Project Management

5 Types of Project Cost

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Categories: cost

In their book, Project Management Workflow, Dan Epstein and Rich Maltzman describe the different kinds of costs that make up the whole cost of a project. The 5 costs they cover are:

  1. Direct cost
  2. Indirect cost
  3. Fixed cost
  4. Variable cost
  5. Sunk cost

Let's look at each of these in turn.

Direct cost

Direct costs are those directly linked to doing the work of the project. For example, this could include hiring specialised contractors, buying software licences or commissioning your new building.

Indirect cost

These costs are not specifically linked to your project but are the cost of doing business overall. Examples are heating, lighting, office space rental (unless your project gets its own offices hired specially), stocking the communal coffee machine and so on.

Fixed cost

Fixed costs are everything that is a one-off charge. These fees are not linked to how long your project goes on for. So if you need to pay for one-time advertising to secure a specialist software engineer, or you are paying for a day of Agile consultancy to help you start the project up the best way, those are fixed costs.

Variable cost

These are the opposite of fixed costs - charges that change with the length of your project. It's more expensive to pay staff salaries over a 12 month project than a 6 month one. Machine hire over 8 weeks is more than for 3 weeks. You get the picture.

Sunk cost

These are costs that have already been incurred. They could be made up of any of the types of cost above but the point is that they have happened. The money has gone. These costs are often forgotten in business cases, but they are essential to know about. Having said that, stop/continue decisions are often (wrongly) based on sunk costs. If you have spent £1m, spending another £200k to deliver something that the company doesn't want is just wasting another £200k. Epstein and Maltzman write:

"Sunk cost is a loss which should not play any part in determining the future of the project." Unfortunately, project sponsors and other senior executives (and even project managers) often value completion over usefulness and it does take courage to suggest to your sponsor that you stop a project that has already seen significant investment.

What other examples of these types of costs do you have on your projects? And have you ever taken the hit and stopped a project after incurring significant cost? Let us know in the comments.

Posted on: July 03, 2013 11:33 AM | Permalink

Comments (9)

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Ramakrishnan Kollengode program manager| Warner Bros Burbank, Ca, USA
How about cost of quality ? Often there is lot of costly rework if we do not focus and invest in QA and other areas .

Elizabeth Harrin Director| London, England, United Kingdom
Very true!

Mohsin Taie Assistant Manager| Almansour for general contract West Des Moines, Ia, USA
Thanks for the great notes!!!

bayan gh Saudi Arabia

Can you give some examples of sunk costs and how it is measured or accounted in project management process.

Elizabeth Harrin Director| London, England, United Kingdom
@Charles Sunk costs - anything you've already spent on the project. It's measured the same way anything else would be on the project, just with normal project accounting. So if you've spent $20k on infrastructure and then are considering cancelling the project and you can't get the $20k back in anyway, that's a sunk cost.

Elizabeth Harrin Director| London, England, United Kingdom
@Charles: here's a video explaining more:

Binay Samanta Director| Project & Environment Consultants Dhanbad, Jharkhand, India
Sunk costs- already been incurred, they have happened. The money has gone. These costs are essential to know about., decisions are often (wrongly) based. Infructuous expenditures should be avoided.

Ajit Unnithan Director & President of PMI South Western Ontario Chapter| Halight Inc. Windsor, Ontario, Canada
Sunk cost - Marketing or Advertising cost, Research & Development cost, Training, Hiring are some of the other examples of "Money gone"!

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