BSBPMG533

Manage project cost

Student Book
Topic 1 - Determine project costs
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Table of Contents

1. Determine project costs ................................................................................................................ 2

1.1 – Identify resource requirements for individual tasks identified in the work breakdown structure
in consultation with relevant stakeholders ............................................................................................. 3
What is a work breakdown structure?................................................................................................. 3
Why use a work breakdown structure? ............................................................................................... 3
When would you use a work breakdown structure? ........................................................................... 4
Resource requirements........................................................................................................................ 4
Resource task matrix............................................................................................................................ 6
Guidance from others .......................................................................................................................... 7
Identifying and managing internal and external stakeholders ............................................................ 7
Project procurement ............................................................................................................................ 8
Estimating costs ................................................................................................................................... 8
1.2 – Estimate project costs for project budget to be prepared within agreed tolerances .................. 10
Estimating project costs ..................................................................................................................... 10
Estimation techniques ....................................................................................................................... 11
1.3 – Develop a project budget .............................................................................................................. 13
What is a project budget? .................................................................................................................. 13
Developing a project budget .............................................................................................................. 14
Top-down approach ........................................................................................................................... 15
Bottom-up approach.......................................................................................................................... 15
Using project management software ................................................................................................ 16
Contingencies ..................................................................................................................................... 16
1.4 – Develop a cost-management plan for project finances according to scope of responsibility ...... 18
What is a cost-management plan? .................................................................................................... 18
Developing a cost-management plan ................................................................................................ 19
Estimates ............................................................................................................................................ 20
Management of project finances ....................................................................................................... 20
References ............................................................................................................................................. 22
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1. Determine project costs

1.1. Identify resource requirements for individual tasks identified in the work breakdown structure
in consultation with relevant stakeholders

1.2. Estimate project costs for project budget to be prepared within agreed tolerances

1.3. Develop a project budget

1.4. Develop a cost-management plan for project finances according to scope of responsibility
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1.1 – Identify resource requirements for individual tasks identified in the work
breakdown structure in consultation with relevant stakeholders
By the end of this chapter, the learner should be able to:
➢ Identify and list resource requirements for individual tasks and create a work
breakdown structure flowchart

➢ Communicate effectively with relevant stakeholders who may provide guidance on

resource requirements.

Project cost management is a key element of project management and is relevant regardless of
industry. It is made up of estimating, budgeting and controlling costs through a project’s life cycle, while
keeping expenditures within an approved budget. The first step is to correctly identify the individual
tasks and the resources required to complete the project, you can then use this information to start
estimating costs.

What is a work breakdown structure?

A Work Breakdown Structure (WBS) is a tool used within project management that aims to capture the
project tasks in a visual, organised manner. It is a decomposition of the project into smaller components
and it organises the project into smaller, more manageable sections. It provides the project manager
with an opportunity to predict outcomes based on a particular scenario. This ensures that the decision-
making process is effective. A WBS can also be used to help identify potential risks within your project.

Why use a work breakdown structure?

Detailed steps:
The WBS encourages project managers, team members, and customers to generate a dialogue at the
beginning of the project to identify each step, resource, cost and potential risk.

Schedule and budget:

A well-structured WBS enables an effective schedule and reliable budget plans.

Accountability:
The detailed structure of the WBS allows project managers to allocate tasks
to individual team members setting out their task, time limit and expected
result ensuring each team member contributes to the completion of the
project equally.

Commitment:
The task of outlining each element of a project will involve all team members’
participation and expertise. Teams work best when they have had an input into
determining their own goals and objectives.
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When would you use a work breakdown structure?

The development of the WBS normally occurs at the start of a project, and a completed WBS will
resemble a flowchart.

For example:

If a project ever falls behind, the WBS is usually referred to as it is thought of as the map of the whole
project.

Resource requirements
Within your WBS, you will have divided your project tasks into smaller, more manageable tasks. Once
you have identified the tasks, determined the sequence of these tasks and established a schedule for
your project, you are ready to determine the resource requirements for each of these tasks. The
resources that you require may vary depending on the nature of your project or organisation.

Creating a resource requirement plan

The resource plan will allow you to extend the information you have recorded in your work breakdown
structure and elaborate on what resources would be needed, how much and for how long.

