Project Cost Management

Project Cost Management function (WBS-1) is a knowledge area that covers only 2 phases of the entire life cycle of the project. During each phase, certain processes pertaining to this knowledge area take place. Each of the process levels (WBS-2) were expanded into activity levels (WBS-3). An additional level (WBS-4) lists the techniques that are associated with some of of the activities. Cost Management is one of the primary functions of Project Managers.

Predicting, and analyzing the prospective financial performance of of the project’s product is performed outside the project, but in capital facilities projects it can be included, such as return on investment, discounted cash flow, and investment payback analysis. To expend on earned value management (EVM) , the concept of earned schedule (ES) replaces the schedule variance, in such a way that if the amount of ES is greater than 0, than the project is ahead of schedule. The schedule performance index (SPI) is ES/AT, actual time(AT), which indicates the efficiency of the accomplished work.

In case of projects with high risk of uncertainty, lightweight estimates are used for long term predictions. If the budget is strict, then the scope and schedule are adjusted accordingly.

These processes are tailored according to the company’s formal knowledge management and financial database repository available to the project manager., the company’s cost estimating and budgeting procedures, company’s use of earned value management, company’s use of predictive/waterfall or adaptive/agile methodology, and company’s audit procedures.

Project Initiation

There are no processes taken place during this phase.

Project Planning

During this phase, there are 3 processes taking place: Cost Management Planning, Cost Estimating, and Cost Budgeting.

Plan Cost Management

It defines how the project costs will be estimated, budgeted, managed, monitored, and controlled. In smaller projects, these processes are done at the same time by the same person.

Inputs

Project Charter – pre approved financial resources and approval requirements.
Project Management Plan – the processes and controls of schedule management plan and risk management plan.
Enterprise Environmental Factors – organizational culture and structure, market conditions, currency exchange rate, commercial cost databases, PMI, global productivity differences.
Organizational process assets – financial controls procedures; lessons learned repository, financial database, existing cost estimating and budgeting procedures.

Tools and Techniques

Expert judgment – previous similar projects, technical knowledge, cost estimating, and earned value management.
Data Analysis – alternative analysis of funding:self funding, funding with equity, funding with debt, and of resource acquisition: making, purchasing, renting, or leasing.
Meetings – project manager, selected project team members, selected stakeholders, anyone with responsibility for project costs.

Outputs

- Cost management plan – describes how how costs will be planned, structured, and controlled, by specifying such as units of measure, level of precision, level of accuracy (the acceptable range), company’s account numbers, variation threshold, define the points to measure control accounts, establish EVM techniques ( weigted milestones, fixed-formula, percent complete, specify tracking and calculating methodologies to estimate at completion (EAC), reporting formats and frequency, strategic funding choices, currency fluctuation procedures, project cost recording procedure.

Estimate Costs

It is the process of developing an approximation of the monetary resources needed to complete the work. A cost estimate is a prediction based on known information. It includes costing alternatives, cost trade offs, risks, such as make vs buy vs lease and resource sharing. They are expressed in units of currency or staff hours. at the initial phase the estimates are around +75%. Cost are estimated for labor, materials, equipment, services, and facilities, inflation allowance, cost of financing, or contingency costs, indirect costs. they are presented at the activity level or in summary form.

Inputs

Project management plan – cost management plan estimating methods, and quality management plan described activities and resources to achieve the quality objectives, and scope base line : the deliverables and acceptance criteria in the scope statement, WBS relationships and dictionary.
Project documents – lessons learned earlier in the project, scheduled activities, activity required recurses, listed risks register.
Enterprise environmental factors – market conditions availability, public cost/price information, exchange rate and inflation.
Organizational process assets – lessons learned, cost estimating procedures and templates.

Tools and Techniques

Expert judgment – previous similar projects, technical knowledge, cost estimating.
Analogous estimating – previous project : scope, cost, budget, duration, scale.
Parametric estimating – statistical relationship between historical data and other variables, where possible.
Bottom-up estimating – from the individual work package to to the greatest level of reporting
Three-point estimating – considering risk and uncertainty: most likely, optimistic, and pessimistic averaged.
Data analysis – alternatives analysis of cost, schedule, resources, quality of buy vs make, reserve analysis: contingency reserves allocated for known risks, cost quality: short term cost reductions
Project management information system – spreadsheet, simulation software, statistical analysis
Decision making – voting

Outputs

Cost estimates – quantitative assessments, contingency reserves, and management reserves for unplanned work.
Basis of estimates – documentation of the basis of the estimates, assumptions, constraints, risks, range values, confidence level.
Project documents updates – assumption log, lessons learner register, risk register.

