PROJECT COST MANAGEMENT

Learning Outcomes
• Define project cost management
• Explain the overview of project cost
management
• Prepare the project budgets.
INTRODUCTION
• primarily concerned with the cost of the
resources needed to complete project activities
• Project Cost Management must consider
stakeholder’s requirements for managing costs –
each stakeholder will measure costs differently.
• The cost management planning effort occurs
early in the project & sets the framework for each
of the cost management processes so that
performance will be efficient.
TYPES OF COST IN A PROJECT

• Fixed cost: - Fixed costs are those that do not change

throughout the life-cycle of a project.
• Those are not linked to how long the project goes on
for.
• consultancy cost which help to start the project up the
best way

• Variable cost:- opposite of fixed costs - charges that

change with the length of the project.
• staff salaries,
• Machine hire ,
• Direct cost: - directly linked to doing the work of
the project.
• eg, developer salaries are direct costs
(Outsourcing)
• Indirect cost: - not specifically linked to the
project but are the cost of doing business overall.
It can be shared across multiple projects.
• Egs. heating, lighting and office space rental.
• Sunk cost:- costs that have already been incurred
in a project, but have not produced value towards
the project’s objectives.
• Sunk costs are often a consequence of not
collecting requirements properly.
PROJECT COST MANAGEMENT
• includes the processes involved in resource planning, cost
estimating, cost budgeting, and cost controlling so that the
project can be completed within the approved budget.
major processes:
• Resource Planning—determining what resources (people,
equipment, materials) and what quantities of each
• Cost Estimating—developing an approximation (estimate)
of the costs of the resources
• Cost Budgeting—allocating the overall cost estimate to
individual work activities.
• Cost Control—controlling changes to the project budget.
RESOURCE PLANNING
• involves determining what physical resources (people,
equipment, materials) and what quantities of each
should be used and when they would be needed.
• It must be closely coordinated with cost estimating.
• Eg:
• A construction project team will need to be familiar
with local building codes.
• if the local labor pool lacks experience with specialized
construction techniques, the additional cost for a
consultant might be the most effective way
• The requisite knowledge might be obtained by hiring a
consultant
RESOURCE PLANNING
3 COST ESTIMATING
• developing an approximation (estimate) of the costs of the
resources
• the estimator considers the causes of variation of the final estimate
• When a project is performed under contract, care should be taken
to distinguish cost estimating from pricing.
• Cost estimating involves developing an assessment of the likely
quantitative result—how much will it cost
• Pricing is a business decision how much charge for the product or
service
• Cost estimating includes identifying and considering various costing
alternatives.
• Eg in most application areas, additional work during a design phase
is widely held to have the potential for reducing the cost of the
production phase.
COST ESTIMATING
COST BUDGETING
• involves allocating the overall cost estimates
to individual activities or work packages
• Allocating estimates are done after budgetary
approval is provided, but estimates should be
done prior to budget request
COST BUDGETING
Cost Control

• Cost control is concerned with (a) influencing the

factors which create changes to the cost baseline to
ensure that changes are beneficial, (b) determining
that the cost baseline has changed, and (c) managing
the actual changes when and as they occur.
• Cost control includes:
– Monitoring cost performance to detect variances from
plan.
– Ensuring that all appropriate changes are recorded
accurately in the cost baseline.
– Preventing incorrect, inappropriate, or unauthorized
changes from being included in the cost baseline.
– Informing appropriate stakeholders of authorized changes.
Project Budget
• An organization's budget (usually expressed in
dollars) represents management's long- range,
midrange, and short-range plans.
• The budget should contain a statement of
prospective investments, management goals,
resources necessary to achieve those goals,
and a timetable.
Functions of a budget?
• A communication channel for management.
• Advises managers (at all levels) of the
organizational goals and the resources allocated
to their units.
• Defines expected costs and expenditures,.
• A yardstick
• A successful manager who can achieve the
budget goals with the resources allocated, that is,
one who can successfully execute the
organization's policy.
• A useful tool for identifying deviations from plans
Guidelines for Effective budgeting:
• The budget should present management's
objectives stated in terms of measurable
outputs:
• The budget should be presented
quantitatively (e.g., in monetary units or
sometimes in person-hours)
• The budget should be divided into long-range
(strategic), midrange (tactical), and short-
range (operational) levels.
Seven common factors affecting project
selection and budget structure:

• 1. Competition.

• 2. Profit – could be short, medium or long term (time oriented). Could be

high, medium or low (volume oriented)

• 3. Cash flow.

