Project Cost Management

29 February, 2016

In application domains, such as software development, many project managers do not have to manage a budget. Their teams are made up of full-time staff and there might be no material or equipment expenses incurred during the project. Essentially, the cost of the development is borne by the software department as a whole.

However, such is the breadth of project management that some project managers are responsible for managing multi-million Euro budgets – massive construction projects would be good examples. In other words, anyone who would like to describe themselves as a Project Management Professional (PMP)© had better be capable of developing a budget and of tracking revenues and expenditure during a project.

As with the other project management knowledge areas, the first step to arriving at a budget is to plan what you are going to do. In this way, you explicitly lay out where you are going to look for project costs. This is not as easy as it looks. You might consider staff costs and material costs. You might even be aware of equipment or office space that must be rented for the duration of the project, but there are other costs that are not so obvious. How about the cost of mitigating risks? Not to mention the contingency reserves needed to cope with risks that do materialize. How about the cost of quality? How much do comprehensive design reviews and extensive testing cost? How much does it cost to get external organizations to audit the project for compliance?

How about communications and stakeholder management? Do you need to set up a video conferencing system to communicate with remote team members, or have an entertainment budget to keep stakeholders on-side? If we are issuing tender requests to avail of third-party input to the project, how much will that process cost?

Once we understand what to include in the budget – a scoping exercise in itself – we need to describe how we are going to estimate costs and how we will manage the budget during the project. We will need to detail items such as: units of measure – e.g. staff hours, staff days or staff weeks; level of precision – e.g. on large projects, costs may be rounded up to thousands; level of accuracy – how precise the estimates should be and control thresholds – what is considered acceptable over- or under-spending.

Once we know how we are going to develop and manage our budget and, more importantly, when the Project Sponsor and the key stakeholders agree with our approach, it is time to Estimate Costs.

Before coming up with any estimates, we need to identify what the costs are. Most of these will come from the Estimate Activity Resources and Estimate Activity Durations processes from Project Time Management. However, as mentioned previously, we will have to consider costs from other project management knowledge areas as well. What do we need to spend on quality, risk mitigation and contingency, communications, managing stakeholders and external procurements?

For each item in the list, we need to employ estimating techniques to determine what value to set aside for each item. This is a similar exercise to how we calculated duration estimates when developing the schedule. However, material costs are usually easier to estimate. Professionals called Quantity Surveyors provide very accurate quantity assessments and then the cost estimate is based on quotations received from suppliers. Labour estimates depend on the duration estimates obtained during the scheduling exercise. These costs are very much at the mercy of their underlying duration estimates. If the project is labour-intensive, the cost estimates could really suffer if scheduling is inaccurate. This situation occurs regularly in research projects, where the work required is uncertain.

Determining the budget is very straightforward after this. Just take all the identified costs and add them together! However, budgets also need to cover overhead costs – usually calculated as a percentage of the total set of estimates. Another addition is a contingency reserve based on the risk analysis carried out in Project Risk Management.

Another issue the Project Manager needs to be aware of is when funding will be available during the project. In certain industries, projects are funded on a quarterly or even an annual basis. It is important to revisit the project schedule and ensure that tasks requiring expenditure occur when we can afford them. This funding limit reconciliation exercise can often add dependencies to the schedule

If the stakeholders agree with your initial figures, then the budget can be baselined and used to track actual expenditure during the project. The Project Management Institute recommends Earned Value Management for tracking the budget. Basic Earned Value is used to report progress – are we on budget, under budget, or over budget? Advanced Earned Value provides forecasting abilities, allowing us to predict what the end total for the project will be.

Just like true love, projects rarely run smoothly and often corrective and preventative actions are needed if the project’s costs are exceeding estimates. We might have to re-estimate or look for cheaper ways of getting tasks done. Stakeholders can request changes. These can often have budgetary implications. An accepted change can mean re-baselining the budget. Note that any corrective or preventative action, as well as any change request, has to be approved by the change control board.

Tracking and managing the budget is what the Control Costs process is all about.

By Velopi Seamus Collins

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