Running head: COST ESTIMATION
Project Cost Terms and Their Application in Cost Estimation
Absorption costing – this refers to the method that is used in the recovery of the indirect
overhead costs. This is achieved by dividing them up by the total direct cost of the
Cost escalation – sometimes, the cost of operation exceeds the projected cost. This term
is used to refer to the summation of all the costs that exceed the original estimates due to
the increment of salaries and wages and rise in the country's inflation (Kerzner, 2013).
The value is expressed as an annual percentage. This value is significant for long-term
projects and in times of high inflation.
Below-the-line costs – after the estimation of the total basic cost, an allowance is
allocated to cater for the future uncertainties. This term is used to refer to the total
allowances that are topped by the total basic cost estimate. They mainly comprise; the
exchange rate fluctuations, cost escalations, provisional cost items, and the contingencies.
Direct costs – these are the costs that are directly attributable to the project work. They
are typically referred to as variable costs since the expenditure rate is dependent on the
project activity intensity. These costs are zero during a time when there is no work.
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