Project Cost Management

• Neeraj Sharma
• Nishma Bajracharya
• Prasansa Shrestha
• Sajeeb Chand
What is Cost and  Project Cost
Management? 

 Cost is a resource sacrificed or foregone to achieve a specific

objective or something given up in exchange
 Costs are usually measured in monetary units like Rupees,

dollars
 Project cost management includes the processes required to
ensure that the project is completed within an approved budget .It
is also called life –cycle cost.
 Project managers must make sure their projects are well

defined, have accurate time and cost estimates and have a

realistic budget that they were involved in approving
Project Cost Management

 preliminary concern with the cost of the resources

needed to complete schedule activities.
 Consider the effect of project decisions on the cost of
using, maintaining and supporting the product, service
or result of the project.
 Considers the information requirements of the project
stakeholders
Cost Management Plan 
 A cost management plan is a document that describes
how the organization will manage cost variance on the
project
 For example, how to respond to proposals from
suppliers that are higher or lower than estimates
 A large percentage of total project costs are often
labor costs, so project managers must develop and
track estimates for labor
 Many organizations estimate the number of

people or hours they need by department or skill

over the life cycle of a project
Cost management plan can be
establish as:
 Precision level
 Units of measure
 Organizational procedures links
 Control thresholds
 Earned value rules
 Reporting formats
 Process description
Project Cost Management Processes
There are three project cost management
processes:
 Cost estimating: developing an approximation or
estimate of the costs of the resources needed to
complete a project
 Cost budgeting: allocating the overall cost estimate
to individual work items to establish a baseline for
measuring performance
 Cost control: controlling changes to the project
budget
Cost Estimating 

 Cost estimating: developing an approximation or estimate of the costs of

the resources needed to complete a project

 Estimating schedule activity costs involves developing an approximation of

the costs of the resources needed to complete each schedule activity.
 Calculate risk

 Identifying and considering various costing alternatives.

 Cost estimates are generally expressed in units of currency such as

Rupees, Dollars, etc and also can use units of measure such as staff hours
or staff days along with their cost estimates.

 After developing a good resource requirements list, PMs and their teams
must develop several estimates of the costs for these resources.
Cost Estimating 
 The accuracy of a project estimate will increase as the project
progresses through the project life cycle.

 A rough order of magnitude (ROM) estimate provides an

estimate of what a project will cost.

 Also referred to as a ballpark estimate, a guesstimate, a swag, or a

broad gauge.

 A project in the initial phase could have a rough order of magnitude

(ROM) estimate in the range of -50 to +100 %.
Cost Estimating 

 A ROM estimate that actually cost $100,000 would range between

$50,000 to $200,000. The accuracy range is often much wider for IT
projects.
 Often IT project estimates for software development are

doubled because of the history of cost overruns.

 Project managers must take cost estimates seriously if they want

to complete projects within budget constraints.

 The costs for schedule activities are estimated for all resources that
will be charged to the project which is not limited to labor, materials,
equipment, services, and facilities, as well as special categories
such as inflation allowance or a contingency cost.
Inputs / Tools & Techniques / Outputs
Cost Estimation Inputs
 Enterprise Environmental Factors

 Market Place conditions: Analysis of what product, services,

and results are available in the market place, from whom
and under what terms and conditions.

 Commercial Databases: Resource cost rate information

available from commercial database that tracks skills and
human resource costs.

 Published seller price lists

Cost Estimation Inputs
 Organizational Process Assets

 Cost estimating policies. Some organizations have

predefined approaches to cost estimating. Where these
exist, the project operates within the boundaries defined by
these policies.

 Cost estimating templates. Some organizations have

developed templates (or a pro forma standard)
The organization can continuously improve the template
based on its application and usefulness in prior projects.
Cost Estimation Inputs
 Historical information. Information that pertains to the project’s
product or service, and is obtained from various sources within the
organization, can influence the cost of the project.

 Project files. One or more of the organizations involved in the

project will maintain records of previous project performance that
are detailed enough to aid in developing cost estimates.

 Project team knowledge. Members of the project team may recall

previous actual costs or cost estimates. While such recollections
can be useful, they are generally far less reliable than documented
performance.
Cost Estimation Inputs
 Lessons learned: cost estimates obtained from previous projects
that are similar in scope and size.

