Cost based project management: Cost Control Techniques for Effective Project Execution

1. What is cost based project management and why is it important?

Cost is one of the most critical factors that affect the success or failure of any project. cost based project management (CBPM) is a methodology that focuses on planning, estimating, budgeting, monitoring, and controlling the costs of a project throughout its life cycle. CBPM aims to ensure that the project is completed within the approved budget and delivers the expected value to the stakeholders. CBPM is important for several reasons:

- It helps to align the project scope, schedule, quality, and resources with the available funds and the expected benefits.

- It enables the project manager and the team to identify and mitigate the risks and uncertainties that may impact the project costs.

- It facilitates the communication and reporting of the project performance and progress to the stakeholders and the sponsors.

- It supports the decision-making and problem-solving processes by providing accurate and timely information on the project costs and variances.

- It enhances the accountability and transparency of the project management process and the use of the project funds.

Some of the cost control techniques that are commonly used in CBPM are:

1. Cost baseline: This is the approved version of the project budget that serves as a reference point for measuring and reporting the project cost performance. The cost baseline is derived from the cost estimates and the contingency reserves and is usually displayed as an S-curve that shows the cumulative planned value of the project over time.

2. Earned value management (EVM): This is a technique that integrates the project scope, schedule, and cost data to measure and evaluate the project performance and progress. EVM uses three key metrics: the planned value (PV), the earned value (EV), and the actual cost (AC). PV is the authorized budget assigned to the work to be accomplished. EV is the measure of the work performed expressed in terms of the budget authorized for that work. AC is the total cost incurred for the work performed. EVM also calculates the cost variance (CV), which is the difference between EV and AC, and the cost performance index (CPI), which is the ratio of EV to AC. A positive CV or a CPI greater than one indicates that the project is under budget, while a negative CV or a CPI less than one indicates that the project is over budget.

3. Forecasting: This is a technique that uses the current project data and trends to predict the future outcomes and results of the project. Forecasting helps to anticipate the potential issues and challenges that may affect the project costs and to take corrective actions accordingly. Forecasting can be done using various methods, such as extrapolation, regression analysis, simulation, and expert judgment. One of the common forecasting metrics is the estimate at completion (EAC), which is the expected total cost of the project at the end. EAC can be calculated using different formulas, depending on the assumptions and the factors influencing the project costs.

4. Variance analysis: This is a technique that compares the actual project results with the planned or expected results and identifies the causes and the impacts of the deviations. Variance analysis helps to monitor and control the project costs and to implement the necessary changes and adjustments to bring the project back on track. Variance analysis can be performed at different levels of detail, such as at the work package, activity, or task level, and can involve different types of costs, such as direct, indirect, fixed, or variable costs.

5. Change control: This is a technique that ensures that any changes to the project scope, schedule, quality, or resources are properly evaluated, approved, and documented before they are implemented. Change control helps to prevent or minimize the adverse effects of the changes on the project costs and to maintain the integrity and the validity of the cost baseline. Change control involves a set of processes and procedures that define how the changes are identified, requested, analyzed, approved, communicated, and recorded. Change control also requires the use of tools and techniques, such as change logs, change requests, change impact analysis, and change approval boards.

2. How to estimate the cost of a project using various methods and tools?

One of the most crucial aspects of cost-based project management is cost estimation. cost estimation is the process of predicting the resources and expenses required to complete a project within a defined scope, quality, and duration. Cost estimation helps project managers to plan, budget, and control the project costs, as well as to evaluate the feasibility and profitability of the project.

There are various methods and tools that can be used to estimate the cost of a project, depending on the level of detail and accuracy required, the availability of historical data, and the complexity and uncertainty of the project. Some of the common methods and tools are:

1. Analogous estimation: This method uses the actual cost of a previous, similar project as the basis for estimating the cost of the current project. This method is simple, fast, and inexpensive, but it relies on the assumption that the projects are comparable in size, scope, and complexity, and that the cost data is accurate and reliable. Analogous estimation is usually used in the early stages of a project when there is limited information available. For example, if a previous project of building a website cost $10,000 and took 100 hours, an analogous estimate for a similar project would be $10,000 and 100 hours.

