Chapter Project Cost Management

Project Cost Management includes the processes involved in estimating, budgeting, and controlling costs so that the project can be completed within the approved budget. Table 7-1 provides an overview of the Project Cost Management processes which include the following:

7.1 Estimate Costs—the process of developing an approximation of the monetary resources needed to complete project activities.

7.2 Determine Budget- -the process of aggregating the estimated costs of individual activities or work packages to establish an authorized cost baseline.

7.3 Control Costs- -the process of monitoring the status of the project to update the project budget and managing changes to the cost baseline.

These processes interact with each other and with processes in the other knowledge areas as well. Each process can involve effort from one or more persons or groups of persons based upon the needs of the project. Each process occurs at least once in every project and occurs in one or more project phases, if the project is divided into phases. Although the processes are presented here as discrete elements with well-defined interfaces, in practice they may overlap and interact in ways not detailed here. Process interactions are discussed in detail in Chapter 3.

On some projects, especially ones of smaller scope, cost estimating and cost budgeting are so tightly linked that they are viewed as a single process that can be performed by a single person over a relatively short period of time. These processes are presented here as distinct processes because the tools and techniques for each are different. The ability to influence cost is greatest at the early stages of the project, making early scope definition critical (Section 5.2).

The work involved in performing the three processes of Project Cost Management is preceded by a planning effort of the project management team. This planning effort is part of the Develop Project Management Plan process (Section 4.2), which produces a cost management plan that sets out the format and establishes the criteria for planning, structuring, estimating, budgeting, and controlling project costs. The cost management processes and their associated tools and techniques are usually selected during the project life cycle definition (Section 2.1), and are documented in the cost management plan. For example, the cost management plan can establish the following:

• Level of accuracy. Schedule activity cost estimates will adhere to a rounding of the data to a prescribed precision (e.g., $100, $1,000), based on the scope of the activities and magnitude of the project, and may include an amount for contingencies.

• Units of measure. Each unit used in measurements (such as staff hours, staff days, weeks, or lump sum) is defined for each of the resources.

• Organizational procedures links. The work breakdown structure (WBS) (Section 5.3.3.1) provides the framework for the cost management plan, allowing for consistency with the estimates, budgets, and control of costs. The WBS component used for the project cost accounting is called the control account (CA). Each control account is assigned a unique code or account number(s) that links directly to the performing organization's accounting system.

• Control thresholds* Variance thresholds for monitoring cost performance may be specified to indicate an agreed-upon amount of variation to be allowed before some action need be taken. Thresholds are typically expressed as percentage deviations from the baseline plan.

• Rules of performance measurement. Earned value management (EVM) ruics of performance measurement arc set. For example, the cost management plan could:

o Define the WBS and points at which measurement of control accounts will be performed, o Establish the earned value measurement metrics (e.g., weighted milestones, fixed-

formula, percent complete, etc.) to be employed, and o Specify the earned value management computation formulas for determining the projected estimate at completion (EAC) forecasts and other tracking methodologies.

• Reporting formats. The formats and frequency for the various cost reports are defined.

• Process descriptions. Descriptions of each of the three cost management processes are documented.

All of this information is included in the cost management plan, a component of the projcct management plan, cither as text within the body of the plan or as appendices. The cost management plan may be formal or informal, highly detailed or broadly framed, based upon the needs of the project.

Table 7-1. Project Cost Management Overview

Project Cost Management Overview

7.1 Estimate Costs

1. Inputs

1. Scope baseline

2. Project schedule

3. Human resource plan

4. Risk register

5. Enterprise environmental factors

6. Organizational process assets

2. Tools & Techniques

1. Analogous estimating

2. Parametric estimating

3. Bottom-up estimating

4. Reserve analysis

5. Cost of quality

6. Project management estimating software

7. Vendor bid analysis

3. Outputs

1. Activity cost estimates

2. Basis of estimates

3. Project document updates

7.2 Determine Budget

1. Inputs

1 Activity cost estimates

2. Basis of estimates

3. Scope baseline

4. Project schedule

5. Resource calendars

6. Contracts

7. Organizational process assets

2. Tools & Techniques

1. Cost aggregation

2. Reserve analysis

3. Expert judgment

4. Historical relationships

5. Funding limit reconciliation

3. Outputs

1. Cost performance baseline

2. Project funding requirements

3. Project document updates

7.3 Control Costs

1. Inputs

1. Cost performance baseline

2. Project funding requirements

3. Work performance data

4. Organizational process assets

2. Tools & Techniques

1. Earned value measurement

2. Forecasting

3. To-complete performance index

4. Project status performance reviews

5. Variance analysis

6. Project management software

3. Outputs

1. Work performance measurements

2. Forecasted completion

3. Organizational process asset updates

4. Change requests

5. Project management plan updates

6. Project document updates

Project Cost Management should consider the requirements for capturing costs of the project stakeholders. Different stakeholders will measure project costs in different ways and at different times. For example, the cost of an acquired item can be measured when the acquisition decision is made or committed, the order is placed, the item is delivered, or the actual cost is incurred or recorded for project accounting purposes.

Project Cost Management is primarily concerned with the cost of the resources needed to complete scope and schedule activities. Project Cost Management should also consider the effect of project decisions on the subsequent recurring cost of using, maintaining, and supporting the product, service, or result of the project. For example, limiting the number of design reviews can reduce the cost of the project but could do so by increasing the customer's operating costs.

In many organizations, predicting and analyzing the prospective financial performance of the project's product is done outside the project. In others, such as a capital facilities project, Project Cost Management can include this work. When such predictions and analyses are included, Project Cost Management may address additional processes and numerous general management techniques such as return on investment, discounted cash flow, and investment payback analysis.

The cost management planning effort occurs early in project planning and sets the framework for each of the cost management processes so that performance of the processes will be efficient and coordinated.

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Project Management Made Easy

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