Project cost management

Project cost management involves all actions taken by project managers necessary to achieve project goals within agreed budget limits. All those activities are tightly linked and interrelated with each other. Project cost management include:

• resource planning,
• cost estimating,
• cost budgeting,
• cost control.

Resource planning in project cost management

Resource planning involve careful choice of resources, i.e. materials, equipment, people, which are required to complete the entire project. It is necessary to plan the exact number and amount of each resource. Resource plan has to closely correspond with cost estimated.

Structure of project cost management plan

Inputs to resource planning:

• work breakdown structure (WBS) - identification of all project components, tasks and activities that require resources,
• historical information, information about planning in similar projects in the past,
• scope statement, motives of undertaking the project and objectives,
• Resource pool description, availability of resources,
• organizational policies,
• estimates of task duration.

Tools and techniques for resource planning:

• expert judgement - the assessment of the outputs to the project,
• identification of alternatives.

Outputs from resource planning:

• Resource requirements, description of types and quantities of resources required for project execution.

Project cost management plan, includes all resources (material, human, financial) needed to complete the project, and associated cost of this resources (based on approximate market value). It is necessary to create budget of a project.

Cost estimating in project cost management

Cost Estimating involves forecasting of costs (prices) of the resources necessary for project..

Inputs to cost estimating:

• project work breakdown structure,
• organization of the cost estimates,
• resource requirements,
• resource prices (per unit rate, staff cost per hour, etc.),
• activity duration estimates,
• publications and commercial data about cost estimating (statistical forecasting, industry analyses, etc.),
• historical price and cost data,
• structure of financial reports inside the company,
• information about the possible risks.

Tools and techniques for cost estimating:

• estimating based on analogous projects undertaken in the past - top-down estimating of the current costs based on information about the costs of a previous, similar projects,
• parametric modelling - prediction of the project costs based on a mathematical model,
• bottom-up estimating - assessing the cost of individual activities and summarizing the individuals approximations,
• IT systems for cost accounting.

Outputs from cost estimating:

• cost estimates,
• supporting details,
• cost management plan.

Cost Budgeting in project cost management

Fig. 1. Cost baseline (based on PMBOK)

Cost budgeting is the conversion the cost estimation into a feasible control budget. The outcome of the Cost Budgeting is a cost baseline for measuring project implementation.

Inputs to Cost Budgeting:

• cost estimates,
• identification of project components to which costs will be distributed,
• project Schedule - the beginning and the end dates for the project components to which costs will be distributed,
• risk management plan,
• cost budgeting tools and techniques.

Outputs from Cost Budgeting:

• cost baseline - budget planned for particular time periods and developed to calculate and control cost progress on the project. Cost baseline is a sum of estimated costs for each time period, usually presented as an S-curve (fig. 1).

Cost control in project cost management

Cost control contains monitoring and control of expenditures as the work proceeds as well as modifying the method if the results are not satisfactory

Inputs to cost control

• cost baseline,
• performance reports - the reports about project scope and project progress,
• change request,
• cost management plan.

Tools and techniques for cost control

• cost change control system - definition of the formulas and systems by which the cost baseline can be changed,
• performance measurement - measurement techniques which estimate the dimension of any modifications that happen,
• earned value management (EVM),
• additional planning,
• IT system.

Outputs from cost control

• revised cost estimates - modifications to the initial cost data,
• budget updates - changes in a cost baseline,
• corrective action,
• estimate at completion - calculation of the most probable total project costs,
• project close-out,
• lesson learned - documented and saved description of the all corrections and changes reasons.

Typical project cost escalation factors

• bias of managers and employees, bad execution,
• delivery/procurement problems,
• project schedule changes,
• engineering and construction complexities,
• scope changes,
• poor cost estimation,
• inconsistent application of contingencies,
• ambiguous contract provisions, bad contract wording,
• macroeconomic factors: inflation, interest rate,
• market conditions.