• 4. Risk.

• 5. Technological ability.

• 6. Resources.

• 7. Perceived Needs.
3 procedures used in budgeting
• Top-Down Budgeting
• based on the use of the collective judgments
and experiences of top and middle managers
and available past data of similar activities
and projects were undertaken.
• these cost estimates are then provided to
middle management who are expected to
continue to breakdown
Problems
• 1. Translating long-range budgets into short-
range budgets.

• 2. Competition for funds among lower-level

managers who try to secure adequate funding for
their operations.

• 3. Subordinate managers often feel that they

have insufficient budget allocations to achieve
the objectives to which they must commit
Advantages
• 1. Research shows that the aggregate budget
is quite accurate.
• 2. high predictability
• 3. executive management experience has
factored this into the overall estimate
Bottom-Up Budgeting
• In bottom-up budget building elemental activities, tasks,
their respective schedules, and their respective budgets are
constructed through the work breakdown structure.
• The people doing the work are consulted regarding times
and budgets for the tasks to ensure the best level of
accuracy.
• The individual components are then aggregated into a total
project direct-cost project budget.
• functional managers prepare the budgets for their units,
considering the resources required in each period.
• Finally, top management streamlines and integrates the
individual project and functional unit budgets into a
strategic long-range organizational budget.
Advantages
• 1. Clear flow of information
• 2. Leads to more accurate project budgeting
because there is accurate costing at the activity
level
• Use of detailed data available at the project
management level as the basic source of cost,
schedule, and resource requirement information.
• 3. Participation in the process leads to ownership
and acceptance
Disadvantages
• 1. Top management has limited influence over
the budgeting process,
• 2. Individual tend to overstate their resource
needs
• 3. More influential managers sometimes get a
disproportionate share of resources
• 4. A significant portion of budget building is in
the hands of the junior personnel in the
organization
• 5. Sometimes critical activities are missed and
left unbudgeted
Iterative Budgeting (The Budget Request
Process)
•
• Generally a combination of top-down and bottom-up
budget building is used.
• Frequently this method is called a Budget Request
Process.
• Typically, senior management requests budget
requests be submitted annually.
• Division heads pass this information along to
departments, sections, and subsections, each of which
presumably collects requests from below, aggregates
them and passes them back up the organizational
ladder.
Disadvantage

• 1. Major disadvantages center on the

relatively long duration needed for agreement
and the excessive use of management time.
• 2. Process may not work well when
communication channels are either informal
or blocked between lower-level managers and
senior management
Advantage
• Both senior management and lower level
managers closer to the actual process
participate in the budgeting process
 Guidance notes on Project Budget

• The items that are to be classified under

administrative costs
• under activity costs
• The items that are not allowed
• Administrative costs in any project should not
exceed 25% of total project cost
 Item Classification Justification

Salaries Administrative Salary of the staff involved in

cost the project will be considered as
administrative costs as it does
not directly accrue benefit to
the project but facilitates
project implementation
Travel Administrative Cost incurred on travel of staff
cost within project areas for project
purposes other than capacity
building and training of staff.
Office Running expenses Administrative Cost incurred on day to day
cost office running expenses such as
postage, printing (other than
printing of survey reports),
electricity, telephone, fax,
stationary etc.
Contingency Administrative It is meant to tide over unforeseen
cost expenses and should not exceed 5% of
total project cost.

Capacity building of staff & Activity cost Capacity building of staff and
beneficiaries beneficiaries including workshop,
meetings, training, and travel for
training purposes will be considered
activity cost as they directly affect the
project implementation.
Development activities Activity cost The cost incurred on all such activities
that are proposed for implementation
of the project. For e.g. Construction of
structures, establishing micro & small
scale processing units, plantations,
nursery raising, packaging etc.
Monitoring & Evaluation Activity cost Monitoring and evaluation exercises such as
meetings, discussions, physical
verifications including reporting and
documentation will be considered as
activity costs.

Hiring of Consultants Activity cost The cost of hiring external consultants for
direct project related activities that have
been classified under development
activities.

