Project Cost Management: Steps, Basics, and Benefits | EcoSys

Project cost management is the process of estimating, budgeting and controlling costs throughout the project life cycle, with the objective of keeping ... 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Thisiscertainlynotgoodnewsforenterprisesascostoverrunsnotonlyimpacttheirmargins,butalsohindertheabilitytoexecutefutureprojects.Understandingwhatprojectcostmanagementisandhowtobeeffectiveatitcanbebeneficialfororganizationstostayoncourse. Inthisarticle,welookatwhatprojectcostmanagementis,itsbenefitsandthestepsinvolvedinitsimplementation. WhatisProjectCostManagement? Projectcostmanagementistheprocessofestimating,budgetingandcontrollingcoststhroughouttheprojectlifecycle,withtheobjectiveofkeepingexpenditureswithintheapprovedbudget. Foraprojecttobecalledsuccessful,it’snecessarythat itdeliversontherequirementsandscope itsexecutionqualityisofahighstandard it’scompletedwithinscheduleand it’scompletedwithinbudget. Hence,projectcostmanagementisoneofthekeypillarsofprojectmanagementandisrelevantregardlessofthedomain,beitmanufacturing,retail,technology,constructionandsoon.Ithelpstocreateafinancialbaselineagainstwhichprojectmanagerscanbenchmarkthecurrentstatusoftheirprojectcostsandrealignthedirectionifneeded. WhyisProjectCostManagementImportant? Theimportanceofcostmanagementiseasytounderstand.Totakeasimple,real-lifeexample,ifyoudecidetobuildahouse,thefirstthingtodoissetthebudget.Whenyouhaveasenseofhowmuchtospendontheproject,thenextstepistodividethehigh-levelbudgetintoexpensesforsub-tasksandsmallerlineitems. Thebudgetwilldeterminecriticaldecisionpointssuchas:whichdesignertohire—ahigh-endonewhowillconstructanddelivertheprojectend-to-end,orsomeonewhocanhelpwithafewelementsandbeabletoworkforasmallerbudget?Howmanystoriesshouldthehousehave?Whatqualityofmaterialsshouldbeused? Withoutapredefinedbudget,notonlyisitdifficulttoanswerthesequestions,butitbecomesimpossibletoassesswhetheryouareprogressingintherightdirectiononcetheprojectisunderway.Inlargeorganizations,thescaleofthisproblemisfurthermagnifiedduetoconcurrentrunningofmultipleprojects,changeininitialassumptionsandtheadditionofunexpectedcosts.That’swherecostmanagementcanhelp. Byimplementingefficientcostmanagementpractices,projectmanagerscan: Setclearexpectationswithstakeholders Controlscopecreepduetotransparenciesestablishedwiththecustomer Trackprogressandrespondwithcorrectiveactionataquickpace Maintainexpectedmargin,increaseROI,andavoidlosingmoneyontheproject Generatedatatobenchmarkforfutureprojectsandtracklong-termcosttrends   SeehowEcoSyscanhelpyouachieveTotalCostManagement   VisitthecostcontrolwebpageOn-DemandwebinarwithAACE   TheFourStepsinProjectCostManagement Whilecostmanagementisviewedasacontinuousprocess,ithelpstosplitthefunctionintofoursteps:resourceplanning,estimation,budgetingandcontrol.Theyaremostlysequential,butit’spossiblethatsomeresourcechangeshappenmidwaythroughtheproject,forcingthebudgetstobeadjusted.Or,thevariancesobservedduringthecontrolprocesscancallforestimaterevisions. Letuslookateachofthesefourstepsindetail. 1.ProjectResourcePlanning Resourceplanningistheprocessofidentifyingtheresourcesrequiredtoexecuteaprojectandtakeittocompletion.Examplesofresourcesarepeople(suchasemployeesandcontractors)andequipment(suchasinfrastructure,largeconstructionvehiclesandotherspecializedequipmentinlimitedsupply). Resourceplanningisdoneatthebeginningofaproject,beforeanyactualworkbegins. Togetstarted,projectmanagersfirstneedtohavethework-breakdownstructure(WBS)ready.TheyneedtolookateachsubtaskintheWBSandaskhowmanypeople,withwhatkindofskillsareneededtofinishthistask,andwhatsortofequipmentormaterialisrequiredtofinishthistask? Byadoptingthistask-levelapproach,itbecomespossibleforprojectmanagerstocomeupwithanaccurateandcompleteinventoryofallresources,whichisthenfedasaninputintothenextstepofestimatingcosts. Afewtipstoconsiderduringtheprocess: