Project Cost Management

Project Cost Management

Cost management is the process of estimating, allocating, and controlling the costs in a project. It allows a business to predict coming expenses in order to reduce the chances of it going over budget. Projected costs are calculated during the planning phase of a project and must be approved before work begins.

 

This knowledge area provides.

  1. A frame work for cost management
  2. Develop Cost Estimates
  3. Finalize Project Budget including contingency reserves
  4. Prepare a cost baseline
  5. Control on Project Cost

 

As per Project Body of Knowledge ( Edition 6) there are four process. Three of them are in Planning Process Groups and One in Monitoring and Controlling Process Groups

  1. Plan Cost Management :

Plan Cost Management is the process that establishes the policies, procedures, and documentation for planning, managing, expending, and controlling project costs. The key benefit of this process is that it provides guidance and direction on how the project costs will be managed throughout the project. Cost management plan consists of

 

  1. Units of measure: Since units of measure is a critical aspect to determine and estimate the cost, it must be included in the cost management plan.
  2. Levels of precision: They must be included in cost management plan as well. For instance, what will be the number of decimal places during calculations? This might come to you a trivial point. But if you consider the mega projects, millions of materials are used, and the level of precision might cause significant variances in total.
  3. Control thresholds: They must be included in the cost management plan as well. For instance, what will be the amount of budget variance to take action to get back on track? If you are managing a 1 million-dollar project, and if you set $20,000 as control thresholds, this means, you need to take corrective actions if you are more than $20,000 behind the schedule.
  4. Rules of performance measurement: Such as earned value management technique or percent completion method for activities must be included in the cost management plan. Earned value management is the most common technique used to measure cost performance of a project, and abbreviated as EVM. Either EVM or any other method that will be used in performance measurement must be mentioned in the cost management plan. Percent completion method for activities must be included in the cost management plan as well. For instance, how do you consider an activity in progress? Generally, there are 3 assumptions for activities in progress. The first approach considers them as not started. The second approach considers them as 50% complete. The third approach considers them as 100% completed. How activities in progress will be considered must be included in the cost management plan.
  5. Reporting formats: They must be included in the cost management plan. How frequent will you be reporting about cost performance of the project? What will be the format for cost reporting? For instance, you will report a brief high-level cost report to senior management in every 2 weeks, and a detailed report in every month. These must be cleared out in the cost management plan.
  6. Additional details: Such as strategic funding choices, cost recording procedure etc. must be included in the cost management plan as well. In case you need additional budget for your project, how to find sources should be mentioned in the cost management plan. If there are corporate tools or application that keep track of costs and expenses in a project, these must be described in the cost management plan as well.
  1. Estimate Costs

Estimate Costs is the process of developing an approximation of the monetary resources needed to complete project activities. The key benefit of this process is that it determines the amount of cost required to complete project work.

It is important to note here that all costs , direct and indirect cost are considered while estimating cost of activities.There are various types of estimating techniques used. They are explained in the following figures

  1. Analogues Estimation
  2. Parametric Estimation
  3. Three Point Estimation
  4. Bottom Up Estimation

3.Determine Budget

Determine Budget is the process of aggregating the estimated costs of individual activities or work packages to establish an authorized cost baseline. The key benefit of this process is that it determines the cost baseline against which project performance can be monitored and controlled.

The important output of this process is Cost Baseline. A cost baseline is an approved time phased plan. Once a detailed budget is developed and approved, the project manager should publish his baseline and set it as a point of comparison for actual Performance progress. The baseline budget is the tool for measuring how project changes affect our schedule and budget.

Please look at the figure below on how cost budgeting is done by adding contingency and management reserves.

  1. Control Costs

Control Costs is the process of monitoring the status of the project to update the project costs and managing changes to the cost baseline. The key benefit of this process is that it provides the means to recognize variance from the plan in order to take corrective action and minimize risk. It takes care of following aspects as mentioned in the figure

One of the important tool here is Earned Value Management. Earned Value Management (EVM) helps project managers to measure project performance. It is a systematic project management process used to find variances in projects based on the comparison of worked performed and work planned. EVM is used on the cost and schedule control and can be very useful in project forecasting.

This tool help Project Managers to review the project cost at any point of the project. One can look at the figure above. The dark line is the Planned Value(PV) line which is plotted against time. At the project closure it gives the budgeted cost at the planned completion ( BAC) .While reviewing this one can get following information

  1. Earned Value (EV) – Value of work accomplished as of the date of review. This is the value of work accomplished against the Planned Value (PV).
  2. Actual Cost (AC)- The cost incurred till the date of review.

From above details one can get

  1. Cost Variance( CV)= Earned Value( EV) – Actual Cost (AC)
  2. Schedule Variance ( SV) = Earned Value ( EV) – Planned Value (PV)
  3. We can also get the ratios or index like Cost Performance Index and Schedule Performance Index.

 

 

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