Project Cost Management (PMP Certification Preparation notes. Based on PMBOK)

Cost is one of 3 Triple constraints of the project. Managing costs of the project is very crucial and hardest part of the project. It spans across all phases of the project right from conception to closure of the project.

Cost Management is not just controlling “Costs”, it involves definitive planning and preparing budgets. Collecting cost associated data. Comparing the data to prepared budgets and taking appropriate actions when needed. Following table lists all 3 Processes in this Knowledge Area, spread across '2 out of 5 Process Groups'   5 Process Groups Intiation Planning Execution Monitoring and control Closing Processes 1. Cost Estimating 2. Cost Budgeting   3. Cost Control

7.1 Cost Estimating Process Inputs Tools Outputs Enterprise environmental factors Organizational process assets Project Scope Statement Work breakdown structure WBS dictionary Project management plan - Schedule management plan - Staffing management plan - Risk register Analogous estimating Determine resource cost rates Bottom-up estimating Parametric estimating Project management software Vendor bid analysis Reserve analysis Cost of quality Activity cost estimates Activity cost estimate supporting detail Requested changes Cost management plan (updates).

There are 3 different types of estimation techniques listed over here under Tools section of Cost Estimation.
- Analogous Estimation techniques
- Bottom-up approach technique
- Parametric approach technique

Both Analogous and parametric take Top-to-Down approach unlike Bottom-up approach.

Analogous estimation is mainly based on Expert Judgment or based on similar previous Projects. This approach is very useful in early stages of the project where WBS and work packets are completely defined. The expert judgment success factor depends on similarity of previous projects too. The main disadvantage is that it is good for ball-park figures but not for precise project cost.

Parametric Estimation considers different project characteristics to calculate total costs of the project. For example, in the Telephone wire digging project, if we know cost per meter we can estimate it to whole project. For a house construction, if we know cost to construct per square feet, we can estimate total house project. For complex projects there will be multi dimensional parameters involved. When historic information is available these parametric estimation will be more accurate.

Bottom-up approach is elaborative estimation technique. We start estimating from the bottom most part of WBS hierarchy which is work package. Work packages are divided into activities. Summing up work packages to modules or groups, summing up different modules to stages, summing up different stages to project is the bottom-up approach method. The people who will actually do this work should create the estimates.

7.2 Cost Budgeting Process Inputs Tools Outputs Project scope statement work breakdown structure WBS Dictionary Activity cost estimates Activity cost estimate supporting detail Project schedule Resource calendars Contract Cost management plan Cost aggregation Reserve Analysis Parametric estimating Funding limit reconciliation Cost baseline Project funding requirements Cost management plan (updates) Requested changes

Cost budgeting

The main goal of this process is to develop Cost Baseline. At the starting point of this Process, you should have finished Project Cost Estimation and have a complete list of estimates of individual activities.

You use Cost Aggregation tools to sum up those low level activity costs to Work package to higher levels of WBS hierarchy.

Cost Budgeting is time-based approach to project’s actual costs. Once you prepare this time based planning you baseline it. The baseline is a reference point for the project to compare time to time. You will monitor and control project costs comparing to the baseline and report any variations. Costs at work package level are tied to financial systems using Chart of Accounts. Chart of accounts show cost allocation categories.

Project manager is allowed to allocate extra resources (time or money) as a buffer for known unknowns; we call it as Contingency Reserve.

7.3 Cost Control Process Inputs Tools Outputs Cost baseline Project funding requirements Performance reports Work performance information Approved change requests Project management plan Const change control system Performance measurement analysis Forecasting Project performance reviews Project management software Varience management Cost estimate (Updates) Cost baseline (Updates) Performance measurements Forecasted competition Requested changes Recommended Corrective actions Organizational process assets (updates) Project management plan (updates)

Cost control:
Once you estimate Project costs and baseline those and prepare a Budget, you will be on cruise mode to control the costs. That doesn’t mean it is easy there after. No not at all. You have to monitor your cost so closely. Your work performance information is key input for this process. You should have clear set templates to report the work progress. Otherwise all unwanted junk data might ruin the soup.

Cost Change Control System is from “Tools and Techniques” section of this Process. It is part of overall Change Control process of you Project Management Organization but only oversees those changes which are directly affect costs. Changes are very important to watch out. Uncontrolled changes can ruin whole projects with out mercy. So what is been asked to change and how much it would cost should be managed.

Project performance review is another Tools & Techniques provided. You will review project progress with your baseline plans and will provide what you’ve earned against what you have planned. This is known as Earned Value Analysis and helps you to track your day to day progress. 3 possible scenarios are: you are progressing ahead of plan that means you are getting more than what you have planned, or progress is as per the plan or not getting enough worth for your investment. Based on these 3 scenarios you can take according corrective actions. Corrective actions are what you are supposed to do in this process.

You can use Project Management software of your choice to help you in this regard. MS Project is popular one or even you can simply use well planned out Excel sheets to track those costs.

First you will find variances and report those using Variance analysis. The terms you use over here are Cost Variance (CV) and Schedule Variance (SV). From that point you might required to forecast rest of the project. This involves estimating rest of the work. You use terms like Estimation to Completion (ETC) and Estimate at Complete (EAC). Those names are telling what you have to Estimate.

Other terms you use here are Cost Performance Index (CPI) and SPI (Schedule Performance Index)