Project_cost_managment definition and tools

Project Cost Management
• Neeraj Sharma
• Nishma Bajracharya
• Prasansa Shrestha
• Sajeeb Chand

What is Cost and Project Cost
Management?
 Cost is a resource sacrificed or foregone to achieve a specific
objective or something given up in exchange
 Costs are usually measured in monetary units like Rupees,
dollars
 Project cost management includes the processes required to
ensure that the project is completed within an approved budget .It
is also called life –cycle cost.
 Project managers must make sure their projects are well
defined, have accurate time and cost estimates and have a
realistic budget that they were involved in approving

Project Cost Management
 preliminary concern with the cost of the resources
needed to complete schedule activities.
 Consider the effect of project decisions on the cost of
using, maintaining and supporting the product, service
or result of the project.
 Considers the information requirements of the project
stakeholders

Cost Management Plan
 A cost management plan is a document that describes
how the organization will manage cost variance on the
project
 For example, how to respond to proposals from
suppliers that are higher or lower than estimates
 A large percentage of total project costs are often
labor costs, so project managers must develop and
track estimates for labor
 Many organizations estimate the number of
people or hours they need by department or skill
over the life cycle of a project

Cost management plan can be
establish as:
 Precision level
 Units of measure
 Organizational procedures links
 Control thresholds
 Earned value rules
 Reporting formats
 Process description

Project Cost Management Processes
There are three project cost management
processes:
 Cost estimating: developing an approximation or
estimate of the costs of the resources needed to
complete a project
 Cost budgeting: allocating the overall cost estimate
to individual work items to establish a baseline for
measuring performance
 Cost control: controlling changes to the project
budget

Project_cost_managment definition and tools

 Cost estimating: developing an approximation or estimate of the costs of
the resources needed to complete a project
 Estimating schedule activity costs involves developing an approximation of
the costs of the resources needed to complete each schedule activity.
 Calculate risk
 Identifying and considering various costing alternatives.
 Cost estimates are generally expressed in units of currency such as
Rupees, Dollars, etc and also can use units of measure such as staff hours
or staff days along with their cost estimates.
 After developing a good resource requirements list, PMs and their teams
must develop several estimates of the costs for these resources.
Cost Estimating

Cost Estimating
 The accuracy of a project estimate will increase as the project
progresses through the project life cycle.
 A rough order of magnitude (ROM) estimate provides an estimate
of what a project will cost.
 Also referred to as a ballpark estimate, a guesstimate, a swag, or a
broad gauge.
 A project in the initial phase could have a rough order of magnitude
(ROM) estimate in the range of -50 to +100 %.

Cost Estimating
 A ROM estimate that actually cost $100,000 would range between
$50,000 to $200,000. The accuracy range is often much wider for IT
projects.
 Often IT project estimates for software development are
doubled because of the history of cost overruns.
 Project managers must take cost estimates seriously if they want
to complete projects within budget constraints.
 The costs for schedule activities are estimated for all resources that
will be charged to the project which is not limited to labor,
materials, equipment, services, and facilities, as well as special
categories such as inflation allowance or a contingency cost.

Inputs / Tools & Techniques / Outputs

Cost Estimation Inputs
 Enterprise Environmental Factors
 Market Place conditions: Analysis of what product, services,
and results are available in the market place, from whom
and under what terms and conditions.
 Commercial Databases: Resource cost rate information
available from commercial database that tracks skills and
human resource costs.
 Published seller price lists

 Organizational Process Assets
 Cost estimating policies. Some organizations have
predefined approaches to cost estimating. Where these
exist, the project operates within the boundaries defined by
these policies.
 Cost estimating templates. Some organizations have
developed templates (or a pro forma standard)
The organization can continuously improve the template
based on its application and usefulness in prior projects.

 Historical information. Information that pertains to the project’s
product or service, and is obtained from various sources within the
organization, can influence the cost of the project.
 Project files. One or more of the organizations involved in the
project will maintain records of previous project performance that
are detailed enough to aid in developing cost estimates.
 Project team knowledge. Members of the project team may recall
previous actual costs or cost estimates. While such recollections
can be useful, they are generally far less reliable than documented
performance.

 Lessons learned: cost estimates obtained from previous projects
that are similar in scope and size.
 Project Scope Statement
Describes the business need, justification, requirements, and
current boundaries for the project.
The project scope statement includes constraints, assumptions,
and requirements. Constraints are specific factors that can limit cost
estimating options.
Most common constraints for many projects is a limited project
budget, required delivery dates, available skilled resources, and
organizational policies.

 Work Breakdown Structure:
 The project’s work breakdown structure (WBS) defines the total
scope of the project.
 WBS is often used to develop or confirm a common
understanding of project scope.
 WBS Dictionary
The WBS dictionary (Section 5.3.3.3) and related detailed
statements of work provide an identification of the deliverables and
a description of the work in each WBS component required to
produce each deliverable.
 Project Management Plan
The project management plan (Section 4.3) provides the overall
plan for executing, monitoring, and controlling the project, and
includes subsidiary plans that provide guidance and direction for
cost management planning and control.

