Direct Costs vs Indirect Costs in Project Management

Difference between direct costs and indirect costs is an area that PMP aspirants often have problem understanding. This post is another in the series on PMP Study Notes to help make your concepts crystal clear and give you confidence as you go into the PMP exam. This is an addition to my 80+ Commonly Confused Concepts for PMP Certification. In this post, we’ll learn about the difference between direct costs and indirect costs in project management with detailed examples and explanation.

Difference between Direct Costs and Indirect Costs

Direct costs are costs that can be directly attributed to a specific project, e.g. labor, raw materials, and equipment rental costs. Indirect costs are costs that cannot be directly attributed to a specific project, e.g. management, general administration, rental and utility costs. In other words, indirect costs are those for activities or services that benefit more than one project.

Examples of Direct Costs and Indirect Costs

Examples of direct costs include:

• Employee salaries and benefits
• Labor costs
• Materials costs
• Equipment rental costs
• Project related travel costs

Examples of indirect costs include the costs of:

• Management
• General administration
• Building rental
• Utilities
• Security
• Advertisement
• Insurance
• Legal

Let’s take a specific case of an IT services company operating out of a rental facility and handling multiple projects of varying sizes and durations from the facility.

In such an environment, direct costs would include:

• Salaries and benefits of the staff working on the project
• Costs of computers, printers, network and other equipment allocated for the project, and that of the associated maintenance and support
• Costs of software licenses
• Costs of project related travel
• Costs of staff training
• Costs of team-building activities

Indirect costs would include:

• Salaries of executives and directors who are overseeing multiple projects
• Rental cost of the building (it would be very hard to distribute the monthly building rental to the various projects running in that facility)
• Utility costs (electricity, telephone, broadband, water etc.)
• Administrative costs
• Costs of equipment shared by multiple projects (like shared printers)

Are Indirect Costs included in Project Estimates?

Direct costs are included in the project cost estimate (and budget), whereas Indirect Costs may or may not be included in the project cost estimate. According to the PMBOK^® Guide, 5th Edition the project assumption of whether indirect costs are included or excluded from the project cost estimates are documented in:

• Project Scope Statement
• Basis of Estimates document

Direct and Indirect Costs consideration in Make-or-Buy Decisions

Both direct and indirect costs should be considered while making Make-or-Buy decisions on projects. Direct Cost would include the actual cost of purchasing the product whereas, Indirect Cost would include the cost of supporting the purchasing process and the purchased product.

Conclusion

Direct costs directly benefit a particular project where indirect costs benefit multiple project.

I hope you found this post useful. If you have other examples of direct and indirect costs that are not listed here, please contribute them to this post by using the comments section below. Also let me know through your comments other such topics that would like me to write about for PMP Certification.