What is project cost management?
Project cost management is the process used to plan, estimate, budget, manage and control project costs from start to finish. The main purpose of project cost management is to complete and complete the project according to its approved budget. In the cost management process, special project management functions such as estimating, data collection, planning, accounting and design are used.
According to the definition provided by the Project Management Institute, the project cost management guide includes the following processes:
- Cost Management Planning: The process of establishing policies, procedures, and documentation for planning, managing, consuming, and controlling project costs.
- Cost Estimation: The development process is an approximation of the financial resources required to complete project activities.
- Budgeting: The process of aggregating the estimated costs of individual activities or work packages to establish an enforced cost baseline.
- Cost control: The process of monitoring the status of a project to update project costs and manage changes in the cost baseline.
The advantage of cost control or project cost management advantage is that it provides the ability to detect deviations from the plan in order to take corrective action and minimize risk. Cost control not only means monitoring and recording data, but also analyzing this data in order to react correctly and in a timely manner, and perhaps managers’ decision-making.
Cost control is a subsystem of cost management and control system that performs control activities in both planning and operational processes. The cost control system should be able to meet the demands and needs of management, in a way that allows the project to move towards its targeted completion.
Therefore, the cost control system should have the following features:
- Increased project predictability.
- Increase efficiency.
- Display cost and time performance in relation to each other.
- Be a picture of the real progress of the work.
- Provide information at various levels of managers for decision-making and decision-making.
- Record and analyze cost patterns for different resources (manpower, machinery (resources), etc.). For example, compare with relevant standards.
- Provide low-level information and identify weaknesses and reprogram as needed.
- Comparison of management software with estimates and standards.
- Ability to predict project budget deficits using efficiencies.
- Urgency in quantitative evaluation of selected solutions.
Without effective and efficient control, the people in the project are unplanned and naturally inevitably increase costs and time. One of the functions of the control system is to show efficiency and cost and physical progress are the criteria for determining the efficiency of design management, engineering, procurement, and manufacturing.
Since the progress of project work is rarely in line with the set time and budget, management should have the tools to determine how the project is progressing, the range of project problems, and the changes that are taking place.
The control system is a tool that quickly informs the management of the changes made in the budget plan and enables him to react in a timely manner, which is the only way to manage the dynamics of the project. In projects, due to the close relationship between cost control and corporate profits and losses, it is essential that the needs of the cost control system and the information it contains are properly recognized to better understand the concept of cost control.
The control process in project cost management has the following steps:
- Cost control structure
- Cost and budget forecasts
- Record real action
- Calculate the difference
- Perform an action commensurate with the size of the variance
Project cost management steps
Step 1- Preparing the project budget The
first stage of project financial management is preparing the budget for the project. It is not efficient and always faces issues. You need to anticipate the total amount of manpower, equipment, materials and other costs required for the project. Then, when preparing a project plan, you should use this information and consider these costs. By doing this, you can get a picture of the project’s cash flow that shows you the amount of money needed to run the project on a weekly basis.
Step 2 – Support budget
Before you require extra money, you need to anticipate the budget. This additional budget will be used to complete the project. Few project managers really do this on time. Remember that always having a backup budget brings you better benefits than looking for an extra budget when you require it. Having a backup budget in the early stages of your project life cycle will reduce your stress.
Step 3- Weekly follow-up
The next step after preparing the budget and backup budget is to control the budget consumption on a daily basis. You must record any expenses. Ask the project team to complete the cost forms and send them to you for approval. This will make it easier for you to control the cost of the project if you can convince the team to get your approval first before incurring any costs. Next, you need to control the cost of manpower.
Step 4: Update the plan
When project costs increase from the projected budget, there are 3 ways to stay within the budget:
– Re-forecast the costs and submit a new budget to the employer for approval
– Immediate reduction of project costs. This means lower costs for doing the same job. Or similarly, if your employer agrees to reduce the project scope, you can reduce the project scope.
Spend the project support budget on additional expenses.
Step 5 – Cash flow management
Make sure you always have enough funds to cover the current month’s expenses. Cash flow management is the management of the money needed to deliver a project. So make sure the employer approves the work in the next month or two and the budget needed to carry out the activities will be available. Then check your budget on a weekly basis.
The four processes and their associated activities as shown on the Function chart (Figure 1) cover all aspects of the Total Cost Management function. The Function chart, the Function Impact Matrix chart (Figure 2), glossary of terms, and technical references attached provide a subject outline for an educational program. A truly successful project depends on the successful interaction and integration of all Project Management functions. The Function charts will provide the educational background required, for the accreditation and certification programs in Project Management.
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Glossary of Terms
Cost Management is a function which includes the processes that are required to maintain effective financial control of projects (evaluating, estimating, budgeting, monitoring, analyzing, forecasting and reporting the cost information).
