Question

What are the types of costs associated with a project? What impact and relationship can you identify between these two variables and a project. Write at least two paragraphs to synthesize your ideas.

Answer 1

What are the types of costs associated with a project

There are five types of costs in a typical project:

• Fixed
• Variable
• Direct
• Indirect
• Sunk

Fixed Costs

Fixed costs are those that do not change throughout the life-cycle of a project.

For example, if you are constructing a road, the excavators and bulldozers are fixed costs. For software development projects, the physical development space and development computers are fixed costs to the project.

Variable Costs

Variable costs, as the name suggests, are costs that change during the project life-cycle. Construction projects usually have a long duration and can easily span several years.

For example, in 1987, the Channel (Euro) Tunnel project begun. The objective of this project was to construct an undersea high-speed train tunnel that would connect Great Britain to France. The project was completed over a period of 3-4 years and at a cost of about 13 billion U.S. dollars. The project employed over 15,000 people and had mammoth cost overruns.This project required tremendous risk management skills. During the construction of this project there were several variable costs, such as fuel costs and labor rates.

Direct Costs

Direct costs are expenses that come out of the project budget directly. For example, if you have outsourced some of your development work, the developers are expected to put in a specific amount of time, which is then billed for. The developer salaries are direct costs.

Indirect Costs

Indirect costs are those that are shared across multiple projects. Indirect costs are sometimes also referred to as Oversight costs. For example, in software development projects, it is common for a project manager or an architect to be partially allocated across several projects. Hence, the cost of the project manager or architect will be shared among the projects they are allocated to

Sunk Costs

These are the cost which are not relevant. These cost have already been incurred in the past and doesnot play any important role in deision making of project.