What goes into your costs?

Young workers checking blue print at building place

Think of project costs as a blueprint for project work — no pay, no play 

Project cost estimates are based on several categories:

  • Direct costs — labor & materials, things you can see
  • Overhead — utilities, legal expenses, marketing, etc
  • Fixed costs — leases on equipment, facilities, financing costs
  • Variable costs — commissions, pay-per-hour resources

OK, how do you assign those costs to your project? Get help. Most likely, you will not have to do this work in isolation. In fact, you shouldn’t. There are a number of managerial and financial considerations that your financial, legal and managerial teams can share with you so that your project accounts for all the necessary costing. Leave out a key costing element and your career as a project manager may be short, at that organization, at least.

Where do you start? Your project scope statement defines the work to be done. It can be a challenge, however, to assign a price tag to the scope statement. Direct costs can be associated with the scope statement using a rough guess approach, comparing similar efforts (called analogous estimating) or a per-unit figure such as cost per unit (a technique called parametric estimating). These techniques are quick although the estimates created from these quick methods may not reflect the reality of the work, leaving money on the table, under-funding work or loss of profit. Project managers, especially those in the commercial space, should be keenly aware that profit represents the ability to do good things — pay bills, taxes, and do other projects in the future. Your role as the project manager is to sew up the gaps in understanding by creating as detailed an estimate as time / knowledge permits and to continually revise your estimates as the work moves forward (this practice is called “progressive elaboration” if you are preparing for the PMP exam or just want to impress your colleagues with jargon, and who doesn’t secretly love intimidating the uninitiated, right?).

So, how do you sew up the gaps in understanding? The most accurate method of estimating the work is called bottom-up estimating. This is a team effort. In bottom-up estimates, the team that will be doing the work or has expert knowledge of the work (as is the case on large projects that use professional project estimating teams), breaks down the scope statement into distinct deliverables. Often, the project contract, an agreement to work with an outside organization and a precursor to the project’s charter, contains this lower-level information. When it does, you can take the deliverables and break them down into the work needed to create those deliverables (this approach is called decomposition). While you are decomposing the work, it is a good idea to use the four cost categories as a checklist.

  1. Have we accounted for all the direct costs? Where will the work take place? Do we know the costs of doing work in that location, especially internationally?
  2. Are there any indirect costs we haven’t considered, especially risks associated with the activities and management of those activities?
  3. What are policies and laws governing how we apply overhead to the project? Are we missing cost elements that could cause revenue leakage?
  4. Have variable costs such as the additional costs for overtime and extra equipment hours been included, just in case? Have we included money for testing and inspections? Remember, what we fail to invest in quality we usually pay for later as the result of poor quality.

Details on these approaches can be found in a number of resources, which I will gladly share should anyone be interested — just drop me a line. Cheers! Gordon



About Gordon Young

Need 10's of millions? Start here. Keynote speaker, coach and instructor. I help companies tap into the creativity and energy of their teams resulting in profit, engagement and well-being.
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