Mastering Project Cost Estimation with CPMA

Key Takeaways

Project cost estimation. Project cost estimation involves roughly estimating how much money will be spent on different resources, tools, overhead, and other costs necessary to accomplish the project. Accurate cost estimate is critical for any project. For example, a project's feasibility analysis depends on the correct estimation of project costs. Wrong cost estimates can make an infeasible project look like a feasible project. Similarly, incorrect and conservative cost estimates can make a good project look infeasible. The project budget is prepared based on the project cost estimates. If cost estimates have many errors, then the project budget will be less accurate. On the other hand, if cost estimates are correct and accurate, then the project budget will be more accurate and practical. Types of project costs. The project manager needs to differentiate between different types of project costs. Project costs can be categorized as direct and indirect costs, recurring and non-recurring costs, fixed and variable costs, and normal and expedited costs. Direct and indirect costs. Direct costs are costs that can be directly attributed to a specific project. Examples of direct costs include salaries of project employees, project-related labor costs, materials costs, equipment rental, and travel costs. Indirect costs are costs that cannot be directly attributed to a specific project. They are incurred for more than one project. They are those activities or services that benefit more than one project. Examples of indirect costs include general administration, building rental, utilities, security, and legal expenses. Recurring and non-recurring costs. Costs can be classified in terms of the frequency at which they occur. Non-recurring costs are also known as non-repeating costs. They are expenses for a specific activities that are not expected to continue over time. Initial marketing analysis or project team member induction training costs are examples of non-recurring costs. On the other hand, costs that continue over the project's life cycle are recurring costs. Labor, materials, logistics, and utilities are examples of recurring costs because they are incurred throughout the project life cycle. Fixed and variable costs. Costs that do not vary regardless of their usage are fixed costs. The monthly rent of a machine or equipment is an example of a fixed cost. Whether the machine is used for 10 hours or 50, its rental cost is the same. On the other hand, costs that increase through their usage are variable costs. These are the costs that change with the amount of production or the amount of work. Examples include the cost of direct materials, packaging costs, sales commissions, hourly wages, or direct labor costs. Normal costs and expedited costs. Normal costs are the costs that are incurred when project tasks are completed according to the original plan duration. Expedited costs are those costs that are incurred for attaining the desired project progress as fast as possible. Project S-curve. The majority of project expenses are incurred during the execution phase. During this phase, required materials are purchased, equipment is leased or procured, and subcontractors are used. In comparison, project expenditure is likely to be relatively minimal at the definition phase. For example, human resource costs of a project are likely to be low at the beginning and then may increase at the later stages of a project. Only a few people are involved in the project during the definition stage. The number of people involved gradually increases during the planning phase. The project team grows during execution phase and then levels off at the closure phase when the project comes to an end. A typical project S-curve shows the typical trends of costs incurred in different phases of a project.