2. Parametric estimation: This method uses a mathematical model that relates the cost of a project to one or more parameters, such as the size, duration, or complexity of the project. The model is based on historical data and statistical analysis, and it can be adjusted for different project characteristics and conditions. Parametric estimation is more accurate and reliable than analogous estimation, but it requires more data and expertise to develop and apply the model. Parametric estimation is usually used in the later stages of a project when more information is available. For example, if a parametric model estimates that the cost of a project is $100 per unit of work, and the project requires 150 units of work, the parametric estimate would be $15,000.

3. Bottom-up estimation: This method involves breaking down the project into smaller, more manageable components, such as tasks, activities, or deliverables, and estimating the cost of each component individually. The cost of the project is then calculated by adding up the cost of all the components. Bottom-up estimation is the most detailed and accurate method, but it is also the most time-consuming and expensive. Bottom-up estimation is usually used in the final stages of a project when the scope and requirements are well-defined and stable. For example, if a project consists of 10 tasks, and each task has a different cost, the bottom-up estimate would be the sum of the cost of all the tasks.

4. Three-point estimation: This method uses three different estimates for each component of the project: the most optimistic, the most pessimistic, and the most likely. The three estimates are then combined using a weighted average formula, such as the PERT (Program Evaluation and Review Technique) formula, to produce a single estimate that reflects the uncertainty and risk of the project. Three-point estimation is a more realistic and comprehensive method than using a single point estimate, but it requires more data and assumptions to generate the three estimates. Three-point estimation is usually used in conjunction with other methods, such as parametric or bottom-up estimation, to improve the accuracy and reliability of the estimate. For example, if a task has an optimistic estimate of $1,000, a pessimistic estimate of $3,000, and a most likely estimate of $2,000, the PERT estimate would be ($1,000 + 4 x $2,000 + $3,000) / 6 = $2,000.

3. How to allocate the estimated cost to different project activities and resources?

One of the essential aspects of cost-based project management is cost budgeting, which involves distributing the total estimated cost of the project among its various activities and resources. Cost budgeting helps to establish a baseline for measuring and controlling the project performance, as well as to allocate funds and resources efficiently and effectively. Cost budgeting requires a clear understanding of the project scope, schedule, and quality, as well as the cost estimation methods and tools used.

Some of the steps involved in cost budgeting are:

1. Identify the project activities and resources. Based on the project scope and work breakdown structure (WBS), the project manager should identify the main activities and tasks required to complete the project, as well as the resources needed for each activity. Resources can include human resources, materials, equipment, facilities, and services. For example, for a software development project, the activities could be design, coding, testing, and deployment, and the resources could be programmers, testers, software licenses, servers, and cloud services.

2. Estimate the cost of each activity and resource. Using the cost estimation methods and tools, such as analogous estimation, parametric estimation, bottom-up estimation, or expert judgment, the project manager should estimate the cost of each activity and resource. The cost estimation should consider factors such as labor rates, material prices, equipment rental, overhead, contingency, and risk. For example, for a software development project, the cost of coding could be estimated by multiplying the number of hours required by the hourly rate of the programmers, and adding the cost of software licenses and other expenses.

3. Aggregate the cost estimates. The project manager should add up the cost estimates of all the activities and resources to obtain the total estimated cost of the project. This should be compared with the project budget and scope to ensure that the project is feasible and realistic. If the total estimated cost exceeds the project budget, the project manager should look for ways to reduce the cost, such as negotiating with vendors, optimizing the project schedule, or changing the project scope or quality. For example, for a software development project, the total estimated cost could be compared with the client's budget and expectations, and adjustments could be made accordingly.

