Project Cost Management: A Comprehensive Guide

Project Cost Management

Project cost management encompasses the processes of planning, estimating, budgeting, financing, funding, managing, and controlling costs to ensure project completion within the approved budget. The ability to influence cost is greatest during the early project stages, making early scope definition critical. Project cost management focuses on the cost of resources required to complete project activities, considering the impact of decisions on the recurring cost of using and maintaining the project's outcome.

Plan Cost Management

This process defines how project costs will be estimated, budgeted, managed, monitored, and controlled. Cost management planning occurs early in project planning, establishing the framework for each cost management process to ensure efficiency and coordination.

Estimate Costs

This process involves developing an approximation of the cost of resources needed to complete project work. It's a prediction based on information available at a given time, typically expressed in currency units. The accuracy of a project estimate improves as the project progresses through its lifecycle. Costs are estimated for all resources charged to the project, including labor, materials, equipment, services, facilities, and financing costs.

Tools and Techniques

Expert Judgement

• Similar projects
• Industry information
• Cost estimating methods

Analogous Estimating

This method uses values or attributes from previous, similar projects.

Parametric Estimating

This technique uses a statistical relationship between relevant historical data and other variables to calculate project work costs.

Bottom-Up Estimating

This method estimates the cost of individual work components. The detailed costs are then summarized or "rolled up" to higher levels for reporting and tracking.

Three-Point Estimating

• Triangular distribution: cE = (cO + cM + cP)/3
• Beta distribution: cE = (cO + 4cM + cP)/6

Data Analysis

• Alternative analysis (buying vs. making)
• Reserve analysis: contingency reserves for identified risks
• Cost of quality: invest in conformance vs. cost of nonconformance

Project Management Information Systems (PMIS)

Spreadsheets, simulation software, statistical analysis, etc.

Decision Making

Determine Budget

This process aggregates the estimated costs of individual activities or work packages to establish an authorized cost baseline. A project budget includes all funds authorized for project execution. The cost baseline, the approved version of the time-phased project budget, includes contingency reserves but excludes management reserves.

Control Costs

This process involves monitoring the project's status to update project costs and manage changes to the cost baseline. The key benefit is maintaining the cost baseline throughout the project. Monitoring fund expenditures without considering the value of work accomplished has little value beyond tracking fund outflow.

Tools and Techniques

Expert Judgement

• Variance analysis
• Earned value analysis
• Forecasting
• Financial analysis

Data Analysis

• Earned value analysis (EVA): Compares the performance measurement baseline to the actual schedule and cost performance. For each work package and control account:
  • Planned value (PV): The authorized budget assigned to scheduled work. At a given time, PV defines the physical work that should have been accomplished. The total PV for the project is also known as the budget at completion (BAC).
  • Earned value (EV): A measure of work performed, expressed in terms of the authorized budget. The measured EV cannot exceed the authorized PV budget for a component. EV is often used to calculate the percentage of project completion.