Project Cost Management: Step by Step Implementation Guide


When you put your hands on a project, it is extremely important to make sure that the cost of the project is effectively controlled. Otherwise, you end up with insufficient budget to run the project. Running out of budget is not a characteristic of good project manager. He ensures that the costs estimates are performed and cost management plan is developed in order to use the budget accordingly. This is done through Project Cost Management which is one of the areas of knowledge of Project Management as mentioned in PMBOK methodology from Project Management Institute (PMI).

To control the project, its costs needs to be controlled first. So, when you are developing all the Project Management plans, doing Project Cost Management is equally significant.

Project Cost Management comes with four major processes i.e. planning the cost management, estimating costs of the monetary resources, determining budget to develop an authorized cost baseline, and controlling the cost and managing the changes to the cost baseline.

These processes can be easily handled through the following 10 steps:

1. Analyze Current Project Documents

You need to begin the process with studying and analyzing all the project documents involved in the project management plan. It helps in coming up with all the gaps and constraints that are present in these documents. This leads to developing of a cost management plan which has no gaps and the constraints can also be dealt with properly.

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The two important project documents are:

Project charter

Project Charter is the profound basis of the project. By analyzing project charter, you will come across preapproved financial resources. This helps in developing detailed project costs.

The project approval requirements are also present in the Project Charter so, you will have a good idea regarding how to develop proper costs as per the requirements and then get them approved.

Project Management Plan



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While analyzing the Project Management Plan, you will study two important documents:

  • Schedule Management Plan: This plan includes scheduling processes and controls that will let you know what impacts it can have on cost estimation and management.
  • Risk Management Plan: This plan includes identification, analysis and monitoring of the risks. It also lets you have an idea of which risks are going to impact cost estimation and management.

2. Develop Cost Management Plan

Once you have done a good analysis of the project documents, next step is to develop cost management plan. This plan describes how to costs of the project will be planned, structured and controlled. There are several cost management processes and their associated approaches that are included in the cost management plan.

Cost management plan includes the following:

  • Units of measure that will be used to define various resources such as staff hours staff duty times, different quantity measures or currency calculation.
  • Level of precision for rounding up of currency.
  • Level of accuracy to determine realistic cost estimates.
  • Work Breakdown Structure that provides a good framework for the estimates, budget and control of the costs.
  • Reporting formats for different cost reports throughout the project.
  • All the additional details regarding cost management such as funding choices and taking care of the fluctuations in currency exchange rates.

3. Perform Estimate Cost Activities

In order to calculate the approximated cost of resources that are essential to complete the project tasks on time, estimate cost activities are performed. These activities help in cost estimate that are not limited to labor but covers all the categories such as material, equipment, services, inflation, cost of contingency etc.

The most helpful activities for this purpose are:

Analogous estimating

It uses the values and attributes of the previous similar projects and then compare it with the current one to observe similar parameters or measurements for the current project.

Parametric estimating

This activity uses statistical relationship between historical data and other variables to come up with cost estimates that are higher in level of accuracy.

Three point estimating

When one point estimates are not enough, three point estimating is used to define an accurate range of activity’s costs. These three estimates are:

  • Most likely (cM): It calculates cost of the activity based on all the predicted expenses.
  • Optimistic (cO): It analyzes the cost on the analysis of best-case scenario for the activity.
  • Pessimistic (cP): It analyzes the cost on the analysis of worst-case scenario for the activity.

4. Produce Cost Estimates

When all of these activities are performed, next step is to produce cost estimates of the project work. This occurs after the costs are estimated for all the required project resources such as labor, material and other services.

Cost estimates contains three main points:

  • Probable costs for the project work.
  • Contingency amounts for identified risks.
  • Management reserve for unplanned or any extra work.

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5. Determine The Budget Of The Project

Determining budget of the project involves aggregating all the estimated costs be it individual activities or work packages. So, once cost estimates are produced, it is time to bring them together and come up with the budget of the project.

As it would require some activities and approaches for determining the budget of the project accurately, following are the significant one of them:

Cost aggregation

Cost aggregation is the approach to aggregate the costs of all the activities of the project level by level as framed in WBS. It is started with work packages (lowest level activities) and then moved up to higher components. Eventually, the entire project is covered and you will come up with an aggregated cost for the whole project.

Financing

Financing is used to get funds for the project. It is mainly the case with high-end projects such as any infrastructure, industrial or public work. Financing helps in seeking external sources for the funds.