See also:

• Budget of a project
• Project lifecycle
• Project cycle management

Advantages of Project cost management

Project cost management provides multiple advantages that help ensure successful project completion. These advantages include:

• Improving budget accuracy: Project cost management helps to identify the required resources and associated costs accurately, which helps to estimate the project budget as accurately as possible.
• Reducing cost overruns: Project cost management helps to monitor the project costs and identify any possible cost overruns before they occur. This helps to keep the project on budget and to avoid unexpected costs or delays.
• Mitigating risks: Project cost management helps to identify potential risks associated with the project and to develop strategies to mitigate them. This helps to ensure that the project is completed within budget and on time.
• Enhancing communication: Project cost management helps to ensure that all stakeholders are aware of the project costs and associated risks, which enhances communication and strengthens collaboration between the team members.
• Improving project visibility: Project cost management helps to make the project visible and to provide insights into the project progress and budget. This helps to ensure that the project is within the budget and on schedule.

Limitations of Project cost management

Project cost management involves all actions taken by project managers necessary to achieve project goals within agreed budget limits. However, there are certain limitations to project cost management:

• Unforeseen Circumstances: A project cost management system cannot account for unforeseen circumstances or events such as natural disasters, sudden changes in the market, or unplanned changes in the project scope.
• Limited Resources: Project cost management can be limited by the availability of resources and the capacity of the project team.
• Lack of Buy-in: A project cost management system may not be fully embraced by all stakeholders if they do not understand or agree with the proposed budget.
• Poor Planning: Poor planning can lead to inaccurate cost estimations and a lack of clarity on deliverables, which can lead to increased costs.
• Unclear Scope: Unclear objectives and project scope can lead to miscommunication and inaccurate cost estimates.
• Difficulties in Tracking: Project cost management can be difficult to track and monitor due to the complexity of the project and the number of stakeholders involved.

Other approaches related to Project cost management

Project cost management involves all actions taken by project managers necessary to achieve project goals within agreed budget limits. Other approaches related to Project cost management include:

• Cost Estimating: Cost estimating involves determining the cost of the resources required to complete each activity of the project. Cost estimators use historical data, expert judgment, and other techniques to determine accurate estimates.
• Cost Budgeting: Cost budgeting involves allocating resources to each activity in the project. This includes assigning personnel and materials, and also deciding when to purchase materials and resources.
• Cost Control: Cost control involves monitoring and controlling the actual costs of the project to ensure they are in line with the budget. This includes tracking actual expenses, comparing them to the budget, and taking corrective action when the actual expenses exceed the budget.
• Change Control: Change control is a process for managing changes to the project scope, schedule, and budget. This includes reviewing change requests, determining the impact on the project, and deciding whether to approve the change.

In summary, Project cost management involves all actions taken by project managers necessary to achieve project goals within agreed budget limits. Other approaches related to Project cost management include cost estimating, cost budgeting, cost control, and change control.

Project cost management — recommended articles

Project risk assessment — Activity network diagram — Cost tracking — Software cost estimation — Performance models — Project risk analysis — Earned value analysis — Evaluation of risk — Critical activities

References

• Atkinson, R. (1999). Project management: cost, time and quality, two best guesses and a phenomenon, its time to accept other success criteria. International journal of project management, 17(6), 337-342.
• Chou, J. S. (2011). Cost simulation in an item-based project involving construction engineering and management. International Journal of Project Management, 29(6), 706-717.
• Jackson, S. (2002, September). Project cost overruns and risk management. In Proceedings of Association of Researchers in Construction Management 18th Annual ARCOM Conference, Newcastle, Northumber University, UK (pp. 2-4).
• PMI Standards Committee, & PMI Standards Committee. (1996). A guide to the project management body of knowledge. Project Management Institute.
• Shane, J. S., Molenaar, K. R., Anderson, S., & Schexnayder, C. (2009). Construction project cost escalation factors. Journal of Management in Engineering, 25(4), 221-229.

Author: Ewa Szczepankiewicz