Project costs in translation
Each of these approaches will achieve the same project price, but result in different calculations for the cost of the project and its cost accounts. The cost reports will provide quite different data.
Most organisations are not as simple as the above example though, and most organisations typically include a range of indirect costs at different points. For example, the project cost of wages.
Assuming a wage of $52,000 per year, a person would be paid $1,000 per week, assumed to be $200 per work day. However, that person will not work public holidays, annual leave, or sick leave. So instead of working 52 weeks x 5 days = 260 days in the year, the person will typically work 260 less 20 annual leave, less 10 public holidays, less a few sick days, or about 220 days. Typically, the direct labour cost is based on this lesser number of days and would be $236.36 per day. This rate therefore includes a hidden allocation of $36.36, or 18%, for labour overheads.
Where the staff regularly spend time not billing to projects, the organisation is also likely to include a utilisation factor to cover the downtime. Training, team management, HR costs, support staff, tool and travel costs may also be included in the calculation.
For privacy, and to enable departments to better control their own costs, many departments have a transfer price cost rate for their personnel instead of a true staff cost. This transfer price averages out the wages of individuals and is likely to include an even broader range of management and support costs such as department administration, tools, utilisation factors, and incidental expenses. The final ‘direct cost’ may bear little relationship to the actual pay packet of the worker, and therefore be difficult for a project manager to calculate.
The inclusion of some indirect costs in project costs and some indirect costs outside of project costs makes it difficult to forecast the cost of any project. Large projects also tend to distort the allocation of indirect costs. For example, the transfer price cost of a software developer may include an allocation for software development licences, a computer and accommodation. A large project is likely to separately purchase its own software development licences, computers or accommodation and therefore double recover for these costs.
Once the project begins to become as large as the entire organisation, it distorts the indirect cost allocation process even more. Will doubling the labour force really double the marketing costs? Will doubling the labour force for a temporary project double the redundancy provision or quadruple it? The project manager and CFO need to address these questions and to readdress the allocation of overheads if they are to create an accurate cost forecast.
The calculations used by finance sections differ from one organisation to another. When a project manager arrives at a new organisation to plan or undertake a project, they will not understand the definitions of cost used within the organisation. Before the project manager attempts to control a project based on the numbers in a cost report, they need to have an understanding of what that cost report is saying, and what it is not saying. PMOs can help new project managers by making an explanation of the cost reports, and the cost posting process.
