Project Cost

Management Guide
Best Practices & Processes
What is Cost Management in Project Management?

Cost management is the process of managing project

costs through the process of planning, estimating,
and controlling a project’s budget. While project cost
management begins before a project starts, it continues
on throughout the entire project lifecycle to completion.
Upon completion, the data provides a view of the
project’s planned predicted costs versus its actual costs;
which can be used for benchmarking future projects and
portfolios.

Project cost control is a critical part of project

management and project controls, as major construction
projects are, on average, delivered one year behind
schedule and 30% over-budget (McKinsey & Company).
 Project Cost
Management Processes
Project Cost Management Processes

Effective cost management throughout a project

significantly helps project organizations and enterprises
avoid cost overruns. According to PMBoK, the project
cost management processes for making this happen
include:
• Forming a plan cost management / resource planning
• Estimating project costs
• Determining the project budget
• Controlling project costs

The first three processes of project cost management

occur prior to the project during planning, while the last
process occurs throughout the project’s execution.
Project Cost Management Processes

1. Plan Cost Management / Project

Resource Planning

2. Estimating Project Costs

3. Determining Project Budget

4. Controlling Project Costs

Project Cost Management Processes

1. Plan Cost Management / Project Resource

Planning
During the creation of a cost management plan (a key
component of the overall project management plan),
descriptions of how project costs will be planned,
structured, and controlled are defined. Resource
planning involves utilizing a work breakdown structure
(WBS), a hierarchical breakdown of all of a project’s
deliverables and the work required to complete them.
The WBS is used to calculate the full cost of resources
needed to complete a project successfully.
Project Cost Management Processes
2. Estimating Project Costs
Cost estimation is an important process in project cost
management in which costs associated with all required
resources needed to complete the project are quantified.
In some projects, estimates are built item by item as
part of the Work Breakdown Structure (WBS) to provide
a bottom-up, total cost of the project. Sometimes, an
item estimate is provided based on industry heuristics
that provide costs based on square footage, feet of pipe,
miles of road and number of work months compiled from
similar projects.
A project estimate may also include costs for
contingency for future situations that are partially
predictable or quantifiable (“known-unknowns”) and risks
that are impossible to predict (“unknown-unknowns”).
Once approved, the estimate becomes the budget for
the project.
Integration with Cost Management Systems
Our integration system, PRISM Integrator, is able to integrate the
synchronization of a project’s cost control elements from the ARES PRISM
cost management system and the work breakdown structure within the
scheduling system to various other systems. PRISM Integrator is also able
to bring in project estimating data via PRISM Estimating. This allows the
business to use standardized (synchronized) code throughout the business.
Hence, supporting further services or business processes to be initiated
from the standardization of a control account structure. Business processes
such as change management and risk management can also be integrated.
This allows the change and risk data to be raised in a contract management
system and the impact measured through the cost control system. Now the
organization has a single view of cost, change, risk and schedule throughout
the program.
Project Cost Management Processes

3. Determining Project Budget

Creating a project budget involves calculating individual project task budgets into an overall budget for the entire
project. A project budget is used to determine project funding needs, and they include contingency reserves allocated
to manage unexpected project costs.

For medium to large projects, it often involves establishing a time-phased budget.

Time-Phased Budget Method Cost-Loaded Schedule Method

A time-phased budget is a budget that is not only defined in terms of
magnitude, but also indicates the planned expenditure of that budget over time.
The Time-Phased Budget method begins with an estimate and a schedule, but
instead of incorporating one within the other, it uses “control accounts” to link
them together. A “control account” or “cost account” is a management control
point where earned value measurement takes place. It is the place where scope,
schedule, and budget are integrated at the organizational level responsible
for the day-to-day management of a segment of a project. Cost management
applications use a control account as the centralized record that, at times,
represents multiple activities and multiple estimate line items.
An alternative method is creating a cost-loaded schedule. This method often
involves the simultaneous development of a project estimate using various
estimating tools, and a project schedule using the Critical Path Methodology.
This is typically done using Primavera P6, Microsoft Project or even
MS Excel. When the activities have been sequenced and spread across the
duration of the project, and the resources with their estimated costs have been
included, the result is a Cost-Loaded Schedule. The time-phased budget method
is usually preferable to the cost-loaded schedule method.
Project Cost Management Processes

4. Controlling Project Costs

Project cost control is imperative to successful
project management and delivery. How enterprises
and organizations accurately predict and report on
the success of their projects and still have time to
actually manage them is a challenge all projects face.
The answer is applying earned value management
(EVM).

