Why Manage Costs?
1. Costs of inputs and services change during the course of project leading to cost escalations
2. Cost estimation is difficult since there are many Factors that influence the cost of a project and not all of them are under the project’s direct control.
3. Delay in project execution increases the chances of cost escalation
Plan Cost Management
Process that established the policies, procedure and documentation for planning, managing, expending, and controlling project cost.
Cost Management Plan
The cost management processes and their associated tools and techniques along with following component are documented:
Units of measure
Levels of Precision: The degree to which activity cost estimates will be rounded up or down
Levels of accuracy: The acceptable range (e.g. +5%) used in determining realistic activity cost estimate
Amount for contingencies.
Organizational Process Assets: The following internal policies and processes are used
Cost Estimating Policies – internal guidelines on how to estimate cost.
Cost Estimating templates - that can be used to develop cost estimate
Historical information – related to project product or services.
Project Scope baseline: The project scope statement along with the WBS and WBS enables the estimator to come up with the cost estimate.
Human Resource Plan: key resources are always on demand and have to allocated and de-allocated at the appropriate time.
Risk Register: The cost of responding to a risk need to be a part of the estimated costs. It could be a threat and hence, increase the cost or could be an opportunity reducing the cost.
Enterprise Environmental Factor:
Estimates have variable level of accuracy depending on the amount of information available at different stages of the project life cycle.
Some level of estimation accuracy are:
Rough order of Magnitude – This is used during initial estimation. -25% to +75% Variance
Budget Estimate – This is at early stage of planning. -10% to +25% Variance
Definite Estimate – It is most accurate, WBS are required to create this. -5% to +10 %
Estimating Cost- Tools and Techniques
Analogous Estimating: Technique that uses analogy to arrive at the estimate.
Bottom-up Estimating: Estimate for project is arrived at by estimating the cost of work package and rolling them up.
Parametric Estimating: Statistical relationship between historical data and other information.
Project Management Software: Spreadsheet and schedule graphing tools are widely used to arrive at estimate.
Vendor Bid Analysis: Bids sent in by various vendors are evaluated and the costs are used to estimate the final cost of the project.
Reserve Analysis: To Provide the contingencies where risk is involved
Cost of Quality: Cost incurred is preventing defect (non conformance).
Activity Cost Estimates: Quantitative assessment of likely costs of resources that are needed to complete the assigned task.
Basis of Estimates: Additional details used to support the activity cost estimates.
Project document updates: If the estimation activity resulted in any approved change request to the cost management plans.
The process of aggregating the estimated costs of individual activities or work packages to establish an authorized cost Baseline.
Activity Cost Estimates : Activities within each work package to arrive at the estimate for each work package.
Basis of Estimate: Developed during the cost estimating phase.
Project Scope Baseline: To review and incorporate funding constraints, available in the charter
and which get documented in the project scope statement into the cost budget.
Project Schedule: Used to aggregate costs for the period when the specified activity would be performed.
Resource Calendars: Shows details of when the particular resource can be active and when it would be inactive.
Contract: Information related to what products or services need to be produced is obtained.
Determine Budget-Tools and Technique
Reserve Analysis: Used for “unknown unknowns”, the money is reserved as management contingency reserve.
Cost Aggregation: Cost Estimates of activities are aggregated to the work package level and then up-to project.
Funding Limit Reconciliation: Expenditure towards the project are reviewed against limits set by the customer, periodically.
Project Cost Management
Cost Control is executing one or more of the following with a view to controlling costs within a project:
Comparing actual cost with the Cost Baseline.
Influencing factors that impact Cost Baseline.
Managing Changes efficiently thereby controlling costs.