This is the fourth in a series of CVG-articles delivering simple and practical Project Management advice through the lens of Construction Project Management. To catch up on the first, second, and third articles, please click here, here, and here. For more Project Management articles visit www.cvgmanagement-dfw.com
Project Cost Management
In the second article of CVG’s Project Management Series, we described Knowledge Areas and explored the interaction between Process Groups and Knowledge Areas. Last week we began to dive into specifics of the various Knowledge Areas, exploring in detail Project Scope Management and Project Schedule Management. This week we will dive into the fourth Knowledge Area, Project Cost Management, which includes the processes involved in planning, estimating, budgeting, financing, funding, managing, and controlling costs so that the project can be completed in adherence to the approved budget.
Project Cost Management is particularly concerned with the cost of the various resources required to complete the project activities. It assists the project manager in foreseeing the project expenses and in taking precautionary actions to mitigate the chances of over expenditure. Cost Management acts as an umbrella process that covers the entire project, from initial planning phase through completion and turnover.
Project cost is generally estimated during the Project Planning Phase, and it is more visible in corporate projects, usually requiring approval by senior management before its execution begins. As the project gradually enters the Execution Phase, all expenses are tracked and documented to measure against the budget. In other words, project manager assumes a large responsibility over project costs.
After project completion, deviations between the predicted and the actual costs incurred are compared, and costs could be audited during the project and/or after conclusion. Results are from thee examinations and audits are used as references for the curating cost management plans and budget in the future.
In project management terms, there are five types of costs that can be incurred:
1. Fixed Costs: Fixed costs are static and do not fluctuate throughout the project lifecycle.
2. Variable Costs: Variable costs have a high tendency to change depending on the duration of a project.
3. Direct Costs: Direct costs are directly linked to the project budget.
4. Indirect Costs: Indirect costs are not particularly linked to your project but is shared across multiple projects.
5. Sunk Costs: Sunk costs have already been incurred and have failed to generate any value for the project’s objectives.
By implementing effective project cost management and with practice, project managers will establish cost baselines, which will aid in managing all aspects of cost management. Overall project decision making will improve, and project overruns will be avoided.
There are numerous benefits to proper Cost Management including:
1. Controlling the costs of the specific processes/activities aids in gaining control over business costs;
2. Proper cost management will help to accurately estimate future expenses;
3. Cost management helps in predefining the expenses of all the project activities which are then maintained as good business records;
4. Preventing over expenditure maintains the budget balance;
5. Project tasks are prioritized by strictly limiting the financial flow, so focus is always on the most important activities; and
6. Expenses are reduced due to review and approval process conducted by management.
As with the other Knowledge Areas, Project Cost Management involves a series of processes:
1. Plan Cost Management
2. Estimate Costs
3. Determine Budget
4. Control Costs
Plan Cost Management
Plan Cost Management is the initial process of project cost management, during which parameters regarding how the costs of the project will be estimated, budgeted, managed, monitored, and controlled are set. Generally, techniques like Work Breakdown Structures (“WBS”) and use of historical data of similar kind projects are implemented for defining the cost resource requirements which include time, material, labor, equipment, etc. This process roughly outlines the resources involved and maps the optimal path to manage costs throughout the project lifecycle. Plan Cost Management is typically performed at some specific predefined point in the project.
During the Determine Budget process estimated costs of individual activities are summed to establish the cost baseline, which includes all authorized funds that are essential for project execution. The budget often includes various reserves of contingency. Cost baseline is an authorized time-phased budget that is used as the initial point for monitoring and calculating the project performance and progress, and the process is executed at specific, generally predefined points in a project.
Below is a table that contains the various inputs, tools & techniques, and outputs involved in the Determine Budget Process:
Quite literally, Estimating Costs aids in estimating the cost of the resources required for project completion. Since cost is a crucial variable to ensure project success, detail and care is required in estimating total project cost. Throughout the project lifecycle, this process is performed at periodical intervals, and the project manager uses various methods to estimate costs depending on the amount of information available.
Next week we will continue to our in-depth exploration of essential Project Management Knowledge Areas. For more information visit www.cvgmanagement-dfw.com at the blog section.