weekly overheads EUR
salary per (% of staff salary per (% of staff
staff EUR costs) EUR staff EUR costs) EUR

1 2 3=1*2 4 5=3*4 6= 0.2 x 5 7=5+6 1 2 3=1*2 4 5=3*4 6= 0.2 x 5 7=5+6

Activity 1 5 6 30 500 15,000 1,800 16,800 - - - - - - -
Activity 2 3 4 12 500 6,000 720 6,720 3 8 24 503 12,060 1,206 13,266
Activity 3 - - - - - - - 3 15 45 503 22,613 2,261 24,874
Total 8 42 21,000 2,520 23,520 6 69 34,673 3,467 38,140

Estimated % of other overheads: 12% 10%

15 This table is also provided in the Cost Calculation Tool, which is the annex to this
Guide

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Explanation

The sheet is completed by the Ministry directly engaged in implementation of

activities 1,2 and 3 from the Action Plan. Two categories of costs are estimat-
ed, as per the costing team guidelines:

Staff time is estimated in weeks. For each activity the number of staff en-
gaged (column 1) is multiplied with the average number of weeks per staff
(column 2) to calculate total workweeks the Ministry will dedicate to the activ-
ity (column 3). Average gross weekly salary and allowances is calculated for
all staff engaged (column 4) and multiplied with the total workweeks (column
3) to calculate total staff costs (column 5). The calculation is made for each
year separately. Note that average weekly cost in 2019 is increased by 0,5%
to account for salary increase.

Other relevant overheads are estimated as a percentage of staff costs. Only

costs of communication, office supplies, maintenance and utilities are includ-
ed, because other costs are not relevant to the activities. Based on the 2018
budget, these costs represent 12% of the Ministry’s total staff costs. This
percentage is applied to staff costs estimated at 21,000 EUR (column 5) to
estimate other overheads (column 6). The calculation is repeated for each
year. Note that the estimated overheads percentage in 2019 is higher by 2
percentage points. This is based on the institution’s mid-term budget.

Total contribution is the sum of staff costs (column 5) and overheads (column
6), calculated by activity. This is repeated for each year and summarized for
the entire Action Plan period.

Each institution directly engaged in implementation of activities 1, 2 and 3

should fill out this form separately. Total existing cost of the activity should
then be calculated by the costing team as the sum of costs reported by all
institutions.

3.10. Producing and Verifying Cost Estimates

3.10.1. General Guidelines

Producing Cost Estimate

Once the costs of activities have been calculated, they should all
be added up to calculate cost of respective higher level elements
(e.g. programs, results, objectives) and ultimately cost of action
plan or strategy as a whole. Appropriate calculation tool should be
designed to facilitate the calculation, in line with objectives and specific
requirements of the costing exercise. Calculation tools can vary from

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Methodological guide for costing of government strategies

simple spreadsheets to sophisticated tools enabling analysis of input

data and unit costs, conducting what-if scenarios, and presenting data
by various criteria. The level of complexity is proportional to number of
cost categories that need to be estimated (incremental, full, or economic
costs), different perspectives from which the cost is analysed (public,
private, or society as a whole), time period for which the estimate is
made, number of organizational levels and institutions involved, and
complexity of the action plan. Using a proper calculation tool will enable
documenting calculation details, minimise errors, ensure accuracy and
consistency of calculation and facilitate subsequent revisions of cost
estimates. Calculation tool should ideally enable presentation of cost
information by:

• Action plan element (objective, program, result, activity, output), to

enable linking costs with areas of work and results;
• Line item (including at least salaries, materials and services, and
capital expenses), to enable linking cost estimate with government
and donor budget and resource planning;
• Year of implementation, to enable linking cost estimate with
multiannual and annual budgets;
• Frequency of cost occurrence, to enable distinction between one-
off and recurrent cost of strategy, for the purpose of better budget
planning;
• Relevant cost category (such as incremental and existing costs), to
enable decision making for specified purposes.

