How to Go About Managing Costs on the Project

“Money often costs too much.”
– Ralph Waldo Emerson

Project Cost Management Knowledge Area

Image Courtesy: Wikipedia

Sydney Opera House is built on 4.5 acres of land, is 183 m long, 120 m wide and is supported on 588 concrete piers sunk as much as 25 m below sea level!

Construction started in March 1959, with an estimated cost of $7 million and estimated completion date of January 1963.

An ambitious and grand project indeed.

When the project was completed, it had cost $103 million with 10 years of delay.

That’s a cost overrun of 14 times the original estimate!

Project Cost Management Knowledge Area helps with estimating cost of all the resources used on the project, figuring out the budget, and planning for ways of keeping costs in check.

Earned Schedule (ES)

Earned Schedule is a concept increasingly used in the project management field and it replaces the usage of Schedule Variance measurements used in Earned Value Method (EVM) calculations.

In simple terms the difference Earned schedule and Actual Time (i.e, Schedule variance = ES – AT) determines whether the project is ahead or behind schedule. We shall see more in the EVM exam notes post.

Tailoring in Cost management

Tailoring is the process of determining which processes, tools and techniques are used for cost management on the project. Some of these decisions may be dictated by the PMO if your organization has one, or existing practices and policies around cost management in the organization.

Even best practices used in the industry, project management methodology (agile!), available expertise, and stakeholder influence (client insistence) may also determine tailoring considerations.

This knowledge area has 4 processes as below –

Planning How to Manage Cost

This project management activity defines policies, procedures and suggests any specific tools and techniques that organizational policies would mandate, for creating and managing changes to cost baseline, in other words, planning to controlling project costs.

Many projects have had to be cancelled due to cost overruns, and most of the times successfully completed projects end up costing more than the budget. Hence planning becomes one of the crucial activities of cost management.

Many aspects of costing need to be considered while planning. For instance, for long term projects inflation needs to be taken into account along with forecasts of cost of raw materials, equipment, machinery, and other resources required for the project.

Small things like reducing multiple rounds of reviews can reduce cost, but for each such decisions we need to look at the potential risks and costs associated with dealing with those risks should they occur.

Estimating Project Cost (Based on Activities)

This is the project management activity to identify costs associated with each of the tasks (including people and other resources such as equipment, servers, tools, machinery, software), and costs associated with identified risks, and understanding what does the project cost overall.

Based on which stage of the project you are in, a different need for estimating costs dictates a different estimation technique. For instance, at the beginning of the project you may use Analogous estimation – which is fast and crude – could be good enough. And when you need to estimate for specific WBS item, you may choose either 3-point estimation technique. When you things go out of hand and you need to know more accurate estimates for remaining activities, bottom-up estimation may suit well.

We’ll see more in this post.

Coming up with Project Budget

This is the project management activity to determine budget considering the costs and reserves, and to understand how and when the money is released during project life cycle. This process establishes cost baseline. It also shows at which points in time should you make parts of budgeted money available to the project.

This is actually where things become black and white and stakeholders would know how much of investment is required.

This is also the stage where the project manager may come under some pressure to reduce budget, and may have to exercise restraints to not cut corners.

Controlling Cost on the Project

This project management activity is very essential for project sustenance and used to measure and understand the current spending, and forecast whether the project is on track to be completed with allocated budget or not.

Again, apart from analysis, expert judgement (available internally or via a consultant) will go a long way in controlling project cost.

Cost estimation is a crucial skill for a project manager to possess. Earned Value Method formulas provide valuable insights into incurring project costs, and forecasts help project manager to control costs.

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