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The proper cost and budget management contribute reasonably in the success of project as well as in the overall profitability of an organization. The project manager is responsible to control, monitor and manage all the costs related to the project and also track the project performance with respect to time, cost and available resources throughout the project life cycle. This academic paper is mainly focused on the cost management including the prevailing techniques of cost estimating and cost controlling along with the different types of cost estimates and overall strategy for the cost management process.
This paper supplements the information pertaining to cost management provided in the Project Management Plan (PMP) for the project R012 which is presented as part of the group assignment of the same project. The techniques and approach presented herein for the cost control and estimating of costs will be adopted throughout the project life cycle for the project R012.
The cost management contributes a vital role in the success of a project when integrates with other success leading factors such as time management, scope management and resource management. Cost management of a project includes mainly the processes of estimating cost, determination of budget and control and monitoring of project costs throughout the life cycle of the project.
It is one of the prime responsibilities of a project manager to manage and control the budget and costs pertaining to all the project activities for the completion of project on or under the allocated budget in conjunction with the overall control of scope, cost and optimized resource utilization.
A typical pattern of cost and staffing level with respect to time at different stages of project is shown in the below mentioned figure.
Figure - Typical Cost and Staffing Levels across the Project Life Cycle
Relationship of Stages of Project Development to Types of Cost Estimates:
A cost estimate is a quantitative assessment of the likely costs for resources required to complete the activity. Cost estimates are developed and further refined at several stages during the life cycle of project. In the preceding section, development of project at several stages is presented along with the relevant estimates.
The concept stage consists of a development phase and studies of all the available information related to the project which include the findings of feasibility report, survey results, geotechnical investigation reports and other pertinent data to the project. During this investigation process, planning feasibility study estimates are derived for preliminary budget estimates of total project cost. In an inception phase, a project could have a ballpark estimate or rough order of magnitude (ROM) estimate.
The design stage consists of the preliminary design phase and detailed design phase. In the preliminary design phase, a preliminary cost estimate is prepared based on the preliminary design with the help of a greater level of available information and the estimates consist of area, volume or similar approximate estimating techniques. In the detailed design phase, cost estimates are based on the detailed design including a detailed quantity takeoff that is an outcome of the total amount of basic work required along with the costs of labor, construction equipment, and materials.
The implementation stage consists of the construction and phases of field operations when actual work and operations are performed. These cost estimates are required throughout the life of the project for cost control. These cost estimates are based on production rates that can be expressed as hours of labor or equipment time required to accomplish a unit amount work.
Techniques of Cost Estimating: Project costs can be computed by following methods:
Expert Judgment: Expert judgment, guided by historical information, provides valuable insight about the information from prior similar projects.
Analogous Estimating: Analogous cost estimating uses the values of parameters, such as scope, cost, budget and duration from a previous, similar project as a basis for current project.
Parametric Estimating: Parametric estimating uses a statistical relationship between historical data and other variables to calculate an estimate for the project.
Bottom-up Estimating: In bottom-up estimating, the cost of individual activities is estimated with the greatest level of specified detail and the detailed cost is then rolled-up to higher levels.
Three-Point Estimating: This concept is based on Program Evaluation and Review Technique (PERT). It uses three estimates to define an approximate range for an activity's cost:
Most Likely (CM): The cost of activity based on realistic effort.
Optimistic (CO): The activity cost based on analysis of the best-case scenario for the activity.
Pessimistic (CP): The activity cost based on analysis of the worst-case scenario for the activity.
PERT analysis calculates an expected (CE) activity cost using a weighted average of these three estimates:
CE = (CO + 4CM + CP) / 6
Development of project budget:
When the cost estimate has been completed, the project control budget is prepared.
The project budget is a detailed schedule of expenses that the project manager uses for cost control purposes during the project life cycle. At the inception of project, a baseline budget for the project is established based upon the scope of work stated in the signed contract. The work progress and performance are continuously monitored and controlled against the same baseline budget. As the project progresses, the baseline budget gets refined based on the modification in scope of work due to changes resulting in a detailed budget with the aggregation of estimated costs of individual activities or work packages.