Cost is the cash value of project activity.
|1.||Cost Estimating is the process of assembling and predicting the costs of a project. It encompasses the economic evaluation, project investments cost and predicting or forecasting of future trends and costs.|
|1.a||Economic Evaluation is the process of establishing the value of a project in relation to other corporate standards/benchmarks, project profitability, financing, interest rates and acceptance.|
|1.a.1||Feasibility Studies are the methods and techniques used to examine technical and cost data to determine the economic potential and the practicality of project applications. It involves the use of techniques such as the time value of money so that projects may be evaluated and compared on an equivalent basis. Interest rates, present worth factors, capitalization costs, operating costs, depreciation, etc., are all considered.|
|1.b||Profitability is a measure of the total income of a project compared to the total monies expended at any period of time. The techniques that are utilized are Payout Time, Return on Original Investment (ROI), Net Present Value (NPV), Discounted Cash Row (DCF), Sensitivity and Risk Analysis.|
|1.c||Financing involves the techniques and methods related to providing the sources of monies and methods to raise funds (stock, mortgages, bonds, innovative financing agreements, leases, etc.) required for the project.|
|1.d||Prospectus is the assembly of the evaluation profitability studies and all the pertinent technical data in an overall report for presentation and acceptance by the owner and funders of a project.|
|1.d.1||Project Budget is the amount and distribution of money allocated to a project.|
|1.d.2||Budget when unqualified, usually refers to an estimate of funds planned to cover a fiscal period. (See Project Budget.) Also: a planned allocation of resources.|
|1.e||Project Investment Cost is the activity of establishing and assembling all the cost elements (capital and operating) of a project as defined by an agreed scope of work. The estimate attempts to predict the final financial outcome of a future investment program even though all the parameters of the project are not yet fully defined.|
|1.e.1||Order of Magnitude (−25, +75 percent). This is an approximate estimate made without detailed data, that is usually produced from cost capacity curves, scale up or down factors that are appropriately escalated and approximate cost capacity ratios. This type of estimate is used during the formative stages of an expenditure program for initial evaluation of the project. Other terms commonly used to identify an Order of Magnitude estimate are preliminary, conceptual, factored, quickie, feasibility and SWAG.|
|1.e –||Parametric Cost Estimating is an estimating methodology using statistical relationships between historical costs and other project variables such as system physical or performance characteristics, contractor output measures, or manpower loading, etc. Also referred to as “top down” estimating.|
|1.e.3||Budget Estimate (−10, +25 percent). A budget estimate is prepared from flowsheets, layouts and equipment details. This is often required for the owner’s budget system. These estimates are established on quantitative information and are a mixture of firm and unit prices for labour, material and equipment. These estimates are used to establish the funds required and for obtaining approval for the project. Other terms used to identify a Budget estimate include Appropriation, Control, Design, etc.|
|1.e –||Definitive Estimate (−5, +10 percent). A definitive estimate is prepared from well defined data, specifications, drawings, etc. This category covers all estimate ranges from a minimum to maximum definitive type. These estimates are used for bid proposals, bid evaluations, contract changes, extra work, legal claims, permit and government approvals. Other terms used for a Definitive Estimate include check, lump sum, tender, post contract changes, etc.|
|1.e.6||Project Close Out and Start Up Costs are the estimated extra costs (both capital and operating) that are incurred during the period from the completion of project implementation to the beginning of normal revenue earnings on operations.|
|1.f||Contingencies. Specific provision for unforeseeable elements of cost within the defined project scope; particularly important where previous experience relating estimates and actual costs has shown that unforeseeable events which will increase costs are likely to occur. If an allowance for escalation is included in the contingency it should be as a separate item, determined to fit expected escalation conditions of the project.|
|1.g||Inflation/Escalation is a factor in cost evaluation and cost comparison that must be predicted as an allowance to account for the price changes with time that can occur and over which the Project Manager has no control (such items as cost of living index, interest rates, other cost indices, etc.).|
|1.i||Cost Forecasting is the activity used to predict future trends and costs within the project duration. These activities are normally marketing oriented. However, such items as sales volume, price and operating cost can affect the project profitability analysis. Items that affect the cost management function are: predicted time/cost, salvage value, etc.|
|1.i. –||Trend Analyses are mathematical methods for establishing trends based on past project history and allowing for adjustment, refinement or revision to predict future cost. Regression analysis techniques can be used for predicting cost/schedule trends using data from historical projects.|
|1.j||Statistics are the mathematical methods used to determine the best range of probable values for a project and to assess the degree of accuracy or allowance for unpredictable future events such as accidents, technological innovations, strikes, etc., that can occur during the project life. The techniques that can be used are risk analysis with Monte Carlo simulation, confidence levels, range analysis, etc.|
|2.||Cost Budgeting is the process of establishing budgets, standards and a monitoring system by which the investment costs of the project can be measured and managed, that is, the establishment of the control estimate. It is vital to be aware of the problems “before the fact” so that timely corrective action can be taken.|
