Explore the different approaches to adjusting for risk in project management, including potential costs that should be considered above any markups. Understand the importance of applying markups to all costs throughout your entire project, including factors such as inflation and labor agreements.
Key Insights
- The term 'cost' should be considered a hard cost in project management, and markups must be applied to all costs throughout the entirety of a project.
- Inflation and expiry of labor agreements are potential risks that can increase project costs, therefore, they should be taken into account when budgeting for a project.
- Material purchase strategies can impact the project cost. For example, getting price quotes from vendors at bid time may require material to be stocked on site if it is not ready to be installed, which could be more costly than purchasing it later.
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Here's a few other ways that we adjust for risk. The following potential costs should be added above any markups and are always factors to be considered. Let me reference that you put this above the markups.
So the key is, potential cost, the word cost, is a hard cost. Make sure that your markups apply to all costs throughout the entire project. So one of these items should be inflation that should be considered for projects with an extensive schedule.
Expiration of labor agreements could require higher rates to complete the project. This is not common, but it could actually happen, so evaluate that. Increases in material not purchased by a given date.
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Very often you'll actually get price quotes from your vendors at bid time saying that the price is good to the end of the year. If the material is purchased before the end of the year, then you're going to have to stock it on site if it's not ready to be installed right away. That might be more costly than actually having the price go up a little bit and purchasing it later.