4. Allocate the cost estimates. The project manager should assign the cost estimates of each activity and resource to the corresponding project accounts, such as cost centers, work packages, or deliverables. This helps to track and monitor the project cost performance, as well as to report and communicate the project cost information to the stakeholders. The project manager should also allocate the contingency and risk reserves to the appropriate project accounts, based on the level of uncertainty and risk involved. For example, for a software development project, the cost estimates of each activity and resource could be allocated to the respective WBS elements, and the contingency and risk reserves could be distributed among the high-risk activities or deliverables.

4. How to establish a cost baseline as a reference point for measuring cost performance?

One of the essential steps in cost based project management is to establish a cost baseline as a reference point for measuring cost performance. A cost baseline is a time-phased budget that represents the expected cost of the project over its duration. It is derived from the cost estimates and the project schedule, and it reflects the approved scope, schedule, and resources of the project. A cost baseline serves as a basis for comparing the actual costs with the planned costs and identifying any deviations or variances. It also helps to forecast the future costs and determine the project's profitability and feasibility.

To establish a cost baseline, the following steps are usually involved:

1. estimate the costs of each project activity. This involves identifying and quantifying the resources needed for each activity, such as labor, materials, equipment, and overheads. Various methods and tools can be used for cost estimation, such as expert judgment, analogous estimation, parametric estimation, bottom-up estimation, and three-point estimation. The accuracy and reliability of the cost estimates depend on the availability and quality of the data, the level of detail, and the assumptions made.

2. Aggregate the costs of each project activity to obtain the total project cost. This involves adding up the costs of all the activities and accounting for any contingencies, reserves, or allowances. The total project cost represents the budget at completion (BAC) of the project, which is the total amount of money that the project is expected to spend.

3. Distribute the total project cost over the project timeline. This involves allocating the costs of each activity to the time periods in which they occur, based on the project schedule and the resource availability. The result is a cost distribution curve that shows how the project costs are spread over time. The cost distribution curve can be used to calculate the planned value (PV) of the project at any given point, which is the amount of work that should have been completed by that time according to the budget.

4. Review and approve the cost baseline. This involves verifying and validating the cost baseline to ensure that it is realistic, accurate, and aligned with the project objectives and constraints. The cost baseline should be approved by the project sponsor, the project manager, and other key stakeholders before it is finalized and documented. The cost baseline should also be communicated to the project team and the relevant parties for their awareness and commitment.

An example of a cost baseline for a software development project is shown below:

| Month | Activity | Cost |

| 1 | Requirement analysis | $10,000 |

| 2 | Design | $15,000 |

| 3 | Coding | $20,000 |

| 4 | Testing | $15,000 |

| 5 | Deployment | $10,000 |

| Total | | $70,000 |

The cost distribution curve for this project is shown below:

![Cost distribution curve](https://i.imgur.com/7zXyZ9E.

5. How to track and report the actual cost of the project against the cost baseline?

One of the most crucial aspects of cost-based project management is cost monitoring, which involves tracking and reporting the actual cost of the project against the cost baseline. The cost baseline is the approved budget for the project, which includes all the planned costs for each activity, resource, and deliverable. Cost monitoring helps project managers to identify and control any deviations from the cost baseline, and to take corrective actions if necessary. Cost monitoring also provides valuable information for project stakeholders, such as sponsors, clients, and senior management, who need to know the status and performance of the project in terms of cost.

There are several techniques and tools that can be used for effective cost monitoring, such as:

1. Earned Value Management (EVM): EVM is a widely used method that integrates scope, schedule, and cost data to measure the progress and performance of the project. EVM compares the planned value (PV), which is the budgeted cost of work scheduled, with the earned value (EV), which is the budgeted cost of work performed, and the actual cost (AC), which is the actual cost of work performed. EVM uses various indicators, such as cost variance (CV), cost performance index (CPI), and estimate at completion (EAC), to determine whether the project is on track, ahead, or behind the cost baseline. For example, a positive CV or a CPI greater than 1 indicates that the project is under budget, while a negative CV or a CPI less than 1 indicates that the project is over budget.

