20 Project Cost Management Terms You Need To Know

 

There is a lot of jargon around project cost management – personally I think it is one of the areas of project management most laden with new terms to learn. Here are 20 budgeting and financial management terms that you need to know.

1. Forecast/Reforecast

Predicting future expenditure based on what has happened in the past or what you know about. Reforecasting is when you take your last forecast and tweak it now that you have new information.

2. Contingency

Contingency is the provision you make for anything you don’t know enough about yet within your budget. It is supposed to address a particular risk, like the fact you haven’t got full cost estimates for the delivery piece of work that you’ll be doing. It is often added on to the budget as 10% of the total budget amount before tax in order to give you a cushion if something unexpected happens.

3. Management Reserve

Like contingency but different. It’s a pot of money put aside to deal with the unexpected impact of problems arising from missing deadlines or other objectives.

More on the differences between contingency and management reserves.

4. Tolerance

A range within which you can deliver your project without having to go back and ask for your sponsor’s approval. This is helpful because a project will never cost exactly what you have budgeted. Let’s say your detailed estimate is £1503.23. Your tolerance on that piece of work could be the range £1500 to 1550 because you and your sponsor acknowledge that within that range the difference is insignificant and no further approvals are required.

5. Capital

Money to be spent on capital assets e.g. physical things like a printer for the office.

6. Operating Expense

Money to be spent on items that keep the project running e.g. paying for a contractor.

7. Actual

The actual amount of money spent on a task, activity, phase or project. People talk about ‘Actuals’ in comparison to ‘forecasts’.

Use like this: “We forecasted $100 but the actual was $76.”

8. Accrual

I could write a lot about how I’ve been caught out with accruals in the past. Accruals are an accounting procedure where the expenditure is recognised when it is incurred, even if you don’t yet have the goods and regardless of when the money leaves the bank. Most important at the end of an accounting period so you don’t forget to let the finance team that you have received the goods but not yet had the invoice.

9. Budget

The amount of money you have to deliver your project.

10. Charging

The way you account for expenses incurred on your project.

Use like this: “We’ll be charging 25 hours for the work done in August.”

11. Estimate

A guess at how much an item or task will cost. It should be the most educated guess possible as the impact of getting it wrong can be significant! There are estimating techniques to help take the guesswork out of calculating estimates.

12. Sunk Cost

Costs already incurred on your project that you can’t get back. Most relevant when talking about whether or not you should close down a project. You won’t be able to recoup the sunk costs if a project is closed.

13. Opportunity Cost

Often used as a way of selecting which project to do. It works out the return that would have been earned if you went ahead with one activity over another. For example, if you choose to do Project A and not Project B, and Project B offered a return of €60k, then your opportunity cost is €60k.

14. Cost Benefit Analysis

A way of working out how much benefit you get for your investment. Cost Benefit Analysis is a tool used in project selection. It gives you information about whether the project is financially viable and whether it is worth pursuing or not. It’s a simple calculation that looks at whether the benefit you are going to get outweighs the cost of getting it.

15. Payback Period

The payback period of a project helps you understand whether you get a return quickly enough for the project to be worth doing. Find out more in this video: Understanding Payback Period

16. ROI

ROI stands for return on investment. It’s a way of calculating whether a project is worth doing or not. This video explains more: ROI Explained: A Video

17. Cost Aggregation

Basically just adding up all the individual costs on your projects to work out the overall cost of doing something.

18. Accuracy

Your level of accuracy will be specified in your cost management plan. It relates to what rounding is used in your estimates. An accurate measure is one very close to the actual measure.

19. Precision

Precision is different from accuracy. The level of precision you are going for will also be specified in your project cost management plan. Precision means that when you look at a range of figures they are close to each other.

Use like this: “Precision range for this budget item is +/-1%.”

Actually, if you’ve got a great way to explain the difference between accuracy and precision then let me know in the comments below, because it is tricky to get your head around.

20.  EMV

Finally, EMV. This video explains what expected monetary value is all about.

What did I leave out? Leave your additional essential cost management terms in the comments below!