What are the Components of Cost of the Project?

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by StarAgile

December 16, 2020
Category Project Management


What are the Components of Cost of the Project?

Expenses are the basic part of any project. Managing them is one of the PMBOK 10 knowledge areas. 

The main 4 elements are as follows,

1. Material costs - This is the cost that is associated with the procurements of items such as equipment, tools, raw materials, etc. For example, if consider the project of building a house you will procure materials such as concrete, tiles, bricks, foundation materials, drywall, electrical components, plumbing, fixtures, roofing materials, and paints, etc Similarly if you consider the software project then the procurement of OS, software, hardware, etc

2. Human Resources - The labor cost or the staff cost which includes all the human resources such as project manager, team members other indirect costs such as janitor, cleaners, security, etc. This cost includes the cost of salary, insurance, and other costs. This includes costs for direct staff, indirect staff, and contract staff.

3. Pre-panning costs - This cost includes the proposal making costs, Proof of concept costs, market research costs, vendor costs, and bidding costs, etc. This also includes the hiring costs such as hiring project costs, team members’ and establishing the budget and timeline for the project. Then obtaining necessary permits and licenses and securing the workspace, equipment, and materials, etc also comes under the pre-planning costs.

4. Operating costs - The operating costs of the project consists of fees associated costs for purchasing project supplies etc. Other costs such as rental costs, facility costs, energy costs, and other daily expenses costs. This also includes all the overhead costs of permits, inspections, and daily operations. Running the daily machinery, fuels if needed, pickup and delivery of goods costs, etc also comes under this cost. For example, if you are in manufacturing set up the costs includes the energy consumption, rental fees, insurance and maintenance of the machinery, processing the goods, and delivery and pickup of the goods, etc.

Enroll for PMP online training at StarAgile to do cost management for the project.

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Different Types of Cost

Learn the PMP course online at StarAgile and enhance your career to new heights. We have seen the 4 elements of the costs now we will discuss the types of project costs that are an integral part of project management.

1.Fixed costs - Fixed costs are the costs that do not change with time or do not depend on the output. For example, the costs of building, legal bills, and insurance are the cost that does not change whether you produce the goods or services or not. It remains the same and fixed throughout the life cycle of the project.

2.Variable costs - These are the costs that change with time and materials. For example, if you produce more goods such as cars the cost of the raw materials will vary as the metal for manufacturing the car is more so that more raw materials are procured. Similarly, when there is a slack period and output is low the raw materials costs also come down. These are called variable costs.

3.Semi-variable costs - Here the costs may vary and also needed when you produce goods are not. For example, if you produce more cars the cost of staff is more. However, even if you do not produce cars you might need staff to look after the factory. So these costs are known as semi-variable costs.

4.Opportunity costs - Here the costs are that for next best alternative foregone. For example, if you invest money in one of the car models then you cannot use the same money for making other models.

5.Marginal costs - Costs incurred for producing an extra amount of items such as if the cost of 3 goods is Rupees 1550 then the costs of fourth items may be just Rupees 350.

6.Avoidable costs - Here the costs can be avoided, such as if you are not producing the cars then you can avoid paying for raw materials and energy, etc.

7.Accounting costs - This is costs associated with the monetary outlay for producing certain items or goods.

8.Economic costs - This includes direct costs both the opportunity costs and accounting costs such as if you are for training for a week, then you lose Rupees 15000 for the week and also involves the Rupees 20000 for the training. So the economic costs are Rupees 35000.

9.Sunk Costs - Once these costs are incurred you cannot reclaim it back. For example, if you incur costs for advertising for cars, you cannot reclaim it back. However, if you purchase raw materials or machinery you can still sell a certain amount of money.

10.Explicit costs - These are the costs that are incurred and appear on the accounting sheet. For example purchase of building and facility for car manufacturing. These can be variable or fixed costs but are clear costs.

11.Implicit costs - These are the costs that do not appear in the accounting sheet but affect the company, such as if you do corporate social responsibility you may incur the costs and also lose out time and money by not doing the actual work.

Let us see some math behind the costs,

The total costs = Fixed costs + Variable costs

Average total costs = Total costs / quantity

Average fixed costs = Fixed costs / quantity

Average variable costs = Variable costs / quantity

Cost of Project and Cost Management 

The cost management plan describes the various methods to manage the cost of the projects. Register for Project management professional training at StarAgile and learn cost management with real-time examples and hands-on projects.

There are 3 types of planning such as self-funding, funding with debt, and funding with equity.

a. The cost management plan consists of the following

• Units of measure

• Rules of performance measurement

• Reporting formats

• Organizational procedures links

• Level of precision

• Level of accuracy

• Control thresholds

There are 2 types of plan they are as follows,

1.Life cycle costing - Considering the cost of the whole product life cycle and not only the project costs

2.Value analysis - Finding the lowest costs to do project work without sacrificing the performance.

b. Estimate costs are the estimate of the costs done for the projects. There are 3 types of estimating they are as follows,

1.Parametric Estimating - Using mathematical models or calculations to estimate the activity costs.

2.Analogous Estimating - This is done by providing a similar historical estimate of the project activities.

3.Bottom-up Estimating - This is the way of doing the detailed estimate for each activity.

c. Then determining the budget of the projects

1.Cost baselines - It is the approved budget of the project which is time-based.

2.Control accounts - Providing the budget for the entire product life cycle and not only the project budget.

d. Control costs are the process of monitoring the actual costs of the projects against the cost baselines and manage the changes to the costs baseline.

Components of cost controls are as follows,

• Creating change requests if required

• Timely completion of change requests

• Monitor the cost for the project

• Reporting the cost changes to the key stakeholders

• Preventing unapproved changes to the cost

• Bring the cost overruns within the budget.

Conclusion

Cost management is not an easy topic and is not that difficult to master. Register for the PMP certification online and master cost management by attending the PMP training at StarAgile. StarAgile is the training partner of the Project Management Institute (PMI) for the PMP training.