PROJECT COST MANAGEMENT

PROJECT COST MANAGEMENT

 Processes required to ensure that a project team completes a project within an

approved budget.
 4 PCM processes:
 Planning cost management
 Estimating costs
 Determining budget
 Controlling costs
 PRINCIPLES OF COST MANAGEMENT

 Profit – revenue minus expenses.

 Profit margin – ration of profits to revenues
 Lifecycle costing – a big-picture of the project cost throughout its life cycle.
 Project success criteria – reaching a certain ROI over a life cycle.
 Cash flow analysis – determining how well an organisation can define estimated
costs and benefits for a project.
 Direct costs – directly related to the project products/services.
 Indirect costs – not directly related to the products/services.
PRINCIPLES OF COST MANAGEMENT

 Reserves – amounts included in a cost estimate to cater for future situations difficult
to predict.
 Contingency reserves – allows for future situations that may be planned included in the
project cost baseline.
 Management reserves – allows unpredictable future situations that are not included in the
project baseline.
1. PLANNING COST MANAGEMENT

 Project management plan includes:

 Level of accuracy – how accurate cost estimates of activities can be.
 Units of measure – each unit used in cost measurement should be defined.
 Organisation procedure links – the project team must use correct codes that the
organisation is using.
 Control thresholds – specified amount of variation allowed before action needs to
be taken.
 Rules of performance measurement – how performance of cost will be measured.
 Reporting formats – formats and frequency of cost reports required for the project.
 Process descriptions – how to perform all of the cost management processes.
 2. ESTIMATING COSTS

 Types of cost estimates

 Rough order of magnitude (ROM) – an estimate of the project cost done
very early in the project and helps management make project selection
decisions.
 A budgetary estimate – used to allocate money into an organization’s
budget at least 2 years into the future.
 Definitive estimate – provides an accurate estimate of project costs. Used
for making purchasing decisions and estimating final project costs.
2. ESTIMATING COSTS

 Tools and techniques

 Analogous – uses the cost of a previous similar project as the basis for estimating the cost
of the current project.
 Bottom-up – estimating the cost of individual activities and summing up to get a project
total.
 Parametric estimates – use project characteristics (parameters) in a math model to
estimate project costs.
2. ESTIMATING COSTS

 Typical Problems with IT Cost Estimates

 Estimates are done too quickly.
 Humans lack estimating experience.
 Humans are biased towards underestimation.
 Management desire accuracy.
3. DETERMINING THE BUDGET

 Involves allocating the project cost estimate to individual material resources or work
items over time.
 Cost baseline – time-phased budget that project managers use to measure and
monitor cost performance.
 Estimating cost for each major project activity over time provides project managers
& top management with a foundation for project cost control.
 Also provides information for project funding requirements.
 CONTROLLING COSTS

 Earned Value Management (EVM)

 Project performance measurement technique that integrate scope, time
and cost data.
 Involves 3 values calculated for each activity from the WBS
 1. Planned value (PV)– portion of the approved total cost estimate planned to
be spent on an activity during a given period.
 2. Actual cost (AC)– the total direct and indirect costs incurred in
accomplishing work on an activity in a given period.
 3. Earned value (EV)- an estimate of the value of the physical work actually
completed.
PROJECT PORTFOLIO MANAGEMENT

 Can be viewed as having five levels from simple to most complex, namely,
 Put all your projects in one database
 Prioritize the projects in your database
 Divide your projects into 2 or 3 budgets based type of investment
 Automate the repository
 Apply modern portfolio theory including risk-return tools that map project risk on a curve.
PROJECT MANAGEMENT SOFTWARE

 Tools to assist in project cost management

 Spreadsheets
 Help in cost estimating, cost budgeting and cost control.

 Project 2013
 Has many cost management features including EVM.