A simple Excel tool for calculating incremental costs of PAR strategies

based on bottom-up costing approach is provided as Annex 3 to this
Guide. The tool also supports full costing at basic level. It can essentially
be used for costing of any strategy based on action plan, after being
adjusted for relevant cost categories and action plan elements. Graph 3
illustrates the output cost information delivered by this tool.

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Graph 3: Output Cost Information Delivered by the Calculation Tool

Also broken down to incremental

(additional) and existing costs

Year 1 Year 2 Year 3 Years 1-3

Incremental Existing Full Costs Full Costs Full Costs Full Costs
Element
Costs Costs
1 2 3=1+2 4 5 6=3+4+5
Activity 1.1. 400 100 500 200 - 700
Program 1

Activity 1.2. 300 - 300 100 - 400

Activity 1.3. - 200 200 - - 200
Total Program 1 700 300 1,000 300 - 1,300
Activity 2.1. 500 100 600 1,000 500 2,100
Program 2

Activity 2.2. 600 - 600 300 400 1,300

Activity 2.3. 200 - 200 100 - 300
Total Program 2 1,300 100 1,400 1,400 900 3,700
… … … … … -
Total Action Plan/ Strategy (EUR) 2,000 400 2,400 1,700 900 5,000

Incremental costs in each year broken down by line item

and by frequency of cost occurrence

Incremental By Line Item By Frequency of Occurrence

Element Costs Materials and Capital
Labor One-off Recurrent
Services Items
Activity 1.1. 400 200 100 100 150 250
Program 1

Activity 1.2. 300 300 - - - 300

Activity 1.3. - - - - - -
Total Program 1 700 500 100 100 150 550
Activity 2.1. 500 - 500 - 500 -
Program 2

Activity 2.2. 600 - 400 200 600 -

Activity 2.3. 200 - 200 - 200 -
Total Program 2 1,300 - 1,100 200 1,300 -
… … …
Total Action Plan/ Strategy (EUR) 2,000 500 1,200 300 1,450 550

Documenting Rules and Assumptions

Cost estimates are based on limited information and bound by certain
constraints. Rules and assumptions that explain the conditions under
which the estimate was produced should be properly documented. Cost
estimate rules represent a common set of estimating standards that
provide guidance for the costing process. When no rules can be defined,
assumptions should be made to allow the estimate to proceed. Rules and
assumptions can be related to various implementation and cost aspects,
such as activity schedule, institutional and financial responsibilities for
shared activities or programs, resources provided for free by government
or other stakeholders, anticipated salary grades and increases, inflation
indexes, technology assumptions, items specifically excluded from cost
estimate etc. Documenting all calculation details, methodologies, data
sources, rules and assumption will result in more professional, credible
and convincing estimates, facilitate future revisions, and enable better
insight into potential risk areas. This will also represent a valuable point
of reference for future costing exercises.

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Methodological guide for costing of government strategies

As a best practice, sensitivity analysis of cost estimates is conducted

to examine the effects of changing rules and assumptions. This is
done by identifying the cost elements that represent the most risk and
changing their value to determine which factors affect results the most.
For example, the estimate may be made under the assumption that
government will provide facilities and equipment for free. If there is a
risk that these resources will not be available, different scenarios can
be applied to see how financial cost changes as a result of changes in
assumptions.

Validating Cost Estimate

The cost estimate should be validated by the relevant stakeholders
prior to being formally adopted. This includes verifying the calculations,
making sure that the assumptions, methodologies, and documentation
are complete, accurate and reasonable, and confirming that the results
of costing meet the specified purpose and objectives. Estimates should
first be double-checked by the costing team. The authorized ministry
or institution should take the primary responsibility for verifying the
programmatic aspects of costing, including the anticipated outputs and
requirements for physical resources. Consultations with institutions
responsible for implementation are needed. The MoF should be
responsible for validating the data sources, assumptions, methodology
and cost calculations and confirming the quality, completeness and
reasonableness of the cost information that was prepared. Both,
the responsible line ministry and the MoF, as well as other relevant
stakeholders, should be responsible for confirming that the costing
information satisfied its purpose and objectives. In complex or highly
sensitive costing exercises, the MoF or senior government officials may
choose to contract a qualified, neutral third party to validate the results
of the exercise.