You would firstly list all major resources needed to complete the project and then list the individual
components of each group.

Major resource requirements may include:

➢ Human resources

➢ Equipment

➢ Facilities

➢ Fees and charges

➢ Materials

➢ Services

➢ Statutory costs.
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Example equipment resource requirement sheet:

Item Amount Purpose Specification Start Date End date Cost

Your WBS may reveal that some of the resources that you require will cost your project more than other
resources. Some of your resources may be more difficult to obtain; you must carefully plan your project
to ensure that the resources that you require are available when you need them. You may need to
prioritise your requirements in order to determine which requirements will be included in the project
and which requirements will be excluded completely.

Human resources
One of the most important resources when carrying out a project is the people that need to be
involved. So, when considering the human resources that you need for your project, you should take
each of the tasks that have been outlined within your WBS and define the skills that are required to
complete these tasks. Then, once you have done this, you can match the people to those defined skills.
One method of doing this includes developing a skills sheet; this will match the skills to your tasks. Also
included in a skills sheet are the names of the relevant people, their start dates, and their costs.

Example skills sheets:

Task Skills needed Person Skills level Deliverable Effort days Start date End date Cost

Task Skills needed Hours needed When needed Source Contact details

Activity Skills needed Hours needed Cost per hour Total cost Date required Source

The skills sheet that you develop for your project will depend on the nature of your project and the
organisation. Like most things, there is no one way of doing it; your way should suit you.
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Nonperson resources
You may also need to consider the nonperson resources that you require for your project, for
example:
➢ Materials

➢ Equipment

➢ Facilities

➢ Costs.

You can plan for these resources using a similar sheet to the skills sheet discussed above.

Example nonperson availability sheet:

Task Resource needed Time in hours Date(s) needed

Resource task matrix

A resource task matrix can help to organise your project tasks in terms of people or departments. It can
also show which nonperson resources will be needed for each project task. Basically, a resource task
matrix is a combination of the example tables we have already discussed.

Your resource task matrix will show a list of resources (departments, people or nonperson resources)
and each task that is involved in your project. If a resource plays a part in one of the project tasks, that
cell is marked by the kind of participation the resource will apply.

Example resource task matrix:

Resource/person Task A Task B Task C Task D Task E Task F

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Guidance from others

When determining the resource requirements for your individual project tasks, you may need the input
from the stakeholders and/or the guidance from others. The advantage of involving others in your
project and not simply to comply with organisational requirements enables a wider range of expertise,
knowledge, and experience to be considered when planning the project.

Others may include:

➢ Program manager

➢ Project specialists

➢ Relevant project authority

➢ Subject matter experts

➢ Team members.

Identifying and managing internal and external stakeholders

The stakeholder is the individual who has something to gain or lose through the outcomes of a planning
process or project. Stakeholders can be internal or external; for example, an internal stakeholder may
be a Director/Manager, and an external stakeholder may be a Local Authority, funders and customers. It
is important to understand the stakeholder’s interest as this will influence and affect the decisions you
make in a project when outlining the budget/resources required.

Stakeholder management is essentially stakeholder relationship management.

There are seven key principles that can be used to monitor and manage stakeholder relationships:
➢ Acknowledge and monitor concerns of stakeholders

➢ Listen and communicate with stakeholders about concerns and contributions

➢ Adopt behaviour to each stakeholder’s constituency

➢ Fair distribution of the benefits and burdens of

corporate activity – taking into account their
risks and vulnerabilities

➢ Cooperate with other entities

➢ Avoid activities that may give rise to risks

➢ Acknowledge potential conflicts for the

interests of stakeholders and address conflicts
through communication, reporting, and third-
party review.

Further information relating to how to monitor and manage relationships can be found in Friedman, L.,
and Miles, S. (2006) Stakeholders Theory and Practice textbook.
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Your organisation will have a procedure in place to communicate with stakeholders. You should
establish what method of communication should be used, who should communicate with the
stakeholders, and determine when and where the stakeholder would need to provide the project with
authorisations and permissions. You should familiarise yourself with the relevant protocols and
conventions in place relating to your organisation.

