Project Cost Management

Project Cost Management

1. Project Cost Estimating

   • Developing an approximation or estimate of the costs of the resources needed to complete a project
   • Best estimate is gathered from WBS
   • Created before budget
   • Types
     • Analogous Estimating "Top-Down"
       • Compare historical files to current project
       • Requires good deal of Expert judgement
       • Passed down by Senior management to the project manager
       • Less accurate and more costly than other types
     • Bottom-Up Estimates
       • Involves estimate derived from WBS to develop detailed estimate.
       • More accurate but time intensive and expensive
     • Parametric Modelling (Mathematical)
       • Uses mathematical model or parameters to estimate project cost
       • Most reliable when historical information used is accurate
       • Parameters are readily quantifiable and model is flexible
   • Pitfalls
     • Buy-in Decision
       • Based on assumption of bail out changes or follow on contracts later.  Example:  Asking stakeholders for more money if budget is exceeded. "Padding."  Paying $20 for a $10 product
     • Misinterpretation of statement of work
     • Omission of improperly define the scope
       • Not going to get a good quality deliverable
     • Inaccurate WBS
       • If WBS is not properly constructed.  Every part of WBS is 'cost center' so if part is not constructed well, the costs will not be accurate
     • Applying improper skills levels to tasks
       • If in a team, you're doing a project the person handling the electrical section is not an electrical engineer, he is a technician, it is beyond his level of understanding. If it he is working based on experience alone, it will not result in a good estimate.
       • When making a team, use people with skills specialized in the field they are assigned to in the WBS.
     • Failure to account for risks
       • When a project is commissioned, you begin to account for risk immediately.  If omitted, the project is more likely to fail. Continue to idenfity risk throughout project. "A risk of today will not become a risk of tomorrow." Identify risks on weekly basis, refine, etc. Monitor, construct risk log, do better job.
     • Failure to understand or account for cost escalation and inflation
       • As project manager be someone with ear to the ground.  You must be aware of what is going on in entire environment. Eg.  Watch CP24 and watch exchange rate on daily basis.   Without monitoring all activities throughout environment, you must account for cost inflation and excalation, how good is the economy doing? Eg.  At stores, price of foodstuffs went up, even though cost of oil has gone down. All factors such as this will effect cost of project.
     • Failure to use the correct estimating technique
       • Say used analogous technique, values will likely be incorrect. WBS technique much more accurate
     • Failure to account for overhead, general and administrative and indirect costs
       • apart from fact that building estimate, you much account for overhead costs as well.

2. Project Cost Budgeting

   • Allocating the overall cost estimate to individual tasks over time to establish a base line for measuring performance
   • Created from Cost Estimate
   • In any project, the project manager is not left alone.
     • There will always be an undistributed budget to be used as a buffer
   • Contract Cost: Includes overhead, administrative cost, insurance, etc.

3. Cost Control: Earned Value Analysis

   • Records past of a project in order to forecast its future
   • Measures projects schedule and cost performances (Schedule & cost variances)
   • Measures estimate at completion and estimate to complete (EAC & ETC)
   • Integrates Scope, Time & Cost
   • Proactive and Predictive
   • Warns of possibly problems and creates opportunities to fix them in a timely manner
   • Keep the project on its planned course
   • Establishes accurate measurement of physical performance against a plan to enable reliable forecast of final cost and completion date
   • Types of Values
     • PV: Planned Value
     • AV: Actual Value
     • EV: Earned Value

Images and files in the map