Institutionalization Activity cost Costs incurred on formation, stabilization,

linking and meetings of groups.
• Example 1: A Tutoring Program
Consider a school that wishes to establish a
tutoring program. A coordinator and five
tutors might be able to help 50 students (10
students per tutor at $10,000)
• Coordinator salary and fringe benefits:
$30,000
Calculate the Cost per student
• Cost per student: $80,000/50 students; $1,600
per student
• The same coordinator might be able to run a
program with eight tutors and 80 students,.
lowering the average cost on a per
student basis
• Coordinator salary: 30,000
Fees for tutors: $10,000 per tutor x 8 tutors
$80,000
Cost per student: $110,000/80 students
$1,375 per student
• However, expanding the program beyond
eight tutors might require hiring another
coordinator, driving the average cost per
student
• even higher than it was originally.
• Coordinator salaries and fringe: $60,000
Fees for tutors: $10,000 per tutor x 9 tutors
$90,000
Cost per student: $150,000/90 students
$1,667 per student
• Once you can change your plans and update
your budget so that revenues and expenses
expected to be in the proper relationship, the
full board, in its governance role, must
approve the plan for the year and the budget.
• From that point, staff and volunteers begin to
put the plan into action and prepare monthly
reports comparing actual income and
expenses to the budget.
 Budget Worksheet

Project Title…………………………… Budget Period …………………….

Draft No……………………………
Currency used…………………………… Total Budget …………………….

Budge Description Unit No. Quantit Unit Total Notes Accts Donor
t Type units y cost Cost Code code
item
ref.
Example:
The following information are given for a four day workshop for 20
participants with two tutors at Youth Club in Jaffna Peninsula.

i. A room will be hired to conduct the workshop for 4 days at a cost

of Rs. 2,500 per day.
ii. It is decided to pay as tutoring fee of Rs. 1,000 per tutor per day.
iii. Tutor’s accommodation will be provided at a cost of Rs. 500 per
night per tutor.
iv. Lunch and refreshments will be provided at a cost of Rs. 500 per
head.
v. Course modules are printed at a cost of Rs. 500 per module.
vi. Folders and stationeries will be provided to the trainees at a cost
of Rs. 300 per participant.
Required:
Prepare the budget for Youth Club to conduct the 4 day workshop
using given format.
 Budget Worksheet

Project Title…………………………… Budget Period …………………….

Draft No……………………………
Currency used…………………………… Total Budget …………………….
Budg Description Unit Type No. Quantity Unit cost Total Cost Notes Accts Code Donor
et units code
item
ref.

1 Workshop costs
1.1 Room hire for Days 4 1 2,500 10,000
workshop
1.2 Tutors’ fees Days 4 2 1,000 8,000
1.3 Tutor’s Nights 5 2 500 5,000
accommodation
1.4 Lunch & Delegate 22 4 500 44,000
refreshments
1.5 Course Delegate 22 1 500 11,000
handbooks
1.6 Folders for Trainee 20 1 300 6,000
papers
Total Coast 84,000
• The Director of Legacy NGO has asked you to help her calculate the costs
of running a Legal Advice Service (LAS) for women. After discussing the
proposed activity plans for the first year, you have been able to come up
with the following essential information.
• The legacy financial year runs from 1 July to 30 June. Project budgets are
in US Dollars.
• The LAS will employ one full time Legal Adviser at $350.00 per month plus
medical costs (18% of gross salary) and employer’s taxes (11% 0f gross
salaries). This is a new post and must be advertised in 2 newspapers-each
advert entry will cost approx. $125.00.
• The activity plans include 4 advice sessions each week throughout the
year, except for first four weeks of the project and two weeks in December
(i.e.46 week in all). Each advice session will be run by one trained
paralegal volunteer. Volunteers receive an allowance of $8.00 per session
to cover travel and lunch.
• The project will hire a room at a local community hall where each session
will cost $15.00.
• Public for the project will take place in the first month of the project.
Quotations to print 2,000 leaflets and 100 posters have been obtained.
The cheapest quote is for $740.00, which the Director thinks is a good
price and is from a good supplier.
• A new telephone line will be installed (for the Legal Advice center’s use only) from
month 3 of the project. Installation costs will be $150.00; the average cost of line
rental and calls is estimated to be $75.00 per month.
• The project worker will also need to buy some reference books and manuals for
the advice workers. The director has been advised by a colleague in a similar
project to allow a lump sum of at least $425.00n for this purchase. These will be
purchased in month 1 of the project.
• The project will be running a series of seminars for women-1 workshop every
month except July and December. Each workshop will have places for10
participants. The cost of the training pack has been estimated at $7.00 per
participant. The seminars will be held in legacy’s meeting room so there will be no
room hire charge.
• The project officer will use one of Legacy’s shared vehicles. It is estimated that she
will travel approx. 500 kms per month, for 11 months of the year. The cost per km
for using the vehicle is $1.00. Staff may also need to use buses and taxis and
estimate they need $20.00 for each month of the year.
• An external evaluation will take place in the last month of the project. The Director
has advised that 5 days will be adequate for this purpose and consultant’s fee will
be approx. $100.00 per day.
Required: - Using this information and the budget worksheet format attached,
calculate the direct project costs for the LAS budget. Showing clearly how each
budget line item has been calculated.
 Budget Worksheet
Project Title …………………………… Budget Period ……………………. Draft No……………………………
Currency used …………………………… Total Budget …………………….

