Project Cost Management: An Overview

 

Project cost management is an important part of managing a project: A Guide to the Project Management Body of Knowledge – Fifth Edition (PMBOK Guide®) devotes over 30 pages to it. But where do you start? It’s a daunting subject because somehow managing money seems much more difficult than managing people or organising tasks, don’t you think? It doesn’t have to be that way and the PMBOK Guide actually gives you some straightforward approaches to making it easier.

For a start, project cost management the whole purpose of it – the reason why we bother with cost management at all – isn’t rocket science. It’s so that the project can be completed within the approved budget.

It is, however, wider than just budgeting. Cost management involves planning how you’ll spend the money, estimating, getting the financing, finding funding, managing and controlling the costs and of course budgeting too.

Let’s take a look.

Project Cost Management Processes

There are four processes covering cost management in the PMBOK Guide. They are:

1. Plan Cost Management

This is the process of working out how you are going to do your financial management. In this process you’ll establish what policies you should adhere to, what company procedures are relevant and set up the documentation for planning, managing, spending and controlling money as it flows in and out of your project (mainly in at the start as you get authority to spend your budget and then pretty much exclusively out – projects are expensive things and don’t normally generate an income of their own during execution).

At the end of this process you’ll have a cost management plan that tells you everything you need to know about managing your project finances. If nothing else, this should give you the confidence that you’re doing the right thing!

2. Estimate Costs

This process involves coming up with the total figure that your project is going to spend. It’s a part of your overall resource estimating – cash, after all, is a resource on your project. People costs might fall into here but people may be considered a different type of ‘cost’ and you may not need to account for them at all. You’ll also get quotes from suppliers and other third parties in this process for anything that your company can’t do itself.

During this process you’ll apply estimating techniques and build up a picture of the cost of individual activities. Weirdly, you don’t add them all together in this process. You have to wait for…

3. Determine Budget

You add up all your estimates here. This process collates all your estimated costs into a total for the whole project. This is also the process where you get authority to spend your money and that gives you an authorised cost baseline. At the end of this process you’ll also know the ‘profile’ for your spending or the run rate: how much money you need for your project at various points. This can be useful if you’re working on a multi-year project as your organisation can split the funding across several financial years and it isn’t tied up in project accounts when it could be put to better use elsewhere.

4. Control costs

Once the project is in full flight, you’ll be spending money and you’ll need some way to monitor and control what’s happening. This process takes the documentation you prepared earlier and puts it into practice. You’ll apply those policies and procedures (such as how you pay invoices) and record what is going on.

If you are doing Earned Value Analysis on your project, this is the step where that kicks in, as a monitoring and control tool.

Personally, I think Estimate Cost and Determine Budget run so closely together on many small projects that it’s hard to see where one ends and the other begins. As with many things in the PMBOK Guide, you’ll have to apply the processes pragmatically so that you don’t end up with too much bureaucracy but you do get adequate control. In fact, the PMBOK Guide does say that there is plenty of continuity between the cost management processes and the only reason they are split out into four separate processes is because they use different tools and techniques. Those tools and techniques might be different enough to make up a separate section in the book, but in reality you are likely to use them together in a budget workshop – so don’t be afraid to merge the different steps together to get the end result you want.

Over the coming weeks I’ll be looking at each of these processes in more detail, and talking more about the tools and techniques involved. In the meantime, leave your project budget process questions in the comments and I’ll make sure to answer them in a future article.

Elizabeth Harrin also blogs at A Girl's Guide To Project Management.