If there is any external funding, there must be some criteria or requirements as well. It is equally important to meet those requirements.

Funding limit reconciliation

This approach is used for the reconciliation of expenditure of the funds with funding limits of the project. If any variance is found, there is a need to level out the rate of expenditures. It can be done by imposing date constraints on the work in the project schedule so funds are not wasted.

After performing these activities for the aggregation of budget, you are done with the process of determining budget.

6. Develop Cost Baseline

Once the budget is determined, you will move towards developing the cost baseline.

What is a cost baseline? It is the authorized and approved version of the project budget. Budget needs to be approved once aggregated. For that, it is important to develop cost baseline. Once the cost baseline is approved, changes can be made only through formal change control procedures. Now, how the cost baseline is developed? It is done through:

  • Cost estimates of various project activities and contingency reserves are aggregated.
  • Work packages are aggreagated into control accounts.
  • Control accounts are summed up to form cost baseline.
  • Management reserves are added to cost baseline to produce project budget.

It is followed by requesting for the approval of project stakeholders and other financing sources. Once approved, a full-fledged authorized cost baseline is in your hands.

7. Controlling Cost Of The Project

The process to effectively control the budget does not end here. When you have developed a cost baseline, it is important to keep a check if the project is running according to that. This is done through the process of Control Costs.

This process helps in monitoring the status of the project in order to ensure that cost baseline is maintained throughout the project. If there is any deviation, you fail in controlling the costs of the project effectively.

In order to control the costs of the project, following activities help in monitoring the cost baseline:

To-complete performance index (TCPI)

TCPI is the calculation of cost performance with respect to the remaining work and remaining resources so that the specified management goal is met. The cost performance index that are used for this purpose are Budget at Completion (BAC) and Estimate at Completion (EAC). If BAC is no longer viable, EAC is used.

Expert Judgement

Expert judgment is the analysis and work of the experts that have already worked in this area many times. Some approaches to come up with an expert judgement include:

  • Variance analysis: It considers the cost (CV) and schedule (SV) of the project and then determine the variance at completion (VAC).
  • Financial analysis: Financial analysis is done to ensure that the budgets and funds designed are received properly or not.
  • Earned value analysis: It is used to compare the current performance of the project to that of decided and approved in the cost baseline and project schedule to ensure is the work is being done accordingly. It helps in efficient monitoring of the costs.
  • Forecasting analysis: It is done by developing a forecast for the estimate at completion (EAC) as budget at completion (BAC) is no longer viable.

Once these activities are performed, you are all set for monitoring the cost of the project.

8. Record Work Performance Information

Once all the analysis is made and calculations are done to control the cost of the project, next step is to record all the information regarding work performance of the project tasks and activities.

Work performance information includes a complete information on how to the project work is done according to the cost baseline. Variances in the work performed and cost of the work are regularly evaluated. All the activities performed for controlling the cost of the project such as variance analysis, earned value analysis etc. along with their results are recorded in work performance information.

9. Implement Change Requests

When you do analysis of the cost performance and project performance, there might be some changes that need to be made in the cost and schedule baseline. Apart from this, there can be other changes to do as well.

So, implement all the change requests in order to effectively control the cost of the project.

10. Update Project Documents

Once all the steps are implemented and work is done accordingly, follow it by updating the project documents. The important documents to update are:

  • Assumption log: The calculated cost performance might present a need to alter the assumptions regarding resource productivity and any other factor influencing cost performance.
  • Basis of estimates: Cost performance might incur a need to revise the basis of estimates so a proper basic can be redefined.
  • Cost estimates: Once the actual cost of the efficiency of the project is found, the cost estimates might need to be updated.
  • Lessons learned register: As each project has a lessons learned register, the lessons learned register for this project can be updated with all the constraints occurred in controlling the cost of the project and then approaches and activities implied to come up with a solution. This helps with many further challenges and next projects.
  • Risk register: As the risk register includes all the uncertainties and risks, it can be updated if the cost variances have crossed or are about to cross the project cost estimates and project budget.

Conclusion

So, these are the ten steps that help in effectively controlling the cost of the project. If these steps are followed properly, there is no chance that your cost estimates go wrong or budget appears to be inadequate. In order to run the project properly, it is important to take an effective hold of its budget. It helps in ensuring that project is going right according to the schedule and there are no problems or delays due to unavailability of enough budget.

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