Determine Budget

It is the process of aggregating the estimated costs of work packages to establish an authorize baseline. It is a time phased project budget that includes contingency reserves. but excludes management reserves. Work package cost estimates include activity cost estimates and their contingency reserve. Adding contingency reserves to work package cost estimates will form the control accounts (cost baseline). Adding management reserve to cost baseline will form the project budget.

Inputs

Project management plan – cost management plan (cost structure); resource management plan (personnel and resource rates, estimated travel costs, and other foreseen costs); scope baseline ( scope statement, WBS, WBS dictionary)
Project documents – basis of estimates (assumptions details of costs estimates), cost estimate (aggregated per work package), project schedule (dates, activities, milestones, work packages, control accounts), risk register ((aggregate risk response costs)
Business documents – business case (critical success factors); benefits management plan (net present value calculations, benefits time-frame and metrics)
Agreements – costs of products, services agreements
Enterprise environmental factors – exchange rates
Organization process assets – cost budgeting procedures, lessons learned repository, cost budgeting tools, reporting methods.

Tools and Techniques

Expert judgment – previous similar projects, technical knowledge, financial principles, funding requirements and sources.
Cost aggregation – according to WBS
Data analysis – reserve analysis to establish management reserves for control purposes, when the management reserves are being used the amount is added to the cost baseline (updated)
Historical information review – in (project characteristics) parametric or analogous estimates to develop mathematical models.
Funding limit reconciliation – if funding limits are different then planned expenditures may lead to rescheduling of work to level out the rate of expenditures, by placing imposed date constraints for work.
Financing – acquiring funding. if the it is done externally, the funding entity may have certain requirements to be added to the projects.

Outputs

Cost baseline – for the various activities along with any contingency reserves. it is the performance measurement baseline when using earned value management. It includes management reserves when they are used.
Project funding requirements – total funding requirements and periodic funding requirements are derived from the cost baseline (which includes projected expenditures and anticipated liabilities)
Project documents updates – cost estimates, project schedule (if costs are included in the schedule), risk register (updated if needed)

Project Execution

There are no processes taken place during this phase.

Project Controlling

In this phase, 1 process takes place: Cost Control.

Control Costs

It is the process of monitoring the status of the project to update the costs and change the baseline. Monitor and analyze funds consumption and the work accomplished.

Inputs

Project management plan – cost management plan (cost management); scope baseline ( vs. actual), performance measurement baseline ( vs. actual)
Project documents – lesson learned
Project funding requirements – project expenditures plus anticipated liabilities
Work performance data – actual costs
Organizational process assets – cost control procedures, tools, monitoring and reporting tools

Tools and Techniques

Expert judgment -variance, earned value, forecasting, and financial analysis
Data analysis – earned value analysis (planned and earned value, actual cost)
- Planned value. The value of the work planned to be completed.
- Earned value. The actual value of all the work completed (earned).
- Actual cost. The actual cost of all the work completed.
- Variance analysis for cost (CV = EV-AC); for schedule (SV = EV – PV); at completion (VAC = BAC – EAC)
- Performance Index for cost (CPI = EV/AC); for schedule (SPI = EV/PV)
- Trend analysis: variance charts; forecasting (EAC = AC + bottom-up ETC)
- Reserve analysis
To-complete performance index (TCPI = (BAC – EV)/(EAC -AC)
Project management information system: tracking PV, EV, AC

Outputs

Work performance information – variances in the work performed and the cost of work are evaluated at the work package level and control account level. CV, CPI, EAC, VAC, TCPI are included in work performance reports
Cost forecasts – EAC communicated to stakeholders
Change requests – of the cost and schedule baseline or other components of project management plan
Project management plan updates – cost management plan (thresholds, accuracy), cost baseline (due to scope, resources, cost estimates changes), performance measurement baseline (due to changes in scope, performance, cost estimates)
Project documents updates – assumption log (resource productivity), basis of estimates, cost estimates, lessons learned register (techniques in maintaining the budget, variance analysis, earned value analysis, forecasting, corrective actions), risk register (if the variance larger than threshold)