Glossary A 02

Question 1

Project Cost Management

Answer 1

Is a core area of project management focused on planning, estimating, budgeting, funding, managing, and controlling project costs to keep the project within the approved budget.

Question 2

Value Engineering

Answer 2

is a systematic, organized approach to improving the value of a project by examining its functions and identifying cost-saving opportunities without compromising performance, quality, or safety.

Question 3

Example of Value Engineering

Imagine a project to build a bridge. In the VE process, the team might:

Answer 3

Identify High-Cost Materials: Look for alternative materials that are cheaper but equally durable.
Optimize Design: Simplify the bridge design to use fewer resources without sacrificing safety or performance.
Evaluate Construction Methods: Identify more efficient construction techniques that save time and labor costs.

Question 4

Type of Costs

Answer 4

In project management and finance, understanding the various types of costs is crucial for budgeting, controlling expenses, and ensuring a project stays within financial limits.

Question 5

1. Direct Costs

Answer 5

Definition: Costs that can be directly attributed to a specific project, product, or activity.
Examples: Labor costs for project team members, materials directly used in the project, equipment needed specifically for the project.

Question 6

2. Indirect Costs

Answer 6

Definition: Costs that are not directly tied to a specific project but are necessary for the organization’s overall operations.
Examples: Utilities, administrative salaries, general office supplies, and building rent.

Question 7

3. Fixed Costs

Answer 7

Definition: Costs that remain constant regardless of the project’s level of activity or output.
Examples: Lease or rent payments, salaries of permanent staff, insurance.

Question 8

4. Variable Costs

Answer 8

Definition: Costs that vary in proportion to the level of activity or output.
Examples: Raw materials, wages for temporary labor, utility costs that increase with production.

Question 9

5. Sunk Costs

Answer 9

Definition: Costs that have already been incurred and cannot be recovered.
Examples: Money spent on research or preliminary design work that is no longer usable or relevant.

Question 10

6. Opportunity Costs

Answer 10

Definition: The cost of foregoing the next best alternative when making a decision.
Examples: Choosing to allocate resources to one project over another, thus losing the potential benefits from the unselected project.

Question 11

7. Contingency Costs

Answer 11

Definition: Additional funds set aside to cover unforeseen expenses or risks that may arise during the project.
Examples: Budget reserves for delays, extra materials in case of waste, or unexpected regulatory requirements.

Question 12

8. Operating Costs

Answer 12

Definition: Costs associated with the ongoing operation of the project or a finished product.
Examples: Maintenance costs, energy costs, and recurring supplies for a completed facility or system.

Question 13

9. Capital Costs

Answer 13

Definition: Large, one-time costs incurred for acquiring or improving long-term assets that benefit the project over time.
Examples: Equipment purchases, infrastructure development, and software licenses.

Question 14

10. Overhead Costs

Answer 14

Definition: Indirect costs that support the project but are not directly traceable to specific activities.
Examples: Corporate management salaries, utility bills, general administrative support.

Question 15

11. Labor Costs

Answer 15

Definition: Costs associated with the work done by employees and contractors on a project.
Examples: Wages, salaries, benefits, and contractor fees.

Question 16

Cost Estimation Types

Answer 16

In project cost estimation, different types of cost estimates are used to plan and budget the project effectively. Here are the key cost estimate types:

Question 17

1. Order of Magnitude Estimate

Answer 17

Purpose: Provides a rough approximation of costs, often used during the initial phases of a project when little detail is available.
Accuracy: Low, usually with a range of –25% to +75%.

Question 18

2. Preliminary Estimate (Conceptual Estimate)

Answer 18

Purpose: Offers a somewhat refined cost projection based on preliminary project scope, still early in the planning process.
Accuracy: Moderate, typically –15% to +50%.

Question 19

3. Budget Estimate

Answer 19

Purpose: Provides a more detailed estimate based on a fairly well-defined project scope, intended to establish a project budget.
Accuracy: Medium to high, generally –10% to +25%.

Question 20

4. Definitive Estimate

Answer 20

Purpose: The most accurate estimate, developed from detailed information on the project’s scope, schedule, and resource requirements.
Accuracy: High, usually –5% to +10%.

Question 21

5. Control Estimate

Answer 21

Purpose: Used to monitor and control project costs, comparing actual expenses with projected costs during the project’s execution.
Accuracy: Varies, but closely aligned with the definitive estimate as it’s used for tracking.