Project Management

[ Project Management Topics ]

Cost Management - I of II

Here we make sure the project is completed within the approved budget. It incorporates four areas:

  1. Resource planning - as noted above but with an emphasis on what is the most cost effective (within your risk tolerance level) method of obtaining the needed resources
  2. Cost estimating - coming up with an approximate estimate of overall costs (coined life-cycle costing)
  3. Cost budgeting - allocating the overall cost estimate to individual work activities
  4. Cost control - making sure the project stays on budget

Resource Planning

Why is this an important part of cost management? Well, because the resources you choose will likely vary quite a bit in their cost. If you went with external professionals for every task you will likely have a very high cost project. However, if you go with some lower cost alternatives you may be sacrificing quality, creativity, or market expertise. Another example is if you spend less time in the beginning developing the optimal design for a project product you may end up spending more that was necessary in operating or development costs.

There are seven fundamental resources you most likely will need:

  1. people
  2. money (cash versus net value should be considered)
  3. equipment
  4. facilities
  5. materials and supplies
  6. information
  7. technology

Cost estimating

Here you come up with the overall expected costs for the project and start to break those costs out into what will become the project budget. Basically you need to start somewhere with a budget and then refine it. Another important factor of this step is it considers the overall costs of project from start to finish so the company and the team understand the actual costs of the project up front (to the degree possible) and can earmark areas with high potential for going over budget due to high risks, high costs, or high levels of ambiguity.

Cost estimating is actually done throughout the project and often becomes more accurate as the project proceeds.

Types of estimates:

Cost budgeting

Your intended output from cost budgeting is developing a cost baseline. A cost baseline "is a time-phased budget that will be used to measure and monitor cost performance on the project." (PMI, 2000, p. 90). In basic terms, cost budgeting is allocating cost to individual work items in the project. As described by Newell, "the cost baseline for the project is the expected actual cost of the project. The budget for the project should contact the estimated cost of doing all of the work that is planned to be done for the project to be completed. In addition, cost must be budgeted for work that will be done to avoid, transfer, and mitigate risks. Contingency must be budgeted for risks that are identified and may or may not come to pass. A reserve must be budgeted for risks that are not identified." (Newell, 2002, p. 83)

Cost control

"Cost control is concerned with a) influencing factors that create changes to the cost baseline to ensure that changes are agreed upon, b) determining that the cost baseline has changed, and c) managing the actual changes when and as they occur. Cost control includes:

Cost control includes searching out the 'whys' of both positive and negative variances." (Project Management Institute, 2000, p. 91)

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Newell, M. W. (2002). Preparing for the Project Management Professional (PMP) Certification Exam. New York, NY: American Management Association.

Project Management Institute (2000). A Guide to the Project Managment Body of Knowledge. Newton Square, PA: Project Management Institute, Inc.