When validating the cost estimate, the stakeholders should ensure that
the estimate is:
• Well-documented, with indication of source data, rules and
assumptions and calculation details. Explanations of why
particular methods or references were chosen should also be
included, as well as explanations of any potential deviations
from these methods or references. A narrative summary of
methodological approach and costing results should be prepared.
• Comprehensive, meaning that it has sufficient details to ensure
that cost elements are neither overlooked nor double-counted.

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• Accurate, meaning that it is unbiased and that the work effort

is not overly conservative or overly optimistic and is based on
the estimated most likely cost. Mathematical errors should be
minimum and insignificant.
• Credible, meaning that any limitations related to uncertainty
contained in data or assumptions are discussed. Major
assumptions can be varied to determine how sensitive the results
are to changes in the assumptions. Risk analysis may need to
be performed to determine the level of risk associated with the
estimate, and the results cross-checked by an independent
estimator.

3.10.2. PAR Examples

Several countries have used a customized calculation tool to produce

PAR strategy cost estimate based on action plan. Information on
incremental costs is provided by action plan elements (structured
around main reform areas) and by main line items. Annual projections
are provided only in Kosovo* PAR action plan, as explicitly required
by relevant legislation. As a rule, recurrent costs implications are not
indicated.

Presenting the Strategy Cost information – Albania

The Cross-cutting PAR Strategy of Albania 2015-2020 includes a separate
section on implementation financing, indicating funding requirements by ob-
jective, by reform area and by line item. Cost information by reform area is
shown below (figures in Albanian LEKs).

Area Amount 4% 8% Civil Service and

Civil Service and Human Resources 884,383.50 11% 1%
Human Resources
Albanian School of Public Administration 138,478.34 11% Albanian School of
Public Administration
Policymaking, Legislation 1,183,524.36 Policymaking,
Innovation 7,060,505.62 Legislation
Innovation
Local Administration 1,137,906.00
Transparency and A/C 388,031.00 Local Administration
Total Costs (000 ALL): 10,792,828.82 Transparency and A/C
- 65%

Once reviewed by the costing team, institutions responsible for

implementation, and MoF representatives participating in the costing
process, cost estimates should be approved by the body responsible for

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Methodological guide for costing of government strategies

action plan development and submitted for government approval as part

of the action plan approval process.

Verifying Estimates – Kosovo*

Preliminary cost estimates of Action Plan for implementation of the of Strat-
egy for Modernization of Public Administration in Kosovo* (2015-2017) were
reviewed by working group responsible for drafting of action plan at the final
review session. Representatives of the MoF participated at this session and
provided their feedback, which was incorporated in the final estimate. The
final estimate was then submitted for government approval, also including
formal MoF approval.

3.11. Using the Cost Information

3.11.1. General Guidelines

Costing is only the first step in strategy financial management cycle. To

ensure sustainable implementation, cost information should be used for
identification of financing sources and mechanisms, producing funding
proposals, prioritization and management of financial gap, financial
monitoring and reporting, and future revisions of cost estimates. These
elements of strategy financial management are beyond the scope of this
Guide, and are only briefly addressed.
Sources of financing need to be identified and amounts of anticipated
available funding estimated for each program and activity. The calculation
tool provided in annex to this Guide enables entering data on anticipated
available funding and calculation of potential funding gap per activity.
Implementation of government strategies in transitional countries is
normally financed from budget and donors16:

• Budget should be the primary source of financing for

government strategies. Budget funds are normally
provided through allocations to institutions responsible for
implementation. Horizontal or shared activities or programs are
usually funded through budgets of several institutions (budget
users). Information on financing should ideally be presented by
institution. Budget funds can be provided through earmarked or
mainstream allocations. Earmarked allocations are designated
to support a particular program or activity and can be easily
traced to it (e.g. grants or other special-purpose budget lines).
16 Loans are an important financing instrument for strategies in some sectors.

