In this video I talk about the cost management processes.
9 Cost Management Terms Defined
Categories: cost management
I was contacted by a student recently who was having trouble understanding some of the outputs from the cost management processes, specifically around the terminology about what goes into a cost management plan.
The trouble is, some of the training material makes things unnecessarily complex. The jargon makes you feel as if the explanation can’t possibly be that simple. I think that was the problem he was having – he couldn’t get past the fact that it was supposed to be complicated.
Some of it is complicated. But some of the cost management jargon is just that – jargon. When you get to the bottom of what the PMBOK Guide is really talking about then you see that actually it’s quite simple.
Here are the 9 areas of a cost management plan that he asked me to help define.
1. Unit of measure
This is just a fancy way to say ‘day’ or ‘hour’ or ‘dollar’.
Write down the units that you are using in your cost management plan. If you are using several, make it clear what is being used for which areas.
2. Level of precision
A precise estimate just means that when you talk about a range of figures, they are all bunched together. The less precise you are, the more your numbers spread out.
Use it like this: “Precision range for this budget item is +/-1%.”
That would be super precise.
3. Level of accuracy
Level of accuracy is talking about the rounding you use in your estimates. An accurate measure is one very close to the actual measure, once that is known.
4. Organizational procedural links
This section of the cost management plan lists the details of any processes you have to follow e.g. what account codes you need to use for budgeting. Basically, it’s information that you will get from the Finance team. Once you’ve written it in one cost management plan, it’s highly likely that every other project for that company will use the same processes so you won’t have to research and write it out again.
Top tip: Copy this section from another project manager who has already worked it out. Then take a few hours to make sure you really understand what their paragraphs mean and copy and paste it into your own plan.
5. Control thresholds
This relates to the agreed amount of variation allowed in your project. In other words, are you able to go over by 10% without having to ask your sponsor’s permission? Look at it as another way to describe tolerance.
6. Rules of performance measures
Write in the plan how you will track how you are doing against your budget and at what level e.g. every week, every month, to the penny or to the nearest £100. Say if you will use Earned Value Management or not and if you are going to use it, then how you are going to do so.
7. Reporting formats
Your cost management plan just needs a sentence that explains what format you are going to report in. There’s nothing special about this. You just write ‘We’ll use the standard project report template to report on cost’ in the cost management plan document, or whatever you are going to use.
8. Process descriptions
Write in the plan ‘We’ll follow the normal accounting processes for our company’ or whatever process you are going to follow.
I have never met a manager who expects there to be a process flow diagram in here explaining how each financial process works. Perhaps it’s relevant for consultancy bids, but I doubt that many businesses require more detail than just a few lines referring back to standard operational practices.
9. Additional details
This is just a generic section of the cost management plan for anything else that needs to go in.
If you think of anything that is useful for you to record, shove it in here.
Now, it’s perfectly possible that I’ve misunderstood some of these terms myself, and made them seem much simpler than they really are. Feel free to chime in and let me know if that is the case. Maybe I’m missing something, but it does seem like a lot of buzzwords to me.
Got Any Excel Questions?
I’m delighted that Carl Nixon, The Excel Expert, has offered to answer your questions on spreadsheets, and in particular, Excel.
In my experience project budgets are often done in Excel – it’s certainly the product I turn to. I use it for everything from doing the odd sum instead of loading that calculator desktop app, to building complex financial trackers.
They aren’t really that complex. I’m not an Excel Expert, unlike Carl.
So, without further ado, I’d like to introduce you to Carl in his own words. At the bottom you’ll see how to get in touch with your queries. I’ll collate the questions, feed them back to Carl and in a future article he’ll answer them for you. I’m really excited! I think we could all learn a lot.
Introducing Carl Nixon – The Excel Expert To Answer Your Excel Questions
As a freelance “Excel Expert”, I provide Excel spreadsheet services to companies big and small around the world. I have helped them to save thousands of hours and to reduce their errors to the barest minimum.
