Assessment BSBPMG412

Apply project cost management techniques

Raymundo Silveira Souza Filho

TASK1

1. Explain the following key steps of the project cost management process
and identify at which stage of the project life cycle it is used. (60 words
each)

a) Cost Estimation: There are several methods of cost estimation that can be applied to
forecast how much it will cost to execute the activities of a project. The level of
information available is necessary to make the choice of method. The cost of previous
projects can serve as a basis for predicting the current project, using a previous estimate.
Another option is to use mathematical model types that have been tested before and the
more detail the better the accuracy of the design. With this, a more detailed estimate of
costs can be obtained. If there are gaps and uncertainties in the estimates, these will be
covered by the reserve cost.

b) Budget Determination: Cost control is used to measure baseline cost variations to take
corrective action to meet minimum costs. These types of techniques are applied to
monitor expenditures and performance against project progress. The changes need to
be recorded and the final costs are continuously forecast. You need the actual cost
information to be in control and explain if there is a variation on this line. Action for
correction may be necessary to avoid cost overruns. There are many cost control
programs (software) that define standard procedures and facilitate monitoring, approval,
change and analysis. These same softwares help in the simplification and routing of the
reports and facilitate the communication of the project participants.

c) Spending Control: The cost estimates have to come in forms along with the schedule and
the entire project for the cost budget. This budget shows the overview of periodic and
total expenditures. These cost estimates will define the cost of each piece of work or
activity done, since the budget will allocate the costs in the period in which the cost has
not been made. There is a line based on these costs, it is an approved phase budget
used as a starting point to know the progress of the project.

2. Identify the key purpose and objectives of budgeting in project

management. (60 words)

- Provide structure: A budget is especially useful for giving a company guidance

regarding the direction in which it is supposed to be going. Thus, it forms the basis for
planning what to do next. A budget only provides a significant amount of structure when
management refers to it constantly and judge the employee performance based on the
expectations outlined within it.
- Predict cash flows: A budget is useful for predicting cash flows, but yields
increasingly unreliable results further into the future. Therefore, providing a view of cash
flows is only a reasonable budgeting objective if it covers the next few months of the budget.
 - Allocate resource: Some companies use the budgeting process as a tool for deciding
where to allocate funds to various activities, such as fixed asset purchases. Though a valid
objective, it should be combined with capacity constraint analysis to determine where
resources should really be allocated.
-Model scenario: If a company is faced with a number of possible paths down which
it can travel, you can create a set of budgets, each based on different scenarios, to estimate
the financial results of each strategic direction. This objective can result in highly unlikely
results if management lets itself become overly optimistic in inputting assumptions into the
budget model.
-Measure performance: A common objective in creating a budget is to use it as the
basis for judging employee performance, through the use of variances from the budget. This
is a treacherous objective, since employees attempt to modify the budget to make their
personal objectives easier to achieve (known as budgetary slack).

3. Outline the main steps in the budgeting process for a project. (7 steps)

1. Define the Direct Labor Cost: Depending on the scope of a project, you may have
dozens or hundreds of labor costs to consider. Will the project require workers with special
training, and what is the average cost of hiring the needed workers? These questions need to be
fully vetted before creating a direct labor cost. Some positions may require minimal training, yet
other more advanced positions, such as welders, may require years of knowledge and
experience.

2. Estimate the Material Costs of the Project: After determining how many workers will
be needed for the project, estimate the total material cost of the project. This step provides a
balance against the labor costs. If your material costs are minimal, you may be to hire additional
workers to complete the project ahead of time. If your materials are extensive, you may need to
see if labor or other costs may be reduced to meet the project’s demands.

3. Assess Potential Travel Costs of the Project: If your project is located across geographic
or political boundaries, consider how travel costs will affect your project. Will you be traveling
to meet with upper-level management on a regular basis, or will computer conferencing be a
better, cost-effective solution.

4. Estimate the Cost of the Project Office: The project office cost includes the salaries of
your project team members, your time, and what additional materials may be needed. You must
separate the cost of the project office from the cost of purchasing project management software.
This allows you to focus on other costs in your project management office without worrying about
software concerns.

5. Define What Equipment Costs May Exist in the Project Budget: Larger project may
incur additional equipment costs, especially in the oil and gas industries. Use your labor and
material estimates to define the equipment for the project as well as how many pieces will be
needed.

6. What Administrative Costs Will Be Incurred: For extensive projects, especially projects
as part of a program, consider the potential costs of administrative input in the project. This may
include an administrative assistant or an administrative staff away from the project management
team.

