Cost Management

Cost Management
• Cost management is the process of planning and managing the budget of a business or
project. In the case of a project, it helps the project manager estimate what the project
will cost and set controls to reduce the chances of the project going over budget.
• Cost management is one of the most important responsibilities of a project manager;
projects always need resources such as materials, labor and equipment, which generate
costs. Those costs must be estimated and controlled throughout the project life cycle to
complete the project.
• Effective cost management requires the right software. ProjectManager is the perfect tool
to track project costs, resources and workload. Our Gantt charts, project calendars and
timesheets allow you to manage costs, time and tasks in one place.
 Cost management
• How to Manage Project Costs in 4 Steps
• The four steps below outline how the cost management process works in project management.
• 1. Resource Planning
• Resource planning is the process of forecasting future resource requirements for a business,
project or scope of work. To create a resource plan, you need to start by defining the
project scope, a document that details the project activities that will be done.
• Once the project activities have been defined, project managers usually rely on historical data,
expert opinions, and resource planning tools such as a resource breakdown structure (RBS) to
estimate the resources that will be needed.
 Cost Management
• 2. Cost Estimating
• Cost estimating consists of assigning costs to the resources you need to execute your
projects, such as labor, materials and equipment. Cost estimating is one of the most
important steps in the cost management process because it lays out the base for your
project budget. There are several cost estimating techniques you can use depending on
the characteristics of your project.
 Cost Management
• Cost Budgeting:
• Based on your cost estimates, you can now create a project budget, which is simply
the sum of all your project costs. Make sure to include all types of project costs,
including direct, indirect, fixed and variable costs. A project budget should also
include contingency reserves in case there’s work that needs to be redone, or a risk
has struck the project and risk mitigation strategies need to be taken.
• Once the project starts, the project budget is a baseline that’s used to compare
actual costs vs. estimated costs. Therefore, project budgets allow project managers
to quickly understand if their costs are too high and if there’s a risk of cost overrun.
 COST management
• Cost Control:
• Cost control refers to all the activities, guidelines and procedures taken to
minimize and track project costs. Poor cost control can affect the
profitability of a project, but luckily project management software can
help you to easily keep track of costs with tools such as timesheets,
workload planners and project dashboards.
• The outputs of these 4 steps can be documented in a cost management
plan, a critical component of the project plan.
 Importance of project cost management
• Developing a business
• Companies that successfully manage their operational costs
tend to complete projects efficiently and grow their business
over time. This means that they accomplish tasks associated
with projects in the budget. By using cost management, you
can easily anticipate expenses and prioritize financial goals.
 Importance of project cost management
• Making decisions
• Part of cost management is conducting a methodical analysis
of facts and figures. This assessment provides an evaluation of
a project's feasibility and profitability. With this important data,
it is easier to make accurate, data-driven business decisions.
Using cost management during the planning process can
reduce the likelihood of risks associated with a project.
 Importance of project cost management
• Reducing expenditures
• Cost management is a great tool that many companies utilize
to lower their overall business expenses. The process of
reducing expenses involves limiting different costs, such as
marketing or supply chain expenditures. The financial
information that a cost management process produces helps
identify and eliminate funds you may have allocated to
redundant operations or avoidable debts.
 Importance of project cost management
• Keeping records
• Efficient record-keeping is another benefit of cost
management. It helps businesses perform effective financial
accounting planning and develop budgets with an expenditure
limit. You can get an overview of a business' expenditures by
assessing business or project costs. This helps financial
planners and managers create accurate budgets.
 Resource Planning

• Resource planning organizes, identifies and lists the resources required to complete a project
successfully. Resources are assets that are required to execute a project; a resource is a broad
category and includes equipment, tools, supplies, materials, time and people.
• A proper resource plan will map out the exact quantities of the necessary storable resources (such
as cash) and non-storable resources (like machinery or labor). Considerations made during
resource planning factor greatly into the scheduling and budgeting of projects.
• Because it’s so important to align your resources with your budget and your project schedule, it’s
best to use a project planning software to get everything organized in one tool. ProjectManager
makes it easy to manage resources, budgets and project schedules in one online platform.
 Resource planning
• Resource Plan Key Terms
• Resource Plan: A detailed list of resources and the ways you will manage them
throughout the project. The more detailed, the better.
• Resources Breakdown Structure (RBS): A resources breakdown structure
creates hierarchies of resources, according to the hiring organization (like a
reporting structure or team hierarchy) or by geography (such as all the teams or
equipment required in Asia or Africa). Include all resources on which the project
funds will be spent, but it’s up to you to define which type of hierarchies are
relevant to your project. Its execution is similar to a WBS.
 Resource planning
• Responsibility Assignment Matrix: A responsibility assignment matrix
defines resources according to various levels of responsibility for
completing project tasks or for the overall project. Clarify the roles and
responsibilities of the entire project.
• Resource Overallocation: Overallocation simply means when a person is
given too much work, which can impact the budget and even detail a project.
It’s crucial that resources are balanced, so you’re going to need a way to stay
on top of your team’s workload throughout the life cycle of the project.
 Resource planning