Project Cost Accounting:
Project cost accounting is the key ingredient in the project cost system. It provides the basic data required for both cost control and estimating. Cost accounting relates solely to determining the detailed makeup of productivity and costs associated with the production of a product in the field, including the necessary overhead expense. Cost accounting involves the continuous determination of productivity and cost data.
Project Cost Coding:
All project related activities are described by a name or descriptive title augmented by a specific cost code with respect to their positions in the hierarchy of project work breakdown structure. A brief representation of project cost codes with respect to the WBS activities is presented below:
Description as per WBS
Administration and Project Control
Integration of Project Cost with the Work Breakdown Structure (WBS):
All the project related costs and controls are basically originated from the work breakdown structure (WBS). The WBS is a hierarchical and logically oriented grouping of project elements (typically deliverable or phase based) that defines the total scope of the project and organizes it in a manner that is consistent with the execution plan. The top level of the WBS consists of a single element that reflects the entire project scope. Each subsequent level represents an increased level of detail until the desired control levels are established. As work progresses, the WBS provides the framework on which costs, time, and schedule/performance can be compared against the budget for each level of the WBS.
Integration of Project Cost with Quality:
To verify that a product or service meets the customer's requirements requires the measurement of the costs of quality, i.e. the cost of conformance and the cost of nonconformance. Conformance costs include items such as training, indoctrination, verification, validation, testing, maintenance, calibration, and audits. Nonconforming costs include items such as scrap, rework, warranty repairs, product recalls, and complaint handling.
Cost of Conformance
Cost of Nonconformance
Internal Failure Costs
(Build a quality product)
(Failures found by the project)
• Document processes
• Time to do it right
External Failure Costs
(Failures found by the customer)
(Assess the quality)
• Warranty work
• Lost business
• Destructive testing loss
Money spent during and after
the project because of failures
Money spent during the project
to avoid failures
Figure - Cost of Quality
Project Cost Categories:
The project costs can be broadly classified into following categories:
Variable costs or Direct costs: These are the costs that incurred at a rate which is proportional to the rate of working on the project, these costs can be measured and associated directly with a particular project.
Fixed costs or Indirect costs: These are the costs that with few exceptions constitute the overhead or indirect costs, i.e. the costs that are not directly associated with a particular project.
Types of Cost Estimates: The type of cost estimates mainly depend on the quality of available information and degree of confidence of estimators in the accuracy. Main type of cost estimates are as follows:
Ballpark estimates or Rough Order of Magnitude (ROM)
Ballpark estimates or Rough Order of Magnitude (ROM): Ballpark estimates are those estimates which contain vague outline information about the project or prepared based on a detailed level of information but with a time constraint.
Comparative estimates: These cost estimates are prepared by comparing the work to be done for a new project with the work already done for a similar previous project.
Feasibility estimates: These types of estimates can be derived only after having a significant amount of information about preliminary design.
Definitive estimates: Definitive estimates are prepared based on the contract documents which include all the project specifications and final drawings.
Project Cost Control:
The project manager must ensure that all work is performed in a cost effective manner and that appropriate cost controls are in place on the project at all times. The project manager is also responsible to review and approve all labor charges and other project costs and to take immediate action to correct negative variances.
The cost control entails a proper cost management process, which primarily includes the following:
Influencing the factors that create changes to the authorized cost baseline.
Ensuring that all change requests are acted on in a timely manner
Managing the actual changes when and as they occur
Ensuring that cost expenditures do not exceed the authorized funding, by period and in total for the project,
Monitoring cost performance to isolate and understand variances from the approved cost baseline,
Monitoring work performance against funds expended,
Preventing unapproved changes from being included in the reported cost or resource usage,
Informing appropriate stakeholders of all approved changes and associated cost, and
Acting to bring expected cost overruns within acceptable limits.
Project cost control initiates with the preparation of the original cost estimate and the subsequent project budget. As the work progresses, cost accounting methods are applied to determine the actual costs of production. The costs as they actually occur are continuously compared with the budget. In addition to monitoring current expenses, periodic reports are prepared that forecast final project costs and compare these predicted costs with the established budget.
