Project Cost Management

By Steven Macdessi

Project Cost Management includes the processes involved in estimating, budgeting and controlling costs so that the project can be completed within the approved budget. The budget is the most important single measure of project performance, and in the end, schedule and quality are reducible to budget. The briefing and design process carried out during the Scope Management process of the project effectively sets the budget.

The reduction of uncertainty through time has an important effect on the project budgets. Budget estimates made early in the project life cycle are relatively inaccurate compared to those made later as more information becomes available regarding the precise work to be done and the current market level of prices.

The Project Cost Management process includes the following:
1. Estimate Costs – The process of developing an approximation of the monetary resources needed to complete project activities;

2. Determine Budget – The process of aggregating the estimates costs of individual activities or work packages to establish an authorized cost baseline; and

3. Control Costs – The process of monitoring the status of the project to update the project budget and managing changes to the cost baseline.

These processes in practice may overlap and interact with each other as well as with other project management processes. On some projects, especially ones of smaller scope, cost estimating and cost budgeting are so tightly linked that they are viewed as a single process that can be performed by a single person over a relatively short period of time.

1. ESTIMATE COSTS
Estimate Costs is the process of developing an approximation of the monetary resources needed to complete project activities. Cost estimates are a prediction that is based on the information known at a given point in time. The reduction of uncertainty through time has an important effect on project budget estimates. Budget estimates made early in the project life cycle are relatively inaccurate compared to those made later as more information becomes available regarding both the precise work to be done and the current market level of prices.

Estimate Costs – Inputs
The following information is generally required for formulating project estimate costs:
Scope Statement (refer to Scope Management lecture notes);
Work Breakdown Structure (refer to WBS lecture notes);
Project Schedule – the type and quantity of resources and the amount of time which those resources are applied to complete the work of the project;
Human Resource Plan – project staffing attributes, personnel rates and related rewards/recognition;
Risks – can be either threats or opportunities that typically have an impact on both activity and overall project costs;
Enterprise Environmental Factors – Market Conditions (regional and/or global supply an demand conditions) and Published Commercial Information (resource cost rate from commercial databases);
Organizational Process Assets – Cost estimating policies, cost estimating templates, historical information and lessons learned.

Estimate Costs – Tools and Techniques
Expert Judgment – guided by historical information, provides valuable insight about the environment and information from prior similar projects;
Analogous Estimating (Unit Rate) – uses values of parameters from a previous, similar project as the basis for estimating the same parameter or measure for a current project (eg scope, cost, budget, size, duration). Used when there is limited amount of detailed project information. This process generally less costly and less time consuming than other techniques, but also less accurate;
Parametric Estimating (Ratio Analysis) – Uses a statistical relationship between historical data and other variables to calculate an estimate. For example, construction costs at $2,000/m2;
Bottom-Up Estimating (Bill of Quantities) – method of estimating components of work or activities with the greatest level of specific detail;
Reserve Analysis – Cost estimates include a contingency allowance to account for cost uncertainty;
Cost of Quality – Assumptions about costs of quality may be used to prepare the activity cost estimate;
Three Point Estimates – Provide a three point cost estimate between a ‘best case’ scenario (pessimistic), a ‘worst case’ scenario (optimistic) and most likely (mode or central estimate) outcome. Uncertainty is progressively reduced through time as more information is acquired:
Trade Input – Approach the market to provide quotations for work packages. Depending on the level of information and documentation available (scope) will influence the accuracy of the quotes received.
Project Management Estimating Software – Project management estimating software applications, spreadsheets, simulation and statistical tools are becoming more widely accepted to assist with cost estimating. Such tools can simplify the use of some cost estimating techniques and thereby facilitate rapid construction of cost estimate alternatives.

Estimate Costs – Outputs
Cost Estimates – The quantitative assessment of the probable costs for all activities required to complete the project work.
Basis of Estimates – The amount and type of additional details supporting the cost estimate. Eg, documentation used, assumptions made, known constraints, exclusions.

2. DETERMINE BUDGET
Determine Budget is the process of aggregating the estimates costs of the individual activities of work packages to establish an authorized cost baseline. A Budget is a quantitative expression of management’s plans. Both implicitly and explicitly it represents the intentions and objectives of management to all levels of the organization and provides a vehicle for monitoring the implementation of plans. It enables management to assess the adherence of individuals and organizational components to the goals stipulated in the plan and thereby to provide a quantitative basis for measuring and rewarding individual and departmental performance.

Basic Features of a Budget
1. A budget will reflect a financial plan, which in turn reflects the goals set by senior management for their organization,
2. A budget will be expressed in time phased and measurable terms with specific elements of work so that performance along the way can be determined,
3. All individual elements of the organization will be aware of their portion of the overall grand budget,
4. Performance against budgets will be monitored by management and reviewed periodically with each organizational segment.
5. Good and/or bad performance against approved budgets will be rewarded and/or disciplined by management.

Contingency
The provision of amounts in a budget so as to provide for the inclusion and subsequent costing of an activity, that can not be accurately pre-assessed, or estimated, using any other formal manner. A “guessed” allowance that will require the input of management in establishing the cost/s incurred in executing that activity at a later date

Cost Performance Baseline
The cost performance baseline is an authorised time-phased budget at completion (BAC) used to measure, monitor and control overall cost performance on the project. It is developed as a summation of the approved budgets by time period and is typically displayed in the form of an S-curve.

3. CONTROL COSTS
Control Costs is the process of monitoring the status of the project to update the project budget and managing changes to the cost baseline.

Project cost controls include:
Influencing the factors that create changes to the authorised cost baseline;
Ensuring that all change requests (variations) ar acted on in a timely manner;
Managing the actual changes when and as they occur;
Ensuring that cost expenditures do not exceed the authorised funding, by period and in total for the project;
Monitoring cost performance to isolate and understand variances from the approved cost baseline; and
Monitoring work performance against funds expended.

Cost to Complete
Identifying areas of future risk with the intent of eliminating them so as to more accurately predict the cost outcome.

REFERENCES

1. PMI (2008), A Guide to the Project Management Body of Knowledge (PMBOK Guide), 4th Ed, Project Management Institute, Newtown Square, PA.

Project Management

A brief video by Steven Macdessi, Project Manager.