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 are 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. Be sure to list these above the markups.
So the key is: potential cost—the word "cost"—is a hard cost. Make sure your markups apply to all costs throughout the entire project. One of these items is inflation, which should be considered for projects with an extensive schedule.
Expiration of labor agreements may require higher wage rates to complete the project. This is not common, but it could happen, so evaluate that risk. Increases in material costs if not purchased by a specific date should also be considered.
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Very often, you'll receive price quotes from your vendors at bid time stating that the price is valid through the end of the year. If the material is purchased before that deadline, you’ll need to store it on-site if it’s not ready to be installed right away. That might end up costing more than allowing the price to increase slightly and purchasing it later.