A starting point for EVM is creating a Performance

Measurement Baseline to plan, track, and report
project progress against. Project management is
the art of planning, tracking, coordinating, aligning,
communicating, and, of course, reporting progress on
a project. It is the project manager’s responsibility to
ensure a successful project, in its various forms and
inform everyone when obstacles threaten the success
of the project.
Successful Project Cost Management

When predicting the likelihood of a project’s success, there are many different
questions that can be asked:

• Will the project be completed on-time?

• Will the project be delivered within budget?
• Will the project quality meet or exceed standards and expectations?
• Does the project meet all the requirements and scope?
Performance Measurement
Baseline
Performance Measurement Baseline

Performance Measurement Baseline (PMB) is part of the ANSI Standard for Earned Value
Management Systems (ANSI EIA 748-A). The two most widely used methods to fulfill the
ANSI requirement: Cost-loading a schedule and using a control account time-phased
budget, both of which are discussed above.

Project Costs: Budget, Scope & Time

To facilitate managing and reporting on the project, the project manager needs to
combine budget, scope and time in a way that allows a comparison of the actual
progress against the plan and provides an accurate forecast of the future but is not
burdensome to create or maintain.

For each task within a project, the project manager will gather the:
• Planned value: The value of the work that is planned to be completed.
• Earned value: The actual value of all the work completed.
• Actual cost: The actual cost of all the work completed.
Performance Measurement Baseline

With planned value, earned value, and actual costs, we

can calculate additional project values that indicate the
project’s current status and performance– from either
a budget perspective (CV and CPI), or from a schedule
perspective (e.g., Schedule Variance (SV) and Schedule
Performance Index (SPI)).

Four additional values can then be calculated to

determine the project’s current status through to the end
of the project (e.g., Estimate to Complete (ETC), Estimate
at Completion (EAC), Variance at Completion (VAC), and
To-Complete Performance Index (TCPI).
The Importance of Project
Cost Management
The Importance of Project
Cost Management

It’s important to measure and control project costs,

report them to stakeholders throughout the project
lifecycle, and use them for benchmarking progress
during the project and forecasting for future projects.

Key Cost Management Metrics:

• Earned Value
• Project Cost Performance
• Cost Performance Index (CPI)
The Importance of Project Cost Management

Earned Value
Earned value tracks the cost and value of the work performed, and represents the
progress of the project. Earned value management determines if the project is falling
behind schedule or over budget. By measuring the historical performance of the
project, EVM forecasts the probability of successful delivery.

Project Cost Performance Report

A project’s cost performance can be assessed by measuring how the actual
expenditures compare with the planned expenditures per the project budget. It often
serves as the basis for preventive or corrective actions to avoid cost overruns. Project
controls software like ARES PRISM offers a project cost performance report out-of-the-
box and meets federal government reporting requirements.

Cost Performance Index (CPI)

The Cost Performance Index measures a project’s financial effectiveness and efficiency,
and represents the amount of completed work for every unit of cost spent. A CPI of 1
means that the project is performing on budget. A CPI of less
than 1 means that the project is over budget.
ARES PRISM is enterprise project controls software that manages
the complete project lifecycle delivering dependable forecasts,
cost control, and performance measurement. PRISM is a scalable,
robust and intuitive system that harnesses industry best practices
and integrates all aspects of the project, including cost and
schedule, change management, project estimating, earned value,
contracts & procurement, and field progressing. Achieve superior
project management with increased visibility and control, boosted
accuracy and efficiency, and improved financial performance.
www.aresprism.com