Project Cost Management Basics

• Cost management involves estimating, budgeting, and controlling costs throughout a project's life cycle, with the goal of staying within the approved budget.
• Successful projects deliver on requirements and scope, have high execution quality, meet deadlines, and stay within budget.

Cost Management

• Cost management is planning and controlling costs related to running a business.
• It includes collecting, analyzing, and reporting cost information to effectively forecast and monitor costs.
• Cost management is complex but involves resource planning, cost estimation, cost budgeting, and cost control.

Key Cost Elements

• Cost management plans keep all project costs, both direct and indirect, in one place and project managers track these to prevent budget overruns.
• The five types of costs are: direct, indirect, fixed, variable, and sunk.

Direct Cost

• Direct costs are linked to the work of the project, being the most common type of cost for businesses.
• They are associated with producing a product or service and include raw materials, labor, distribution, and delivery costs.
• Specialized contractors, software licenses, and prototype testing can be considered direct costs.
• For car manufacturers, direct costs encompass raw materials and employee wages.

Indirect Cost

• Indirect costs are not specifically project-linked and are related to the overall business operation.
• These are the expenses a company must consistently pay, not directly tied to production.
• Examples of indirect costs include heating, lighting, office space rental and communal coffee machines.
• The electricity used to power manufacturing machines and the factory is an indirect cost for car manufacturing.

Fixed Cost

• Fixed costs are one-off charges, not linked to project duration, and do not vary over time or change depending on output.
• They are generally the easiest costs to determine.
• Rent is an example of a fixed cost; and it remains the same regardless of production volume, unless the company moves to bigger premises.

Variable Cost

• Variable costs, unlike fixed costs, change over the duration of a project and vary with production/scope; an increase in production/scope leads to increased variable costs, whereas a decrease leads to decreased variable costs.
• Examples include direct labor costs or sales commissions.
• Paying staff salaries over 12 months is more expensive than over 6 months and the machine hire over 8 weeks is more costly than for 3 weeks.
• A company giving sales commissions sees its variable costs increase if sales increase, and decrease if there's a drop in sales.

Sunk Cost

• Sunk costs are costs that have already been incurred and can be any cost type.
• They are historical, cannot be reclaimed and often forgotten, but are essential to know about in business cases for future business decisions.
• Even though sunk costs can't be recovered, they can enable the business to make a profit.
• New equipment purchased by a manufacturing company can increase the number of cars made, increasing the company's profit, but this is still considered a sunk cost.

Cost Management Processes

• Cost management processes include planning cost management, estimating costs, determining budget, and controlling costs.

Plan Cost Management

• Plan Cost Management establishes the policies, procedures, and documentation for planning, managing, expending, and controlling project costs.
• Inputs to plan cost management include include project management plan, project charter, enterprise environmental factors, and organizational process assets.
• Tools used for plan cost management include expert judgement, analytical techniques and meetings.
• The goal of plan cost management is to create a cost management plan.

Estimate Costs

• Estimate Costs is the process of developing an approximation of the cost of resources for the project activity.
• Inputs for estimate costs are scope baseline, project schedule, risk register, cost management plan, human resource management plan, enterprise environmental factors, and organizational process assets.
• Tools to estimate costs include expert judgement, analogous estimating, parametric estimating, bottom-up estimating, three point estimating, reserve analysis, cost of quality, vendor bid analysis and group decision-making techniques.
• The goal is the activity cost estimates, the basis of estimates, and project document updates.

Cost Estimation Methods

• Cost estimation techniques include expert judgment, analogous, parametric, bottom-up and three-point estimating, data analysis, project management information, and decision making.
• Four major cost estimation techniques are analogous, parametric, bottom-up and three-point estimating.
• Cost estimates depend on the organization's policies and available expertise, with some beginning with rough estimates and refining later.

Analogous Estimating

• Analogous estimating calculates expected project costs based on known costs from similar past projects using historical data and expert judgement.
• Given that each project is unique, this method is often used in the earliest planning stages when only a rough estimate is necessary and relatively little information about the current project is available.

Parametric Estimating

• Parametric estimating assigns a dollar value to project costs using historical data and statistical modeling.
• This method determines the unit cost for a component of a project.
• While more accurate than analogous estimating, it requires more initial data for assessing costs accurately and it is often used in construction.
• For example, a budget identified using parametric estimating can accurately fall within range by taking the cost per square foot of a property and multiplying it by the square footage of the project.

