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 certification in Bangalore at StarAgile to do cost management for the project.
Master PMP Course in Hyderabad with StarAgile – Enroll Now to Boost Your Career with Hands-On Training and Industry-Recognized Certification!
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
How to Calculate the Total Cost of a Project
Most people think of total project cost as one big number. It’s easier to get right if you build it from the bottom up, in layers. Here’s a method you can follow on almost any project, whether you’re building a mobile app, renovating an office or launching a product.
Step 1: List every piece of work first, then price it.
Break the project into work packages, such as design, development, testing and rollout. Cost is easy to miss when it hides inside a vague task like “build the product.” Anything you can’t name, you can’t price.
Step 2: Add up the direct costs.
These are expenses you can tie straight to the project: salaries or hourly rates multiplied by the time people spend on it, software licences, cloud usage, hardware, vendor invoices, training and travel. Use real rates and real durations rather than rounded guesses.
Step 3: Add a fair share of the indirect costs.
Some money gets spent for the project without appearing on its invoices, like office space, admin support, utilities, IT helpdesk time and management oversight. Most organizations allocate these as a percentage of direct costs, often 8-15%. Check what your finance team uses before picking a number.
Step 4: Add contingency for the risks you’ve identified.
Contingency covers known risks, the “this might happen” items in your risk register. You can calculate it as a percentage of the subtotal or price each risk by probability × impact. Add it to your estimate so it lives in the baseline.
Step 5: Set aside a management reserve.
This is a separate buffer for surprises nobody saw coming. It sits outside the cost baseline and usually needs a senior approver to release it. Together, the baseline and the reserve give you the project budget.
The formula in one line:
Total project budget = Direct costs + Indirect costs + Contingency + Management reserve
A worked example
Say you’re running a six-month mobile app project in India.
| Item | Amount (₹) |
| Team salaries (3 developers, 1 designer, 1 QA, 1 project manager, for their working months) | 25,00,000 |
| Software licences and cloud hosting | 1,50,000 |
| Test devices | 80,000 |
| Vendor work (payment gateway integration, security audit) | 1,20,000 |
| Training | 30,000 |
| Direct costs | 28,80,000 |
| Indirect costs at 10% of direct | 2,88,000 |
| Subtotal | 31,68,000 |
| Contingency at 8% of subtotal | 2,53,440 |
| Cost baseline | 34,21,440 |
| Management reserve at 5% of baseline | 1,71,072 |
| Total project budget | 35,92,512 |
The team would track spending against ₹34.21 lakh, while the sponsor knows there’s an additional ₹1.71 lakh in reserve for truly unexpected issues.
Two quick sanity checks before you share the number:
- Compare it with a similar past project. If yours is 40% lower, find out why.
- Ask someone outside the project to read the cost sheet. Fresh eyes catch missing lines fast.
Also remember that a project’s cost doesn’t always end at launch. If the product needs support, upgrades or licence renewals afterwards, mention those separately so the sponsor sees the full picture.
Also Read: Enterprise Environmental Factors in Project Management
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 cost estimating techniques in project management they are as follows,
1. Parametric Estimating - Using mathematical models or calculations to estimate the activity based 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.
Also Read: Change Management in Project Management
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 in project management 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 in project
• 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.
FAQs
1. How can project managers handle unexpected expenses during a project?
Start by checking whether the expense was already covered by a risk in your register. If it was, use the contingency fund and log the draw. If it wasn’t, document what happened, estimate the full impact and raise a change request so the right approver can decide whether to release management reserve. Don’t absorb surprises quietly. Small hidden overspends add up quickly and damage trust when they finally surface.
2. What should you do when actual project costs exceed the approved budget?
First, find out why. Is it an estimating error, scope growth, a vendor price rise or poor productivity? The cause decides the fix. Then recalculate your estimate to completion, so you know where the project will really finish. Explore options like trimming scope, re-sequencing work or negotiating with suppliers. If none of them closes the gap, take the revised forecast to your sponsor and ask for a formal decision.
3. How often should project costs be reviewed?
For most projects, a weekly check of spending and a monthly formal variance review works well. Short, fast-moving projects may need more frequent reviews, while long infrastructure projects can run on monthly cycles with lighter weekly check-ins. Also review costs whenever a major milestone closes, or a change gets approved. The aim is to spot a drift while it’s still small enough to correct.
4. Who is responsible for monitoring and approving project expenses?
The project manager monitors day-to-day spending and reports on it. Approval depends on the size of the expense and your governance rules. Small purchases may fall under the project manager’s authority, larger ones usually need the sponsor or a steering committee, and finance teams often validate invoices. Agree on these approval limits at the start of the project and write them down, so nobody is guessing when a bill arrives.
5. How can historical project data improve future cost estimates?
Past projects show you what things really cost, not what you hoped they would. Look at actual effort against planned effort, typical overrun percentages, vendor performance and which tasks were consistently underestimated. Even a simple spreadsheet of “estimated vs. actual” from your last five projects will sharpen your next estimate. It also gives you proof when you need to defend a contingency figure to a skeptical sponsor.
6. How can project managers prioritize spending when the budget is limited?
Begin with what the project can’t succeed without: the items tied to the main objective, legal requirements and critical deadlines. Then rank the remaining items by value delivered per rupee or dollar spent. Defer or drop the nice-to-haves, and be open with stakeholders about what you’re trading off. A MoSCoW list (must, should, could, won’t) is a simple way to have that conversation without it turning into an argument.
7. What records should be maintained for a project cost audit?
Keep the approved budget and cost baseline, including every version. Add contracts, purchase orders, vendor quotes, invoices and proof of payment. Keep timesheets, the change request log with approvals, variance reports, and notes from meetings where spending decisions were made if contingency or reserve was used, record who approved it and why. Organized, dated records can turn an audit from a stressful event into a routine one.
8. How can changes in project scope affect the approved budget?
Every added feature brings extra work, and extra work brings extra cost, often more than people expect, because it also affects testing, documentation and coordination. Even “small” additions can pile up into serious overruns. Always assess a scope change for its cost and schedule impact before agreeing to it, and route it through your change control process. If it’s approved, update the baseline so your variance reports stay honest.
9. Which tools can help track project expenses against the budget?
It depends on how complex your project is. Excel or Google Sheets work well for small projects. For larger ones, Microsoft Project, Smartsheet, Zoho Projects, and Jira (paired with a time-tracking add-on such as Tempo) can link tasks, effort and cost. Power BI or similar dashboards help you visualize spending trends, and your organization’s ERP system can supply invoice and payment data. The best tool is the one your team will actually keep updated.
10. How can project managers communicate cost overruns to stakeholders?
Tell them early, and tell them plainly. Lead with the headline: how much over, and what the new forecast is. Then explain the cause, what you’ve already done about it and the options you recommend. Bring numbers, not just reassurance. Stakeholders can handle bad news far better than late news, and they’re more likely to back you when you arrive with a plan instead of only a problem.