Project procurement
Project procurement is a process in which the products or services that you need from outside your
project team in order to complete your work are purchased or acquired. Project procurement is crucial
to the success of your project and dependent on the goals and objectives of your project.

There are six steps involved in the process of project procurement, including:
➢ Planning purchases and acquisitions

➢ Contract planning

➢ Requesting seller

➢ Selecting seller

➢ Administering contract

➢ Closing contract.

In order to complete a thorough cost analysis, as well as the costs, you should also indicate:
➢ The dates that the completed project is required by

➢ Any relevant supplier contact details

➢ Any information that the project’s management will require

➢ Resource acquisition and lead time.

Procedure Consulting advice Lead time Date required Responsibility Other

Estimating costs
If you cannot assign a cost to the tasks outlined in your WBS, you may need to break the tasks down
even further. You should be able to confidently assign the cost and amount of effort needed for each
task.

Remember; the more accurate your project cost estimations are, the better you will be able to handle
your project budget.
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Estimating project costs are important as:

➢ It provides you with a guideline to help ensure that you have the necessary funds to
complete your project

➢ It enables you to see whether the funds that you need to support your project are
available

➢ It allows you to weigh the benefits against the costs to see whether your project makes
sense.

Tips to keep in mind when estimating project costs include:

➢ Cost each task within your WBS – not your project as a whole

➢ Provide your customer with regular budget statements – then they

are always aware of the position of the project

➢ Get an expert view if necessary

➢ Make use of your own experiences as well as others.

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1.2 – Estimate project costs for project budget to be prepared within agreed
tolerances
By the end of this chapter, the learner should be able to:
➢ Accurately calculate and estimate project costs to determine project budget

➢ Use a range of calculations and formulas to estimate project costs.

Estimating project costs

Although you can never know the true cost of your project until it is completed, you will need to try
your best to estimate the costs involved in your project and outline an approximate cost of your project.
Your estimates may start out broad and as your project deliverables come into focus, you can provide
more accurately defined estimates. A real estimate will evolve as more and more details of your project
become available.

A good estimate will clearly define:

➢ What your project will accomplish

➢ The assumptions that you have made

➢ How long your estimate is valid for

➢ How much the project will cost based on current information.

Once you have an estimate of the cost of your project, you can then establish a budget.

Project costs are estimated considering:

➢ Contingencies to allow for identified risks and uncertainty

➢ Degree of accuracy required (tolerance levels)

➢ Information available at the time

➢ Organisational requirements, for example, overhead and profit margin

➢ Work breakdown structure.

Before starting your estimates, ensure that you have:

➢ Addressed the project scope details

➢ Reviewed your WBS

➢ Defined your project tasks

➢ Reviewed your resources

➢ Researched stakeholder input

➢ Estimated your budget tolerance.

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Estimation techniques
There are many estimate techniques, including:
➢ Ballpark estimation

➢ Budget estimation

➢ Definitive estimation

➢ Three-point estimation

➢ Historical project estimation

➢ Resource cost rates estimation software.

Ballpark estimation
A ballpark estimation is also known as a rough order of magnitude (ROM) and is based on the high-level
objectives of your project. It provides you with an overview of the project deliverables. This type of
estimation allows for wiggle room.

Budget estimation
Budget estimation is more accurate than a ballpark estimation and is also called top-down estimation.
Within this technique, you will start at the top and work your way down. For example, you will start
with the overall cost of your project. These costs will then be separated down to meet to various
components of your WBS. This is often down early on in the planning phase of your project, and
although it is quick, it is not as precise as you may require.

Definitive estimation
A definitive estimation is a technique that is used the most; it is the most accurate estimation
technique. Also known as bottom-up estimation, definitive estimation takes the most time to complete.
It requires using your WBS to start from the bottom and account for each little thing that your project
will purchase, create and/or deliver. As this technique involves creating estimates from a task level, you
will need to make sure that your tasks are accurate.

Three-point estimation
Within three-point estimation, the end value is a weighted average of three different estimates. Using
this estimation technique, you can gain a greater degree of control over how the end value is calculated.

For a particular task, you will need to think of the best case, most likely and worst-case estimates:
➢ Best case (1/6) (B)

➢ Most likely (4/6) (M)

➢ Worst case (1/6) (W).

