A major component of the project plan is cost. Cost management, however, is more than just calculating the cost of the overall project. It also consists of creating a budget (identifying the cost of individual elements of work) and the time-scaling of the overall project expenditure. First, let’s look at some basic definitions.
Types of Costs
Estimating and budgeting project costs is not as easy as you may think. One reason for that is because there are so many types of costs that you should include in your estimate. Also, there’s the overriding issue of direct vs. indirect costs. There is a definte distinction so I’ll clarify these further.
A direct cost is an expenditure specifically and directly incurred by the execution of your project. These are typically the most obvious categories of costs, and include the following:
- Labor: The cost of the people carrying out the activities on your project. This could include contract labor. This is often the largest component of the project budget.
- Materials: The cost of items purchased for use in executing the project.
- Supplies and Equipment: The cost of items consumed by the project and specifically required to execute the project. This item could include items that are purchased, leased, or rented.
- Facilities: This would be included only if the facilities are built or purchased solely for the use of the project (in other words, when it’s part of what the project delivers).
- Training: Training specifically required to achieve project success. This cost is often associated with customer training during installation or startup.
- Travel and Other Miscellaneous Costs: Again, the only rule is that the cost must be required to execute the project.
An indirect cost is a cost related to supporting the facilities, general services, and organizational environment within which the project team functions. It may include the following:
- Fringe Benefits: This is the non-payroll component of workers’ salaries for the project. They’re often calculated as a simple percentage of direct labor costs and include Social Security costs, health insurance contributions by the organization, and profit-sharing plans, to name a few.
- Facilities: The cost incurred to maintain the environment within which the project team functions during the project. This might include building rent, utility costs, building maintenance, communications networks, office supplies, etc.
- General and Administrative: The costs of management and support services, such as secretarial, and the purchasing, accounting, and human resources departments, as examples.
In the case of organizations or companies that earn their money through project work, profit would be another necessary component of the project estimate, although not necessarily expected to be spent.