Five Types of Project Costs

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November 21, 2013

I am mentoring a junior project manager, and she asked me for help putting together her project budget the other day. “What sort of things should I include?” she said. She had already put in the major costs – staff salaries, and a piece of equipment that the team needed to buy to make the product. But she figured that there must be other things that she should be taking account of.
She was right – and it’s also fine to ask for help if you think you have identified a weakness in your own skills. Together, we went through the five types of project cost and made sure that her project budget included as many items in those categories as we could think of.
So, what are those five types of project cost? This is the way that we laid out her budget template.

1. Direct Costs

Costs that are considered ‘direct’ are those that are clearly linked to the project work itself. For my colleague’s project, this included the piece of equipment she needed to make the product that her project was delivering.
Other direct costs are things like:

• Software licences
• Hiring specialist third party contractors or service providers
• The cost of commissioning a new office for your project team to work in
• Training costs, including hiring a trainer to train everyone on the project deliverables, training materials and room hire.

In short, most of the things that you first think of when you are putting together your project expenses will fall into this category.

2. Indirect Costs

Indirect costs are essentially the cost of doing business. They aren’t specifically linked to the project work, but they are required in order for your project and the team to function. For example, heating your office, paying for air conditioning, milk for the communal office fridge, lighting, health and safety equipment, mandatory first aid training for designated staff and so on. You can’t come to work if you don’t have a safe building to work in, so these are all costs of keeping the company going and they aren’t specifically related to your project.
Normally these costs are not included in your project budget. After all, if every project budget included an amount for heating and lighting, project managers the world over would be coming up with innovative ways to slash those costs or get them covered by someone else’s cost center! If in doubt, check with your finance department. There may be some overheads and indirect costs that they will ask you to include.

3. Fixed Costs

Direct costs can be fixed or variable, but it’s useful to consider fixed costs as a separate category. These are things that you pay for once. You know the amount at the start and that’s what you pay. The price is fixed and it won’t change, regardless of how much you use the product or what you do. And if your project overruns by a couple of months, you won’t get charged more. Conversely, you won’t get money back if you deliver early and don’t need the item for as long as you thought!
Here are some examples of fixed costs:

• Advertising
• Brand consultancy for packaging for your new product
• Project management consultancy as a one-off exercise at the start of the project
• Enterprise-wide software licence for a new application
• Servers and other hardware (excluding the maintenance fees).

Many project costs are fixed – after all, you only need them as a one-time thing for the project. Many of your project expenses will fall into this category.

4. Variable Costs

Unsurprisingly, variable costs are the opposite of fixed costs! And as the name suggests, variable costs vary. That is, you don’t necessarily know how much you’ll be paying overall as it is dependent on a number of factors.
My colleague needed to hire a contract resource for her project. Each month that person obviously needs a salary, based on negotiated contract fees. However, if the project takes an extra month, that person still needs to be paid. If the project takes an extra 6 months, that person’s salary needs to be paid for an extra 6 months.
Maintenance costs for servers and other equipment are also variable costs. In fact, anything that has a support contract is generally a variable cost. You will probably pick up the cost of these for the first year, or for the duration of your project. After that, these costs will transfer to the operational team who will be responsible for making sure the expenses get paid.

5. Sunk Costs

Not all projects have sunk costs at the beginning. If you haven’t done any work, how can you have incurred any cost? But some projects do. In my colleague’s situation, her project had started off with a proof of concept. The company had already invested some money (admittedly, not very much) in the proof of concept. When they knew the product worked and would be a success, a full project was put in place to develop it further and launch it. All the costs involved in the proof of concept are sunk costs – money that has already been spent and that we couldn’t get back even if we wanted to.
After going through these five categories we managed to populate her budget template with everything we could think of that related to the project. She left our meeting feeling confident that she had a comprehensive project budget and that she knew how to account for everything, including costs that she hadn’t yet come across.
It’s very simple, but categorizing your project spend into these five categories will make it easier for you to double-check that your project budget includes everything you need it to.