Project Cost

Management

Understand the importance of project cost

management

Explain basic project cost management principles,

concepts, and terms

Discuss diferent types of cost estimates and

methods for preparing them

Understand the processes involved in cost

budgeting and preparing a cost estimate and
budget for a project

Understand the benets of earned value

management
!hy cost management is important

Projects have a poor trac" record for meeting

budget goals

#he C$%&' studies found the average cost

overrun (the additional percentage or dollar
amount by )hich actual costs exceed estimates*
ranged from +,- percent in +../ to 01 percent in
2--/3 other studies found overruns to be 4454/
percent
!hy cost management is important

!hy cost management is important
!hat can go )rong

#he U6'6 government, especially the 7nternal

8evenue 'ervice (78'*, continues to provide
examples of ho) not to manage costs
% series of project failures by the 78' in the +..-s
cost taxpayers more than 90- billion a year
7n 2--1, the 78' )as in the ne)s for a botched
upgrade to its fraud5detection soft)are, costing
94+, million in fraudulent refunds that didn:t get
caught
% 2--, ;overnment %ccountability &<ce (;%&*
report stated that more than /-- U6'6 government
agency 7# projects, )orth an estimated 920 billion,
sufer from poor planning and underperformance
!hat is cost management

Cost is a resource sacriced or foregone to

achieve a specic objective or something given up
in exchange

Costs are usually measured in monetary units li"e

dollars
!hat is cost management

Project cost management includes the

processes re=uired to ensure that the project is
completed )ithin an approved budget
Processes in cost
management

Estimating costs> developing an approximation

or estimate of the costs of the resources needed
to complete a project

Determining the budget> allocating the overall

cost estimate to individual )or" items to establish
a baseline for measuring performance

Controlling costs> controlling changes to the

project budget
?asic Principles of Cost
Management
Profts are revenues minus expenditures
Proft margin is the ratio of revenues to prots
Life cycle costing considers the total cost of
o)nership, or development plus support costs, for a
project
Cash fow analysis determines the estimated
annual costs and benets for a project and the
resulting annual cash @o)
?asic Principles of Cost
Management
#angible costs or benets are those costs or
benets that an organiAation can easily measure in
dollars
7ntangible costs or benets are costs or benets
that are di<cult to measure in monetary terms
Direct costs are costs that can be directly related to
producing the products and services of the project
7ndirect costs are costs that are not directly related
to the products or services of the project, but are
indirectly related to performing the project
'un" cost is money that has been spent in the past3
)hen deciding )hat projects to invest in or
continue, you should not include sun" costs
?asic Principles of Cost
Management

Learning curve theory states that when

many items are produced repetitively, the unit
cost of those items decreases in a regular
pattern as more units are produced

Reserves are dollars included in a cost

estimate to mitigate cost risk by allowing for
future situations that are difficult to predict
Contingency reserves allow for future situations
that may be partially planned for (sometimes called
known unknowns) and are included in the project
cost baseline
Management reserves allow for future situations
that are unpredictable (sometimes called unknown
unknowns)
Estimating Costs

Project managers must ta"e cost estimates

seriously if they )ant to complete projects )ithin
budget constraints

7t:s important to "no) the types of cost estimates,

ho) to prepare cost estimates, and typical
problems associated )ith 7# cost estimates
Cost management plan

% cost management plan is a document that

describes ho) the organiAation )ill manage cost
variances on the project

% large percentage of total project costs are often

labour costs, so project managers must develop
and trac" estimates for labour
Cost Estimation, #ools and
#echni=ues

?asic tools and techni=ues for cost estimates>

%nalogous or top5do)n estimates> use the actual

cost of a previous, similar project as the basis for
estimating the cost of the current project

?ottom5up estimates> involve estimating

individual )or" items or activities and summing
them to get a project total

Parametric modelling uses project characteristics

(parameters* in a mathematical model to
estimate project costs
Typical Problems with Cost
Estimates
#ypical Problems )ith Cost
Estimates

Estimates are done too =uic"ly

Bac" of estimating experience

$uman beings are biased to)ard underestimation

Management desires accuracy

7nteraction costs are hidden in estimates

Typical Problems with Cost
Estimates

Cormal conditions do not apply ()hat is normal

today may not be the same next )ee"*

#hings )ill go )rong

Changes in projects scope and plans

&verly optimistic

'trategic misrepresentation ( someone selling the

project may overestimate the benets and
underestimate costs*
Estimating costs

?efore creating an estimate, "no) )hat it )ill be

used for, gather as much information as possible,
and clarify the ground rules and assumptions for
the estimate

7f possible, estimate costs by major !?'

categories

Create a cost model to ma"e it easy to ma"e

changes to and document the estimate
Determining the ?udget

Cost budgeting involves allocating the project cost

estimate to individual )or" items over time

#he !?' is a re=uired input to the cost budgeting

process since it denes the )or" items

7mportant goal is to produce a cost baseline

% time5phased budget that project managers use

to measure and monitor cost performance
Controlling Costs

Project cost control includes>

Monitoring cost performance

Ensuring that only appropriate project changes

are included in a revised cost baseline

7nforming project sta"eholders of authoriAed

changes to the project that )ill afect costs

Many organiAations around the globe have

problems )ith cost control
Earned Dalue
Management

EDM is a project performance measurement

techni=ue that integrates scope, time, and cost
data

;iven a baseline (original plan plus approved

changes*, you can determine ho) )ell the project
is meeting its goals

Eou must enter actual information periodically to

use EDM

More and more organiAations around the )orld are

using EDM to help control project costs
Earned Dalue Management
#erms
#he planned value (PD*, formerly called the budgeted
cost of )or" scheduled (?C!'*, also called the budget,
is that portion of the approved total cost estimate
planned to be spent on an activity during a given
period
ctual cost (%C*, formerly called actual cost of )or"
performed (%C!P*, is the total of direct and indirect
costs incurred in accomplishing )or" on an activity
during a given period
#he earned value (ED*, formerly called the budgeted
cost of )or" performed (?C!P*, is an estimate of the
value of the physical )or" actually completed
ED is based on the original planned costs for the project
or activity and the rate at )hich the team is completing
)or" on the project or activity to date