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Project Cost Management
Posted on: May 18, 2012 at 12:00 AM
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Project cost management (PCM) is the method of measuring the cost and productivity of the project with the help of various tools and techniques. Project cost management in a project management encompasses various functions including estimating, job controls, field data collection, scheduling, accounting and design.

Project cost management (PCM) is the method of measuring the cost and productivity of the project with the help of various tools and techniques.

Project cost management in a project management encompasses various functions including estimating, job controls, field data collection, scheduling, accounting and design. These are the vital tools for effective cost management to analyse the various aspects of the project.

Starting from the initial phase to the completion of the project cost management plays an important role in every phase to minimise the cost of the project and to complete the project within the estimated budget.

Project Cost Management includes the processes required to ensure that the project is completed within the approved budget. Commonly an effective cost management involves four steps that are:

Resource Planning:

This is the first step that is carried out to determine the actual requirements of people, equipment and materials in order to perform project activities.

Cost Estimating:

An approximate estimation of cost is done here that will be needed for the successful completion of the project.

Cost Budgeting:

This process involves the allotment of budget to all activities to be done in the coarse of the entire project.

Cost Control:

This controls any changes in the project budget in between the project life cycle.

Let us discuss the all the process of the project cost management to get an overview of an effective cost management of a project:.

Resource Planning

Resource planning is the preliminary estimation of the physical requirements such as people, equipments to complete the project successfully.

Inputs of Resource Planning

Work breakdown structure:

The work breakdown structure is used for identifying the elements of the project that will be needed for getting the desired output from the project.

Historical information:

The previous information is also used from the secondary data in order to know what type of resources had been used earlier in similar kind of projects.

Scope statement:

Scope statement contains the project justification and the objective of the project both of which are quite essential for a proper resource planning.

Resource pool description:

It is very important to know that what resources and materials are likely to be needed in every activity and phase of the project. In a project life cycle, the requirements may vary in each stage and hence should be taken into consideration.

Organizational policies:

The organisational policies for staffing, rent, purchase and equipments should be well understood during resource planning and taken into consideration accordingly.

Tools and Techniques for Resource Planning

Expert judgment:

Expert judgment is the most effective tool that can be used for resource planning for deciding the input of the process. This technique involves a group of trained experts to get the suggestions for resource planning. The experts may be a consultant, industry group or professional and technical associations.

Outputs from Resource Planning

Resource requirements:

The output of the resource planning process is the detailed availability of the total number of resources needed for the completion of entire project and in what quantities they will be need. The same can be obtained through staff acquisition or procurement.

Cost Estimating

Cost estimating is an approximate estimation of total cost of the resources needed to complete the project. It is an assessment of the total cost required to get the final product or service as per the requirement and specifications of the project.

Inputs to Cost Estimating

Work breakdown structure:

This helps the project manager to organise the total cost estimates and see that whether all the works that has been identified has been estimated or not.

Resource requirements:

Resource requirements include the analysis of all the resources and materials required for the project for proper estimation of cost.

Resource rates:

The project manager or the concerned individual is expected to know the unit price of each of the resource needed for the project to calculate the overall cost of the entire project. If the actual prices are not known than there may be a miscalculation in the estimation.

Activity duration estimates:

Activity duration estimates is the estimated time an activity is likely to take for completion. This can affect the cost estimate for the project as the project budget includes the financial allowance for a certain period.

Historical information:

Historical information or secondary data can prove quite helpful in cost estimation and can be a good reference for the project managers to calculate the approximate cost.

Project files:

It is very important to maintain the proper record of the previous project especially when one or more organisations are involved in a project. This helps a lot in making an appropriate estimate for the current project.

Project team knowledge:

The team or member involved in previous projects can have adequate knowledge of the cost due to previous experiences and hence can be useful.

Tools and Techniques for Cost Estimating

Analogous estimating:

Also called top-down estimating, analogous estimating, is the method of using the previous data of the cost for similar projects for the estimation of cost of the current project. It is quite useful for estimating cost of a project when limited amount of information for the project is available. It's just like a form of expert judgement and less costly than the other techniques. The estimate made using this technique is also less accurate. This depends on basically two factors:

  1. The previous projects are similar in fact rather than just appearance, and
  2. The members or team preparing the estimates have adequate expertise.