2. variance analysis: Variance analysis is a technique that compares the actual cost of the project with the cost baseline, and identifies the causes and sources of the variances. Variance analysis helps project managers to understand the reasons for the deviations from the cost baseline, and to take appropriate actions to correct them. Variance analysis can be performed at different levels of detail, such as by activity, work package, deliverable, or project. For example, if the actual cost of a work package is higher than the planned cost, the project manager can analyze the factors that contributed to the increase, such as changes in scope, quality, resources, or risks, and decide whether to request a change in the budget, reduce the scope, improve the quality, optimize the resources, or mitigate the risks.

3. Forecasting: Forecasting is a technique that predicts the future cost of the project based on the current cost data and trends. Forecasting helps project managers to estimate the final cost of the project, and to adjust the cost baseline if needed. Forecasting can be done using various methods, such as extrapolation, regression, or simulation. For example, if the project is experiencing a consistent cost overrun, the project manager can use extrapolation to project the future cost of the project based on the historical cost data, and compare it with the original cost baseline. If the projected cost is significantly higher than the cost baseline, the project manager can request a change in the budget, or implement cost-saving measures to reduce the cost overrun.

6. How to identify and manage cost variances and changes in the project?

One of the most crucial aspects of cost based project management is to ensure that the project stays within the budget and meets the expected outcomes. However, in reality, projects often face various challenges and uncertainties that can cause deviations from the planned cost baseline. These deviations are known as cost variances and changes, and they can have a significant impact on the project performance and success. Therefore, it is essential for project managers to identify and manage cost variances and changes effectively throughout the project life cycle. In this segment, we will discuss some of the techniques and best practices for cost control, such as:

1. Establishing a realistic and detailed cost baseline. A cost baseline is a reference point that represents the approved budget for the project. It is derived from the cost estimates and the project scope, and it serves as a basis for measuring and controlling cost performance. A realistic and detailed cost baseline should reflect the project requirements, assumptions, risks, and contingencies, and it should be aligned with the project schedule and resources. A realistic and detailed cost baseline can help project managers to avoid unrealistic expectations, underestimating or overestimating costs, and missing important cost elements.

2. Monitoring and measuring cost performance. Monitoring and measuring cost performance is the process of comparing the actual costs incurred with the planned costs in the cost baseline. This can help project managers to identify the cost variances, which are the differences between the actual and planned costs. Cost variances can be positive or negative, indicating that the project is under or over budget, respectively. Cost performance can be measured using various indicators, such as the cost variance (CV), the cost performance index (CPI), and the earned value (EV). For example, CV = EV - AC, where EV is the value of the work completed, and AC is the actual cost of the work completed. A positive CV indicates that the project is under budget, while a negative CV indicates that the project is over budget.

3. Analyzing and reporting cost variances and changes. Analyzing and reporting cost variances and changes is the process of determining the causes and impacts of the deviations from the cost baseline, and communicating them to the relevant stakeholders. This can help project managers to understand the root causes of the cost problems, such as scope changes, schedule delays, resource issues, quality defects, or external factors. It can also help project managers to assess the impacts of the cost problems on the project objectives, such as scope, time, quality, and risk. Analyzing and reporting cost variances and changes can be done using various tools and techniques, such as variance analysis, trend analysis, forecasting, change control, and performance reports. For example, variance analysis is a technique that compares the actual and planned costs to identify the sources and magnitude of the variances, and to determine if they are within the acceptable thresholds.

4. Taking corrective and preventive actions. Taking corrective and preventive actions is the process of implementing the necessary changes and improvements to bring the project back on track or to prevent further deviations from the cost baseline. This can help project managers to minimize or eliminate the negative effects of the cost variances and changes, and to enhance the cost performance and efficiency of the project. Taking corrective and preventive actions can involve various activities, such as revising the cost estimates, adjusting the project scope, schedule, or resources, implementing quality control, managing risks, negotiating with stakeholders, or requesting additional funds. For example, if the project is over budget due to a scope change, the project manager can take corrective actions such as requesting a change approval, updating the cost baseline, and communicating the change to the project team and the client.