|2.a||Work Breakdown Structure (WBS). A task-oriented “family tree” of activities which organizes, defines and graphically displays the total work to be accomplished in order to achieve the final objectives of a project. Each descending level represents an increasingly detailed definition of the project objective. It is a system for subdividing a project into manageable work packages, components or elements to provide a common framework for Scope/Cost/Schedule communications, allocation of responsibility, monitoring and management.|
|2.b||Code of Accounts. Once the project has been divided into the WBS work packages, a code or numbering system is assigned to the cost data for cost monitoring, control, reports, tax class separations and forecasting purposes.|
|2.c||Budget Costs are the translation of the estimate into manhour rates, quantity units of production, etc. so that these budget costs can be compared to actual costs and variances developed to highlight performance and alert those responsible to implement corrective action if necessary.|
|2.d||Cash Flow Analysis is the activity of establishing cash flow (dollars in and out of the project) by month and the accumulated total cash flow for the project for the measurement of actual versus the budget costs. This is necessary to allow for funding of the project at the lowest carrying charges and is a method of measuring project progress.|
|2.e||Managerial Reserves are the reserve accounts to allocate and maintain funds for contingency purposes on over-or under-spending on project activities. These accounts will normally accrue from the contingency and other allowances in the project budget estimate.|
|2.f||Cost Performance Measurement Baseline is the task of formulating the budget costs measurable goals (particularly time and quantities) for the purpose of comparisons, analyzing and forecasting the future costs.|
|2.g||Project Cost Systems is the establishment of a project cost accounting system, ledgers, asset records, liabilities, write offs, taxes, depreciation expenses, raw materials, pre-paid expenses, salaries, etc.|
|2.g.1||Project Accounting is the process of identifying, measuring, recording and communicating actual project cost data.|
|2.h||Funding (PMI, 1986). The status of internal fund allocation or allocation by an external agency, if applicable, to perform the SOW tasks.|
|3.||Cost Controls are the processes of gathering, accumulating, analyzing, reporting and managing the costs on an on-going basis and includes all of the following activities.|
|3.c||Project Procedures are the methods, practices and policies (both written and verbal communications) that will be used during the project life.|
|3.e. –||Project Cost Changes are the changes to a project and the initiating of the preparation of detail estimates to determine the impact on project costs and schedule. These changes must then be communicated clearly (both written and verbally) to all participants that approval/rejection of the project changes have been obtained (especially those which change the original project intent).|
|3.f||Monitoring Actual versus Budget is one of the main responsibilities of cost management for continually measuring and monitoring the actual cost versus the budget in order to identify problems, establish the variance, analyze the reasons for variance and take the necessary corrective action. Changes in the Forecast Final Cost are constantly monitored, managed and controlled.|
|3.g||Variance Analysis is the analysis of the following:|
|3.g.1||Cost Variance = BCWP – ACWP|
|3.g.3||Unit Variance Analysis
|3.g.5||Schedule/Performance = BCWP – BCWS|
|3.h||Integrated Cost/Schedule Reporting is the development of reports that measure budget versus actual, S curves, BCWS, BCWP, ACWP.|
|3.h 2||BCWP – is the Budget Cost of Work Performed|
|3.h.1||BCWS – is the Budget Cost of Work Scheduled|
|3.h.3||ACWP – is the Actual Cost of Work Performed|
|3.h.4||S Curves – are the graphical display of the accumulated costs and labour hours against time for both budgeted and actual amounts.|
|3.i||Progress Analysis is the development of performance indices such as:|
|3.i.1||Cost Performance Index =|
|3.i.2||Schedule Performance Index =|
|3.i.3||Productivity is the measurement of labour efficiency when compared to an established base. It is also used to measure equipment effectiveness, drawing productivity, etc.|
|3.j||Corrective Action is the development of changes in plan and approach to improve the performance of the project.|
|4.||Cost Applications are the processes of applying cost data to other techniques that have not been described in the other processes.|
|4.a||Historical Data Banks are the data stored for future reference and referred to on a periodic basis to indicate trends, total costs, unit costs and technical relationships, etc. Different applications require different data base information. This data can be used to assist in the development of future estimates.|
|4.b||Responsibility Charting is the activity of clearly identifying personnel and staff responsibilities for each task within the project.|
|4.c||Post Project Evaluation is the activity of appraising the costs and technical performance of a completed project and the development of new applications in project management methods to overcome problems that occurred during the project life to benefit future projects.|
|4.d||Life Cycle Costing is the concept of including all costs within the total life of a project from concept, implementation, start up to dismantling. It is used for making decisions between alternatives and is a term used principally by the government to express the total cost of an article or system. It is also used in the private sector by the real estate industry.|
|4.e||Value Analysis is an activity devoted to optimizing cost performance. It is the systematic use of techniques which identify the required functions of an item, establish values for those functions and provide the functions at the lowest overall cost without loss of performance (optimum overall cost).|
|4.f||Computer Cost Applications are the computer assisted techniques to handle, analyze, and store the volume of data accumulated during the project life that are essential to the cost management function. The areas associated with cost management are:
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14. __________. Proceedings of the Annual Seminar/Symposiums. Drexel Hill, PA: The Project Management Institute.
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THE PM NETWORK August, 1987