Project Cost Management involves planning, budgeting, and managing costs. Cost management does not happen in isolation – the project manager needs input from the project team and key stakeholders. Cost management should occur early in project planning in order to establish a framework for all cost management processes and ensure that the project does not go over budget. In this PMP study guide, we’ll cover all the processes in the Cost Management Knowledge Area in PMBOK 6th Edition.
Although estimating cost and determining budgets can be one process on small projects, PMI separates them into two processes because the exam assumes the PM is managing a large project. Many financial management techniques, such as ROI, payback, and discounted cash flow, are used during this process.
Plan Cost Management
Plan Cost Management process establishes the framework/policies/procedures for how to estimate and manage costs
The key benefit of this process is that it provides guidance and direction on how costs are managed from project initiation to closure
There are many ways to fund a project, including: 1) Self-funding, 2) Funding with equity, or 3) Funding with debt
The Cost Management Plan is a component of the Project Management Plan that details how cost management processes will be carried out. This plan will describe how project costs are planned, estimated, and controlled.
The cost management plan also establishes the following:
Units of measure
Level of precision
Level of accuracy
Organizational procedures links
Rules of performance measurement
Life Cycle Costing – Looking at the cost of the whole product life cycle, not just the cost on the project
Value Analysis – Finding less costly ways to do the same work. Value analysis involves identifying required project functions, assigning values to these functions, and providing these functions at the lowest cost without sacrificing performance.
Estimate Costs is the process of establishing an approximate monetary value to each project activity.
The key benefit of this process is that it determines the amount of money needed to complete project work
Cost estimate is a prediction of how much an activity will cost upon completion given the information we know now.
When estimating cost, you need to know whether you are only estimating the direct project costs or whether your estimates need to include indirect costs as well.
To estimate costs, you need to look at the project schedule to see which activities need which resources.
Types of Estimation:
Analogous Estimating – use similar historical project activity costs to determine the current project activity costs. Relies of expert judgment. Use this technique when you have limited information available. Also called top-down estimating.
Parametric Estimating – use mathematical calculations or models to determine activity costs (generally more accurate). E.g. it costs $100 to install 20m of wires, thus, it will cost $1000 to install 200m.
Bottom-up Estimating – detailed estimating is done for each activity (if available) or work package (if activities are not defined), and the estimates are then rolled up into control accounts and finally into an over project estimate
Contingency Reserves – the part of the budget set aside to deal with negative risks that may occur
Vendor Bid Analysis – analyzing the bids from qualified vendors. If cost estimates vary significantly, it could mean that the scope is not well defined. If third-party vendors are used on the project, the PM needs to make sure their cost estimates are included in the project budget.
Activity cost estimate – an estimation of what the activity will cost upon completion based on information known to date.
Supporting details for activity cost estimates:
Basis of estimation
Range of possible estimates
Confidence level of final estimate
Types of costs:
Variable costs – these costs change with the amount of production or the amount of work
Examples: cost of material, supplies, and wages
Fixed costs – these costs do not change as production changes
Examples: rent, equipment, etc.
Direct costs – these costs are directly attributable to the work on the project
Examples are team travel, team wages, recognition, and costs of material used on the project
Indirect costs – indirect costs are overhead items or costs incurred for the benefit of more than one project
Examples include taxes, fringe benefits, and janitorial servicesCost of quality – The total cost of all efforts related to quality
Accuracy of Estimates
Rough Order of Magnitude (ROM) Estimates
This type of estimate is usually made during the initiating process
A typical range from ROM estimate is a +/- 50% from actual, but this range can vary depending on how much is known about the project when creating the estimates
This type of estimate is usually made during the planning phase and is in the range of -10% to +25% from actual
Later during the project, the estimate will become more refined. Some project managers use the range of +/- 10% from actual, while others use -5% to +10% from actual
Determine Budget is the process of aggregating individual activity or work package costs into the project budget.
The Key Benefit of this process is that it determines the cost baseline against which project performance is measured.
Cost aggregation – the process of rolling up individual activity costs into work packages and work packages into control accounts and control accounts into the project budget
Funding limit reconciliation – Comparing plan project expenditures against funding limits to determine if any variances exist.
Cost baseline – approved time-phased project budget. The cost baseline tells you how much you should have spent at any given point in time. Any changes to the cost baseline must be approved by the change control board.
Control accounts – During reporting, the key stakeholders may want more details than the overall project cost, but less details than the work packages costs. Control accounts aggregates related work packages together. The PM will report at the control accounts level.
Not part of the project baseline
Sponsor must approve the use of management reserves and then the project must be “re-baselined”
Used at the discretion of the project manager
Part of the project budget
The summation of control accounts gives you your cost baseline.