Project Management: Cost vs. Price

Abstract

Associated to every project, however small it may be, there are always costs associated when trying to manage the project and a price for which we want to sell it. This article will present a review of how cost and price can be related to project management, what is the importance of each one separately and the importance of a good relationship between these two factors. A good harmony between them might be a key of the project success and at the same time the cause for unsucess. Therefore, in this article there will be a reflection about how cost and price relationship can be interpreted and support a good decision making. Decisions factors and decisions methods that a company needs to take into account when pricing a project or select which costs are avoidable and which ones are necessary, will also be explained along the article. The project's quality and profit are also two terms directly connected to the relationship between cost and price of every project, the way the customers evaluate a project's value from its price and the costs that are necessary to incur to sustain a certain quality of the outcome are also relations that will be further discussed here.

Big Idea

Cost definition

By definition cost is the amount of money that is spent in acquiring any good or paying for a service. There are two types of costs, the direct and indirect costs. The direct costs are related to the actual expense that they represent, the act of spending money in exchange of something, i.e. buying a software or equipment. The indirect costs are usually hidden beyond the the cost of a product or service, for instance, the cost of hiring a cleaning service to the office or even the rent. These costs can be classified as fixed costs, where the value does not change - office rent, salary of employees or the cost of the cleaning service if we have a contract for a fixed number of hours, or can be classified as variable costs where there is a chance of the value to change, such as the office's bill of gas or electricity.

Price definition

Price can be defined as the quantity of money, or a compensation that is given from one part to another in exchange of any good or service. The price that a costumer is willing to pay is directly related to the value that it attributes to the commodity or service. Of course, not every customer has the same perception of value about something, and this is the reason why the companies need to be careful when pricing their products. The process of finding a price that fits the market and it is not above nor below the customers expectation will be further discussed - Pricing Strategies (PUT THE LINK HERE). The price of a product or service is not only directly related to the perception of their value, but it is also associated to the customers perception of quality of the product. The price is really sensitive to the market conditions and the - (THEORY OF PRICE) - explains how the price can be related to the relation between the supply and demand.

Profit definition

Defining profit is almost the same as defining a company's purpose to enter in the market. The profit is as simple as the difference between the price for what we sell what we product and the costs to produce it, i.e. the profit is the part of the money that is earned by the company when selling a product or service. For instance, let's suppose that a company spends 5DKK in producing a pencil and they sell the same pencil for 15 DKK, this action of selling the product will generate a profit of 10 DKK to the company.

Quality definition

According to the definition of Oxford English Dictionary, quality can be defined as "The standard of something as measured against other things of a similar kind; the degree of excellence of something.". When managing a project, to ensure the quality of the final outcome is one of the most important objectives of the manager. The project's quality is directly related to its price and sometimes it is also related to the costs that were incurred to manage it - if the process was effective and efficient there were not unnecessary costs.