 Schedule management plan.
 Schedule activity resources and their respective duration.
 Activity Resource Estimating involves determining the
availability and quantities required of staff, equipment, and
materiel needed to perform schedule activities.
 Activity Duration Estimating involves determining the total
activity time which will affect cost estimates.

 Staffing management plan
 when and how human resource requirements will be brought
and taken off the project team.
 Risk register. The cost estimator considers information on risk
responses when producing cost estimates. Risks, which can be
either threats or opportunities, typically have an impact on both
schedule activity and project costs. As a general rule, when the
project experiences a negative risk event, the cost of the project will
nearly always increase, and there will be a delay in the project
schedule.

Cost Estimation Tools and Techniques
 Analogous or top-down estimates: use the actual cost of a
previous, similar project as the basis for estimating the cost of the
current project
 How similar the current and previous project are determines the
accuracy of the estimate.
 Bottom-up estimates or Activity Based Costing : involve
estimating individual work items or activities and summing them to
get a project total cost.
 The smaller the work items, the better the estimate but these
estimates are usually time intensive and expensive to develop.

 Parametric modeling:
 A technique that uses a statistical relationship between
historical data and other variables e.g. square footage in
construction, required labor hours.
 Higher lever of accuracy
 Project Management Software
 PM software, such as cost estimating software applications,
computerized spreadsheets, and simulation and statistical tools,
are used to assist with cost estimating.
 Such tools can simplify the use of some cost estimating
 Provides various cost estimate alternatives.

 Vendor Bid Analysis
 methods include vendor bid analysis and an analysis of what
the project should cost.
 In cases where projects are won under competitive
processes, additional cost estimating work can be required
of the project team to examine the price of individual
deliverables, and derive a cost that supports the final total
project cost.

 Reserve Analysis
 Many cost estimators include reserves, also called contingency
allowances.
 Contingency reserves-costs to be used at the discretion of the
project manager to deal with anticipated, but not certain, events
called “known unknowns”.
 Cost of Quality
 Total costs incurred by investment in preventing non standard to
requirements,
 Appraising the product or service for conformance to
requirements,
 and failing to meet requirements (rework).
 Failure costs are often categorized into internal and external.
 Failure costs are also called cost of poor quality.

Cost Estimating: Outputs
 Activity Cost Estimates
 An activity cost estimate is a quantitative assessment of the
likely costs of the resources required to complete schedule
activities.
 Costs are estimated for all resources like labor, materials,
equipment, services, facilities, information technology, and
special categories such as an inflation allowance or cost
contingency reserve.
 Activity Cost Estimate Supporting Detail includes
• Description of the schedule activity’s project scope of work
• Documentation of the basis for the estimate (i.e., how it was
developed)
• Documentation of any constraints
• Indication of the range of possible estimates

Cost Estimating: Outputs
 Requested Changes
The Cost Estimating process may generate requested changes
(Section 4.4.3.2) that may affect the cost management plan
(Chapter 7 introductory material), activity resource requirements
(Section 6.3.3.1), and other components of the project management
plan. Requested changes are processed for review and disposition
through the Integrated Change Control process (Section 4.6).
 Cost Management Plan (Updates)
If approved change requests (Section 4.4.1.4) result from the Cost
Estimating process, then the cost management plan component of
the project management plan (Chapter 7 introductory material) is
updated if those approved changes impact the management of
costs.

Cost Budgeting
Cost budgeting involves allocating the project cost estimate to
individual work items over time
 The WBS is a required input to the cost budgeting process
since it defines the work items
 An important goal is to produce a cost baseline
 A time-phased budget that project managers use to measure and
monitor cost performance
 Estimating costs for each major project activity over time provides
management with a foundation for project cost control
 Cost budgeting also provides info for project funding requirements
–at what points in time will the money be needed

Cost Budgeting: Inputs
 Project Scope Statement
Formal periodic limitations of the expenditure of project funds can be given in the
project charter or contract. These funding constraints are reflected in the project
scope statement, and can be due to annual funding authorizations by the buyer’s
organization or other entities like government agencies.
 Work Breakdown Structure
The project work breakdown structure (WBS) provides the relationship among all the
components of the project and the project deliverables
 WBS Dictionary The WBS dictionary and related detailed statements of work
provide an identification of the deliverables and a description of the work in each
WBS component required to produce each deliverable.

 Activity Cost Estimates
The cost estimates for each schedule activity within a work package are aggregated
to obtain a cost estimate for each work package.
 Activity Cost Estimate Supporting Detail
The amount and type of additional details supporting the schedule activity cost
estimate vary by application area. Regardless of the level of detail, the supporting
documentation should provide a clear, professional, and complete picture by which
the cost estimate was derived.