By applying these techniques and best practices, project managers can effectively identify and manage cost variances and changes in the project, and ensure that the project is delivered within the budget and meets the expected outcomes. Cost control is a vital skill for project managers, as it can enhance the project quality, satisfaction, and success.

7. How to predict the final cost of the project based on the current cost performance?

One of the most crucial aspects of cost-based project management is to be able to forecast the final cost of the project based on the current cost performance. This allows the project manager to identify any deviations from the planned budget and take corrective actions accordingly. Cost forecasting also helps to communicate the project status to the stakeholders and manage their expectations. There are various methods and techniques that can be used to predict the final cost of the project, depending on the level of detail and accuracy required. Some of the common methods are:

- Estimate at Completion (EAC): This is the most widely used technique for cost forecasting. It involves calculating the expected total cost of the project at the end of the project, based on the actual costs incurred and the remaining work to be done. The EAC can be computed using different formulas, depending on the assumptions and factors considered. For example, one of the simplest formulas is:

$$EAC = AC + BAC - EV$$

Where AC is the actual cost, BAC is the budget at completion, and EV is the earned value. This formula assumes that the remaining work will be completed at the planned rate. However, this may not be realistic if the project is experiencing cost overruns or under-runs. In that case, a more realistic formula is:

$$EAC = AC + (BAC - EV) / CPI$$

Where cpi is the cost performance index, which measures the cost efficiency of the project. This formula assumes that the remaining work will be completed at the current cost performance. Alternatively, if the project is also experiencing schedule variances, then a more comprehensive formula is:

$$EAC = AC + [(BAC - EV) / (CPI * SPI)]$$

Where SPI is the schedule performance index, which measures the schedule efficiency of the project. This formula assumes that the remaining work will be completed at the current cost and schedule performance.

- Estimate to Complete (ETC): This is another technique for cost forecasting, which involves calculating the expected cost of the remaining work to be done. The ETC can be derived from the EAC by subtracting the actual cost, as follows:

$$ETC = EAC - AC$$

The ETC can also be computed independently, by re-estimating the cost of the remaining work based on the current conditions and assumptions. This may be necessary if there are significant changes in the project scope, quality, risks, or resources. The ETC can then be compared with the EAC to assess the accuracy and validity of the cost forecast.

- To-Complete Performance Index (TCPI): This is a technique for cost forecasting, which involves calculating the required cost performance index for the remaining work to be done, in order to meet a specified target. The target can be either the budget at completion (BAC) or the estimate at completion (EAC), depending on the project situation. The TCPI can be computed using the following formulas:

$$TCPI_{BAC} = (BAC - EV) / (BAC - AC)$$

$$TCPI_{EAC} = (BAC - EV) / (EAC - AC)$$

The TCPI indicates the level of cost efficiency that the project needs to achieve in order to complete the project within the budget or the estimate. A TCPI value greater than 1 means that the project needs to improve its cost performance, while a TCPI value less than 1 means that the project has some cost reserve or contingency. The TCPI can be compared with the current CPI to evaluate the feasibility and realism of the cost forecast.

To illustrate these concepts, let us consider an example of a project that has a budget at completion (BAC) of $100,000 and a planned duration of 10 months. The project is currently at the end of the fifth month, and has incurred an actual cost (AC) of $60,000 and earned an earned value (EV) of $50,000. The cost performance index (CPI) is 0.83 and the schedule performance index (SPI) is 1. The project manager wants to forecast the final cost of the project using the different methods and techniques discussed above. The calculations are as follows:

- Estimate at Completion (EAC):

$$EAC = AC + (BAC - EV) / CPI$$

$$EAC = 60,000 + (100,000 - 50,000) / 0.83$$

$$EAC = 120,482$$

The project is expected to cost $120,482 at the end of the project, which is $20,482 more than the budget.