Parametric modeling:

Parametric modeling is the technique that uses the project characteristics or parameters for cost estimation using a mathematical tool. The mathematical too used can be simple or complex depending upon the type of project. These tools depends upon various factors to five an approximate estimation. These includes:

  1. The accuracy of the historical information used to develop the model
  2. The parameters used in the model should be quantifiable.
  3. The model is scalable

Bottom-up estimating:

An entire project is divided into various activities and in bottom line estimating is the technique that involves the estimation of cost for each activity of the project and then rolling them together to get the total cost of the project. The cost and accuracy depends upon the size of activities in the project.

Computerized tools:

A number of computerized tools such as project management software and spreadsheets are available today that helps in the cost estimating process and make the process very simple as well as efficient.

Outputs from Cost Estimating

Cost estimates:

Cost estimates are quantitative estimation of the total cost likely to be incurred in the successful completion of the entire project. A detailed estimation of all types of cost is made including the labour, materials, supplies, and equipments are obtained in this stage. The budget is presented in certain unit such as rupees, dollars, francs, yen etc.

Supporting detail:

This includes the detailed description of the scope of the estimated work. In addition to that, a proper documentation of process and procedures followed in the estimation along with any assumptions made and the range of possible results are also included in the supporting details.

Cost management plan:

The cost management plan describes how to manage the cost variances in the project. It can be formal or informal based on the requirement of the stakeholders.

Cost Budgeting

Cost budgeting involves the allocation of the total estimated cost to the individual activities for establishing a cost baseline for measuring project performance.

Inputs to Cost Budgeting

Cost estimates:

It includes the detailed estimation of all types of expenses to be made in each and every activity or work item for the successful completion of the project.

Work breakdown structure:

The work breakdown structure identifies the total elements of the project to which the cost is to be allocated.

Project schedule:

This includes the plan of time to start the project and the finishing date of the project. This information is required for assigning costs to the time period and
when the cost will be incurred.

Tools and Techniques for Cost Budgeting

Cost estimating tools and techniques:

All the tools and techniques used for the cost estimating can be useful for cost budgeting also.

Outputs from Cost Budgeting

Cost baseline:

The cost baseline is a time-phased budget for the measurement and monitoring of cost performance of the project. It is obtained by adding estimated costs by period and is usually represented in the form of an S-curve. A project, especially larger one, can have various cost baselines to measure different aspects of cost performance.

Cost control

Cost control involves controlling the effect of the variance in the cost baseline to ensure that changes are beneficial. It also determines, whether the cost baseline has changed and if so, how to manage the changes.

Cost control includes:

  • Monitoring cost performance to detect variances from plan.
  • Ensuring that all appropriate changes are recorded accurately in the cost baseline.
  • Preventing incorrect, inappropriate, or unauthorized changes from being included in the cost baseline.
  • Informing appropriate stakeholders for the authorized changes.

Inputs to Cost Control

Cost baseline:

The cost baseline is a time based budget system essential to measure and monitor the cost performance of the project.

Performance reports:

Performance reports helps to analyse the cost performance of each activity of the project by providing the information about which activity has met the budget estimation and which does not. It can also help the project managers know about the possible problems that may arise in future.

Change requests:

Change requests may occur in oral or written, direct or indirect, external of internal, mandatory or optional forms. Changes can lead to increase in the budget or even decrease of budget.

Cost management plan:

The cost management plan helps to manage the cost variances in the project effectively. A cost management plan can be formal or informal depending upon the requirement of the customers.

Tools and Techniques for Cost Control

Cost change control system:

A cost change control system defines various procedures through which the cost baseline can be changed as per the need. This includes paperwork, tracking systems, and approval levels essential for authorizing changes.

Performance measurement:

A Performance measurement technique helps in accessing the variations in the project budget if any. This also helps to find the reasons for the variations and the possible problems that may occur due to these changes in future and what corrective measures should be taken to combat that changes.

Additional planning:

While there is changes in most of the projects, few projects run exactly according to plan but instead of the prospective changes may require new or revised cost estimates or analysis of alternative approaches in any stage of the project life cycle.

Computerized tools:

Computerized tools such as project management software and spreadsheets are very effective tools for comparing the planned costs vs actual cost and for forecasting the possible effects of the cost changes.

Outputs from Cost Control

Revised cost estimates:

Revised cost estimates are modifications to be made in the cost information that helps in the effective management of the project. Revised cost estimates may or may not need adjustments in the other aspects of the project plan. However, the stakeholders must be informed about the revised cost estimates.

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