4 Types of Costs Involved While Managing a Project

Project managers monitor progress and compare it to the project plan throughout the project's life cycle, comparing their predictions to reality. If they don't do this on a regular basis, the budget will suffer and the project will ultimately fail. Fortunately, deviations from the plan, such as cost variance, do not have to spell the end of a project.

In fact, they have the potential to strengthen it. The key is to recognize them and make necessary adjustments to stay on track. Calculating cost variance is one of the most effective ways to avoid cost overrun.

Understanding Project Costs

Regardless of their size, scope, or deliverables, all projects cost money. "There is no such thing as a free lunch," we've all heard. Projects are the same way; there is no such thing as a project without costs. These expenses can take many forms, ranging from material costs to the cost of doing business (rent, salaries, etc.). It is the project manager's responsibility to factor in all of these costs and creates a flexible budget.

Different Types of Project Costs

It's helpful to know the different types of project costs in order to fully comprehend project cost variance. Take a look at the four most likely to be encountered. All four are present in most projects, and each can contribute to overall cost variance:

·         Direct Costs: Direct costs are those that go directly to the project in order to meet deliverables. The cost of the materials required to construct something is a good example of a direct cost. The money spent on these materials will be used to create a finished product.

·         Indirect Costs: Indirect costs, on the other hand, are used to pay for “behind the scenes” expenses that arise during the course of a project's life cycle. Overhead costs are another name for them. Renting office space, for example, is a common fixed overhead expense. This cost must be paid in order to finish the project, but it also helps to fund other projects.

·         Fixed Costs: Fixed costs are expenses with predetermined prices that do not change. These are consistent costs that will not fluctuate and throw a budget off. Fixed costs can include both direct and indirect costs (or variable costs). For example, a fixed cost could be the flat fee a contractor charges for their services.

·         Variable Costs: Variable costs are not as predictable as fixed costs. For example, the cost of renting equipment can vary depending on the vendor, demand, and the length of time the equipment is required.

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