Within this estimation, add your best case estimate to four times your most likely estimate, then add
the worst-case estimate and divide by six. This will give you a balanced view.

Formula: (B+4M+W)/6.
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Historical project estimation

Within historical project estimation, you can use any lessons learned from previous projects that are
similar to your current project. If you have been involved in a project in the past that had similar scope
details and resources; you can use similar estimates for your current project. Remember that it is highly
unlikely that two projects will be exactly the same; be careful when using similar estimation techniques.

Resource cost rates estimation software

This estimation method uses software programs to assist you in your project cost estimations. This
technique involves using your WBS to estimate your project costs. Therefore, the more detailed your
WBS is, the more detailed your cost estimates can be. You may need to factor your project schedule and
cost variance into your estimation. Cost variance is the measurement of the budget requirement for
your project and is calculated by subtracting your actual costs from the earned value. You can
determine the cost of your project resources by applying resource cost rates to estimate task resources.

Consider the following general cost estimating rules:

➢ Make sure the process is understood

➢ Ensure that the project environment is included within the planning stage

➢ Have the appropriate staff available for each task

➢ Consider the parts of the project that your estimate applies to

➢ Have a contingency amount to allow for uncertain costs.

Budget tolerance
Once you have established your estimated budget, you will
need to agree on a budget tolerance. A budget tolerance is a
range, usually 10% of the total budget, which you can use if
your project does not complete within your initial estimated
costs. The size of the tolerance will depend on the size of the
project and organisation.

The cost estimates that have been discussed in this chapter

can be used to help you to establish a budget for your project.
The next chapter will look at what a project budget is and how
you can develop one.
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1.3 – Develop a project budget

By the end of this chapter, the learner should be able to:
➢ Identify indirect and direct costs and conduct top-down and bottom-up approaches

➢ List potential risks with their relevant solutions

➢ Create a clear, concise and accurate summary project budget.

What is a project budget?

A project budget is a key element of your project proposal and is an essential tool that will be used by
many different groups of people that are involved with your project.

For example:
➢ A project manager will use the project budget to determine whether the project is on
track

➢ In order to monitor particular project milestones, the project personnel will use the
project budget as a guideline

➢ The client will use your project budget to assess the overall success of the effort.

Ultimately, your project budget should be a detailed estimate of all the costs that are required in order
to complete your project tasks. It should be an amount that you can spend without having to report
back and ask for more money. Your project budget can help to manage expectation and can give the
relevant information needed to develop a cost/benefit analysis for your project. You can also use your
project budget throughout the life cycle of your project to check that it is on track financially.

Your budget will need to specify all of the costs of your project. There are two types of costs involved
with your project budget: indirect and direct. Although costs will vary depending on the nature of your
project, they are necessary to complete your project budget. One of the major components of your
project budget will be the necessary human resources and their salaries, wages or commissions. This
only involves the people that are directly engaged with your project.

Examples of direct costs include:

➢ Labour/human resources

➢ Raw materials

➢ Equipment

➢ Travel costs

➢ Training costs

➢ Software licences

➢ Consultant fees.
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Examples of indirect costs include:

➢ Office expenses, such as:

o equipment

o rent

o telephone

o internet

o insurance.

Developing a project budget

Your project budget should be linked to the key outcomes of your project. You should establish a set of
reference baselines. As your project progresses, you should monitor the project work then analyse your
findings. The end result should be forecasted and compares with your reference baselines. If the end
result is not satisfactory, you may need to make adjustments to the project and repeat this cycle at
suitable intervals.

How much detail should your project budget have? This will depend on the nature of the project itself
and the organisational policies that may be in place. However, it is recommended that you provide the
details of each individual supply item and its cost within your project budget. Remember that your
project budget is different from your project costs. You should start developing your project budget by
identifying your project costs. This process was discussed in Chapter 1.2. Once these project costs have
been identified, you will need to identify any risks that may occur and assign a percentage to each risk
reflecting how they may affect the overall project. Basically, your project budget is the total of your
project costs plus the total risk percentage of those costs.

