Project Cost Management –  Overview

Project Cost Management includes the processes involved in planning, estimating, budgeting, financing, funding, managing, and controlling costs so that the project can be completed within the approved budget. (PMI Glossary)

The project manager has an overall responsibility for the project costs, including the costs of ownership after the project has ended. This responsibility comes to prevent situation of a product or service so expensive to maintain, it is higher than the benefits / income. Therefore the project manager has a duty to design a product or a service that can be efficiently operated throughout his lifecycle, this is referred as cost of ownership.

Simply put: Project Life cycle Cost = Total Project Cost + Cost of Ownership 

7.1 – Plan Cost Management

In this process we agree on how to manage project costs, for example:

  • What currencies will be used.
  • What are the conversion rates between currencies.
  • How to round up (or down) cost calculations.
  • Level of precision required when making an assumption.
  • How many control accounts will be available in the project, and which ones.
  • Control points.
     

During the Plan Cost Management process we also make fundamental make or but decisions.

  • If the decision is to make – the cost will be planned and managed in this process.
  • If the decision is to buy – the cost will be added to, planned and managed as part of the procurement process (chapter 12).

 

  • Inputs – Project Management Plan, Project Charter, enterprise environmental factors, organizational process assets.
  • Tools – Expert Judgment, Analytical Techniques, Meetings.
  • Outputs – Cost Management Plan
  • In this process we estimated the costs involved in completing the project. Human resources are also included, as they cost money.
  • This process is relevant not only for determining the project budget, but also for change management and control process (for example to validate assumptions: at the day of the estimation steel cost was  $10/Kg and now it is $25/Kg) .
  • Cost of quality – Quality costs money, How much are we willing to invest in quality in order to save money later (during operation phase for instance), and even more important, at what point do we stop investing in quality because the cost will be higher the benefit.
  • In this process we also analyze quotes provided by vendors, in case we are buying a product or a service, rather than developing our own.
  • Cost estimating accuracy – It is crucial that you know this by heart for the exam!

     

    Level

    Phase

    Range

    1

    Rough order of magnitude estimate

    Initiating phase

    -25% – + 75%

    2

    Budget estimate

    Planning phase

    -10% – +25%

    3

    Definitive estimate

    Planning phase

    -5% – +10%

     

  • Cost estimation are made by the person responsible for the relevant work package, along with the project manager. This increases the personal responsibility accountability for the credibility of the estimation.
  • Price vs. Cost: Cost + Profit = Price. Therefore both parameters should be taking into account, despite the fact that from a project standpoint we are interested in the cost.
  • Different types of cost

    Type

    Explanation and example

    Direct vs. Indirect cost

    Direct costs are related and driven by the project only. They end when the project is completed or closed, for example dedicated manpower.

    Indirect costs are not related directly to the project such as electricity, management salary, etc.

    Fixed vs. variable costs

    Variable costs are depended on the quantity of produced units (materials). Fix costs are not, for example rent and insurance.

    Reserve analysis

    • The purpose of contingency reserves is to address “known-unknowns” that can affect that project (simply put – to identified address risks).
    • Contingency reserves are the budget allocated at the project level the handle the above risks and can be part of the cost estimating process, assigned at “the top”.
    • Management reserves are intended to address unidentified risks that can affect the project, also known as “unknown-unknowns”.  The management reserve is not part of the project budget, and not included in the performance measurement baseline (PMB).

    Benefit/Cost ratio

    Compares the benefits with the cost. BCR>1 means benefits are greater than the costs.

    Opportunity cost

    The amount of money we’re “giving up” by selecting one option (project) over the other

    Fringe / Perk benefits

    Fringe – The standard benefits given to all employees.
    Perk – Individual benefits such as bonus.

    Depreciation and Capital

    • Money spent on purchasing equipment or facilities
    • Straight line / accelerated depreciation as a way for more investment more profitable
  • Inputs – Cost Management Plan, HR Management Plan, Scope Baseline, Project Schedule, Risk Register, enterprise environmental factors, organizational process assets.
  • Tools – Expert Judgment, Analogous Estimating, Parametric Estimating, Bottom-up Estimating, Three Point Estimating, Reserve Analysis, Cost of Quality, Project Management Software, Vendor and Bid Analysis, Group Decision Making Techniques.
  • Outputs  – Activity Cost Estimates, Basis of Estimates, Project Documents Updates

 

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