The Money Files

Last time I looked at the process of cost management planning. Today I’m going to look at the next process in the cost management area, that of estimating. Let’s look at the inputs, tools and techniques and outputs for this process as defined by the PMBOK Guide® – Fifth Edition.

The point of this process is to estimate how much your project will cost overall, with as much science as possible. This involves looking at all the options and discounting those that aren’t appropriate, as well as polishing up estimates that will form your final budget.

Inputs

Cost management and human resource plans

Take the cost management plan that you created in the last process as this talks about how costs will be managed and controlled. The most important part of it for this process is the section that defines how you are going to estimate and what level of accuracy you need to find.

The human resource plan will help you establish who is going to be working on the project and you can estimate the people costs based on that. Don’t overlook the reward and recognition elements – it isn’t just base salary that the project has to fund.

Scope baseline

The scope baseline includes:

• The scope statement. This explains what your project is going to do and the constraints. All of these will have an impact on cost as you need to know what you are estimating for.
• The work breakdown structure. This gives the relationship between deliverables. It’s a good way of cross-referencing the project and making sure you have estimated for all the deliverables.
• The WBS dictionary. Use this to work out the exact requirements for each element on the WBS. There is useful information in here which will determine how much something costs.

Project schedule

As you would expect, the project schedule has a bearing on your estimates. If you have to do things faster, you’ll need to put more people and more resources on the project. Take a look at who is doing the work and where it is being carried out and estimate accordingly.

Risk register

How risky is your project? Take the risks into account when estimating the work. The higher the level of novelty or difficulty, the more you should put into your budget. If your risks have firm, costed mitigation plans then these should be taken into account too.

Enterprise environmental factors and organisational process assets

Yes, these turn up again. You’re looking for things that affect how you will estimate such as:

• The market conditions – you may have to pay more for experts in certain countries, for example.
• Published cost data, such as figures about resource rates or information from quotes.
• Estimating policies
• Templates
• Lessons learned
• Historical information.

Tools and techniques

Expert judgement

Wheel out your experts again – you are going to need them to help you estimate. Draw on their expertise and previous experience to help you establish how much things are going to cost. They can also advise on the best way to estimate certain activities.

Estimating

There are several types of estimating that you can use on projects.

Check out these videos on:

Bottom up estimating

Parametric estimating

Analogous estimating

You can also use three-point estimating.

Reserve analysis

This is where you set the levels for the management and contingency reserves.

A contingency reserve is there to account for cost uncertainty, so for example rework when a project deliverable isn’t up to scratch.

Management reserves are for unforeseen work that is added to the scope of the project. You’ll have to set an estimate for both of these reserve types and work out how and when you will call on them, and what the approval process will be.

Cost of quality

This is the place to document any assumptions about the cost of quality.

Vendor bid analysis

This involves looking at bids from vendors and assessing the responses. You might have to add up several quotes from different suppliers, add in contingency and include human resource costs. And, of course, tax, which most quotes will leave off.

Project management software and decision making techniques

You’ve got these tools available to you throughout the project. Your project management software will most likely be capable of managing project budgets – even if you only use a simple spreadsheet. I doubt anyone manages their project budget on paper any longer, but it is worth looking at the different tools available and finding one that you find easy to use.

As for decision making techniques, when it comes to finalising those budget estimates, you’ll need the input from the team so it helps to have some tools available to manage the discussion. Group facilitation techniques and those that help you come to agreement are key and include brainstorming and the Delphi technique.

Outputs

Activity cost estimates

These are your understanding of how much each project activity will cost. You can do them as a summary or in lots of detail, as long as they cover the estimate cost for everything to do with that project task.

Basis of estimates

You’ll have to document how you have come up with your estimates. This is really useful, even if it seems like a headache, because at some point in the future someone is going to ask why you decided that X would cost Y and you can pull out your document and explain.

Project documents updates

Update all your project documentation to date with your cost estimate information. Let’s keep our records tidy now – it will save time in the long term.

Next time we pick up this series I’ll be looking at the process to determine your budget – what to do with your estimates now you have them.

Project cost management is the process that forces you to think about the procedures, policies and documents you need to manage your project finances. Many of these will already be in place but you’ll use the process to work out how you will apply them in your project and to make sure that you’ve got everything you need to be able to adequately manage, spend and control your budget.

As with all PMBOK® processes, there are inputs, outputs and the tools and techniques you need to get the job done.

Inputs

Your project management plan

Your project management plan is critical for a lot of the processes, so it’s definitely something that you’ll be looking at here. In fact, your cost management plan is one of the sub-plans, so you should pull out your overall plan and start to think about how managing costs fits in with the rest of your project processes.

Your project charter

Your overall summary budget comes from the charter. You’ll use this figure, and any other bits of information from the charter, to develop a detailed project budget. Ideally your charter will give you lots of leeway each way because you can guarantee that the person who came up with the summary budget figure didn’t have as much information about how much the project will cost as you will in a few weeks.

