Project Cost and Budget

• Project planning III session #9 took place on 16 Apr 2025

Project cost and budget

• Project cost and budget includes cost management planning, different types of costs, estimating costs, types of cost estimate, cost estimation tools and techniques, budget setting, baseline budget and creating a project budget
• Cost management planning defines how project costs are estimated, budgeted, managed, monitored and controlled
• It gives direction on how project costs will be managed
• It occurs early in project planning and sets the framework for each of the cost management processes to ensure the processes will be coordinated and efficient
• The cost management processes and associated tools are documented in the cost management plan

Cost management plan components

• Includes units of measure, level of precision, level of accuracy, organizational procedure links, control thresholds, rules of performance measurement, reporting formats, and additional details
• Units of measure are expressed in time, quantity or currency
• The level of accuracy is the acceptable range used in determining realistic cost estimates

Different types of costs

• Direct costs are costs for items necessary to complete a project
• These include salaries, materials, equipment rental, software licenses, travel and transportation costs and/or staff training
• Indirect costs (overhead) do not lead to project completion but are still essential for the project team
• These include administrative costs, utilities, insurance, general office equipment and/or security

Estimating Costs

• Estimating costs develops an approximation of the costs of resources needed
• The key benefit is that it determines the monetary resources required
• It is performed throughout the project as needed
• It is a prediction based on the information known at a given time and are expressed in currency
• Cost estimates should be reviewed and refined during the project based on new information
• Project estimate accuracy will increase as the project progresses
• Costs are estimated for resources charged to the project e.g. labor, materials, equipment, facilities

Types of cost estimate

• Rough order of magnitude (ROM) estimate provides an estimate of what a project will cost and occurs early in project planning
• Project managers use ROM to help make project selection decisions
• ROM estimate accuracy can range from -50% to +100%
• Budgetary estimate is used to allocate money into an organization’s budget
• Many budgets are developed two years into the future, making budgetary estimates one to two years prior to project completion
• Budgetary estimates accuracy is typically -10% to +25%
• Definitive estimate provides an accurate estimate of project costs
• Utilized to make purchasing decisions and estimate final project costs
• Definitive estimates are made one year or less prior to project completion and should be most accuracte with a range of -5% to +10%

Cost estimation tools and techniques

• Analogous estimates use the actual cost of a previous similar project as the basis for estimating costs
• This requires expert judgment and is less costly but also less accurate compared to other techniques.
• Bottom-up estimates involves estimating individual work items summing the prices to create a project total
• Also known as activity-based costing performed at each WBS level, requiring experience and time
• Three-point estimates estimate the most likely, optimistic and pessimistic costs for items
• Parametric estimating uses project characteristics in a mathematical model to estimate project costs
• Parametric models are reliable with accurate historical information, readily quantifiable parameters and flexibility in the project's size

Budget setting

• Involves allocating the project cost estimate to individual material resources overtime and is the setting or determining of the budget
• A project budget is the estimated monetary resource needed to achieve a project's goals and objectives
• Project budgets help control costs throughout their duration
• Budget setting aggregates estimated costs of individual activities or work packages to establish a cost baseline
• It determines the cost baseline against which project performance can be monitored and controlled
• This process is performed once or at predefined points in the project
• A project budget includes all the funds authorized to execute the project

The importance of budget setting

• A budget is a tool to reference when communicating with stakeholders
• Budgets control costs and act as the baseline for the financial portion of the project
• Budgets contain items such as labor, operating costs and costs with materials like hardware or software
• In project management a budget is considered a deliverable and a success metric
• Budgeting is important and tricky to stay on budget where it is important to not go over budget or be under budget

Baseline budget

• Baseline budget is an estimate of the project costs you start with at the beginning of the project
• Once created and approved, the baseline should be published and compared against actual performance progress to gain insights into budget performance for potential adjustments
• Project budget must be continually monitored, making changes if necessary
• Budget updates can require the same approvals as the initial budget
• Re-baselining updates /modifies a project's baseline from approved changes to the schedule, cost or deliverable content

Creating a project budget

• Ensure you aren't over or underestimating a budget using resources and tactics
• Research historical data by reviewing similar past projects
• Leverage experts by using insights to effectively complete tasks
• The bottom-up approach includes all the parts from the project including material, resources with costs
• Confirm accuracy after creating budget with resources by double checking everything
• Setting the baseline with the dollar/euro to measure against, to measure the project's success