Cost Management in a Nutshell

 

Why Cost Management is Important?

Cost Management is important because it:

• Sets the baseline for the project's costs.
• Helps to keep the budget on track.
• Makes sure that we do not go over the budget.

You start cost management process in the planning phase of the project. Costs are approved by project owner and executive stakeholders in the project charter. As project is executed you monitored the expenses. At the close of the project you compare the actual costs to the estimated costs determined at the beginning of the project. Cost management is one of the triple constraint metrics that define a project: cost, scope and time.

Example of some of the fixed and variable costs, are shown in the diagram below:

What is Cost Management?

The process of Cost Management is:

• Estimating Costs
• Developing Project Budget with baseline costs
• Controlling expenditure

Cost Management Plan

Cost Management Plan is a component of the overall project management plan.

The better you are at cost precision and accuracy the better you’ll have control of your project costs. You control cost thresholds by knowing the cost variations and where you have wiggle room and where you don’t.

Establish how the project performance will be measured in order to see if you’re meeting the goals and expectations of the project.

Inputs into Cost Management Plan

• Project Charter
• Project Management Plan
• Enterprise environmental factors
• Organizational process assets

Tools and Techniques in Cost Management Plan

• Expert judgment
• Data Analysis
• Meetings

Outputs of Cost Management Plan

• Cost management plan

Cost Planning

As part of Cost Planning is you have to plan for resources. Resource planning is the process of determining future resource requirements for an organization or a scope of work. This involves the evaluation and planning of the use of the physical, human, financial, and informational resources required to complete work activities and their tasks. Resource planning begins in the scope and execution plan development process during which the work breakdown structure, tasks and execution strategy are developed. Resource estimating determines the activity’s resource quantities needed, such as hours, tools, materials. While schedule planning and development determines the work activities be performed. Resource planning takes the estimated resource quantities, evaluates resource availability and limitations considering project circumstances, and then iteratively optimizes how the available resources will be used in the activities over time.

Cost Estimation

Cost Estimation is the process of quantifying the cost and price of the resources required by the project. The outputs of cost estimating are used as inputs for business planning, cost analysis, and decisions or for project cost and schedule control processes. The estimation of the time duration of activities must be considered concurrently with costs because costs are often dependent on time duration and resource requirements identified in cost estimating may affect the schedule. Iterative approaches are used because outcomes of a cost estimate often lead to changes in scope or plans. Estimating process can be viewed as part of the scope definition process because iterative trading off between cost and scope intertwine the processes.

Inputs into Cost Estimation

• Project management plan
• Project documents
• Enterprise environmental factors
• Organizational process assets

Tools and Techniques of Cost Estimation

• Expert judgment
• Analogous estimating
• Parametric estimating
• Bottom-up estimating
• Three-point estimating
• Data analysis
• Project management information system
• Decision making

Outputs from Cost Estimation

• Cost estimates
• Basis of estimates
• Project documents updates

Cost Budgeting

Cost Budgeting is a sub-process within the cost estimating and is used for allocating the estimated cost of resources into cost accounts against which cost performance will be measured and assessed. Cost Budgeting forms the baseline for cost control.

Inputs into Cost Budgeting

• Project management plan
• Project documents
• Business documents
• Agreements
• Enterprise environmental factors
• Organization process assets

Tools and Techniques of Cost Budgeting

• Expert judgment
• Cost aggregation
• Data analysis
• Historical information review
• Funding limit reconciliation
• Financing

Outputs from Cost Budgeting

• Cost baseline
• Project funding requirements
• Project documents updates

Cost Control

During Cost Control you measure the variances from the cost baseline and take necessary corrective action to achieve minimum costs. All of the changes to the cost baseline need to be recorded and the expected final total costs are continuously forecasted. When actual cost information becomes available you measure against the cost baseline to explain and determine what is causing the variance. Corrective action might need to be taken based on this analysis to avoid cost overruns.

Inputs into Cost Control

• Project management plan
• Project documents
• Project funding requirements
• Work performance data
• Organizational process assets

Tools and Techniques of Cost Control

• Expert judgment
• Data analysis
• To-complete performance index
• Project management information system

Outputs from Cost Control

• Work performance information
• Cost forecasts
• Change requests
• Project management plan updates
• Project management plan updates
• Project documents updates

Now that you got the cost management is under your belt. You can be confident in managing your projects.

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