Techniques for the Project Cost Control:
Earned Value Analysis (EVA)
To-complete performance Index (TCPI)
Project management software
Earned Value Analysis (EVA):
Earned value analysis is a proven method to measure progress in achieving the project's objective of performing agreed-to work within an agreed-to budget and schedule. In this project, the project manager must implement the Earned Value Management (EVM) techniques to manage the project. In EVM, cost, schedule, and technical scope are all described using a common unit of measure (usually currency or labor hours). This allows all three aspects of the project to be integrated into a single system that allows the project manager to evaluate and control project risk by planning, measuring, and analyzing the financial and physical project performance. The Earned value management develops and monitors three key dimensions for each work package and control account.
Earned Value (EV): Earned value is the percentage of completed work on the project.
Planned Value (PV): Planned value is the authorized budget assigned to the work to be accomplished for an activity or WBS component.
Actual Cost (AC): Actual cost is the total cost actually incurred and recorded in accomplishing work performed for an activity or WBS component.
Figure - Earned Value, Planned Value and Actual Costs
Any deviations of schedule and cost from the baselines can be monitored with the help of schedule variance and cost variance as mentioned below:
Schedule Variance (SV): Schedule variance is a measure of schedule performance on a project. It is equal to the earned value (EV) minus the planned value (PV), i.e. SV = EV - PV.
Cost Variance (CV): Cost variance is a measure of cost performance on a project. It is equal to the earned value (EV) minus the actual cost (AC), i.e. CV = EV - AC.
The schedule variance and cost variance can further be converted into efficiency indicators, i.e schedule performance index (SPI) and cost performance index (CPI) to reflect the schedule and cost performance of the project.
Schedule Performance Index (SPI): The schedule performance index is a measure of progress achieved compared to the progress planned on a project, The SPI is equal to the ratio of the EV to the PV, i.e. SPI = EV/PV.
Cost Performance Index: The cost performance index is a measure of the value of work completed compared to the actual cost or progress made on the project, The CPI is equal to the ratio of the EV to the AC, i.e. CPI = EV/AC.
Earned Value Metrics
EV - PV
Ahead of schedule
EV - AC
Ahead of schedule
As the project progresses, the project manager can develop a forecast for the estimate at completion (EAC) that may differ from budget at completion (BAC) based on the project performance. EACs are typically based on the actual costs incurred for the work completed, plus an estimate to complete (ETC) the remaining work. One of the common techniques to EAC forecasting approach is a manual, bottom-up summation by the project manager. EAC = AC + bottom-up ETC.
EAC forecast for ETC work performed at the budgeted rate: This method accepts the actual project performance to date as represented by the actual costs and predicts that all future ETC work will be accomplished at the budgeted rate. EAC = AC + BAC - EV.
EAC forecast for ETC work performed at the present CPI: This method assumes what the project has experienced to date can be expected to continue in future. EAC = BAC/cumulative CPI.
EAC forecast for ETC work considering both SPI and CPI factors: In this forecast, the ETC work will be performed at an efficiency rate that considers both the cost and schedule performance indices. EAC = AC + [(BAC-EV) / (cumulative SPI x cumulative CPI)].
To-Complete Performance Index (TCPI): The to-complete performance index is the calculated projection of cost performance that must be achieved on the remaining work to meet a specified management goal, such as the BAC or the EAC. The TCPI based on the BAC = (BAC-EV)/(BAC-AC). The TCPI based on EAC = (BAC-EV)/(EAC-AC).
Figure - To-Complete Performance Index (TCPI)
Performance reviews compare cost performance over time, schedule activities or work packages overrunning and under running the budget, and estimated funds needed to complete work in progress. For the performance reviews based on EVM, the following information is determined:
Variance analysis: Variance analysis compares the actual project performance to planned or expected performance.
Trend analysis: Trend analysis examines the project performance over time to determine if performance is improving or deteriorating.
Earned Value Performance: Earned value management compares the baseline plan to actual schedule and cost performance.
Cost Performance measurements (CV, CPI) are used to assess the magnitude of variation to the original cost baseline.
Project Management Software:
Project management software is also used to monitor the three essential EVM dimensions (i.e. PV, EV and AC), to display graphical trends and forecast a range of possible final project results.