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Mainstream allocations support general operations of institutions

responsible for implementation and cannot be easily traced to
programs or activities being supported (e.g. salaries, travel,
utilities, communication, external services, capital items etc.).
Linking budget allocations with action plans and strategies
requires proper application of program budgeting methodology.
This methodology enables planning and tracking of budget
expenditures by program. The quality of program budgeting in
individual countries therefore directly affects the link between
strategies and budgets.

• Donor support should principally be sought when government

resources are insufficient to support the implementation. Donors
provide support through various types of technical assistance.
Programs and activities can be financed by one or several
donors, or co-financed by donors and government. Government
and donors may also provide joint support through pooled-
funding to which other stakeholders may also contribute. To
ensure accurate estimates, donors should ideally be involved in
estimating costs of programs and activities they plan to support.

Institutions responsible for implementation should use the results

of the costing exercise to produce well-justified mid-term and annual
budget requests for the government, as well as funding proposals for
donors. The government and donors should use this information for the
purpose of mid-term and annual budget planning and financial planning.
Financial planning based on properly costed action plans should also
contribute to better coordination of the overall government and donor
support, avoiding duplication of effort and creating synergies.
If the amount of anticipated available funding is insufficient to cover
the estimated costs, there will be a funding gap. It will therefore be
necessary to prioritize programs and activities to be implemented with
the limited available funding. Cost information should be used as one of
the key inputs in the prioritization process. Different types of analysis,
such as cost-effectiveness or cost-benefit analysis may be needed
to estimate “value for money” of different implementation options and
choose between the alternatives.
The cost information should also be used for financial monitoring and
reporting. Monitoring and reporting on actual costs will highlight the
major deviations from the plan and enable taking corrective actions in
a timely manner. Evaluation of results achieved with the money spent
will enable assessment of relative efficiencies and effectiveness of

Guide to costing process 107

Methodological guide for costing of government strategies

programs and activities. Future programming and financing decisions

should be based on the results of such assessments.
Finally, high-quality cost information will facilitate future revisions of
cost estimate. Cost estimates should be revised together with the action
plan, to reflect changes in priorities, resource requirements and costs.
Estimates produced using electronic tools can be easily updated, by
changing relevant variables. Different scenarios can also be tested to
make decisions on potential expansion or downsizing of programs or
activities. High-quality cost information can also be helpful for conducting
other costing exercises.

3.11.2. PAR Examples

PAR strategies and action plans generally contain information

on anticipated available funding from different sources, including
government and donors, as well as the information on funding gap.
Clear definition of financing sources is also a requirement of the
Principles of Public Administration17. The Principles also require that the
government’s mid-term expenditure framework acknowledges PAR as
one of the government’s priorities and sets out the approximate amount
of resources available for the reform. This amount should be in line with
the amount allocated to PAR in the approved action plan or a similar
document18. Given that significant share of incremental costs is financed
by donors, coordination of government’s and donors’ assistance is
important for effective and efficient use of overall resources. Sector
donor coordination is also one of the criteria for IPA II support under the
sector approach, which is the major source of external financing19.

17 Principle 3 (“Financial sustainability of PAR is ensured”) among other requires that

cost appraisal of reform measures defines the share and source of donor assis-
tance and expected financing from Government.
18 Principle 3 (“Financial sustainability of PAR is ensured”)
19 EC “Sector Approach in Pre-Accession Assistance”

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Funding Sources and Funding Gap – Albania

The chapter on financing of the Cross-cutting PAR Strategy of Albania 2015-
2020 contains information on total anticipated financing from different do-
nors and government, and the amount of funding gap. Details by action plan
elements (activity, objective, reform area) are provided in action plan and
supporting calculations.

Financial Sate
Sate Budget 2,882,950.76 Gap Budget
EU/IPA 855,258.08 28.5% 26.7%
CoE / Swiss Government 44,100.00
World Bank 3,803,054.92 EU/IPA
UNDP 7.9%
UNDP 128,250.92
Financial Gap 3,079,214.14 1.2%
CoE / Swiss
World Government
Total Costs (000 ALL): 10,792,828.82
Bank
0.4%
35.2%

The box below illustrates how program budgeting in Serbia is used to

link government budget allocations with the PAR Action Plan.

