Common Cost Categories in Project Cost Estimation
Accurately estimating future costs of a project is crucial in the project planning phase because it helps accurately predict a project’s benefit. In my experience there are three major common cost categories:
- Fixed Costs
- Variable Costs
- Operating and Maintenance Costs
Fixed Costs
Fixed costs are costs that do not vary with the output of production. For example, if a software firm spent $250,000 on the development of an iPhone application, the number of sales does not increase or decrease the cost of production. In a case like this, it’s important to have as accurate as possible sales forecasts to make sure that the project is worth-while.
Another example is the cost of R&D it takes a car manufacturer to develop a new brand of car. The company has to pay designers, engineers, marketers, hire sub-contractors to develop new parts, ect. that goes in to each car. This is is a cost that doesn’t change based on the number of units sold.
Variable Costs
On the other hand, variable costs are costs that have a direct correlation with the units produced. The same iPhone software company may need to pay for hosting or bandwidth for their users to use the application. Each user of their application will consume some server storage space or bandwidth that the company is providing, thus they pay more for it. The more users the company has, the greater their expenses.
In the case of the car manufacturer, once designed, they have to pay for each part that goes into the car. Each screw, seat, and light bulb increases the cost of the car, but if they didn’t sell any cars, they wouldn’t need to purchase those items. Those expenses increase when units of production increases.
Operating and Maintenance Costs
Although not completely project related, operating and maintenance costs factor in to the project approval decision because management must know how much it will cost to keep the project’s outcome operating in the future after the project has been completed.