By: Mohamed Salah ElDien Mohamed Aly, MSc, PMP®, DIT, MCAD 4. Project Cost Management - 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. - The process involved in estimating, budgeting, and controlling cost so that the project can be completed within approved budget. - Value analysis (value engineering) Looking at less costly way to do the same work within the same scope - Following table lists all 3 Processes in this Knowledge Area, spread across '2 out of 5 Process Groups' 5 Process Groups Initiation Planning Executi on Monitoring and control Closing Processes 4.1. Cost Estimating 4.2. Cost Budgeting 4.3. Cost Control 4.1 Estimate Cost - The process of developing approximation of the monetary resources needed to complete project activities Cost trade-offs & risk must be considered Cost estimates should be refined Inputs Tools Outputs - Scope baseline - Project schedule - Human resource plan - Risk register - Enterprise environmental factors - Organizational process assets - Expert judgment - Analogous estimating - Parametric estimating - Bottom-up estimating - Three-point estimates - Reserve analysis - Cost of quality - Project management estimating software - Vendor bid analysis - Activity cost estimates - Basis of estimates - Project document updates
- 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. - The process involved in estimating, budgeting, and controlling cost so that the project can be completed within approved budget. - Value analysis (value engineering) • Looking at less costly way to do the same work within the same scope
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By: Mohamed Salah ElDien Mohamed Aly, MSc, PMP®, DIT, MCAD
4. Project Cost Management
- 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.
- The process involved in estimating, budgeting, and controlling cost so that the project can be completed within approved budget.
- Value analysis (value engineering)
Looking at less costly way to do the same work within the same scope - Following table lists all 3 Processes in this Knowledge Area, spread across '2 out of 5
Process Groups'
5 Process
Groups Initiation Planning
Executi
on
Monitoring and
control Closing
Processes
4.1. Cost Estimating
4.2. Cost Budgeting
4.3. Cost Control
4.1 Estimate Cost
- The process of developing approximation of the monetary resources needed to complete
project activities
Cost trade-offs & risk must be considered
Cost estimates should be refined
Inputs Tools Outputs
- Scope baseline
- Project schedule
- Human resource plan
- Risk register
- Enterprise
environmental
factors
- Organizational
process assets
- Expert judgment
- Analogous estimating
- Parametric estimating
- Bottom-up estimating
- Three-point estimates
- Reserve analysis
- Cost of quality
- Project management
estimating software
- Vendor bid analysis
- Activity cost estimates
- Basis of estimates
- Project document updates
By: Mohamed Salah ElDien Mohamed Aly, MSc, PMP®, DIT, MCAD
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
Analogous estimation
-It 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
- It 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
- It 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.
Types of Cost;
- Variable Costs
Change with the amount of production/work
e.g. material, supplies, wages
- Fixed Costs
Do not change as production change
e.g. set-up, rental
- Direct Costs
Directly attributable to the work of project
e.g. team travel, recognition, team wages
- Indirect Costs
overhead or cost incurred for benefit of more than one project
e.g. taxes, fringe benefit, janitorial services
By: Mohamed Salah ElDien Mohamed Aly, MSc, PMP®, DIT, MCAD
- It is very important to understand “Cost Variability” that focuses on changing of
cost over time as well as over volume;
Inflation; cost of some items increase over time.
Deflation; cost of technology items decrease over time.
Direct Costs vs. Indirect Costs
- when talking about “a new project team member”, the direct cost will be his salary
while the indirect costs may be the insurance premiums given to him, the paid pill
for his telephone calls, computer internet access cost, his disk or disk space that have
been given to him.
- When talking about “a specific material needed”, the direct cost will be its price
while the indirect cost will be the transportation cost paid to receive such material as
well as the storing cost...etc.
Fixed Costs vs. Variable Costs
- A fixed cost is like the cost of a unit has a certain nature which maybe a resource
such as a specific material or equipment used for the project. If you need to buy a
piece of equipment to allow the project to continue, that is simply a fixed cost
regardless it will be used for once or hundreds of times.
- Variable costs are directly related to the level of work with each and every element
of the WBS. It is like the cost of water needed to drink or Gasoline needed to some
machinery.
Quality/Accuracy of Cost Estimation
By: Mohamed Salah ElDien Mohamed Aly, MSc, PMP®, DIT, MCAD
4.2 Determine Budget
- Process of aggregating the estimated cost of individual activities or work packages to
establish an authorized cost baseline.
Inputs Tools Outputs
- Activity cost estimates
- Basis of estimates
- Scope baselines
- Project schedule
- Resource calendars
- Contracts
- Organizational process
assets
- Cost aggregation
- Reserve analysis
- Expert judgment
- Historical relationship
- Funding limit
reconciliation
- Cost performance
baseline
- Project funding
requirements
- Project document
updates
- 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.
Cost Aggregation;
- We use Cost Aggregation tools to sum up those low level activity costs to Work package to
higher levels of WBS hierarchy.
- Reserves & risk management are important while estimating!
Contingency reserves/Cost Baseline (the cost impacts of the remaining risk)
Management reserves/Cost Budget (extra fund to cover surprising risks or
changes to the project).
The cost baseline
- It 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.
Determines Budget: Other considerations
By: Mohamed Salah ElDien Mohamed Aly, MSc, PMP®, DIT, MCAD
- High level parametric estimate as a rule of thumb