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Direct and Indirect Costs in Project Management

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  • 0:00 Costs & Project Management
  • 0:26 Direct Costs
  • 1:03 Indirect Costs
  • 3:06 Lesson Summary
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Lesson Transcript
Instructor: Shawn Grimsley
Managing the costs of a project is a key element in effective project management, but not all costs are the same. In this lesson, you'll learn about direct and indirect costs in project management.

Costs and Project Management

James works as a project manager for a large car manufacturing company. He's currently been put in charge of managing the roll out of a new hybrid car. An important part of his job is estimating, monitoring, and managing the costs of the project. In order to do this, he must take into account both the direct costs and indirect costs of the project. Let's take a quick look at each.

Direct Costs

Direct costs are the expenses that are directly related to the project and can be measured with a relatively good degree of accuracy. Many of the direct costs for James's project are fairly obvious, like the cost of materials for the manufacture of the hybrid vehicles. These would be things such as raw materials, like steel and fiberglass,; finished components, like electronics, windshields and tires; and finishes, like paint, clear coating, and upholstery. James can also include the direct labor costs in the form of employee wages. Keep in mind that this is not an exhaustive list of direct costs. Direct costs will vary from project to project.

Indirect Costs

Indirect costs are costs that help the company perform its activities but are not easily traceable to one specific project. Examples include the general expenses of doing business, such as rent, utilities, and office supplies. James's company needs these things to support what he does on his projects, but the expenses are really not easily tied to any one project. The wages and benefits of the company's support staff, such as administrative assistants, the receptionists, and even the general managers of the company, are really indirect costs. These folks keep the company humming, but their contribution to James's construction project is indirect. Fringe benefits of the laborers manufacturing the cars are also considered indirect costs. This includes expenses like paid vacation and health insurance. All of these indirect costs are often referred to as overhead costs or burden costs.

How can James and his company factor in these indirect costs into the hybrid car project? He can calculate a burden rate, which is a means of spreading all the indirect costs over various activities undertaken by a business. We can calculate the burden rate with the following formula:

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