Enterprise environmental factors and organisational process assets

These crop up all over the PMBOK. They really relate to how your company does business so they include things like:

The market conditions in your region and industry that may affect how you work

• Currency exchange rates
• Your organisational culture and your senior managers’ approach to spending
• The cost of resources in your area
• What software you have available to help you manage project budgets
• What requirements and controls the Finance team puts on you with regard to policies, reporting and governance
• Company estimating procedures
• Historical information from lessons learned databases around how much similar project activities costs.

Tools and techniques

Expert judgement

You’ve got to love your subject matter experts. When you need to put together your cost plan, experts are essential. They’ll be able to give you a view of what’s realistic, based on their prior experience, previous projects and their background.

Analytical techniques

You might have several different ways that the project could be funded and analysis will help you determine which is the best approach for this project. That’s not as complicated as it sounds – you’ve probably made ‘make or buy’ decisions before without realising that they formed part of this section of the process.

Meetings

Who doesn’t like a good meeting? I’m surprised meetings don’t appear more often in the PMBOK. Putting together the cost management plan isn’t something that the project manager can do alone, so throw a meeting and invite some buddies along to thrash out how you are going to manage the cash.

Outputs

The cost management plan

The output of all of these meetings, expert discussions is the cost management plan. The document sets out how you will apply the processes and principles necessary for managing the budget, any assumptions you’ve made and key decisions such as funding and timescales.

Check out these 7 things for your project’s cost management plan to check that you’re progressing along the right lines.

Next time in this series I’ll look at estimating project costs. In the meantime, what questions do you have about cost management? Let me know in the comments and I’ll answer them in a future article.

Demos and prototypes save your project time and money because you can get early feedback. I’ve talked about that before (in this video) but a couple of people have asked me for some more tips around setting up demos. And I’m very happy to oblige.

Let’s get on with it then, shall we?

The demo environment

Pick a nice room. By that I mean one that is large enough to fit everyone in comfortably and that’s got enough power sockets. Everyone brings a device along these days and they all need plugging in.

Understand the room’s heating and lighting controls. You don’t want people getting fidgety because they forgot their jacket – you want them concentrating on your amazing project deliverable.

If you are doing your demo via a web conference, get the software set up well before you expect everyone else to join the call. Test your microphone and headset and make sure you can share control of the screen with your co-presenters, if you have any.

Set expectations

Manage the expectations of the people in the room. Are you showing them a very rough outline of a product, a prototype that doesn’t quite work properly yet, a feature-rich almost-finished product, or the final thing? Set their expectations around what they are going to see so they aren’t disappointed when features don’t work or when you tell them it’s too late to change the colour because you’ve already ordered 30,000 in blue.

Review your objectives

What is it that you want people to get out of this demo? You can organise a demo or show people a prototype for a number of reasons such as:

• To get buy in for your proposal
• To ensure you are on the right track
• To get feedback
• To confirm your understanding of requirements
• To keep your stakeholders engaged on the project
• To show someone a finished product prior to delivering testing on how to use it.

Think carefully about why you want to do this demo and what outputs you are expecting. Do your demo attendees have the same understanding as you? It’s worth running through the objectives at the start of the meeting, just in case they don’t.

Get organised

Practice, practice, practice. A complete dry run is a good idea. You want your audience to notice what you are saying, not get cut off halfway through your web conference because you don’t know how to use the meeting controls.

Walk through the demo in preparation, whether you are doing it in front of a ‘live’ audience or via a computer screen.

Prepare for questions

Be ready to answer questions. You are showing them your project deliverable in anticipation of some kind of feedback so expect them to have questions about what it does, how it does that and what else it could do. Be prepared to manage the ‘wouldn’t it be great if…’ type questions if you aren’t able to consider any modifications at this point.

Provide back up materials

Your demo attendees will hopefully be so excited about what you have built that they will want to share it with their teams. Have some materials ready so that they can do that: screenshots or handouts are great, but a test login (if software) or samples (if something else) and details of how to use it are better.

This gives them the chance to play with what you have created and if you want further feedback, let them know that you are open to their ideas and provide details of how to get them to you – direct contact, via an online request form or so on.

Demos and prototypes are a really powerful tool, especially if you are delivering a software product or a tangible item. End users particularly find this sort of workshop or meeting a very valuable session as they can see what they are getting. In my experience, showing someone a demo of your product helps build engagement too, as they start to get excited and they can see the idea become real.

However, make sure that if you are doing a demo that you are in a position to comment about when they are likely to get to access the final deliverable. There’s nothing worse than seeing a demo and getting excited about the project only to be told, or you can’t have it for 18 months. Set expectations carefully!

How have you used prototypes and demos? Let us know in the comments.

Elizabeth Harrin also blogs at A Girl’s Guide to Project Management.

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.