Overview of Project Cost Elements
The work of a project is typically defined through its deliverables. Deliverables are the products, services, or processes that a project is intended to create. Deliverables are broken down into sub-deliverables, and eventually into the specific tasks or work packages needed to create the deliverables. At the task level is where most costs are identified.
A cost element defines the resources needed to complete a task. Cost elements might include labor, material, equipment, overhead, or any other resource expenditure. Project management texts differ in their treatment of project-related cost elements. However, most separate cost elements into two categories: direct and indirect costs.
Direct cost elements are charges to the project that can be “tied directly to project deliverables or work packages” (Cleland and Ireland 2004). Direct costs typically include the labor, materials, and equipment needed to complete work packages. Direct costs include both fixed costs (cost that do not change regardless of the amount used) and variable costs (costs that change in relation to the amount used).
Indirect cost elements “can not be associated with any particular work package or activity, hence the term” (Gray and Larson 2006). “Indirect costs are often computed based on a percentage of the direct costs, or some other factor that has been determined to be equitable” (Cleland and Ireland 2004). Indirect costs might include fringe benefits, overhead (such as buildings and electrical services), and management above the direct project human resources.
Once costs are defined they can be placed in a project baseline. The project baseline is the “approved project management plan plus the approved changes” (Schwalbe 2006). The main purposes for creating a baseline are to “monitor and report progress and to estimate cash flow” (Gray and Larson 2006). However, project baselines are managed differently by different organizations. Some organizations manage costs “at the project level while others manage at the work package level” (Cleland and Ireland 2004). The primary purpose of breaking out costs is to “sharpen the control process and to improve decision making” (Gray and Larson 2006). Attempting to define one “correct” way to manage project cost elements would be impossible. Instead, organizations should first define their cost tracking requirements, then configure project management tools, like Microsoft Project, to support the requirements.
Tracking Costs Elements in Microsoft Project
Microsoft Project is a powerful “scheduling and planning tool for project managers” (Pyron 2004) and is used to manage the tasks related to a project. A project manager can also use the tool as a performance management system to track project and task-related cost elements. Microsoft Project is primarily designed to track the costs associated with task resources. As tasks are created, resources can be assigned to each task. Microsoft Project also provides a resource sheet where the project manager can define resources, categorize the type of resource, and assign associated costs. Resources can be categorized as either work or material. Work is typically used to define people resources; the cost per hour and overtime information is captured for each resource. The material category can be used for all non-people resources, for example, building materials or other components needed to complete the work package. In instances where the project manager does not wish to define a formal resource to track a task-related cost, the project manager can assign a fixed cost directly to a project task. Microsoft Project combines the fixed costs and the resource costs to calculate the total costs for a specific task, and the cost for tasks are rolled up to summary tasks, and finally to the total project cost.
For infrastructure-related projects at my company, the cost of internal labor resources is not tracked. Each project manager is required to track and report on all other project-related expenses. In addition, project managers must separate costs into capital and expense, and record and report each against separate cost accounts. However, Microsoft Project does not provide by default a mechanism for doing so. In order to accomplish this, project file templates at my company are configured to use the “fixed cost” field to track capital, and the resource sheet to track expenses. Fixed costs and resource costs are combined in the “cost” field to represent the total costs for the project (Figure 1).
Figure 1—Example of cost tracking in Microsoft Project.
Not all project managers at my company track project costs using Microsoft Project. Instead, some track costs using Microsoft Excel. Either way will work. However, those who use Excel instead of Project miss out on an important feature with Microsoft Project: baseline reporting.
Once the project file has been created and all cost estimates entered, the project manager saves a project “baseline.” The project baseline is the approved project plan and any approved changes. Once the baseline is saved, Microsoft Project will allow the project manager to quickly compare the original plan to any changes that have been made, and report the difference as variance (Figure 2). In the example, the capital cost for “Task 3” was increased from $1000 to $3000. The baseline for Task 3 shows the original Total Cost (capital plus expense) and the variance field shows the amount of the change from the original baseline, in this case $2000.
Figure 2—Cost baseline and variance.
Using baseline reporting makes it quick and simple for project managers to report changes to project-related cost elements. In addition, by incorporating the cost tracking directly within Microsoft Project, the project manager is able to track expense-related cost elements such as travel expenses, and capital-related cost elements like server upgrades and software licenses.
Financial Documents
Although Microsoft Project is not directly connected to the financial systems at my company, it is still important for the project manager to understand the impact of project cost elements on financial documents. Three financial statements in particular are impacted by project costs: the cash flow statement, the balance sheet, and the income statement.
The cash flow statement tracks money coming into and going out of the organization. Any project expenditure where money changes hands will reflect on the cash flow statement. Likewise, any assets that are purchased through the project will reflect on the balance sheet. However, the cash flow statement and the balance sheet might now reflect the cost elements during the same reporting quarter, or event he same fiscal period. For example, my company does not begin recognizing an asset until the asset is placed into service. If a file server is purchased for the dealer migration project phase, the purchase will reflect immediately on the cash flow statement. However, if there is a delay putting the file server into service, this will also delay recognizing the asset on the balance sheet. In addition, depreciating the asset will impact both the balance sheet and the income statement. As the asset is depreciated, the value of the asset on the balance sheet is decreased, and the depreciation expense is reflected as an expense on the income statement.
Project managers have a challenging job—to align the scope of a project with resources and schedule in order to deliver a desired result for their customers. Keeping track of the many types of cost elements can be a challenge. By using tools like Microsoft Project, project managers are able to more effectively track project-related cost elements and to simplify the reporting process.
References
Cleland, D. I. and L. R. Ireland (2004). Project Manager's Portable Handbook, McGraw-Hill.
Gray, C. and E. Larson (2006). Project Management: The Managerial Process, McGraw-Hill.
Pyron, T. (2004). Using Microsoft Office Project 2003. Indianopolis, Que.
Schwalbe, K. (2006). Glossary. Information Technology Project Management. Boston, Thomson.
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