CHAPTER 3

PROJECT COST MANAGEMENT

3.1 Intoduction
Project Cost Management includes the processes required to ensure that the project is
completed within the approved budget. There are following processes which are part of
Project Cost Management:

• Resource Planning
• Cost Estimating
• Cost Budgeting
• Cost Control

Fig. 3.1 Cost Management over view

3.2 Resource Planning

Determining physical resources needed (i.e., material, equipment, and people) and what
quantities of each should be used and when they would be needed to perform project
activities. Expert judgment will often be required to assess the inputs to the Resource
Planning. The output of the resource planning process is a description of what types of
resources are required and in what quantities for each element of work breakdown
structure.

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 Fig. 3.2 resource planning

3.2 Cost Estimating

Process of developing an approximation (or estimate) for the cost of the resources necessary
to complete the project activities. Cost estimating also includes identifying and considering
cost alternatives. Cost Estimating process is a part of "Project Planning Phase".

There is a difference in Cost Estimating and Pricing:

• Cost estimating: Assessing how much it will cost the organization to provide the
product or service.
• Pricing: Assessing how much the organization will charge for the product or service.

3.2.1 Cost Estimating – Input

• Enterprise Environmental Factors: The Cost Estimating process considers,

• Marketplace conditions: What products, services, and results are available

in the marketplace, from whom, and under what terms and conditions.

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 • Commercial databases: Resource cost rate information is often available
from commercial databases that track skills and human resource costs, and
provide standard costs for material and equipment

• Organizational Process Assets: Existing formal and informal cost estimating-related

policies, procedures, and guidelines are considered in developing the cost
management plan.

• Project Scope Statement: The project scope statement describes the business need,
justification, requirements, and current boundaries for the project. It provides
important information about project requirements that is considered during
cost estimating

• Work Breakdown Structure: Used to organize the cost estimates and to ensure that
the cost of all identified work has been estimated.

• WBS Dictionary: The WBS dictionary and related detailed statements of work
provide an identification of the deliverables and a description of the work in each
WBS component required to produce each deliverable.

• Project Management Plan: The project management plan provides the overall plan
for executing, monitoring, and controlling the project, and includes subsidiary plans
that provide guidance and direction for cost management planning and control.
Information like Resource requirements, Resource rates, and various Risks involved
are considered while preparing cost estimate.

3.2.2 Cost Estimating – Tools and Techniques

• Analogous estimating: Analogous estimating is also called top-down estimating and

uses the actual cost of a previous, similar project as the basis for estimating the cost of
the current project. It is frequently used to estimate total project costs when there is a

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 limited amount of detailed information about the project. Analogous estimating is a
form of expert-judgment.

• Determine Resource Cost Rates: The person determining the rates or the group
preparing the estimates must know the unit cost rates, such as staff cost per hour and
bulk material cost per cubic yard, for each resource to estimate schedule activity
costs.

• Bottom-up estimating: Estimating the cost of individual work items and then rolling
up the costs to arrive at a project total - more accurate.

• Parametric modelling: Using project characteristics (or parameters) in a

mathematical model to predict costs (e.g., price per square foot).

• Project Management Software: Project management software, such as cost

estimating software applications, computerized spreadsheets, and simulation and
statistical tools, are widely used to assist with cost estimating

• Vendor Bid Analysis: In cases where projects are won under competitive processes,
additional cost estimating work can be required of the project team to examine the
price of individual deliverables, and derive a cost that supports the final total project
cost.

• Reserve Analysis: Many cost estimators include reserves, also called contingency
allowances, as costs in many schedule activity cost estimates.

• Cost of Quality: Cost of quality can also be used to prepare the schedule activity cost
estimate.

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3.2.3 Cost Estimating - Output

• Activity Cost estimates: Quantitative assessments of the cost of resources (e.g., units
of currency or staff hours).

• Activity supporting detail:

• Description of estimated scope of work

• Documentation of the basis for the estimate
• Documentation of any assumptions made
• Range of possible results

• Requested Changes: The Cost Estimating process may generate requested changes
that may affect the cost management plan , activity resource requirements, and other
components of the project management plan.

• Cost Management Plan Update: If approved change requests result from the Cost
Estimating process, then the cost management plan component of the project
management plan is updated if those approved changes impact the management of
costs.
Fig. 3.3 Cost Estimating

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3.3 Cost Budgeting

The budget related the expected cost and revenue with the time progress. The master
control estimate prepared during the project planning stage is called the original budget.
Each work package is budgeted with its database, containing the scope of work,
resources, cost, the quality, time and the performance responsibility. Original budget is
revised, if the situation demands. There is a fundamental difference in the use of the terms
budget, standard, commitment and value, with respect to a work package.

3.3.1 Cost Budgeting –Input

• Activity Cost Estimates: The cost estimates for each schedule activity within
a work package are aggregated to obtain a cost estimate for each work
package.

• Work Breakdown Structure: The project work breakdown structure (WBS)

provides the relationship among all the components of the project and the
project deliverables.

