PMP Project Management Professional Study Guide, Third Edition (Certification Press)

There are several contributing factors to cost on any project: the expense of the labor to complete the project, the expense of materials needed to complete the project, and the expense of the equipment needed to complete a project. These expenses must be estimated, planned for, and monitored for a project to finish on budget.

Management and customers will want to know how much a project is going to cost so they can determine if the project is worth doing, if the project deliverable will be worth the cost, and if the project will be profitable. The estimates for project costs can come in several forms:

• Analogous estimating Uses similar historical information to predict the cost of the current project.

• Parametric modeling Uses a parameter, such as cost per metric ton, to predict project costs.

• Bottom-up estimating Starts from zero and adds the expenses from bottom-up.

• Top-down estimating Uses a similar project as a cost baseline and factors in current project conditions to predict costs.

The resources needed to complete a project may be one of the biggest expenses in the project’s budget. The activities the resources complete must be worthy of the resource’s time. In other words, the project manager does not want to assign a $125 per hour engineer to filing activity that a $15 per hour administrative assistant is qualified to do. Accurate assignment of project resources to project activities helps prevent waste.

Projects also have four different kinds of cost:

• Direct costs These are costs that attributed directly to the project and cannot be shared with operations or other projects.

• Variable costs Costs that vary depending on the conditions within the project.

• Fixed costs Costs that remain the same throughout the project.

• Indirect costs These costs can be shared across multiple projects that use the same resources—such as training room or piece of equipment.

There is one last cost, called opportunity cost. This is a special cost because it really doesn’t cost the organization anything out of pocket, but rather the cost of a lost opportunity. Opportunity costs are an expense companies that complete projects for other organizations realize. When an organization that completes projects for others must forgo one project in order to complete the other, the value of the forgone project is the opportunity cost. For example, a company has two projects it can complete but it must choose only one of them. Project A is worth $75,000 and Project B is worth $50,000. If the company chooses Project A the opportunity cost is $50,000 because the company misses out on the opportunity.