Session 10

Project cost management

Learning objectives

Importance of good project cost management

Project cost management principles, concepts, and terms

Explain cost estimating techniques

Top down estimation in detail

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National Institute of Design and Analysis

Cost definition

Cost is a resource to achieve a specific objective, or something given up

in exchange.

Costs are usually measured in monetary units, such as dollars.

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Cost importance

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Cost types

Tangible costs or benefits are those costs or benefits that an organization can
easily measure in dollars.

Intangible costs or benefits are costs or benefits that are difficult to measure in
financial terms.

Direct costs are costs that can be directly related to producing the products and
services of the project.

Indirect costs are costs that are not directly related to the products or services
of the project, but are indirectly related to performing the project.

Sunk cost is money that has been spent in the past; when deciding what
projects to invest in or continue, you should not include sunk costs.

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National Institute of Design and Analysis

Project cost management

Includes the processes involved in estimating, budgeting and controlling cost
so that the project can be completed within the approved budget.

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National Institute of Design and Analysis

Cost mgt processes

Resource Planning:
what physical resources (people, equipment, materials etc) and what quantities of
each should be used to perform project activities.
Estimating costs:
The process of developing an approximation of the financial resources needed to
complete project activities.
Determine budget:
Allocating the overall cost estimate to individual work items to establish a baseline
for measuring performance.
Control costs:
Controlling changes to the project budget.

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National Institute of Design and Analysis

Cost estimating
Developing an approximation (estimates) of the costs of the resources
needed to complete project activities.
Includes identifying and considering various costing alternatives.
Project managers must take cost estimates seriously if they want to
complete projects within budget constraints.

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National Institute of Design and Analysis

Estimating vs Pricing
Cost Estimating involves developing an assessment of the likely
quantitative result-how much will it cost the performing organization to
provide the product or service involved.
Pricing is a business decision-how much will the performing organization
charge for the product or service

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National Institute of Design and Analysis

Estimation tools

Analogous or top-down estimates:

Use the actual cost of a previous, similar project as the basis for estimating
the cost of the current project.

Bottom-up estimates:
Involve estimating individual work items or activities and summing them to
get a project total.

Computerized tools:
Tools, such as spreadsheets and project management software, that can
make working with different cost estimates and cost estimation tools easier.

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National Institute of Design and Analysis

10

Top down estimation

Used to calculate the resource unit of labor, non labor and material using
estimated weight in a top down manner.

For the purpose adopt the following procedure:

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Resources to activity already assigned

Give wts to the WBS elements
Give wts to the activities
Apply top down estimation to appropriate WBS
Calculate resource unit for labor, non labor and material
Save the calculations

National Institute of Design and Analysis

11

Top down estimation

WBS workspace- tools- top down estimation

Give a value in prior experience option

If for specific resource- select that resource and make estimation

Can also apply adjustment factor.

Apply save as for future comparison and apply to get the change.

Also make individual Est. wt for the activities.

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National Institute of Design and Analysis

12

Budgeting

Budget (from old French bougette) is a list of all planned expenses and
revenues.

Allocation of overall cost estimates to individual work items in order to

establish a cost baseline for measuring project performances.

Cost baseline
A time-phased budget that project managers use to measure and monitor
cost performance.

Cost controlling
An investigative procedures to detect variance of actual costs from
budgeted costs and, diagnostic procedures to ascertain the causes of
variance and implement corrective actions.
Cost Control is concerned with
(a) Influencing the factors which create changes to the cost baseline
to ensure that changes are beneficial.
(b) Determining that the cost baseline has changed
(c) Managing the actual changes when and as they occur

Thank you

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