 Project Schedule
The project schedule includes planned start and finish dates for
the project’s schedule activities, schedule milestones, work packages, planning
packages, and control accounts. This information is used to aggregate costs to the
calendar periods when the costs are planned to be incurred.
 Resource Calendars
A composite resource calendar for the project documents working days and
nonworking days that determine those dates on which a specific resource,
Whether a person or materiel, can be active or is idle.

 Contract
Contract information related to what products, services, or
results have been purchased — and their costs — are used in developing the
budget.
 Cost Management Plan
The cost management plan component of the project management plan and other
subsidiary plans are considered during cost budgeting.

Cost Budgeting: Tools and Techniques
 Cost Aggregation
Schedule activity cost estimates are aggregated by work packages in accordance
with the WBS. The work package cost estimates are then aggregated for the higher
component levels of the WBS, such as control accounts, and ultimately for the
entire project.
 Reserve Analysis
Reserve analysis establishes contingency reserves, such as the
management contingency reserve, that are allowances for unplanned, but
potentially required, changes. Such changes may result from risks identified in the
risk register Management contingency reserves are budgets reserved for unplanned,
but potentially required, changes to project scope and cost.

 Parametric Estimating
The parametric estimating technique involves using project characteristics
(parameters) in a mathematical model to predict total project costs. Models can be
simple (e.g., residential home construction will cost a certain amount per square
foot of living space) or complex (e.g., one model of software development costs
uses thirteen separate adjustment factors, each of which has five to seven points
within it). Both the cost and accuracy of parametric models vary widely. They are
most likely to be reliable when:
• The historical information used to develop the model is accurate
• The parameters used in the model are readily quantifiable
• The model is scalable, such that it works for a large project as well as a small
one.

 Funding Limit Reconciliation
Large variations in the periodic expenditure of funds are
usually undesirable for organizational operations. Therefore,
the expenditure of funds is reconciled with the funding limits
set by the customer or performing organization on the
disbursement of funds for the project. Reconciliation will
necessitate the scheduling of work to be adjusted to smooth
or regulate those expenditures.Rescheduling can impact the
allocation of resources.

Cost Budgeting: Output
 Cost Baseline
The cost baseline is a time-phased budget that is used as a basis against which to
measure, monitor, and control overall cost performance on the project. The cost
baseline is a component of the project management plan.
 Project Funding Requirements
Funding requirements, total and periodic (e.g., annual or quarterly), are derived from
the cost baseline and can be established to exceed, usually by a margin, to allow for
either early progress or cost overruns. Funding usually occurs in incremental
amounts that are not continuous, and, therefore, appears as a step function. The
total funds required are those included in the cost baseline plus the management
contingency reserve amount.

Cost Budgeting: Output
 Cost Management Plan (Updates)
If approved change requests result from the Cost Budgeting process, then the cost
management plan component of the project management plan is updated if those
approved changes impact the management of costs.
 Requested Changes
The Cost Budgeting process can generate requested changes that affect the cost
management plan or other components of the project management plan. Requested
changes are processed for review and disposition through the Integrated Change
Control process.

Cost Control : Change is inevitable, success is
optional
 Project cost control includes:
 Monitoring cost performance
 Ensuring that only appropriate project changes are included in a
revised cost baseline
 Recording all appropriate changes accurately against the cost
baseline
 Preventing incorrect, inappropriate, or unapproved changes from
being
 included in the reported cost or resource usage
 Informing project stakeholders of authorized changes to the
project that will affect costs
 Acting to bring expected cost overruns within acceptable limits

ALSO
 Performance review meetings can be a powerful
tool to help control project costs
 Knowing you have to report on your progress is an
incentive for people to perform better
 Performance measurement is another important
tool for cost control
 There are many general accounting approaches for
measuring cost performance but earned value
management (EVM) unique to project management
Cost Control

Cost Control
Project cost control searches out the causes
of positive and negative variances.
For example, inappropriate responses to cost
variances can cause quality or schedule
problems or produce an unacceptable level of
risk later in the project.

Cost Control
Tools & Techniques, and Outputs

Earned Value Management (EVM)
 EVM is a project performance measurement technique that
integrates scope, time, and cost data
 Given a baseline (original plan plus approved changes), you
can determine how well the project is meeting its goals
 You must enter actual information periodically to use EVM
 Was a WBS item completed or approximately how much of the
work was completed
 Actual start and end dates
 Actual cost
 More and more organizations around the world are using
EVM to help control project costs

Best Practice
 The most successful organizations are
taking a holistic view of focusing, managing
and measuring their organizational efforts
with an integrated combination of best
practice processes, training and technology
 Unfortunately, most organizations today are not
taking that approach

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