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IntroducingProject CostManagement
CERTIFICATION OBJECTIVES
7.01 Cost Estimating7.02 Analyzing Cost Estimating Results7.03 Completing Cost Budgeting7.04 Implementing Cost Control7.05 Measuring Project Performance7.06 Considering the Cost Control Results
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Chapter 7: Introducing Project Cost Management
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rojects cost money. Ever worked with a client who had a huge vision for a project, butlittle capital to invest in that vision? Or worked with a client who gasped when yourevealed how much it would cost to complete their desired scope of work? Or have youbeen fortunate and had a customer who accepted the costs for the project at face value, madecertain the funds were available, and sent you on your way to complete the work? As a generalrule, management and customers are always concerned with how much a project is going to costin relation to how much a project is going to earn.
Most likely there is more negotiating, questioning, and evaluating for larger projectsthan for smaller ones. The relation between the project cost and the project scopeshould be direct: you get what you pay for. Think it’s possible to buy a mansion atranch home prices? Not likely. Think it’s possible to run a worldwide marketingcampaign at the cost of a postcard mailer? Not likely. A realistic expectation of whata project will cost will give great weight to the project’s scope.As the business need undergoes analysis, progressive elaboration and estimates arecompleted based on varying levels of detail, and eventually the cost of the projectemerges. Often, however, predicted costs and actual costs vary. Poor planning, skewedassumptions, and overly optimistic estimates all contribute to this. A successful projectmanager must be able to plan, predict, budget, and control the costs of a project.Costs associated with projects are not just the costs of goods procured to completethe project. The cost of the labor may be one of the biggest expenses of a project.The project manager must rely on time estimates to predict the cost of the laborto complete the project work. In addition, the cost of the equipment and materialsneeded to complete the project work must be factored into the project expenses.This chapter examines the management of project costs, how to predict them,account for them, and then, with plan in hand, to control them. We’ll examineexactly how costs are planned for and taken into consideration by the performingorganization and how the size of the project affects the cost estimating process.
CERTIFICATION OBJECTIVE 7.01
Cost Estimating
Cost estimating is the process of calculating the costs of the identified resourcesneeded to complete the project work. The person or group doing the estimatingmust consider the possible fluctuations, conditions, and other causes of variancesthat could affect the total cost of the estimate.
Cost Estimating
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There is a distinct difference between cost estimating and pricing. A cost estimateis the cost of the resources required to complete the project work. Pricing, however,includes a profit margin. In other words, a company performing projects for otherorganizations may do a cost estimate to see how much the project is going to cost tocomplete. Then, with this cost information, they’ll factor a profit into the projectwork, as shown next:
P r o j e c t c o s t
Profit marginActualProject duration
More and more companies are requiring that the project manager calculate the project costs and then factor the ROI, and other benefit models, into the project product. The goal is to see the value of the project once its deliverables are inoperations.
Considering the Cost Estimating Inputs
Cost estimating relies on several project components from the initiation and planningprocess groups. This process also relies on enterprise environmental factors, theprocesses and procedures unique to your organization, and the organizational processassets, such as historical information and forms and templates.
Using the Work Breakdown Structure
Of course, the WBS is included—it’s an input to five major planning processes:cost estimating, cost budgeting, resource planning, risk management planning, andactivity definition.
Relying on the Resource Requirements
The only output of resource planning serves as a key input to cost estimating. Theproject will have some requirement for resources—the skills of the labor, the abilityof materials, or the function of equipment must all be accounted for.
Calculating Resource Rates
The estimator has to know how much each resource costs. The cost should be in someunit of time or measure—such as cost per hour, cost per metric ton, or cost per use.
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