7. Define the Cost of Software, If Necessary: If the company requires a specialized project
management software, the cost of adding your staff to the software, such as licensing fees, needs
to be included in the project budget. Furthermore, you may ask the company to use an alternative
software of your choosing, or you may be asked to select the type of project management
software. Either way, the cost of software selection needs to be addressed.

4. Why are key performance indicators (KPIs) used in budgeting? (60

words) Provide three (3) examples of financial KPIs that can be used to
determine the effectiveness of a budget.

Key Performance Indicators define factors the institution needs to benchmark and
monitor. Assessment techniques provide the mechanism for measuring and evaluating the
defined factors to evaluate progress or impact. KPIs specify what is measured and assessment
techniques detail how and when it will be measured. KPI is a measure used to define and evaluate
how successful an organization is.

1- Monitoring Investment: Before you start the activity cycle, you will be most interested in
the investments and inputs required to launch and sustain the activity. If this involves
any complexity, such as multiple investments of money, time and effort from different
places, you may need to monitor the investment inputs to ensure that they are taking
place when required.

2- Monitoring Adoption: When you launch the activity, you want to check whether or not
the activity is being taken up according to plan. You will focus on evidence of activity
levels, and you will be most interested in examining the trends (increasing).

3- Monitoring Health: Once an activity is established you will be less interested in trends
(though you will continue to monitor them for health) and your focus will shift towards
benchmarking your activity levels against other similar organizations and looking for
factors that can strengthen the activities and the outputs. It is at this stage that you will
extend your monitoring beyond activity levels and start to focus on monitoring and
evaluating value creation from the activity. At the investment and adoption stages, value
creation is not a major target of attention.

5. Explain the use of milestones in budgeting. (40 words)

A project milestone is a way to observe, measure and monitor the progress and/or
performance of a project. Milestones in general exist as intermediate stages that must be fulfilled
before reaching a final goal or objective. In terms of their usefulness, milestones can be defined
and provide a foundation from which to monitor progress. They can also serve as proof for
explaining and reporting the status of a project. Key characteristics of milestones include their
frequency and potential for providing opportunities for course corrections and learning
experiences. Milestones can also be used to maintain accountability and motivate staff.

6. Explain how to apply each of the following project cost management

tools. For each tool, also describe its cost effectiveness and its accuracy.
(70 words each)

a) Analogous estimating: uses a similar past project to estimate the duration or cost of
your current project, thus the root of the word: analogy. Used when there is limited information
regarding your current project, an analogous estimate is considered “top-down” and is generally
not as accurate as other estimating techniques. Because the project manager’s, and possibly the
team’s, experience and judgment are applied to the estimating process, it is considered a
combination of historical information and expert judgment.
b) Parametric modelling: Parametric estimating, a more accurate technique for estimating
cost and duration, uses the relationship between variables to calculate the cost or duration.
Essentially, a parametric estimate is determined by identifying the unit cost or duration and the
number of units required for the project or activity. The measurement must be scalable in order
to be accurate.
c) Bottom-up estimating: is a project management technique in which the people who
are going to do the work take part in the estimating process. Typically those people are the
project team members. They work with you, the project manager, to develop estimates at the
task level in the work breakdown structure (WBS). When you set the estimates of the amount of
work, duration and cost at the task level, you can add them up into estimates of higher-level
deliverables and the project as a whole. Also, is the most accurate approach to estimating cost
and duration. It also requires the most time. This kind of estimating involves the entire project
team and gives them the opportunity to take part in developing the estimates used to measure
their work

7. Explain the key processes that should be followed in the event of a

cost change during a project. (100 words)

Proposing a change: A change proposal is a formal proposal to change the level of service or
funding for activities or to effect changes to the scope of work. The change analysis proposal must
be planned and then there has to be a coordinated effort between the client and the contractor.

Summary of impact: the purpose of the Impact Summary and Pathways to Impact are to
encourage researchers to consider the potential impact of their research from the outset and to
ask for information about activities which could maximise the potential economic and
societal impact of research.

Decisions: A Review of the new changes requested and approved.

Implementing a change: Whether the change is a small one, like the implementation of a new
system, or a much bigger one such as a company takeover or merger, the way that change is
managed makes all the difference to its success or failure

Closing a change: After all implementation tasks are complete, the workflow sends an
assignment to the Change Owner to determine whether the Change was successful.