Planning and Managing Costs
Cost management is the process of figuring out how much the project is going to cost and what factors attribute to those costs. It allows a business to plan for costs to prevent it from going over budget.
Project costs are calculated during the planning phase of the project. A high-level budget should be documented with the Project Charter. As the project moves forward and is executed, the costs are recorded and tracked. The Project Manager will monitor the project costs and provide frequent updates to the project stakeholder. Upon project completion, the predicted costs versus the actual costs will be compared, studied and will become part of the project archive. These costs will serve as a benchmark for future projects.
The project cost looks at the human and physical resources that will be procured to deliver the project successfully. For example, in an office renovation, the cost estimation starts from materials, labor, administration and other direct and indirect costs. A project cannot start without a budget. Otherwise, you will have no way of tracking how much you are spending. One of the measures of Project success is decided by how well the project cost has been handled in the project. Exceeding the Project Budget is often deemed as a Project Failure. However, if this is the case, the Project Manager should review the process in which the cost estimates were complete, how accurate they were and what tools were used.
Let’s review the steps for Cost Planning:
Step 1: Planning Resources
Resources attribute to a significant portion of the project cost. The Project Manager should have a well-defined Work Breakdown Structure (WBS) and complete and correct activity list. Once those documents are in place, the project manager can determine the costs based on the resource type, quantity of resources and level of skill required.
Step 2: Estimate Costs
There are a variety of methods to estimate the project costs. The amount of information available and the completeness of the WBS and activity list will determine the method used. The different types of cost estimating are:
Analogous – using historical project information to serve as the basis of estimating for your current project.
Parametric Estimating – An estimate of cost, time or risk that is based on a calculation or algorithm. Typically used in linear, scalable projects. Historical information should be available. It includes all the possibilities, assumptions and uncertainties in cost estimation
Bottom-Up Estimating – This is a very accurate form of estimating, where an estimate is created for each scheduled activity. These individual estimates will then become part of the WBS.
Three-Point Estimating – is also known as the PERT. This technique of estimating focuses on three points: Pessimistic, Most Likely, and Optimistic. There is formula associated with this technique.
Step 3: Budget
When the cost estimates are complete, you will review the project schedule to determine when project funding will be required for the project activities. The cost estimates define the cost for the activities whole the budget will determine the project funding. The cost baseline is an approved time-phase budget used to measure actual performance.
Step 4: Monitor and Control Costs
It is important to remember when you are monitoring and controlling costs; you always want to be proactive. Do not wait for a change or issue to occur, be vigilant and be on the look for any changes. Controlling the costs is concerned with cost variance. Cost variance can be either positive or negative. The Project Manager monitors project expenditures as well as the performance against the project.
As part of the Cost control, the Project Manager continues to update the cost baseline. These updates must be recorded, and all changes must be communicated back to the stakeholder. This information will prove useful when it comes times to review cost variance and as well determine the final total costs. The goal is to avoid cost overruns.
It is vital to the success of a Project that the Project team is aware of the costs and budget. The project budget should be part of regularly scheduled meetings to provide the team with an update as it relates to the project costs.
Learn how to control costs and properly manage a budget in one of our Project Management classes.