• WBS Dictionary: The WBS dictionary and related detailed statements of

work provide an identification of the deliverables and a description of the
work in each WBS component required to produce each deliverable.

• Project Schedule: The project schedule includes planned start and finish
dates for the project schedule activities, schedule milestones, work packages,
planning packages, and control accounts. This information is used to aggregate
costs to the calendar periods when the costs are planned to be incurred.

• Resource Calendars

• Contract: Contract information related to what products, services, or results

have been purchased. and their costs . are used in developing the budget.

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 • Cost Management Plan: The cost management plan component of the project
management plan and other subsidiary plans are considered during cost
budgeting.

3.3.2 Cost Budgeting –Tools & Technique

• Cost Aggregation: Schedule activity cost estimates are aggregated by work packages
in accordance with the WBS. The work package cost estimates are then aggregated
for the higher component levels of the WBS, such as control accounts, and ultimately
for the entire project.

• Reserve Analysis: Reserve analysis establishes contingency reserves, such as the

management contingency reserve, that are allowances for unplanned, but potentially
required, changes. Such changes may result from risks identified in the risk register.

• Parametric Estimating: The parametric estimating technique involves using project

characteristics (parameters) in a mathematical model to predict total project costs.

• Funding Limit Reconciliation: Large variations in the periodic expenditure of funds

are usually undesirable for organizational operations. Therefore, the expenditure of
funds is reconciled with the funding limits set by the customer or performing
organization on the disbursement of funds for the project.

3.3.3 Cost Budgeting – Output

• Cost baseline: Time phased budget that will be used to measure and monitor the cost
performance of the project.

• Project Funding Requirements: Funding requirements, total and periodic (e.g.,

annual or quarterly), are derived from the cost baseline and can be established to
exceed, usually by a margin, to allow for either early progress or cost overruns.

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• Cost Management Plan updates: If approved change requests result from the Cost
Budgeting process, then the cost management plan component of the project
management plan is updated if those approved changes impact the management of
costs.

• Requested Changes: The Cost Budgeting process can generate requested changes
that affect the cost management plan or other components of the project management
plan.

Fig. 3.4 Cost Budgeting

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3.4 Cost Control

Project cost control includes:

• Influencing the factors that create changes to the cost baseline.

• Ensuring requested changes are agreed upon.
• Managing the actual changes when and as they occur.
• Monitoring cost performance to detect variances from the plan.
• Recording all appropriate changes accurately against the cost baseline.
• Ensuring that all appropriate changes are recorded.
• Preventing incorrect, inappropriate, or unauthorized changes from being included.
• Informing the appropriate stakeholders of authorized changes.
• Act to bring expected costs within acceptable limits.
• Analyzing positive and negative variances.

3.4.1 Cost Control – Input

• Cost baseline.
• Project Funding Requirements.
• Performance reports: Information on project scope and cost performance. Alert
project management team to future problems.

• Approved Change requests: Approved change requests from the Integrated Change
Control process (Section 4.6) can include modifications to the cost terms of the
contract, project scope, cost baseline, or cost management plan.
• Project Management Plan: The project management plan and its cost management
plan component and other subsidiary plans are considered when performing the Cost
Control process.

3.4.2 Cost Control – Tools & Technique

• Cost change control system: Procedures used for making changes to the cost
baseline.

• Paperwork
• Tracking system
• Approval levels

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 • Performance measurement analysis: Assessment of the magnitude of any variation,
the cause of the variance, and the corrective action needed.

• Forecasting: Forecasting includes making estimates or predictions of conditions in

the project’s future based on information and knowledge available at the time of the
forecast.

• Project Performance Reviews: Performance reviews compare cost performance over

time, schedule activities or work packages overrunning and under running budget
(planned value), milestones due, and milestones met.

• Project Management Software: Project management software, such as

computerized spreadsheets, is often used to monitor PV versus AC, and to forecast the
effects of changes or variances.

• Variance Management: The cost management plan describes how cost variances
will be managed, for example, having different responses to major or minor problems.
The amount of variance tends to decrease as more work is accomplished.

3.4.3 Cost Control – Output

• Cost Estimates updates: Revised schedule activity cost estimates are modifications
to the cost information used to manage the project.

• Cost Baseline updates: Budget updates are changes to an approved cost baseline.

• Performance Measurements: The calculated CV, SV, CPI, and SPI values for WBS
components, in particular the work packages and control accounts, are documented
and communicated.

• Forecasted Completion: Either a calculated EAC value or a performing

organization-reported EAC value is documented or the value communicated to

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 stakeholders. Either a calculated ETC value or a reported ETC value provided by the
performing organization is documented and the value communicated to stakeholders.

• Project Management Plan updates: Schedule activity, work package, or planning

package cost estimate, as well as the cost baseline, cost management plan, and project
budget documents are components of the project management plan. All approved
change requests affecting those documents are incorporated as updates to those
documents.

• Organizational Process Assets updates: Lessons learned are documented so they

can become part of the historical databases for both the project and the performing
organization.

Fig 3.5 Cost Control

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