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Methodological guide for costing of government strategies

Mobilizing Budget Funds to Support PAR Action Plan Implementation

in Serbia
Costing of PAR Action Plan 2015-2017 in Serbia was done at the result level. Costs of
each result were calculated based on estimates provided by institutions responsible
for implementation of individual activities. One of the anticipated measures is imple-
mentation of inspection supervision reform. Costs of this measure were largely based
on a roadmap and cost estimate provided in a separate operational document. Below
is the overview of results, activities and funding needed for implementation of this
measure, as per the Action Plan.
Additional Funds Needed
Result Activities (summarized, based on the Action Plan)
Budget Donors
A new legal framework Drafting the Law on Inspection Supervision, related by-laws and Guidelines on the
199,390 EUR
for inspection Law implementation
- (USAID Business
supervision established Informing, advising and training on the Law
Enabling Project)
and presented to public Aligning special laws with this Law
Setting-up the Coordination Commission and supporting its operations
113,5 mil
Coordination of work of Analysis of the inspections’ business processes
RSD (2015-
all inspections ensured Establishing a single IT system for pilot inspections (e-inspector)
2016)
Monitoring and evaluation, implementing measures for improvement, training
Setting up commissions and conducting exams for inspectors 4,5 mil EUR
Increased capacities of
Conducting needs assessment and setting up infrastructure for inspections'
inspection services for 17,5 mil
operations
implementation of the Preparing guidelines, instructions, trainings RSD
new inspection (2016)
E-learning application, training of trainers
supervision system
Introducing international standards, restructuring

Cost estimates for implementation of the Law on Inspection Supervision were revised
few months after adoption of the Action plan, as part of the Law’s fiscal impact assess-
ment. Based on the revised estimates, donor and budget funding was mobilized for
implementation of specific activities, as shown below. Note that separate budget pro-
grams were defined within the responsible institutions’ budgets to support the reform.

2015 2016 2017 Financing Mechanism

Result / Activity
Budget Donor Budget Donor Budget Donor
USAID Project (experts, printing,
Result 1 - Informing, advising and
- 8,5 - 15,7 - - workshops)
training on the Law
World Bank support
„Inspection Supervision Reform“
Result 2 - Supporting the
6,5 - 1,3 - 1,21 - program within the MPALSG budget
Coordination Commission
(travel and contractual services)
Result 2 - Analysis of the „Establishing a single IT system for
21 - - - - -
inspections’ business processes inspections“ program within the
Result 2 - Establishing a single IT Directorate for e-Governance budget
- - 80 - 120 -
system for pilot inspections (contractual services)
Horizontal program of professional
Result 3 - Conducting exams for
5 development of inspectors, budgets of
inspectors
MPALSG and relevant institutions
Total mil RSD 36 mil RSD 97 mil RSD 125 mil RSD

The quality of program budgeting in the WB countries is unfortunately

still not at the level that enables comprehensive planning, financial
monitoring and reporting of all budgetary allocations to PAR.

110 Guide to costing process

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Annexes

Annex 1 – References

Annex 2 – Stakeholders Consulted

Annex 3 – Cost Calculation Tool (available as a separate MS

Excel document in the electronic version published on ReSPA
website)

Annexes 111
Methodological guide for costing of government strategies

Annex 1 – References

PAR-related documents:
The Principles of Public Administration, SIGMA – OECD
The Cross-cutting PAR Strategy and Action Plan 2015-2020, Minister of State
for Innovation and Public Administration, Republic of Albania
Draft Strategic Framework 2017-2022 and draft Action Plan 2017-2020,
PARCO, BiH
Draft Strategy on Modernisation of Public Administration 2015-2020 and
Action Plan 2015-2017, The Ministry of Public Administration, Kosovo*
Draft PAR Strategy and Action Plan 2017-2022, Ministry of Information
Society and Public Administration, Republic of Macedonia
PAR Strategy in Montenegro 2016-2020 and Action Plan 2016-2017, Ministry
of Interior, Republic of Montenegro
PAR Strategy in the Republic of Serbia and Action Plan 2015-2017, MPALSG
of the Republic of Serbia
Analytical paper on managing the process of implementation of PAR
strategies in RESPA Members, RESPA, 2016
Optimization of Public Administration in the Western Balkans Region, ReSPA,
2016

