Project management is one such topic which is discussed a lot in various books and articles. Subsequently, there are also many books and articles on various aspects of project management like the cost of the project, estimated revenue etc. It’s because one of the main purposes of all project managers is to work as efficiently as they possibly can. And hence, they need to manage the project cost in a manner in which they can generate maximum revenue without compromising with the quality of the project.
Therefore, to sum the importance of project cost, this quote by Joe Biden justifies it all.
“The best way to determine a project’s value is by being aware of the cost or budget of the project”.
The biggest responsibility that vests on a project manager’s shoulder are to manage a project within the given estimated budget. And, therefore, most firms gauge the effectiveness of a project manager by looking at the manger’s track record in completing a project within the given budget.
There are a number of aspects of a project cost like its definition, importance, types, impact, the existence of the risk factor and much more.
The definition of the project cost
Project cost is basically the cost required to carry on the standardized and co-ordinated flow of business activities performed by man and machine which cross various departmental boundaries and deliver value to internal as well as external customers.
For instance, during the estimation of a construction project, there are many costs that are included which are required to build certain infrastructure. They are material costs, labour costs, overhead costs, services, cost of acquisition of land, equipment, facilities, other revenue and deferred revenue costs.
Now it’s time to know the importance of project cost after knowing its definition.
The importance of project cost
The first thing that a manager does is planning. And, the primary item in the list of a plan is the estimated cost or budget of the project. There are two things that determine the efficiency of working on a project, time and cost. Therefore, if a project manager can complete for a project within a given time and budget, then it’s called an efficient project, which will lead to substantial revenue to the project management team.
There is also a possibility that some projects take more time and cost than what was estimated previously. Eventually, this will lead to a downfall in estimated profit or maybe a loss, as well. The situation of loss takes place when the project cost exceeds the value of the contract revenue.
Therefore, it is of utmost importance for a project manager to estimate the precise project cost, which will ensure a favorable outcome.
The kinds of the project cost
The costs that are included in a project can be divided into five kinds. They are:
– Fixed Cost: The cost which is certain to be incurred during all projects until its completion and is not determined by any factors like time, quantity, etc. is known as a fixed cost.
For example, the depreciation of any asset like a plant, machinery, etc., Every equipment or machinery has a life span. And, the value of the asset deteriorates with time, even if the asset is not used. And, if it’s a fixed asset, then the installation expenses are also included in the fixed cost.
It is vital to know that fixed costs are permanent, but the value of fixed costs can increase or decrease with time. For example, if a firm has a warehouse for storing goods, then the rent is a fixed cost, but the rent chargeable depends on the agreement with the owner of the warehouse.
– Direct Cost: Direct Costs are those costs which are directly attributable to a specific project. For example, all the direct materials and labour required for the project are all direct costs.
– Sunk Cost: These costs are those costs which did not incur any value to the project and can be considered as bad-debt of the firm. For example, advertising, any promotional activities etc.
– Indirect Cost: Costs which are not directly attributable to the project’s outcome is known as an indirect cost. For example, electricity charges, salary etc.