07. Project Cost Management
We have gone so far with project management in IT
and we have seen that all of the three previous knowledge areas were very important for the development of a plan. Now the turn is for the "Project Cost Management". This is interesting because many information technology projects have a poor track record in meeting their budget goals. This because the project managers in IT often overlook the financial issues in project management because they think that this issue belongs only to the finance divisions or to the economics area of studying.
Ok, I know that you may wandering now; what is exactly project cost management? In a few and simple words, we may conclude that project cost management includes the processes required to ensure that a project team completes a project within an approved budget.
Because this knowledge area is important as the other areas are, it is project managers responsibility to be familiar with some of the basic concepts and principles of cost management.
Cost estimating means developing an approximation or estimate of the costs of the resources needed to complete a project.
Cost budgeting means allocating the overall cost estimate to individual work items to establish a baseline for measuring performance.
Cost control means controlling changes to the project budget
Profits are revenues minus expenditures.
Profit Margin is the ratio of revenues to profits.
Life cycle costing considers the total cost of ownership or development, plus support cost, for a project.
Tangible costs or benefits are those costs or benefits that an organization can easily measure in dollars.
Intangible costs or benefits are costs or benefits that are difficult to measure in monetary terms.
Direct costs are costs that can be directly related to producing the products and services of the project.
Indirect costs are costs that are not directly related to the products or services of the project, but are indirectly related to performing the project.
Sunk cost is money that has been spent in the past; when deciding what projects to invest in or continue, you should not include sunk costs.
I think that's enough of definitions from economics. Now let us return to other issues. Based on the table on Project Integration Management post, we can see that project cost management includes three process groups which are:
1. Estimate costs
2. Determine budget
3. Control costs
The first two steps fall under planning process group and the third one falls under monitoring an controlling.
Time now to go in details for each of the three processes.
Cost estimating :
Project managers mus take cost estimating seriously if they really want to success on their projects. Mainly there exists three ways project managers can use for estimating the costs.
i) A rough order of magnitude (ROM) estimate provides an estimate of what a project will cost. Usually this type is done before the project starts or at least in the first stages of the project.
ii) A budgetary estimate is used to allocate money into an organizations' budget.
iii)A definitive estimate provides an accurate estimate of projects costs.
A cost management plan is a document that describes how the organization will manage cost variance on the project
There are different tools and techniques for cost estimating. The basic techniques are :
- 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.
- Bottom-up estimates: involve estimating individual work items or activities and summing them to get a project total.
- Parametric modeling: uses project characteristics (parameters) in a mathematical model to estimate project costs.
Note that there are some problems with the information technology cost estimates such as:
- doing estimations too quickly
- lack of estimating experience
- human beings are biased toward underestimating
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 which is a time-phased budget that project managers use to measure and monitor cost performance.
Cost Control:
Cost control is very important and many organizations around the world have shown to have problems with cost control. Project cost control includes:
i) Monitoring cost performance
ii) Ensuring that only appropriate project changes are included in a revised cost baseline
iii)Informing project stakeholders of authorized changes to the project that will affect costs
An important concept that anyone will be facing in project cost management is the Earned Value Management - EVM which is a project performance measurement technique that integrates scope, time, and cost data. Given a baseline (original plan plus approved changes), you may determine how well the project is meeting its goals
You must enter actual information periodically to use EVM. Many organizations around the world are using EVM to help control project costs and the result good.
A last concept and I think is enough for this topic:
Project Portfolio Management :
Many organizations collect and control an entire suite of projects or investments as one set of interrelated activities in a portfolio. Five levels for project portfolio management are:
- Put all your projects in one database
- Prioritize the projects in your database
- Divide your projects into two or three budgets based on type of investment
- Automate the repository
- Apply modern portfolio theory, including risk-return tools that map project risk on a curve
This is also being used widely from organizations around the world.
and we have seen that all of the three previous knowledge areas were very important for the development of a plan. Now the turn is for the "Project Cost Management". This is interesting because many information technology projects have a poor track record in meeting their budget goals. This because the project managers in IT often overlook the financial issues in project management because they think that this issue belongs only to the finance divisions or to the economics area of studying.Ok, I know that you may wandering now; what is exactly project cost management? In a few and simple words, we may conclude that project cost management includes the processes required to ensure that a project team completes a project within an approved budget.
Because this knowledge area is important as the other areas are, it is project managers responsibility to be familiar with some of the basic concepts and principles of cost management.
Cost estimating means developing an approximation or estimate of the costs of the resources needed to complete a project.
Cost budgeting means allocating the overall cost estimate to individual work items to establish a baseline for measuring performance.
Cost control means controlling changes to the project budget
Profits are revenues minus expenditures.
Profit Margin is the ratio of revenues to profits.
Life cycle costing considers the total cost of ownership or development, plus support cost, for a project.
Tangible costs or benefits are those costs or benefits that an organization can easily measure in dollars.
Intangible costs or benefits are costs or benefits that are difficult to measure in monetary terms.
Direct costs are costs that can be directly related to producing the products and services of the project.
Indirect costs are costs that are not directly related to the products or services of the project, but are indirectly related to performing the project.
Sunk cost is money that has been spent in the past; when deciding what projects to invest in or continue, you should not include sunk costs.
I think that's enough of definitions from economics. Now let us return to other issues. Based on the table on Project Integration Management post, we can see that project cost management includes three process groups which are:
1. Estimate costs
2. Determine budget
3. Control costs
The first two steps fall under planning process group and the third one falls under monitoring an controlling.
Time now to go in details for each of the three processes.
Cost estimating :
Project managers mus take cost estimating seriously if they really want to success on their projects. Mainly there exists three ways project managers can use for estimating the costs.
i) A rough order of magnitude (ROM) estimate provides an estimate of what a project will cost. Usually this type is done before the project starts or at least in the first stages of the project.
ii) A budgetary estimate is used to allocate money into an organizations' budget.
iii)A definitive estimate provides an accurate estimate of projects costs.
A cost management plan is a document that describes how the organization will manage cost variance on the project
There are different tools and techniques for cost estimating. The basic techniques are :
- 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.
- Bottom-up estimates: involve estimating individual work items or activities and summing them to get a project total.
- Parametric modeling: uses project characteristics (parameters) in a mathematical model to estimate project costs.
Note that there are some problems with the information technology cost estimates such as:
- doing estimations too quickly
- lack of estimating experience
- human beings are biased toward underestimating
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 which is a time-phased budget that project managers use to measure and monitor cost performance.
Cost Control:
Cost control is very important and many organizations around the world have shown to have problems with cost control. Project cost control includes:
i) Monitoring cost performance
ii) Ensuring that only appropriate project changes are included in a revised cost baseline
iii)Informing project stakeholders of authorized changes to the project that will affect costs
An important concept that anyone will be facing in project cost management is the Earned Value Management - EVM which is a project performance measurement technique that integrates scope, time, and cost data. Given a baseline (original plan plus approved changes), you may determine how well the project is meeting its goals
You must enter actual information periodically to use EVM. Many organizations around the world are using EVM to help control project costs and the result good.
A last concept and I think is enough for this topic:
Project Portfolio Management :
Many organizations collect and control an entire suite of projects or investments as one set of interrelated activities in a portfolio. Five levels for project portfolio management are:
- Put all your projects in one database
- Prioritize the projects in your database
- Divide your projects into two or three budgets based on type of investment
- Automate the repository
- Apply modern portfolio theory, including risk-return tools that map project risk on a curve
This is also being used widely from organizations around the world.
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