7.

Cost Management
Huu Nguyen
7. Cost Management
 Project Cost Management involves planning, budgeting, and managing costs.
 Cost management does not happen in isolation – the project manager needs
input from the project team and key stakeholders.
 Cost management should occur early in project planning in order to establish
a framework for all cost management processes and ensure that the project
does not go over budget.
 7.1 Plan Cost Management
Plan Cost Management process establishes the framework/policies/procedures for how to estimate and manage
costs
The key benefit of this process is that it provides guidance and direction on how costs are managed from project
initiation to closure
There are many ways to fund a project, including: 1) Self-funding, 2) Funding with equity, or 3) Funding with debt
The Cost Management Plan is a component of the Project Management Plan that details how cost management
processes will be carried out. This plan will describe how project costs are planned, estimated, and controlled.
 The cost management plan also establishes the following:
 Units of measure
 Level of precision
 Level of accuracy
 Organizational procedures links
 Control thresholds
 Rules of performance measurement
 Reporting formats
 Proces descriptions
 Additional details
 Life cycle cost: Looking at the cost of the whole product life cycle, not just the cost on the project
 Value Analysis: Finding less costly ways to do the same work. Value analysis involves identifying required project
functions, assigning values to these functions, and providing these functions at the lowest cost without sacrificing
performance.
7.2 Estimate Costs
Estimate Costs is the process of establishing an approximate monetary value to
each project activity.
The key benefit of this process is that it determines the amount of money
needed to complete project work
Cost estimate is a prediction of how much an activity will cost upon completion
given the information we know now.
When estimating cost, you need to know whether you are only estimating the
direct project costs or whether your estimates need to include indirect costs as
well.
To estimate costs, you need to look at the project schedule to see which
activities need which resources.
7.2 Estimate Costs
Types of Estimation:
 Analogous Estimating – use similar historical project activity costs to determine the current
project activity costs. Relies of expert judgment. Use this technique when you have limited
information available. Also called top-down estimating.  
 Parametric Estimating – use mathematical calculations or models to determine activity costs
(generally more accurate). E.g. it costs $100 to install 20m of wires, thus, it will cost $1000 to
install 200m.
 Bottom-up Estimating – detailed estimating is done for each activity (if available) or work
package (if activities are not defined), and the estimates are then rolled up into control accounts and
finally into an over project estimate
 Contingency Reserves – the part of the budget set aside to deal with negative risks that may occur
 Vendor Bid Analysis – analyzing the bids from qualified vendors. If cost estimates vary
significantly, it could mean that the scope is not well defined. If third-party vendors are used on the
project, the PM needs to make sure their cost estimates are included in the project budget.
 Activity cost estimate – an estimation of what the activity will cost upon completion based on
information known to date.
7.2 Estimate Cost (Cont.)
 Accuracy of Estimates
Rough Order of Magnitude (ROM) Estimates (-25% to 75%)
 This type of estimate is usually made during the initiating process
 A typical range from ROM estimate is a +/- 50% from actual, but this range can vary
depending on how much is known about the project when creating the estimates
 Approximation without detailed data

Budget estimate (-10% to +25%)

 This type of estimate is usually made during the planning phase and is in the range of -10%
to +25% from actual
 Initial funding to gain the project approval

Definitive estimate (-5% to +10%)

 Later during the project, the estimate will become more refined. Some project managers
use the range of +/- 10% from actual, while others use -5% to +10% from actual
 Planning phase
 Most expensive to create

Final estimate (0%)

7.2 Estimate Costs
 Inputs
 Cost management plan
 HR management plan
 Scope baseline
 Project schedule
 Risk register
 EEF
 OPA
7.2 Estimate Cost
 Tools and Techniques
 Expert judgment
 Analogous estimating
 Parametric estimating
 Bottom – up estimating
 Three point estimates
 Reserve analysis
 Cost of quality
 Project management plan
 Vendor bid analysis
 Group decision making techniques
 Outputs
 Activities cost estimate: are quantitative assessments of probable costs required to
complete project work
 Basics of estimates: basis of the estimate, assumption and constraints, the range of
possible estimates, confidence level of final estimate
 Project document updates: risk register
7.2 Estimate cost
 Types of costs:
 Variable costs – these costs change with the amount of production or the amount
of work
 Examples: cost of material, supplies, and wages
 Fixed costs – these costs do not change as production changes
 Examples: rent, equipment, etc.
 Direct costs – these costs are directly attributable to the work on the project
 Examples are team travel, team wages, recognition, and costs of material used on the
project
 Indirect costs – indirect costs are overhead items or costs incurred for the benefit
of more than one project
 Examples include taxes, fringe benefits, and janitorial servicesCost of quality – The total
cost of all efforts related to quality
 7.3 Determine budget
 Determine Budget is the process of aggregating individual activity or work package
costs into the project budget.
 The Key Benefit of this process is that it determines the cost baseline against which
project performance is measured.
 Inputs
 Cost management plan
 Scope baseline
 Activities cost estimates
 Basis of estimates
 Project schedule
 Resource calendars
 Risk register
 Agreements
 OPA
7.3 Determine Budget
 Cost aggregation – the process of rolling up individual activity costs into work packages and work packages
into control accounts and control accounts into the project budget
 Funding limit reconciliation – Comparing plan project expenditures against funding limits to determine if any
variances exist.
 Cost baseline – approved time-phased project budget. The cost baseline tells you how much you should have
spent at any given point in time. Any changes to the cost baseline must be approved by the change control
board.
 Control accounts – During reporting, the key stakeholders may want more details than the overall project
cost, but less details than the work packages costs. Control accounts aggregates related work packages
together. The PM will report at the control accounts level.  
 Reserve analysis:
 Management reserves
 “Unknown-unknown risks”
 Not part of the project baseline
 Sponsor must approve the use of management reserves and then the project must be “re-baselined”
 Contingency reserves  
 “known-unknown risks”
 Used at the discretion of the project manager
 Part of the project budget
 The summation of control accounts gives you your cost baseline.
 Cost baseline + contingency reserves = project budget
 Funding occurs in incremental stages that are not continuous or evenly distributed.
 Funding requirements are derived from the cost baseline
7.4 Control Cost
 The Control Costs process is the process of monitoring actual project costs against
the cost baseline and managing changes to the cost baseline.
 The key benefit of this process is that it allows the PM to detect cost variances
early and take corrective actions to bring the project back on budget.
 Any changes to the budget must be approved through the Perform Integrated
Change Control process.
 Project Cost Control components:
 Ensuring timely implementation of change requests
 Issuing cost-related change requests when necessary
 Monitoring cost performance and understanding the root causes of variances
 Monitoring activity costs against project budget
 Reporting cost performances to key stakeholders
 Ensuring the project do not exceed funding limits
 Preventing unapproved changes from using up the budget
 Bringing cost overruns to within acceptable limits
7.4 Control Costs
 Variance analysis – The procedure of analyzing the difference between the actual cost and the
budgeted cost (from the cost baseline).
 Return on investment (ROI) – a technique to estimate the potential profitability of an
investment
 Progress Reporting
 50/50 rule
 An activity is considered 50% complete when it begins and gets credit for the last 50% only when it is completed
 20/80 rule
 An activity is considered 20% complete when it begins and get credit for the last 80% only when it is completed
 1/100 rule
 An activity does not get credit for partial completion. It only gets credit for full completion
 Earned Value Management – This methodology is used to measure project performance against
the scope, schedule, and cost baselines.
7.4 Control Cost
7.4 Control Cost