Chapter 7: Determining costs, Budget and Earned Value.

The total project cost is often estimated during the initiating phase of the project or when the project charter or a proposal is prepared, but detailed plans are not usually prepared at that time. However, during the planning phase of the project, specific activities are defined and a network plan is created. Once specific activities are defined, then estimates can be made of resources, durations and costs for each specific activity. Resources include people, materials, equipment, facilities, and so forth. The estimated activity resources are used for estimating activity costs. The estimated cost for each specific activity can include the following elements:

1.      Labor costs. These are the estimated costs for the various types or classifications of people who are expected to work on the project such as painters, designers and computer programmers. The labor costs are based on estimated work time (not necessarily the same as the activity estimated duration) and the dollar labor rate for each person or classification.

2.      Materials costs. These are the estimated costs of materials that the project team or contractor needs to purchase for the project, such as paint, lumber, piping, shrubbery, carpeting, electrical cable, paper, art supplies, food, computers and application software.

3.      Equipment costs. Some projects require equipment that must be purchased as part of the project. Equipment can include items such as computers and machinery. For example, a project to construct a clinic would include the purchase of various types of medical equipment. Or a project to upgrade a manufacturing facility may include the purchase of new production machinery. Or a new office might include the purchase of new computer systems.

4.      Facilities costs. Some projects may require special facilities or additional space for the project team, for security reasons, to store materials, or to build, assemble, and test the project end item (deliverable). If such facilities are required, the estimated costs for renting the space need to be included.

5.      Subcontractors and consultants cost. When project teams or contractors do not have the expertise or resources to do certain project tasks, they may outsource some of the work to subcontractors or consultants to perform those activities. Examples of such tasks include designing a brochure, developing a training manual, developing software, and catering a reception.

6.      Travel costs. If travel (other than local travel) is required during the project, the costs for travel, such as airfare, lodging, and meals, need to be included.

7.      Reserve. In addition to the above items, the project team or contractor may include an estimated amount for contingencies to cover unexpected situations that may come during the project, such as items that may have been overlooked when the initial project scope was defined, activities that may have to be redone because they may not work the first time (redesigns), or a high probability or high impact risk that may occur. Often there is a separate budget (management reserve set aside for contingencies at the project level rather than for specific activities.