Tangible costs refer to quantifiable expenses related to recognizable sources such as business operational inputs, employees’ wages, and leases. Intangible costs refer to unquantifiable expenses connected to identifiable assets or sources, such as productivity losses and employee morale reduction.
A fixed cost refers to expenses that do not change with the decrease or increase of profits or losses or the quantity of goods and services produced. An excellent example of a fixed cost is rent. In addition, direct cost is the business expenditure that can be easily and accurately sketched-out (Project, 2013). Direct costs are usually connected to a particular cost object, such as a department or a product. On the other hand, indirect costs are those that cannot be accurately connected to a specific cost object; for instance, insurance, depreciation costs, and cost of power.
Cost baseline refers to the segment of a scheme baseline that handles the sum of cash the scheme or project is estimated to spend, and there is an indication of when the money will be spent. The main use of a cost baseline is to estimate, control, and monitor the entire operational cost of a project.
Cost variance is the divergence between planned or budgeted and actual price amounts.
While management reserve refers to the planned time or sum of money that is added to an approximation to address unpredicted situations, contingency, on the other hand, refers to the scheduled amount of money or time added to a budget to address a particular risk (Project, 2013).
There are various sources of project funding available to all firms. Two of the most common sources include borrowing loans from banks and selling part of the company in the form of shares. Just like sole proprietors’ and other individuals, corporations can take loans from banks, which can be done publicly through debt issues or privately through bank credits (Project, 2013). In addition, a corporation can fund its project through the sale of part of itself to interested investors in the form of shares, commonly known as the equity funding.
Borrowing money from banks has both benefits and drawbacks. One of the advantages is that when a company borrows money from the bank, the lender does not assume the ownership of the company. The proprietor of the company has complete authority and control over the business. The second advantage is that bank loans are flexible in that one can negotiate and shop around for the banks with loan terms that suit the company or an individual. The main drawbacks are that the applications for loans usually entail a lengthy process before the approval. On the other hand, a company’s credit history determines whether the company will get the loan. Similarly, the sale of shares has both benefits and drawbacks. The major advantages are that the company does not have to take a new loan since there is a shared risk in case the company runs at a loss (Project, 2013). Therefore, the firm does not have to repay the money to the investors. However, the sale of shares translates to a loss of ownership and loss of control since the investors have to be part of the company’s decision-making process.
There are several techniques in risk management that companies employ to transfer their risks. One of these techniques is through managing risk through insurance. In fact, the underlying principle behind insurance dealings is the transfer of risk from a party that does not wish to have the risk to the company that is willing to take the risk for a fee. Companies usually purchase an insurance policy, which is a contract that transfers the risk of the company that purchases the policy to the insurance company that issues the policy cover.
Forming a corporation is another technique used in transferring risks from one company to another. When persons run sole proprietorship businesses, they face a great risk since their personal assets are not separated from those of their business. Therefore, investors intending to limit possible connections with their businesses create corporations and hence transfer the risk to it (Project, 2013). Although forming corporations does not prevent losses from occurring, the owners suffer the loss indirectly because the loss incurred is limited to their assets and investments in the corporation.
A contractual arrangement is another technique used in risk management. In this concept, individuals or companies transfer their risks through a guarantee that is included in the sale contract. An excellent example is a warranty that is issued when an individual buys an item such as a car. Should the car develop some mechanical problems in the course of the warranty’s duration, the seller takes responsibility for the cost of repairing the defective parts. In so doing, the buyer transfers the risk to the seller.
Project cost control refers to the task that entails supervising, controlling expenses involved in a project, and preparing for a possible financial peril. Project cost control is typically under the responsibility of the project manager. It involves budgeting, supervising, and monitoring team activities, finding solutions to inevitable problems or damage control, and considering and preparing for potential risks.
There are various reasons why organizations have problems in controlling costs. One of the reasons is poor communication (Project, 2013). Despite the fact that individuals understand the power of proactively sharing information during a project, poor communication has been reported in teams running a project. The second reason is underestimated deadlines. When the manager miscalculates the project’s timeline, the repercussions do not only entail missing deadlines but also delaying the payment for the workers, a factor that increases the estimated budget. The other reason that hinders the effective control of costs is inadequate attention towards an assignment. Managers running a project fail to carry out regular checkups to ensure the project runs effectively.
One way of solving the problems involved in project cost control is keeping the entire team informed about the project budget estimates. Not only does the aspect help keep the team informed, but it also works in enabling the team to own the project and hence work towards accomplishing it timely and at an effective cost (Project, 2013). In addition, managers should forecast the budget time after time. Indeed, projects run without regular budget forecasts are doomed to fail because regular forecast in the budget helps ensure that the financial plan does not run out of the estimate. Managers with the intentions of ensuring that their project cost controls are effective ought to predict continually the budget while keeping their teams informed.
Project, M. I. (2013). Guide to the project management body of knowledge: Pmbok guide. S.l.:
Project Management Inst.