Working as a freelancer has resulted in me working on some very unusual and exciting projects. I have helped farmers understand data gathered from drones, supermarkets plan their pricing and global brands to plan billion-dollar expansions.
As well as providing freelance services, I am currently developing a number of off the shelf solutions for smaller companies.
Tell Me About Your Excel Problems
I have teamed up with Elizabeth and ProjectManagement.com to answer any of your questions on Excel spreadsheets. So, if you have any issues in the following areas get in touch:
My aim is not to just look at practical issues of building a spreadsheet (formulas, macros etc); I can also give you advice on more general spreadsheet concepts as well. We can talk about good spreadsheet design, automation, error prevention and even data security.
So fire away with your Excel questions, no matter how big or small they are!
Just over 6 years ago, I decided to become a freelance Excel consultant (www.excel-expert.com). My reputation for creating no-nonsense solutions soon spread and I quickly picked up clients that included Pepsico, Walmart, General Mills and many other household names.
When I manage to get away from spreadsheets my life revolves around kids. Especially my four wonderful grandsons who seem to eat up every minute of my spare time.
A real passion of mine is helping children’s charities and causes here in the UK and in Eastern Europe. I have done everything from organising film premieres to delivering aid in war zones (Kosovo).
Leave a comment below with your Excel queries and we’ll be in touch when the answers are up.
It’s easy (kind of) to plan the project financial provision and contracts when you’ve got lots of time and plenty of opportunity to research the market. But what about when you are up against it? That’s when you might rush into a decision and only find out afterwards that it’s not the right approach.
Stephen Wearne and Keith White-Hunt have reviewed 12 urgent and unplanned projects (from dealing with local flooding to the 9/11 pile removal project) in their book Managing the Urgent and Unexpected. As you can imagine, the cost implications for each were unique to the situation, but there are some lessons that we can take away from those major pieces of work. Here’s what I can summarise:
“In all the cases of employing contractors for construction work, the terms of the contract chosen were those already approved by the sponsors.”
In other words, even when a new contractor is required, go for contract terms that your management team is familiar with. This isn’t the time to be trying to ask for waivers to the rules or to get round procedures. If you want to be fast, make the decision easy.
“Contractor and consultant teams already employed for longer-term programmes were switched to the urgent and unexpected work under cost-plus payment terms.”
Make the most of the people you already have working for you. Divert them on to the priority projects and update your contracts accordingly. If you can, add the new work into an existing contract – several of the projects in the book did this under cost-reimbursable terms.
“In the 9/11 pile removal case the contracts were made orally, for later confirmation.”
When you’re working in a real emergency, you might not have the time to draw up legally binding paperwork. When you know that you need to get started, get started on the basis of a gentleman’s agreement. You need to have confidence in the supplier to do this, so if the situation itself doesn’t bind you together somehow, work with suppliers that have a similar outlook and values to you.
“Terms adapted from previous contracts for emergency repair of a city stadium were used.”
Reuse, reuse, reuse! Don’t start from scratch. Get your contracted work up and running more quickly by adapting documentation that you already have.
“Contractors previously shown trust when employed on normal projects were reported as responding particularly well to these unexpected demands.”
For example, they made their best staff available and supported the projects through all-hours working. The lesson here is that the more of a partnership approach you take, and the better the working relationships with the suppliers you use, the more they will help you step up when you need it. That applies outside of a crisis as well – good working relationships with all your project stakeholders will help you move projects forward in non-emergency times as well.
The overall message from the book is that when you are dealing with an emergency, you need to cut out the bureaucracy and get going. Actually, this is what you should be doing on all projects: simplification is a good thing where you can do it. In the case of an urgent project, it’s essential.
The book mentioned in this article is:
Wearne, S. and K. White-Hunt. (2014). Managing the Urgent and Unexpected. Farham: Gower.
In this video I share the answers to a couple of questions raised during PMXPO:
I didn't get a chance to answer these during my presentation on 10 Ways to Market Your Project (which you can watch here).