Project Costs

The following are the list of project costs items:

  • Direct and Indirect Costs
  • Variable and fixed costs
  • Actual and standard costs


Direct and indirect costs

Direct costs are expenses that directly affect the budget of a project. Expenses that are for the express benefit of the project, and would not be incurred if not for the project, are usually called “direct expenses.” In other words, direct costs can be identified with specific project activities with high levels of accuracy.

For example, if a project organization outsources some of its system development works, the amount paid to the developer for the development work would be a direct cost. Indirect costs, also known as overhead costs, are shared among multiple projects. Therefore, indirect costs cannot be related to any specific project. Indirect expenses are incurred irrespective of the fact that a particular project is undertaken or not.


Variable and fixed costs

Fixed costs remain unchanged throughout the life of a project. They are incurred for each expense period, regardless of the completion of work. These represent a significant risk to the project manager’s plan of executing the project within the allocated budget. The strategy to mitigate expense risk is to convert fixed expenses to variable expenses whenever possible.

For example, if you are constructing a road, excavators and bulldozers are fixed costs. For software development projects, the physical infrastructure and computers are fixed costs of the project. Variable costs, as the name suggests, are costs that change during a project’s lifecycle. Variable costs change in proportion to the amount of time and material that is spent on the project


Actual and standard costs

Actual costs refer to the actual amount paid or incurred and can be reliably measured. These are the total costs incurred (direct and indirect) in accomplishing a task during a particular time period. A project manager should itemise the actual costs as and when they occur rather than compiling them at the end of the project. The term actual cost is also known as Actual Costs of Work Performed (ACWP).

Standard costs refer to the planned cost for a unit of a product or service rendered. The standard cost is determined on the basis of past experiences and includes direct cost, direct labour and overheads. These serve as tools for controlling the cost. A revision of the standards is necessary to have a better control on the expenditure.

Sarav Author

Leave a Reply

Your email address will not be published. Required fields are marked *