 Project Scope Statement

Describes the business need, justification, requirements, and
current boundaries for the project.

The project scope statement includes constraints, assumptions,

and requirements. Constraints are specific factors that can limit
cost estimating options.

Most common constraints for many projects is a limited project

budget, required delivery dates, available skilled resources, and
organizational policies.
Cost Estimation Inputs
 Work Breakdown Structure:
 The project’s work breakdown structure (WBS) defines the total
scope of the project.
 WBS is often used to develop or confirm a common understanding
of project scope.
 WBS Dictionary
The WBS dictionary (Section 5.3.3.3) 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 (Section 4.3) 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.
Cost Estimation Inputs
 Schedule management plan.

 Schedule activity resources and their respective duration.

 Activity Resource Estimating involves determining the

availability and quantities required of staff, equipment, and
materiel needed to perform schedule activities.

 Activity Duration Estimating involves determining the total

activity time which will affect cost estimates.
Cost Estimation Inputs
 Staffing management plan
 when and how human resource requirements will be brought

and taken off the project team.

 Risk register. The cost estimator considers information on risk

responses when producing cost estimates. Risks, which can be
either threats or opportunities, typically have an impact on both
schedule activity and project costs. As a general rule, when the
project experiences a negative risk event, the cost of the project will
nearly always increase, and there will be a delay in the project
schedule.
Cost Estimation Tools and Techniques  

 Analogous or top-down estimates: use the actual cost of a

previous, similar project as the basis for estimating the cost of the
current project
 How similar the current and previous project are determines
the accuracy of the estimate.

 Bottom-up estimates or Activity Based Costing : involve

estimating individual work items or activities and summing them to
get a project total cost.
 The smaller the work items, the better the estimate but these
estimates are usually time intensive and expensive to develop.
Cost Estimation Tools and
Techniques 
 Parametric modeling:
 A technique that uses a statistical relationship between
historical data and other variables e.g. square footage in
construction, required labor hours.
 Higher lever of accuracy

 Project Management Software

 PM software, such as cost estimating software applications,

computerized spreadsheets, and simulation and statistical tools,
are used to assist with cost estimating.
 Such tools can simplify the use of some cost estimating
 Provides various cost estimate alternatives.
Cost Estimation Tools and
Techniques 

 Vendor Bid Analysis

 methods include vendor bid analysis and an analysis of
what the project should cost.

 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.
Cost Estimation Tools and Techniques
 Reserve Analysis
 Many cost estimators include reserves, also called contingency
allowances.
 Contingency reserves-costs to be used at the discretion of the
project manager to deal with anticipated, but not certain, events
called “known unknowns”.

 Cost of Quality
 Total costs incurred by investment in preventing non standard to
requirements,
 Appraising the product or service for conformance to requirements,
 and failing to meet requirements (rework).
 Failure costs are often categorized into internal and external.
 Failure costs are also called cost of poor quality.
Cost Estimating: Outputs

 Activity Cost Estimates

 An activity cost estimate is a quantitative assessment of the likely
costs of the resources required to complete schedule activities.
 Costs are estimated for all resources like labor, materials,
equipment, services, facilities, information technology, and
special categories such as an inflation allowance or cost
contingency reserve.

 Activity Cost Estimate Supporting Detail includes

• Description of the schedule activity’s project scope of work
• Documentation of the basis for the estimate (i.e., how it was
developed)
• Documentation of any constraints
• Indication of the range of possible estimates
Cost Estimating: Outputs

 Requested Changes
The Cost Estimating process may generate requested changes
(Section 4.4.3.2) that may affect the cost management plan
(Chapter 7 introductory material), activity resource requirements
(Section 6.3.3.1), and other components of the project management
plan. Requested changes are processed for review and disposition
through the Integrated Change Control process (Section 4.6).

 Cost Management Plan (Updates)

If approved change requests (Section 4.4.1.4) result from the Cost
Estimating process, then the cost management plan component of
the project management plan (Chapter 7 introductory material) is
updated if those approved changes impact the management of
costs.
 Cost Budgeting 
Cost budgeting involves allocating the project cost estimate to
individual work items over time
 The WBS is a required input to the cost budgeting process
since it defines the work items
 An important goal is to produce a cost baseline
 A time-phased budget that project managers use to measure and
monitor cost performance
 Estimating costs for each major project activity over time provides
management with a foundation for project cost control
 Cost budgeting also provides info for project funding requirements
–at what points in time will the money be needed
Inputs / Tools & Techniques / Outputs
Cost Budgeting: Inputs

 Project Scope Statement

Formal periodic limitations of the expenditure of project funds can be given in the
project charter or contract. These funding constraints are reflected in the project
scope statement, and can be due to annual funding authorizations by the buyer’s
organization or other entities like government agencies.

