Question

Discuss the relationship of direct and indirect costs in project management. Define Indirect and Direct Costs.

From book Operations and Supply Chain Management, 8th ed.

Chapter 9 – Project Management

Chapter 10 – Supply Chain Management

Chapter 11 – Global Sourcing and Logistics

Answer 1

Direct costs are the costs which can be aligned directly with any particular element, e.g. machinery cost, raw material, labour, etc. Whereas, indirect costs are the costs which cannot be directly aligned, e.g. facilities rental, administration a workplace, etc. This could offer benefits to more than one engagement or project.

In project management, direct costs are aligned with the project budget or estimates whereas indirect costs are not involved in the project estimates. These are generally captured in project scope or estimates document. Both the costs are helpful in “make or buy” decisions for any project with respect to the buying of any goods or services (which may be relevant to the project – termed as direct costs) and at the same time cost involved in the entire buying process is the indirect cost. In project management, direct signified of one project at a time whereas indirect is related to many.