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2.2.2T Build the Budget / Techniques
Estimate Fixed Costs and Variable Costs (2.2.2T.P1)
You may hear the terms fixed and variable cost when
you are estimating the cost of a project. Variable costs are those that
change relative to how many units are being used. An obvious variable
cost on a project is contract labor. The more hours you use from a
contactor or consultant, the more the cost to the project. The cost of
contract labor is variable depending on the number of hours worked. It
is important to be aware of fixed and variable costs so that you know
the impact of increasing or decreasing unit costs. For example, if the
project is running a little behind schedule, you may ask for some
overtime work. If you increase the hours worked from your contractors,
you will increase the cost to the project. If you increase the hours
worked from the employee staff, there may not be an increase in costs,
since their compensation rate is fixed.
Fixed costs are those that are basically the same for the project regardless of the resources being used. For instance, if you were building a house, the lumber and concrete cost would be pretty much fixed once the design was agreed to. The cost of the lot for the house would also be fixed and would not change based on the size of the house you built. If you outsource part of a project to a third party for a fixed price, it becomes a fixed cost to the project as well. (Even if the work takes longer or shorter than estimated, your project cost should still be the agreed upon fixed cost.)
Understand Indirect and Direct Costs (2.2.2.T.P2)
Your project may have a combination of direct and indirect costs. Direct costs are directly attributed to the project. These are the types of costs you are most familiar with today. This includes the costs of the employees for the time they are working on your project, project supplies, contractor costs, etc.
In contrast, you may also be asked to budget for indirect costs, but this is not as common a practice. These are more company or organizational costs. For example, water, heating and air conditioning cost. You can see that your project team uses a portion of these resources, but they are normally budgeted for at the organization level. On some projects, however, you may get asked to actually budget a portion of these costs to your project. The combination of all projects would budget enough to pay for these common expenses.