Budget Description Unit No. Qty Unit Total Notes Accts Donor
item ref.
Type units cost Cost Code code
 The Lewis Trust Project Proposal Budget
All budgets must be presented using the following format
Project Title: ………………………………………………………………….
Project covered:………………………………………………………………
Please Specify currency used …………………………………………..

Code Description Total Cost Total Cost Notes

£
Non-Personnel project inputs
NP1 Tools & equipment
NP2 Computer equipment
NP3 Communication
NP4 Publicity
NP5 Work shop materials
NP6 Food & accommodation
NP7 Reference books
NP8 Transport & Travel
NP9 Other (Specify)
Sum NP Non-Personnel Project inputs
 Project Personnel
PP1 Salaries
PP2 Benefits and taxes
PP3 Recruitment advertising
PP4 Staff training
PP5 Other (Specify)
Sum PP Project Personnel
Sub Total A (NP + PP)
Administration
AM1 End of Project Evaluation 1 consultant for 5 days
AM2 External financial audit 2.5% of Sub Total A
AM3 Programme Support 7.5% of Sub Total A
Sum AM Sub Total B
Total (Sub totals A+B)
 Budget Worksheet
LEGACY – LEGAL AND HUMAN RIGHTS CENTRE
Project Title ……………………………
Budget Period ……………………. Draft No…1
Currency used ……………………………
Total Budget…………………….
Ref. Description Unit No. Quanti Unit Total Notes Accts Dono
Type unit ty cost Cost Code r
s code
A Project Staff
Costs
A1 Legal Adviser Month 12 1 350 4200 1 Full time post 3010 PP1
A2 Medical Month 12 1 63 756 @18% of gross salaries for this 3020 PP2
Insurance project
A3 Social Security Month 12 1 38.5 462 @11% of gross salaries for this 3020 PP2
/Employers’ project
Taxes
A4 Staff Advertis 1 2 125 250 For Legal Adviser in 2 national 3030 PP3
Recruitment ement newspapers
A5 Volunteers Session 4 46 8.00 1472 4 sessions per week, 46 weeks 3050 PP5
Expenses per year, 1 volunteer per
session
7140
Ref. Description Unit Type No. Quanti Unit Total Notes Accts Donor
units ty cost Cost Code code
B Direct Project
costs
B1 Room hire Session 4 46 15 2760 4 advice sessions per week X 46 3210 NP6
weeks
B2 Publicity Lumpsou 1 1 740 740 For 200 leaflets and 100 posters, 3220 NP4
as per quotation
B3 Help-line Lump sum 1 1 150 150 Estimate for advice line based on 3230 NP3
telephone quotation
installation
B4 Help-line Month 10 1 75 750 Estimate for advice line based on 3230 NP3
telephone previous experience
rental/calls
B5 Books, manuals, Lump sum 1 1 425 425 Estimate based on experience of 3240 NP7
publications a similar project
B6 Workshop Participant 10 10 7 700 Training packs for 10 workshops, 3250 NP5
materials 10 participants each
B7 Vehicle running Km per 500 11 1 5500 Use of “pool” car 3110 NP8
cost month
B8 Public transport Month 12 1 20 240 Buses and taxis 3120 NP8
B9 Evaluation Days 5 1 100 500 1 consultant for 5 days 3260 AM1
11765
Total Direct 18905
Project Costs
 The Lewis Trust Project Proposal Budget
Project Title: Legacy : Legal and Human Rights Centre
Project covered:………………………………………………………………
All budgets must be presented using the following format:
Specify exchange rate used £1 : $1.8
Code Description Total Cost Total Cost Notes
$ £
Non-Personnel project
inputs
NP1 Tools & equipment 0 0
NP2 Computer equipment 0 0
NP3 Communication 900 500
NP4 Publicity 740 411 For 2000 leaflets and 100 posters as per
quotation
NP5 Work shop materials 700 389 Advice leaflets, photocopies, materials for
10 workshops, 10 people each
NP6 Food & accommodation 2760 1533
NP7 Reference books 425 236
NP8 Transport & Travel 5740 3189
NP9 Other (Specify) 0 0
Sum NP Non-Personnel Project 11265 6258
inputs
 Project Personnel

