How to identify the project cost?

30-November-2020 by Virtue Ventures

Project costs are funds needed to perform a planned business attempt, and they are a key subject in project budgeting and cost management. When evaluating costs that your project might bring about, you increase a better chance to keep it profitable and achieve the desired performance outcomes.
 

It would help if you started by recognizing which sorts of costs you will bring about.

What is Project Cost?

Project Cost is the total funds needed to complete the project or work that consists of a Direct and Indirect Costs. The Project Costs are any expenditure made or estimated to be made or estimated to be incurred to complete the projects which are listed in a project baseline.

Why it’s important?        

No project begins without a budget. Project success is determined by how well the project cost has been handled in the project. Many times, it happens that, the project may not be finished inside the project cost. It implies that when compared the Project Cost Vs Project Profit. Hence it is necessary to arrive at the correct cost estimation required for the project.

The detailed project cost sheet must be included in any of the investment documents like “Detailed Project Report”, Feasibility report, etc. Moreover, it will also help the promoter to maintain the financials of the project effectively.

To arrive at accurate cost estimation, it will require to understand the types of project costs involved in the project as mentioned below.

Direct costs & Indirect costs

Direct Cost

Costs that are directly visible and responsible to provide the project output are referred to as direct costs. Direct expenses are continuously fixed in nature. Direct costs include the cost of Logistics, Human Resources, Project Development cost used specifically to the project can be considered as a direct cost.

Indirect cost

Costs that do not directly contribute or specific to the output of the project are called indirect costs. It may be either variable or fixed. Indirect costs are the costs which cannot be directly connected with a department in the organization of a production procedure or business project. These indirect expenses are related to things that are utilized for various purposes in an organization. Indirect costs include the cost of Transport, administration, Selling and Distribution, office, security, shipping and postage, utilities and rent, etc.
 
Fixed & Variable Costs

Fixed cost

Any cost which is fixed throughout the project life cycle and would not change by quantity, time or any other project factors called for a fixed cost. Some of the examples of fixed costs are rent for the company space, systems cost, software license cost.
We need to note over here that fixed costs are not fixed permanently. They can change over a period of time. Here we are referring to the project fixed cost which implies that they’re fixed into the delivery of the project.

Variable cost

On the contrary to fixed cost, the Variable cost may be a cost that varies or modifications in proportion to the product or service that the project produces. A rise or reduction of project scope causes the respective change in variable cost. Examples are production materials, remuneration of the project team, cost of power & water.

Total Project Cost:

Computing Total Project Cost is a crucial step for any project. TPC should include all the costs (fixed and variable) of the project. The computation should include the total estimated cost (TEC) and other project costs (OPC). It covers but not limited to activities Costs such as pre-planning, feasibility, operating cost, commissioning, risk analysis, contingency, design, maintenance, etc.

 
In case of not calculating the project costs precisely, one needs to face serious consequences. It will have a direct impact on the project schedule, quality, and scope.  This will lead to cost overrun.


Project Cost Estimation Process

The process of cost estimation determines the amount of resources required to accomplish project activities. It involves the approximation and development of costing alternatives to plan, perform, and deliver the project. It focuses on finding and allocating optimum expenses for the project.
The process is vital to determine whether the project will be successful, whether the goals and objectives will be achieved, and whether the deliverables will be produced in the stipulated timeline.