Identifying project costs

When identifying your project costs, you need to be realistic. It is sometimes helpful to look at past
projects that you have been involved with to give you an idea of how to identify the project costs. As
discussed in Chapter 1.2, there are many techniques that can be used to identify your project costs.

For example:
➢ Ballpark estimation

➢ Budget estimation

➢ Definitive estimation

➢ Three-point estimation

➢ Historical project estimation

➢ Resource cost rates estimation software.

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Assessing risks
The assessment of potential risks is very important for your budget to be successful.

Risk items include unknowns, such as:

➢ Team experience

➢ Obscurity of technology

➢ Location of development teams

➢ Planning time shortages.

Example risk assessment template:

Risk Level Strategy/cost/budget

There are two main approaches that are used when developing a project budget:
➢ The top-down approach

➢ The bottom-up approach.

Top-down approach
The top-down approach to project budgeting often starts with senior management deciding on how
much an overall project should cost. Then, this amount needs to be divided between each task involved
with the project. This process should be more than just guessing; you need to give details on how you
will complete each task within the allocated budget. This approach allows you to use any previous
experience to judge whether the project budget looks realistic.

An advantage of this approach is that it focuses on completing your project within the allocated budget.
This can reduce the chance of any wasteful practices, leading to a more efficient way of working.
However, a disadvantage is that it relies on previous experience to judge the budget; assuming that the
person that is developing the budget has the required knowledge to make reasonable estimates.

Bottom-up approach
The bottom-up approach looks at the cost of the lowest-level project tasks. From this, you will have to
work upwards to estimate the total cost of your project. You should start by identifying the tasks that
are involved in your project and then calculate the direct and indirect costs for each task. From this, you
will be able to estimate the total cost of your project.

An advantage of this approach is that it is an accurate method of developing a project budget. Also, this
approach can be good for team morale as it usually involves everyone. A disadvantage of this approach
is the difficulty of creating the list of tasks involved in your project. If any task is forgotten about and
missed out; this will throw your budget out.
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Example project budget:

Expenditure Cost Running total Notes

Example nonperson resource table:

Cost per item No. of units Total cost

Example human resource table:

Cost per hour No. of hours Total cost

Using project management software

It is important to choose the right project management software to use. Although it will not eliminate
any cost overruns, it can help you to manage them. The correct project management software can show
you where your project stands at any point in its life cycle and can highlight exactly how much money
has been spent.

Contingencies
There are many common strategies for developing your project budget, for example:
➢ You should plan for the worst

➢ Points within your project where changes are likely to occur need to be identified

➢ Once identified, these areas should be closely watched

➢ Develop a contingency budget – just in case things go a bit wild.

The expenses that are involved within your project may seem straightforward. However, there are many
unknowns that can affect your project, how and when it is carried out and how it is completed. A
contingency reserve should be added to your project to cover any possible risks. This fund can then be
used for the occurrence of any unexpected events during your project life cycle.

You should adjust your contingency level to match the risk level that you have identified for your overall
project.
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Contingencies that may relate to your project budget can include:

➢ Project’s unknowns or risks contingency

➢ Cost estimating contingency

➢ Design contingency

➢ Bid contingency

➢ Construction contingency

➢ Cost escalation contingencies.

Although your budget should be based on the best knowledge that

is available, you should remember that it is only an estimate.

Who should approve your project budget? You should know the answer to this before you start
developing your budget. It could be the project manager, the head of finance or the project manager’s
supervisor.
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1.4 – Develop a cost-management plan for project finances according to scope

of responsibility
By the end of this chapter, the learner should be able to:
➢ Create a cost-management plan relevant to a specific project

➢ Report plans in the appropriate manner and to the correct personnel

➢ Work within scope of responsibility when developing plans.

What is a cost-management plan?

A cost-management plan is a document that details how you will manage the costs of your project. As
well as defining how your project costs will be managed, your cost-management plan will also identify
who is responsible for managing them, and it describes how the project costs will be measured. It will
outline who has the authority to approve any changes to the project budget and who you need to
report any findings to. Your cost-management plan can allow you to predict the expenditure of your
project and reduce the chance of going over budget.