Other Government Documents:

Order 102 of the Prime Minister of the Republic of Albania “on the establishment
of working groups for piloting the implementation of the impact assessment
methodology in some ministries”, June 2017
Rulebook on the procedure of producing a statement on fiscal impact
assessment of laws, other regulation and planning documents on budget,
Official Gazette of the Federation of BiH, no. 34/16
Guide on producing a statement on fiscal impact assessment of laws, other
regulation and planning documents on budget, Federal Ministry of Finance,
BiH, 2016
Decision on conducting the process of regulatory impact assessment in the
legislative drafting procedure, Official Gazette of Republika Srpska, 56/15
Administrative Instruction No. 02/2012 on the procedures, criteria and
methodology for the preparation and approval of strategy documents and
plans for their implementation, Manual for preparation of sectoral strategies,
the Government of Kosovo*

112 Annexes
 With examples from public administration reform strategies

Guidance on producing report on regulatory impact assessment, Official

Gazette of Montenegro 09/2012 and Regulatory Impact Analysis Manual,
USAID Montenegro 2011
Draft Law on the planning system of the Republic of Serbia; Draft Decree
on the methodology for policy development, policy and regulatory impact
assessment and contents of policy documents; and Draft Decree on the
methodology for development of mid-term plans, MPALSG of the Republic
of Serbia
Rulebook on the manner of defining and reporting on the estimated financial
impact of laws, other regulation or other documents on budget, i.e. financial
plans of organizations for compulsory social insurance, Official Gazette of the
Republic of Serbia 32/15

Literature:
Cost Estimating and Assessment Guide, Unites States Government
Accountability Office, 2009
Guidelines on Costing, the Government of Canada, 2016
International Standard Cost Model Manual, International SCM Network to
Reduce Administrative Burdens, OECD
The Main Methodological Issues in Costing Health Care Services, University
of York, 2005
Costing Guidelines for HIV Prevention Strategies, UNAIDS, 2000
Costing of Health Programs in Small Island States – Issues and Challenges,
Center for Economics, 2009
Managing the Devolved Budget, Bean and Hussey, 1996
Management and Cost Accounting, Charles T. Horngren, 2008/2008
Costing of Health Services for Provider Payment, Özaltin, A., and C. Cashin,
Joint Learning Network for Universal Health Coverage, 2014
EC Commission Staff Working Document: Better Regulation Guidelines,
2015

Annexes 113
Methodological guide for costing of government strategies

Annex 2 – Stakeholders Consulted

(countries and persons listed in alphabetical order)

Albania

Andi Mazi, Coordinator, Minister of State for Innovation and Public

Administration (MIPA)

Angeliki Votsoglou, Task Manager for PAR, DEU to Albania

Blerta Xhako, Director of the Technical Secretariat of the Integrated

Policy Management Group (IPMG)

BiH

Alija Aljović, Assistant Minister, Budget Sector, Federal Ministry of

Finance, Federation of BiH

Amela Hasanbegović, Budget Sector, Ministry of Finance and Treasury

of BiH (MoFT BIH)

Aneta Raić, Head of Unit for Donor Coordination, Finances, Monitoring

and Evaluation, PARCO

Chloé Berger, Second Secretary, Head of Operation Section for

Justice, Home Affairs & PAR, DEU to BiH

Emina Ćirić, Budget Sector, MoFT BiH

Halida Pašić, Budget Sector, MoFT BiH

Irena Šotra, Program Manager, DEU to BiH

Jasmina Popin, Senior Advisor, GIZ Strengthening Public Institutions

Programme, BiH

Lamija Marijanović, Financial Management Specialist, World Bank

Country Office BiH

Maja Perić, Sector for Programming and Coordination of EU Financial

Support, Ministry of Finance of RS

Mario Vignjević, Program Officer, PAR & Local Governance Reform &
PFM, Swedish Agency for International Development (Sida), BiH

