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Actual Cost in Project Management: Definition & Formula

Instructor: Audrey Brown

Dr. Audrey E Brown has a PsyD in Organizational Leadership, an MS in Management of Programs & Projects, in addition to 15+ years of experience in the field.

Actual Cost in project management is the total cost, to-date, spent on the finished project work. This lesson will discuss the definition and formula for the actual project cost.

Actual Cost in Project Management Overview

Despite the type of organization, projects are still expensive to implement. The cost of a project varies by the project size, complexity, human resources, and physical resources. Generally, as the project manager, your responsibilities include establishing the budget, monitoring project spending against the budget, and reporting periodically on the actual cost of the project.

Actual Cost in Project Management: Definition

What is the definition of the actual cost in a project? The Project Management Body of Knowledge (PMBOK Guide) defines actual cost as any work you and your team have executed on your project and any costs (direct and indirect) completed on the project for a specified period.

Actual Cost in Project Management: Formula

The formula for actual cost is:

actual cost = direct costs + indirect costs + fixed costs + variable costs + sunken costs

As you can see, the actual cost consists of several types of project costs, which are:

  1. Direct Costs: Costs directly related to your projects are obvious and generally, easily verifiable; fixed costs and variable costs are examples of direct costs
  2. Indirect Costs: Costs associated with supporting your projects are usually computed and not as easily measured, such as administrative services
  3. Fixed Costs: Costs that remain the same throughout the project, such as cost to rent equipment
  4. Variable Costs: Costs that changes during the course of the project, for example, the hours for your project architect may be higher at the beginning of the project and then your architect may roll off the project during the middle of the project
  5. Sunken Costs: Cost has incurred, but most likely in error or due scope changes; however, this cost must be included in the total cost of the project.

For example, a financial organization decided to develop a risk management software to monitor stock trades for all stocks trading on the American Stock Exchange; the estimated project duration was 10 months. In the 3rd month, the client learned the software included monitoring the S&P 500 Exchange, based on an assumption made by one of the developers, and the client requested the Project Manager to remove the S&P 500 Exchange, because it was out of scope (that is, it was not included in the original scope). At the end of the 4th month, the project sponsor requested to know the actual cost of the project.

Below is the actual cost of the project as of the end of the 4th month:

  • $5,000 - Direct Costs (monthly software license fee)
  • $2,500 - Indirect Costs (utilities expense)
  • $3,500 - Fixed Costs (computer server rental and monthly cloud rental fee)
  • $1,000 - Variable Costs (project teams' hours)
  • $9,000 - Sunken Costs (S&P 500 Exchange/unauthorized scope change)
  • = $21,000 Actual Costs (at the end of the 4th month)

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