Direct and Indirect Costs
Let's now think about different types of costs so we can more readily identify them, and therefore account for them correctly. If you read the project management textbooks you will see that a common distinction is drawn between direct costs and indirect costs.
Quite simply, direct costs are either materials or labor. Materials are anything purchased to aid or conduct the project. This will include tangibles, for example in a construction project there will likely be concrete and timber; in an IT project there will likely be computer hardware. Direct costs may also include intangibles directly associated with the project such as travel, consultancy, software and licenses.
Similarly, labor is work done by human beings on behalf of the project. Costs associated with labor also include: salaries, benefits, insurance, etc. Direct cost items can also be fixed or variable. They are either fixed regardless of the volume of project outputs, or they vary based on project demands or output volume.
Indirect costs are best described with examples such as extra building space and utility costs, janitor services, annual company auditing and/or legal charges, etc. Often indirect costs are incurred at a higher level in the organization and then pro-rated across a number of projects. In this case, the eventual charges, often assigned at the end of the fiscal year and based on corporate annual performance, are obviously beyond the direct control of the project manager. These may reasonably be excluded from the project manager's responsibility but they nevertheless exist and should be accounted for in the final project analysis.