Bottom-Up Estimating

• Bottom-up estimating involves breaking a larger project into smaller components and estimating costs specifically for each work package.
• This allows for more accurate estimation due to the granular look at individual tasks.
• If a project's work is split by department, costs can be separated accordingly and tallied up as a single estimate for the entire project.

Three-Point Estimating

• Three-point estimating involves using three separate figures for project costs.
• An "optimistic" estimate reflects most efficient work and spending.
• A "pessimistic" estimate reflects the least efficient work and spending.
• A "most likely" scenario sits in the middle of those estimates.

Principles of Cost Estimation

• Accuracy heavily depends on the level of project scope definition.
• Cost estimation allows decision-makers to make investment choices.
• Estimating breaks down the project scope into resources which can be assigned and cost can be allocated, using methods like Work Breakdown Structure (WBS) and Cost Breakdown Structure (CBS).
• A cost estimate includes a Basis of Estimate (BOE) report that describes the assumptions, inclusions, exclusions, accuracy and other aspects to interpret the project costs.

Advantages of Cost Estimation

• Accurate plannings helps to predict future expenses.
• Increased profit margins as expected expenditure is known in advance to help regulate costs.
• Good resource management to increase insight into expenses which helps with proper allocation and implementation of funds for manufacturing.
• A stronger market reputation for better management of funds, resources, and efficient production, benefitting business growth.

Determine Budget

• Determine Budget allocates money to work packages and aggregates the total cost of those packages.
• Inputs include the cost management plan, scope baseline, activity cost estimates, project schedule, resource calendars, risk register, agreements/contracts, basis of estimates and organizational process assets.
• Tools to determine budget include cost aggregation, reserve analysis, funding limit reconciliation, expert judgement and historical relationships.
• The goal of determining a budget are the cost baseline, the project funding requirements and project document updates.

Control Costs

• Control Costs influences factors creating cost variances and controlling changes to the project budget.
• Inputs include project management plan, project funding requirements, work performance data and organizational process assets.
• Tools for managing costs include earned value management, forecasting, performance reviews, TCPI and reserve analysis.
• The goal is work performance information, cost forecasts, change requests, project management documents, process assets and project updates.

Cost Performance

• Measuring performance ensures projects are on track with goals and productivity.
• Progress for each work needs to be regarded in cost from the planning phase as the human resources and salaries account for the majority of a project's budget.
• Reporting involves implementing reporting protocols, frequency, and format to detect budget deviations.

Factors Affecting Cost Control

• The Cost of Materials, cost variance, ROI, labor costs and real costs are all factors that impact cost control.
• Cost of Materials is the entire cost of all supplies and equipment necessary for a project.
• Cost Variance any price disparities between the project's actual cost and the budget you've set. For example, a $500 cost variance exists when you have a budget of $1,000 for the project, but it actually costs $1,500.
• Return on Investment (ROI)measures how profitable a project is in relation to the amount of money invested and a high ROI means the project generated more revenue.
• Labor Costs are the wages to project employees, perks and taxes.
• Real Cost is the sum of all expenses incurred by a project.

Techniques and Tools

• Other cost management techniques include inventory control, outsourcing, using technology and developing market sense.
• Inventory control involves making a list of inventory requirements, doing quantity checks, and checking vendor costs.
• Outsourcing puts staff under third-party responsibilities to prevent the employer from accounting for expenses.
• Project cost management software allows companies to monitor project profitability and estimate the cost of delivering projects, identify actual costs, and compare them to calculate profit.

Other Cost Management Methods

• Control of project-specific and business costs.
• Forecasting future expenses and costs
• Predetermined costs act as company records.
• Aids in cationa for objectives and goals.
• Analysis of long-term company patterns.
• Actual costs compared to anticipated costs.
• Helping the company make an acquisition.

Summary

• Weighted Milestones involve assigned budget value earned at the completion of that milestone.
• Cost of Quality is the cost that is incurred to achieve product/service.
• Reserve Analysis includes Cost/Schedule contingency/reserve analysis used to cover any unforeseen risks or changes to the project
• Cost Performance Baseline is a time phased budget that will be used as a basis against which to measure, monitor, and control overall cost performance on the project.
• Project Budget constitute the funds authorized to execute the project.