• Resources Histogram: This provides a visual of the

resources for anyone in the project who needs to stay in
the loop. It’s a quick and easy way to view the
allocation of your resources and note whether any are
over- or under-allocated.
 Cost estimation techniques
• Cost Estimation Techniques
• All of these factors impact project cost estimation, making it difficult to come up
with precise estimates. Luckily, there are cost estimating techniques that can help
with developing a more accurate cost estimation.
• Analogous Estimating
• Seek the help of experts who have experience in similar projects, or use your own
historical data. If you have access to relevant historical data, try analogous
estimating, which can show precedents that help define what your future costs will
be in the early stages of the project.
 Cost estimation techniques
• Parametric Estimating
• There is statistical modeling, or parametric estimating, which also uses historical data of
key cost drivers and then calculates what those costs would be if the duration or another of
the project is changed.
• Bottom-Up Estimating
• A more granular approach is bottom-up estimating, which uses estimates of individual tasks
and then adds those up to determine the overall cost of the project. This cost estimating
method is even more detailed than parametric estimating and is used in complex projects
with lots of variables such as software development or construction projects.
 Cost estimation techniques
• Three-point Estimate
• Another approach is the three-point estimate, which comes up with three scenarios: most likely,
optimistic and pessimistic ranges. These are then put into an equation to develop an estimation.
• Reserve Analysis
• Reserve analysis determines how much contingency reserve must be allocated. This approach tries
to wrangle uncertainty.
• Cost of Quality
• Cost of quality uses money spent during the project to avoid failures and money applied after the
project to address failures. This can help fine-tune your overall project cost estimation. And
comparing bids from vendors can also help figure out costs.
 Analogous estimating
• Analogous estimating is an estimation technique is also referred to as top-down estimating. It involves
leveraging the estimators’ experience or historical data from previous projects by adopting observed
cost, duration or resource needs to a current project or portions of a project. Analogous estimating does
not require data manipulation or statistical adjustments.
• This technique is useful if you need to produce estimates without having plenty of information
available. This may be the case during project selection or initiation phases, when overseeing a bunch
of projects at the portfolio-level (source: PMI Practice Standard for Project Estimating), or in the early
stages of a project. Estimations can relate to a whole project or parts of a project, such as work
packages or activities.
• The PMI project management framework lists analogous estimating under the techniques of the
processes estimate costs, estimate activity durations and estimate activity resources (PMBOK®, 6th
edition, ch. 6.4.2, 7.2.2, 9.2.2)
 Analogous estimating
• Analogous estimating is typically used to get 4 types of estimates:
• a single-point or absolute value estimate,
• a ratio estimate,
• an estimate range, and
• a three-point estimate (often defined as a subcategory of range estimates).
What Is an Absolute or One-Point Estimate?
• This term refers to an estimation result that consists of a single absolute value. For instance, if
the cost of a previous project used to be $100,000 and it is estimated that a new, similar project
requires a similar budget, the analogous estimate would be $100,000, an absolute value.
 Ratio estimate
• A ratio estimate describes the relative application of historical data or
experience to a current project. One form is estimating by applying a factor
to observed historical values. Estimators might expect, for instance, that the
current project will require 125% of the time of the previous project.
• Another use is the estimation of a breakdown or parts of the full project cost.
Based on historical data, a company may conclude that the expenses for user
acceptance tests typically amount to 25% of the total cost of an IT project,
for instance.
 Estimate range
• A range estimate comprises of a range of possible values, rather than a
single number. It is however often accompanied by a most likely estimate.
A common form of range estimates is the three-point estimation (which is
sometimes referred to as a type of estimate on its own).
 Three point estimate
• Three-point estimating requires the project manager or the team to come
up with three different estimates:
• optimistic estimate,
• pessimistic estimate, and
• most likely estimate.
• These values are then transformed into a final estimate using the
triangular or the PERT distribution.