6 Important Categories of Project Cost

As you probably know from the Risk Assessment Framework, we firmly believe that having categories and prompt lists can help with brainstorming. While some budget estimates can be computed, a big part of the job is to ensure all costs are included. Therefore, it is critical to consider all the charges, including taxes, fees, and economic conditions. In addition, one or more of these categories may be required breakdowns for your budget.

Here are six different ways of looking at project costs to ensure they are all included and that your monitoring and controlling efforts are successful.

1. People, Equipment, and Material Costs. This first category is easily recognized as the project management definition of resources. This categorization is excellent for the first pass over project resources to break them into the three major categories. Be careful about accumulating all costs, including fees, operational costs, or taxes.
2. Direct vs. Indirect Costs. Direct costs are those directly attributable to the project. For example, they might include expenses such as team salaries and training, special software or tools needed for the project, and materials such as lumber, nails, and chemical agents. Indirect costs are shared costs such as office leases for a headquarters building or shared copy machines. Depending on your organization's budgets, you may need to track some portion of indirect costs. Also, it is how the item purchased is applied and its relationship to the project that is important. For example, don't just assume leases are indirect costs. We've managed projects where particular work locations had to be leased just for the project - these were direct costs.
3. Fixed vs. Variable Costs. Fixed costs are those that remain more or less constant. For example, they might include the cost of a leased workplace or a fixed fee paid. Variable costs vary and may be more difficult to predict. These costs are typically identified with language such as "per use" or "per hour." Therefore, it will be critical to have a solid schedule to estimate variable costs.
4. Tangible vs. Intangible Costs. Tangible costs are for items we can see, touch, or feel. Most project resources will fall into this category. Intangible costs are for non-physical costs, which are also more challenging to estimate. These costs might include some form of project waste (e.g., wasted time). Intangible costs may also include items such as reputation or happiness. For example, unhappy project team members may not work efficiently, and more time will be wasted. This wasted time may directly impact tangible costs, such as the time equipment is needed. Finding ways to keep team members happy will keep project costs down.
5. Operational Costs. Some equipment may cost money to operate. Costs could include fuel, electricity, maintenance, other sources of energy, and more. As you review your budget, make sure all operating costs for equipment and materials have been included.
6. Sunk Costs. Sunk costs are those costs that have already been expended. These are also referred to as actual costs - the costs expended each period. While it can be emotionally tricky, sunk costs should not be considered in making important project decisions. For example, if you spend $1m, only to find no way a project can be completed successfully, the project should likely be canceled. Instead, find a way to make productive use of work already completed and don't let that $1m already spent keep you from doing the right thing.

This list is not all-inclusive, and there are many other ways to "slice and dice" costs. What categories would help you determine the cost of the project? What ways are familiar to you? Let us know in the comments below.

This spring, PPC Group will be publishing a new book on project cost management. Watch for more posts and book information in the coming months and weeks.