Project cost management is one of the most important parts of project management, and the primary purpose is to ensure that the project is completed successfully within the approved Budget.
Steps involved in Project Cost Management
The first step is to plan how to manage the project’s cost. It will help you devise your project’s policies, procedures, rules, and regulations.
Once we have the set guideline about how to manage the project? We can now start estimating the cost of each activity or work package (depending on the project manager’s approach).
There are different techniques available for estimation. Once that estimation is done, some contingency will be added to those estimates, and the percentage of this contingency will be guided by the plan for cost management we have initially. The contingency is planned to respond to any identified risks in the project. In case of unforeseen risks, an amount from management reserves will use. Approval from the project sponsor is mandatory to use any amount from the management reserve, and this is not at the project manager’s discretion.
Once the contingency reserves are added, and the mechanism of using management reserve is devised, we will move towards determining the project’s overall Budget. So total project budget is divided into two parts:
- Budget at Completion
- Management reserve
The sum of these two parts will give the total project budget. Ideally, the project manager is only allowed to spend the Budget at completion on the project and is expected to complete the project with a budget at completion. Once the Budget is final and ready, the team will execute the plan according to the Budget. The project manager must ensure all the activities are being done within the approved Budget, and an official change request is required in case of any change. Following all these simple steps, you can easily setup your project cost management.
Project cost management is a crucial aspect of project management that helps in keeping the project within budget while achieving the desired objectives. In the PMBOK 6th edition, the project cost management knowledge area is divided into four processes: plan cost management, estimate costs, determine budget, and control cost. In this article, we will discuss the inputs, tools and techniques, and outputs of each of these processes.
Plan Cost Management:
The plan cost management process is the first process in the project cost management knowledge area. The objective of this process is to develop a plan for how the project costs will be managed, controlled, and reported. The inputs, tools and techniques, and outputs of this process are as follows:
Inputs:
Project Charter: The project charter is a document that provides an overview of the project, including its scope, objectives, and stakeholders.
Project Management Plan: The project management plan includes various subsidiary plans, such as the scope management plan, schedule management plan, and risk management plan.
Enterprise Environmental Factors: These are external factors that can affect the project cost management plan, such as market conditions and economic trends.
Organizational Process Assets: These are internal organizational factors that can affect the project cost management plan, such as historical data, policies, and procedures.
Tools and Techniques:
Expert Judgment: Expert judgment involves using the knowledge and experience of subject matter experts to develop the cost management plan.
Data Analysis: Data analysis includes techniques such as cost-benefit analysis, earned value analysis, and trend analysis to analyze the project cost data.
Meetings: Meetings with stakeholders can be used to discuss and develop the cost management plan.
Outputs:
Cost Management Plan: The cost management plan is a document that outlines how the project costs will be managed, controlled, and reported. It includes the cost baseline, cost management approach, and other relevant information.
Estimate Costs:
The estimate costs process involves developing an approximation of the costs of the resources needed to complete project activities. The inputs, tools and techniques, and outputs of this process are as follows:
Inputs:
Project Management Plan: The project management plan provides information on the project scope, schedule, and resource requirements.
Project Documents: Project documents, such as the WBS, network diagrams, and resource calendars, provide information on the project activities and resource requirements.
Enterprise Environmental Factors: External factors such as market conditions and inflation rates can impact cost estimates.
Organizational Process Assets: Historical data from previous projects, such as actual cost data, can be used to develop cost estimates.
Tools and Techniques:
Expert Judgment: Subject matter experts can provide input on the resource requirements and potential costs.
Analogous Estimating: This involves using historical data from similar projects to develop cost estimates.
Parametric Estimating: This involves using statistical data to develop cost estimates based on specific parameters, such as cost per unit.
Bottom-Up Estimating: This involves estimating the costs of individual work packages and then aggregating them to determine the total project cost.
Outputs:
Cost Estimate: The cost estimate is the approximation of the costs of the resources needed to complete project activities.
Basis of Estimates: This document provides the assumptions and constraints used in developing the cost estimates.
Determine Budget:
The determined budget process involves aggregating the estimated costs of individual project activities to establish a cost baseline. The inputs, tools and techniques, and outputs of this process are as follows:
Inputs:
Project Management Plan: The project management plan provides information on the project scope, schedule, and resource requirements.
Cost Estimate: The cost estimate is used as the basis for determining the project budget.
Enterprise Environmental Factors: External factors such as inflation rates can impact the project budget.
Organizational Process Assets: Historical data from previous projects,such as actual cost data, can be used to determine the project budget.
Tools and Techniques:
Cost Aggregation: This involves summing the estimated costs of individual project activities to determine the total project cost.
Reserve Analysis: This involves setting aside contingency reserves to account for potential risks and uncertainties that may impact the project budget.
Expert Judgment: Subject matter experts can provide input on the resource requirements and potential costs.
Historical Relationships: This involves using historical data from similar projects to develop cost estimates.
Outputs:
Cost Baseline: The cost baseline is the approved version of the project budget. It is used to compare actual project costs against the planned budget.
Project Funding Requirements: This document outlines the funding required for the project and when the funds will be needed.
Control Costs:
The control costs process involves monitoring project spending and managing changes to the project budget. The inputs, tools and techniques, and outputs of this process are as follows:
Inputs:
Project Management Plan: The project management plan provides information on the project budget and the process for managing project changes.
Project Funding Requirements: This document outlines the funding required for the project and when the funds will be needed.
Work Performance Data: This includes data on the actual costs of project activities.
Organizational Process Assets: Historical data from previous projects, such as actual cost data, can be used to manage project costs.
Tools and Techniques:
Earned Value Management: This involves comparing the actual project costs to the planned costs to determine if the project is on track.
Forecasting: This involves using data analysis techniques to predict future project costs.
To-Complete Performance Index (TCPI): This is a formula that calculates the cost performance required to meet the project budget.
Change Control System: This system is used to manage changes to the project budget.
Outputs:
Work Performance Information: This includes data on the actual costs of project activities.
Change Requests: These are requests to modify the project budget.
Project Management Plan Updates: The project management plan may need to be updated to reflect changes to the project budget or cost management processes.
In conclusion, project cost management is a critical aspect of project management that involves developing and managing the project budget. The four processes of plan cost management, estimate costs, determine budget, and control costs provide a framework for managing project costs from start to finish. By using the appropriate inputs, tools and techniques, and outputs, project managers can ensure that the project is delivered within budget while meeting the project objectives.