PP1 Salaries 4200 2333 1 full time post

PP2 Benefits and taxes 1218 677 Medical 18%, taxes 11% of gross
salary
PP3 Recruitment advertising 250 139 For legal adviser in 2 national
papers
PP4 Staff training 0 0
PP5 Other (Specify) 1472 818 4 sessions per week, 46 weeks per
year, 1 volunteer per session
Sum PP Project Personnel 7140 3967
Sub Total A (NP + PP) 18405 10226
Administration
AM1 End of Project 500 278 1 consultant for 5 days
Evaluation
AM2 External financial audit 460 256 2.5% of Sub Total A
AM3 Programme Support 1360 767 7.5% of Sub Total A
Sum AM Sub Total B 2341 1300
Total Project Cost 20746 11525
 Earned Value Management

What is Earned Value Management

(EVM)?
• A method of integrating scope, schedule,
and resources, and for measuring project
performance.
• It compares the amount of work that was
planned with what was actually earned
with what was actually spent to determine
if cost and schedule performance are as
59 planned.
 Earned Value Management

To perform EVM, three values need

to be determined
• Planned Value (PV or BCWS)
• Actual Costs (AC or ACWP)
• Earned Value (EV or BCWP)

59
 Earned Value Management

Planned Value (PV)

What are the budgeted costs of
the work scheduled?
•Time phased based on baseline budget
•Only changes when baseline is changed
•Also referred as “BCWS” & “BAC”

60
 Earned Value Management

Actual Costs (AC)

What are the actual costs of the
work performed?
•Based on the actual completion of work
packages
•Actual costs for reported work
•Also referred as “ACWP”

60
 Earned Value Management

Earned Value (EV)

What are the budgeted costs of
the work performed?
•Based on the actual completion of work
packages
•Baseline value of the reported work
•Also referred as “BCWP”

60
 Earned Value Management Example

Task – Drill & install 10 piezometers

• Budget - $100,000 ($10K per piezometer)
• Time – 10 weeks (1 piezometer per week)
At week 5:
• 4 piezometers drilled and installed
• $47,500 spent to date
PV = $50,000
AC = $47,500
EV = $40,000
 Earned Value Management

Calculating Earned Value and

interpreting results
• to measure the progress of the project
• help identify trends
• forecast costs
• and identify ways to correct/mitigate
project pitfalls.

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 Earned Value Management

Cost Variance (CV)

CV = EV - AC

•Good News: If CV value is positive, the project is currently under

budget (spending less than planned for the work)
•Bad News: If CV value is negative, the project is currently over
budget (spending more than planned for the work)

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 Earned Value Management

Cost Performance Index

(CPI)
CPI = EV / AC
•Good News: If CPI value is >1 or =1, the project cost trend is
currently under or at planned budget
•Bad News: If CPI value <1, the project cost trend is currently over
budget

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 Earned Value Management

Cost Variance % (CV%)

CV% = CV / EV

•Good News: If CV% value is positive, the project is currently

under budget by the CV%
•Bad News: If CV% value is negative, the project is currently over
budget by the CV%

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 Earned Value Management

Schedule Variance (SV)

SV = EV - PV

•Good News*: If SV value is positive, the project is currently ahead

of schedule
•Bad News: If SV value is negative, the project is currently behind
schedule

* - not all positive SVs are good

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 Earned Value Management

Schedule Performance
Index (SPI)
SPI = EV / PV
•Good News: If SPI value is >1 or =1, the project schedule trend is
currently ahead or on planned schedule
•Bad News: If SPI value <1, the project schedule trend is currently
behind schedule

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 Earned Value Management

Schedule Variance % (SV%)

SV% = SV / PV

•Good News: If SV value is positive, the project is currently ahead

of schedule
•Bad News: If SV value is negative, the project is currently behind
schedule

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 Earned Value Management Example

Task – Drill & install 10 piezometers

• Budget - $100,000 ($10K per piezometer)
• Time – 10 weeks (1 piezometer per week)
At week 5:
• 4 piezometers drilled and installed
• $47,500 spent to date
PV = $50,000 CV = -$7,500 SV = -$10,000
AC = $47,500 CPI = 0.82 SPI = 0.80
EV = $40,000 CV% = -19% SV% = -20%
Thank you