Mikan Davidović, Deputy PAR Coordinator in RS

114 Annexes
 With examples from public administration reform strategies

Mirsada Jahić, PAR Coordinator in the Federation of BiH

Nedžib Delić, Expert Advisor for PAR, PARCO

Selma Džihanović-Gratz, Head of European Integrations Section,

Ministry of Justice of BiH, member of ReSPA Governing Board, and
member of ReSPA Network for RIA and better regulation

Snežana Tuševljak, Budget Sector, MoFT BiH

Svetlana Radovanović, Assistant Minister, Budget Sector, Ministry of

Finance of Republika Srpska (RS)

Vlatko Dugandžić, Assistant Minister, Budget Sector, MoFT BIH

Kosovo*

Vedat Sagonjeva, Senior Policy Planning Officer, Office of the Prime

Minister, Kosovo*

Macedonia

Gordana Gapikj Dimitrovska, Head of Unit for Legislation Assessment,

Publication and Supervision Management and National Coordinator for
OGP, Ministry of Information Society and Administration, member of
ReSPA Network for RIA and better regulation

Montenegro

Ana Stanišić Vrbica, Good Governance and European Integrations

Advisor, DEU to Montenegro

Bojana Bošković, General Director, Directorate for Financial Systems

and Business Enabling Environment, Ministry of Finance, member of
ReSPA Network for RIA and better regulation

Eleonora Formagnana, Program Manager for PAR, DEU to Montenegro

Ivan Radulović, Directorate for Financial Systems and Business Enabling

Environment, Ministry of Finance

Jelena Mrdak, Project Manager, Local Governance Program, United

Nations Development Program (UNDP) in Montenegro

Annexes 115
Methodological guide for costing of government strategies

Serbia

Biljana Zagorac, Unit for Financial and Material and IT Affairs, MPALSG

Danka Bogetić, Program Manager, PAR, DEU to Serbia

Dražen Maravić, Acting Assistant Minister, MPALSG

Duška Subotić, Program Manager, Customs, Tax and E-government,

DEU to Serbia

Irena Posin, Sector for EU Integrations and International Cooperation,

Head of Projects Unit, MPALSG

Janko Prica, Public Policy Secretariat

Ljiljana Uzelac, Sector for Good Governance Development, Head of

PAR Management Group, MPALSG

Miroslav Bunčić, Budget Sector, Ministry of Finance

Nataša Radulović, Sector for EU Integrations and International

Cooperation, Head of Project Implementation Group, MPALSG

Nina Zelić, Sector for European Integrations and International

Cooperation, Project Planning and Preparation Group, MPALS

Vera Veljanovski, Advisor, Sector for EU Integrations and International

Cooperation, Project Planning and Preparation Group, MPALSG

Vladan Petrović, Program Manager, PFM, DEU to Serbia

Other Stakeholders:
Bagrat Tunyan, Senior Adviser policy development and co-ordination,
SIGMA
Klas Klaas, Senior Adviser public financial management, SIGMA
Péter Vagi, Senior Adviser policy development and co-ordination, SIGMA
Timo Ligi, Senior Adviser policy development and co-ordination, SIGMA

Jolanda Trebicka, Independent Expert

Renata Zatler, Independent Expert

116 Annexes
 Publisher
ReSPA – Regional School of Public Administration
Branelovica, 81410
Danilovgrad Montenegro
Phone: +382(0)20817200
Fax: +382(0)20817238
Email: respa-info@respaweb.eu
www.respaweb.eu

For the Publisher

Ratka Sekulović

Responsible Manager
Dragan Đurić

Circulation
200 copies

ISBN
978-9940-37-019-0

Prepress
AP Print, Podgorica

Printing
AP Print, Podgorica
CIP - Kaталогизација у публикацији
Национална библиотека Црне Горе,
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ISBN 978-9940-37-019-0
COBISS.CG-ID 34869264