- Estimate to Complete (ETC):

$$ETC = EAC - AC$$

$$ETC = 120,482 - 60,000$$

$$ETC = 60,482$$

The project is expected to cost $60,482 more to complete the remaining work.

- To-Complete Performance Index (TCPI):

$$TCPI_{BAC} = (BAC - EV) / (BAC - AC)$$

$$TCPI_{BAC} = (100,000 - 50,000) / (100,000 - 60,000)$$

$$TCPI_{BAC} = 2.5$$

The project needs to achieve a cost performance index of 2.5 for the remaining work, in order to complete the project within the budget. This means that the project needs to spend $0.4 for every $1 of value earned, which is very unlikely and unrealistic.

$$TCPI_{EAC} = (BAC - EV) / (EAC - AC)$$

$$TCPI_{EAC} = (100,000 - 50,000) / (120,482 - 60,000)$$

$$TCPI_{EAC} = 0.83$$

The project needs to achieve a cost performance index of 0.83 for the remaining work, in order to complete the project within the estimate. This means that the project needs to spend $1.2 for every $1 of value earned, which is equal to the current cost performance. This is feasible and realistic, but still requires maintaining the current level of cost efficiency.

These methods and techniques can help the project manager to forecast the final cost of the project based on the current cost performance, and to take appropriate actions to control the cost and ensure the project success. However, it is important to note that these methods and techniques are based on estimates and assumptions, and may not reflect the actual future outcomes. Therefore, the project manager should also consider other factors and sources of information, such as risk analysis, change requests, quality issues, stakeholder feedback, and market conditions, when making cost forecasts and decisions.

8. What are the key takeaways and best practices for cost based project management?

Cost control is a vital aspect of project management that ensures the project is completed within the allocated budget and delivers the expected value to the stakeholders. However, cost control is not a one-time activity, but a continuous process that requires constant monitoring, analysis, and adjustment of the project resources, activities, and risks. In this article, we have discussed some of the cost control techniques that can help project managers to effectively execute their projects, such as:

- estimating the project costs accurately and realistically, using various methods such as bottom-up, top-down, parametric, or analogous. Estimating the project costs involves identifying all the direct and indirect costs associated with the project, such as labor, materials, equipment, overhead, contingency, and profit. A good estimate should also account for the uncertainties and risks that may affect the project costs, such as scope changes, delays, quality issues, or external factors.

- Establishing a project budget based on the estimated project costs and the available funds. A project budget is a detailed breakdown of how the project funds will be allocated and spent across the project phases, deliverables, and activities. A project budget should also include a reserve for unforeseen expenses or changes that may occur during the project execution. A project budget serves as a baseline for measuring and controlling the project performance and progress.

- Monitoring and tracking the project costs regularly and systematically, using various tools and techniques such as earned value management (EVM), variance analysis, trend analysis, or forecasting. Monitoring and tracking the project costs involves comparing the actual costs incurred with the planned or budgeted costs, and identifying any deviations or discrepancies. This helps to evaluate the project status, performance, and health, and to determine if the project is on track, ahead, or behind schedule and budget.

- Controlling and managing the project costs proactively and effectively, using various strategies and actions such as corrective actions, preventive actions, or change control. Controlling and managing the project costs involves taking the necessary steps to bring the project costs back in line with the budget, or to adjust the budget to reflect the changes in the project scope, schedule, or quality. This also involves communicating and reporting the project cost information to the relevant stakeholders, and obtaining their approval and support for any changes or decisions.

By applying these cost control techniques, project managers can ensure that their projects are executed efficiently and effectively, and that they deliver the desired outcomes and benefits to the stakeholders. Cost control is not only a technical skill, but also a managerial and leadership skill that requires planning, coordination, communication, and problem-solving abilities. Project managers who master the art and science of cost control can enhance their reputation, credibility, and success in the field of project management.

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