Every project has costs, including direct costs, indirect costs, sometimes capital cost, always expense cost. Cost management on a project is generally done partially by the project team and partially by people in other departments. In this chapter we discuss many aspects of project cost management. Cost management encompasses estimation and tracking of costs, as well as cash flow and other economic concepts. We discuss cost control and other aspects that are project related. Also we discuss building cost contingency into the project budget. One very important concept related to cost is Earned Value. This concept is covered separately in Chapter 11, because it is a project management concept that links the budget to the schedule, and hence is not strictly a financial concept.
Some PM's never have to address financial issues, but for others, it is a critical part of the job. In telecom, even during the good years, finances have been a critical component of projects. In fact the financial aspects have been so critical that not only are project managers required to estimate, get approval for, track, and justify all of their project costs, but many cost items are calculated and reviewed by financial departments as well. Engineering Economics departments exist to work the numbers for major investments such as network upgrades, new services, new products, maintenance, etc. And since so much of the telecom environment had traditionally been regulated, very precise and careful methodologies were adopted for calculating the costs. Every cost the company incurred was tracked, and assigned to an appropriate category. Even today, when the level of regulation has significantly decreased, companies are still extremely cost conscious, and extremely careful to manage all costs professionally. Therefore for many projects, Engineering Economics will be involved. Someone from the
Engineering Economics department might be a member of the core project team, or the department might be involved as part of the extended team. In either case, this brings a professional perspective to the project costs that this person handles. Engineering Economics generally handles costs that are related to the product that the project is producing. Of course these are usually a major component of the project costs, and they need to be carefully developed. In this chapter we will introduce some of the tools that Engineering Economics uses, such as NPV, ROI, etc. If these costs are required for the project but there is no Engineering Economics involvement, the project team will have to calculate them. However, we will not cover these topics in extensive detail, as they are really a functional input to the project, and in some cases, the project manager does not even have to deal with them.
Another department involved in the financial aspects of projects, is Accounting. The role of the Accounting department is to track the spending on each project, and to flag to the management (and hopefully also to the Project Managers) any problems that appear. When any project deviates from the planned spending curve, Accounting will generally take some action. This department is generally not included as part of the project team, but since they do have the potential to impact the project, they are stakeholders, and the PM will do well to keep them informed of potential problems, as well as current status. We will discuss some issues in the cash flow section that show the differences in the perspective Accounting might have of a project from the project management perspective.
In telecom, it is almost unheard of that a project manager will not be involved in the financial aspects of a project. Even if the financial aspects of the product are handled completely by Engineering Economics, the PM will have to prepare the project budget, prepare the plan for the cash flow, and manage the spending. This chapter addresses the project related financial concepts. Many project managers have strengths in non-financial areas, such as the soft skills, or technology, and do not enjoy doing the financial work. However, it is integral to the project, and whatever financial aspects the company expects from the team will have to be managed by the team. Given that the PM has to do some of this, if it is not something he enjoys, he should try to hire a team member to manage this aspect of the project. But, as PM, he needs to at least understand what was done, and what the results mean.
In short, Accounting will be involved in tracking the actual expenditures against the budget. Engineering Economics may be involved in project/product assessment. The PM and the team will define the budget; report the progress and monitor results. Senior Management will receive
Accounting reports, and if the project is a high priority project, or one that consumes large resources, the team will be called upon to provide periodic status reports and explanations of the spending. If there are significant deviations from the budget, the PM will have to answer to Accounting and maybe also to senior management. The PM can best manage the budget if he compares actual costs to the budget for the actual work accomplished, and he compares actual work accomplished with planed accomplishment. Therefore all project managers should understand the concepts presented here.
The process areas for cost defined in the PMBOK® Guide are:
Specifically, this chapter addresses:
1. Some concepts
2. Cost estimation
3. Creating the project budget
4. Including budget contingency
5. Cash flow
6. Project cost management
7. Cost tracking and controlling
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What you need to know about… Project Management Made Easy! Project management consists of more than just a large building project and can encompass small projects as well. No matter what the size of your project, you need to have some sort of project management. How you manage your project has everything to do with its outcome.