 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.
Cost Budgeting: Inputs

 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.

 Activity Cost Estimate Supporting Detail

The amount and type of additional details supporting the schedule activity cost
estimate vary by application area. Regardless of the level of detail, the supporting
documentation should provide a clear, professional, and complete picture by which
the cost estimate was derived.
Cost Budgeting: Inputs
 Project Schedule

The project schedule includes planned start and finish dates for
the project’s 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

A composite resource calendar for the project documents working days and
nonworking days that determine those dates on which a specific resource,
Whether a person or materiel, can be active or is idle.
Cost Budgeting: Inputs

 Contract

Contract information related to what products, services, or

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

 Cost Management Plan

The cost management plan component of the project management plan and other
subsidiary plans are considered during cost budgeting.
Cost Budgeting: Tools and Techniques

 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 Management contingency reserves are budgets reserved for unplanned,
but potentially required, changes to project scope and cost.
Cost Budgeting: Tools and Techniques
 Parametric Estimating

The parametric estimating technique involves using project characteristics

(parameters) in a mathematical model to predict total project costs. Models can be
simple (e.g., residential home construction will cost a certain amount per square
foot of living space) or complex (e.g., one model of software development costs
uses thirteen separate adjustment factors, each of which has five to seven points
within it). Both the cost and accuracy of parametric models vary widely. They are
most likely to be reliable when:
• The historical information used to develop the model is accurate
• The parameters used in the model are readily quantifiable
• The model is scalable, such that it works for a large project as well as a small
one.
Cost Budgeting: Tools and Techniques
 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. Reconciliation will
necessitate the scheduling of work to be adjusted to smooth
or regulate those expenditures.Rescheduling can impact the
allocation of resources.
Cost Budgeting: Output
 Cost Baseline

The cost baseline is a time-phased budget that is used as a basis against which to
measure, monitor, and control overall cost performance on the project. The cost
baseline is a component of the project management plan.

 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. Funding usually occurs in incremental
amounts that are not continuous, and, therefore, appears as a step function. The
total funds required are those included in the cost baseline plus the management
contingency reserve amount.
Cost Budgeting: Output
 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. Requested
changes are processed for review and disposition through the Integrated Change
Control process.
Cost Control : Change is inevitable, success is
optional

 Project cost control includes:

 Monitoring cost performance
 Ensuring that only appropriate project changes are included in a
revised cost baseline
 Recording all appropriate changes accurately against the cost
baseline
 Preventing incorrect, inappropriate, or unapproved changes from
being
 included in the reported cost or resource usage
 Informing project stakeholders of authorized changes to the
project that will affect costs
 Acting to bring expected cost overruns within acceptable limits
Cost Control
ALSO
 Performance review meetings can be a powerful
tool to help control project costs
 Knowing you have to report on your progress is an
incentive for people to perform better
 Performance measurement is another important
tool for cost control
 There are many general accounting approaches for
measuring cost performance but earned value
management (EVM) unique to project management
Cost Control
Project cost control searches out the causes
of positive and negative variances.
For example, inappropriate responses to cost
variances can cause quality or schedule
problems or produce an unacceptable level of
risk later in the project.
Cost Control 
Tools & Techniques, and Outputs
Earned Value Management (EVM) 

 EVM is a project performance measurement technique that

integrates scope, time, and cost data
 Given a baseline (original plan plus approved changes), you
can determine how well the project is meeting its goals
 You must enter actual information periodically to use EVM
 Was a WBS item completed or approximately how much of the
work was completed
 Actual start and end dates
 Actual cost
 More and more organizations around the world are using EVM
to help control project costs
Best Practice 

 The most successful organizations are

taking a holistic view of focusing, managing
and measuring their organizational efforts
with an integrated combination of best
practice processes, training and technology
 Unfortunately, most organizations today are not
taking that approach
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