There are different ways to look at the costs while
estimating and controlling project costs.
A cost is either variable or fixed.
A variable cost is any costs that change with the amount of
production or the amount of work. Example: cost of materials, power, water and
Cost that does not change as production changes is a fixed
cost. Example: set up cost, rental or hiring of an equipment or machinery.
A cost can be either direct or indirect.
Costs are directly attributable to the work on the project.
Example: team travel, team wages, recognition, and costs of materials used on
Overhead items or costs incurred for the benefit of more
than one project are indirect costs. Example: Corporate Tax, Fringe Benefit
Tax, and House keeping Services including security services.
The Opportunity given up by choosing a choice of project
over another project is an opportunity cost. For example, if we need to select
one of the following two projects:
-Project A with an NPV $60,000
-project B with an NPV $50000
then opportunity cost of selecting Project A is $50,000.
Sunk costs should not be considered when deciding on
reviving or continuing with a troubled project. Sunk costs are the ones which
were already spent on the project earlier and will not be considered when the
revival plan decision is made.