During your project, all the expenses should be recorded and monitored. By doing this, you can make
sure that they stay in line with your cost-management plan. Once your project is complete, you can
compare your predicted costs against your actual costs. An analysis of this can help any future cost
management. In most cases, the project manager is responsible for managing and reporting the project
cost process. They may also be responsible for sorting any cost-management issues that may occur. For
example, they may be required to make financial decisions and get the project back on budget.

Your cost-management plan will involve cost estimating, cost budgeting and cost control.

Cost estimating tools may include:

➢ Estimating skills

➢ Quality and quantity estimating

➢ Sound project judgement

➢ Quotations and tenders

➢ Project management software.

Cost budgeting tools may include:

➢ Judgement skills

➢ Knowledge of previous projects

➢ Analysis

➢ Project management software.

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Cost control tools may include:

➢ Forecasting skills

➢ Performance reviews

➢ Analysis

➢ Earned value management

➢ Project management software.

Developing a cost-management plan

Your cost-management plan can be formal or informal.

The differences between formal and informal may include:

➢ The level of detail within the plan

➢ The units of measurements used within the plan

➢ Whether contingencies are included, minimised or excluded

➢ Whether the figures are rounded up or not.

The steps involved in developing your cost-management plan may depend on the size and scope of
the project but may include:
➢ Identifying tasks that produce costs

➢ Listing the materials needed for your project

➢ Creating a timeline for your project

➢ Stating the metrics used to measure costs.

You may want to include a timeline within your cost-management plan as it can help you to avoid cost
overruns. It can also ensure that your project stays profitable. A variance analysis can also be included
within your cost-management plan.

Consider how you will report your cost-management:

➢ How frequent?

➢ How complex should it be?

➢ What is the process for doing so?

➢ Consider stakeholder reference

➢ Consider the effect on project decisions.

When developing your cost-management plan, in order to ensure clarity of understanding, you should
do so within the scope of authority.
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Scope of authority means that activities will:

➢ Be conducted routinely or as changing circumstances dictate

➢ Be done independently within broad guidance

➢ Involve consultation with other project members, teams, and internal stakeholders

➢ Involve taking a lead role in a team where required

➢ Involve the selection, use, and supervision of appropriate cost-management methods,

tools and techniques

➢ Take into account internal organisational change and external environmental change.

By ensuring that your cost-management plan is developed within the scope of authority, you can make
sure that it can be clearly understood.

Once a variance change is approved, your cost-management plan should be altered to reflect this.

Estimates
When making your estimates, remember:
➢ It can help you to think of costing alternatives

➢ To consider any possible risks

➢ Use consistent units (e.g., hours, days, or currency)

➢ To include inflation risk and contingency costs

➢ To consider any possible alternatives (e.g., renting

instead of buying)

➢ To consider sharing project resources.

Management of project finances

Your cost-management plan will assist in the ongoing management of your project finances. These
finances should be managed throughout the life cycle of your project. Your project will consume many
resources; it is necessary to manage your investment on a regular basis. When managing your project
finances, consider the wide range of cost-management methods and tools that are available and decide
which ones are appropriate for your project and organisation. Whether you are managing your finances
routinely or as a result of a circumstantial change, you may need the involvement of the other project
team members or the stakeholders.

The management of your project finances can also be conducted independently; by someone that is
completely independent of the project and organisation. Further analysis of financial documents is
often the job of an independent review team.
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The project manager has many roles within a project, including:

➢ Defining the project

➢ Splitting project tasks between team members

➢ Building teamwork

➢ Obtaining vital resources

➢ Setting project objectives

➢ Handling project changes

➢ Being aware of any external factors or influences

➢ Keeping stakeholders informed on progress.

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References

These suggested references are for further reading and do not necessarily represent the contents of
this unit.

Websites
Budget planning: https://opentextbc.ca/projectmanagement/chapter/chapter-12-budget-planning-
project-management/

Project costs blog: http://projectmanager.com.au/?s=project+cost

Project cost-management: http://www.projectsmart.co.uk/project-cost-management.html

Publications
Friedman, L., and Miles, S. (2006) Stakeholders Theory and Practice. Oxford University Press.

Rad, P.F. (2002). Project Estimating and Cost-management. Kogan Page.

All references accessed on and correct as of 15th June 2021, unless otherwise stated.