Direct Nonlabor Expense

Direct Nonlabor Expense

Direct nonlabor expense is the total expense of nonlabor charges applied directly to

the task. It includes subcontractors, consultants, travel, telephone, computer time, material

costs, purchased parts, and freight. This expense is represented in Figure 8-5 by the line “ other

direct cost. ” Material costs include allotments for waste and spoilage and should reflect

anticipated price increases. Material costs and freight charges sometimes appear as separate

line items called direct materials and overhead on materials , respectively; computer time and

consultants may appear as support. Direct nonlabor expenses also include items necessary for

installation and operation such as maintenance manuals, engineering and programming

as freight. These percentages are estimated in the same fashion as the overhead rates

discussed next.

Overhead, General, and Administrative Expenses

Although direct expenses for labor and materials are easily charged to a specific work

package, many other expenses cannot so easily be allocated to specific work packages, nor

even to specific projects. These expenses, termed overhead or nondirect expenses , are the

cost of doing business. They include whatever is necessary to house and support the labor,

including building rents, utilities, clerical assistance, insurance, and equipment. Usually,

overhead is computed as a percentage of the direct labor cost. Frequently, the rate is around

100 percent but it ranges from as low as 25 percent for companies that do most of their work

overhead. Although this is the traditional accounting method for deriving the overhead rate,

for project management it results in an arbitrary allocation of costs, which is counterproductive

for controlling project costs because most sources of overhead costs are not tied to any

particular project. A better way is to divide overhead costs into two categories: direct overhead

, which are costs that can be allocated in a logical manner; and indirect overhead , which cannot.

Direct overhead costs can be traced to the support of a particular project or work package;

these costs are allocated only among the specific projects or activities for which they apply.

For example, the overhead cost for a department working on four projects is apportioned

among the four projects based on the percentage of labor time it devotes to each. The

department ’ s overhead cost is not allocated to projects that it is not involved in.

payments for materials are due. This forecast will be different from the “ when needed ”

forecast because often a portion of the payment must be made at the time the material is

ordered—in other words, the expense precedes when the material is needed. Other times,

payment can be delayed until after the order is received—in other words, the expense follows

when the material is needed. The costs shown in the time-phased budget usually reflect costs

of materials when needed and not when actual payments are due. Because the times when

actual expenditures occur seldom correspond to the times shown on time-phased budgets,

forecasts should be made to reveal places of major discrepancy. Figure 8-18 illustrates this

point. A problem often facing the project manager is maintaining a positive cash flow, i.e., that

the cumulative cash inflow (payments received) always exceeds the cumulative cash outflow