Project Management guide

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What Is Cost in Project Management?

Essentially every project that an organization undertakes will cost money. In fact, cost is traditionally considered to be one of the three primary constraints of any project, along with time and scope. And it’s up to the project manager — with input from the project’s other stakeholders — to determine how much a project will cost, create a suitable budget to allocate the appropriate resources, and manage the budget to maximize value and minimize spend. The first step to understanding cost in project management is to define the types of expenses that a project will likely incur.

They typically fall into two categories:
  • Direct costs: Examples of direct costs include fixed labor, materials, and equipment. They are typically one-off costs that come from a single department or the project itself.
  • Indirect costs: Examples of indirect costs include utilities and quality control. Incurred by the organization at large, indirect costs occur at the same time as the project, but are not necessarily caused by it.

Next, the project manager will need to undertake the process of cost estimation, which is used to predict the resources needed to complete a project within a defined scope, and determine whether the project will be greenlighted.

Cost estimation factors in elements such as:
  • Labor: The cost of team members’ wages and time working on the project
  • Materials and equipment: Physical tools, software, legal permits, and the like
  • Facilities: The use of external workspaces
  • Vendors: Third-party vendors and/or contractors
  • Risk: Contingency plans to reduce risk

If the project is a go, the project manager must devise a budget based on the cost estimation document, allocating resources properly. Managing that budget is key to the project’s success. If certain pieces of the project end up costing more or less than anticipated, the project manager will need to manage the risk and reallocate funds as necessary.

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