Considerhistoricaldata—pastschedulesandeffort—beforedeterminingsub-tasksandthecorrespondingresources. TakefeedbackfromSMEsandteammembers—acollaborativeapproachworkswellespeciallyinprojectsthatdonothavepastdatatouse. Assesstheimpactoftimeonresourcerequirements.Forinstance,aresourcemaybeavailableonlyafterafewmonths,draggingtheproject’sschedule.Thiscouldhaveanimpactoncostestimation. Althoughthisstephappensattheplanningstage,projectmanagersneedtoaccountforgroundrealities.Forexample,youmayidentifytheneedforaresourcewithcertainexpertise,butifsucharesourceisnotavailablewithintheorganization,youhavetoconsiderhiringacontractorortrainingyourteamtogetthemuptospeed.Alltheserealvariablesimpactcostmanagement. 2.CostEstimation Costestimationistheprocessofquantifyingthecostsassociatedwithalltheresourcesrequiredtoexecutetheproject.Toperformcostcalculations,weneedthefollowinginformation: Resourcerequirements(outputfromthepreviousstep) Priceofeachresource(e.g.,staffingcostperhour,vendorhiringcosts,serverprocurementcosts,materialratesperunit,etc.) Durationthateachresourceisrequired Listofassumptions Potentialrisks Pastprojectcostsandindustrybenchmarks,ifany Insightintothecompany’sfinancialhealthandreportingstructures Estimationisarguablythemostdifficultofthestepsinvolvedincostmanagementasaccuracyisthekeyhere.Also,projectmanagershavetoconsiderfactorssuchasfixedandvariablecosts,overheads,inflationandthetimevalueofmoney. Thegreaterthedeviationbetweenestimationandactualcosts,thelesslikelyitisforaprojecttosucceed.However,therearemanyestimationmodelstochoosefrom.Analogousestimationisagoodchoiceifyouhaveplentyofhistoricalcostdatafromsimilarprojects.Someorganizationsprefermathematicalapproachessuchasparametricmodelingorprogramevaluationandreviewtechnique(PERT). Thenthereisthechoicebetweenemployingatop-downversusbottom-upapproach.Top-downtypicallyworkswhenpastcostingdataareavailable.Inthis,projectmanagersusuallyhaveexperienceexecutingsimilarprojectsandcanthereforetakeagoodcall.Bottom-upworksforprojectsinwhichorganizationsdonothavealotofexperiencewith,and,therefore,itmakessensetocalculateacostestimateatatask-levelandthenrollituptothetop. CostEstimationasaDecisionEnabler It’susefultorememberthatcostestimationisdoneattheplanningstageand,therefore,everythingisnotyetsetinstone.Inmanycases,projectteamscomeupwithmultiplesolutionsforaproject,andcostestimationhelpsthemdecidewhichwaytogo.Therearemanycostingmethodologies,suchasactivity-basedcosting,jobcosting,andlifecyclecostingthathelpperformthiscomparativeanalysis. Lifecyclecosting,forinstance,considersthecompleteend-to-endlifecycleofaproject.InITprojects,forexample,maintenancecostsareoftenignored,butlifecyclecostinglookslong-termandaccountsforresourceusageuntiltheendofthecycle.Similarly,inmanufacturingprojects,thegoalistominimizefutureservicecostsandreplacementcharges. Sometimestheestimationprocessalsoallowsteamstoevaluateandreducecosts.Valueengineering,forexample,helpstogaintheoptimalvaluefromaprojectwhilebringingcostsdown. 3.CostBudgeting Costbudgetingcanbeviewedaspartofestimationorasitsownseparateprocess.Budgetingistheprocessofallocatingcoststoacertainchunkoftheproject,suchasindividualtasksormodules,foraspecifictimeperiod.Budgetsincludecontingencyreservesallocatedtomanageunexpectedcosts. Forexample,let’ssaythetotalcostsestimatedforaprojectthatrunsoverthreeyearsis$2million.However,sincethebudgetallocationisafunctionoftime,theprojectmanagerdecidestoconsiderjustthefirsttwoquartersfornow.Theyidentifytheworkitemstobecompletedandallocateabudgetof,say,$35,000forthistimeperiod,andtheseworkitems.TheprojectmanagerusestheWBSandsomeoftheestimationmethodsdiscussedintheprevioussectiontoarriveatthisnumber. Budgetingcreatesacostbaselineagainstwhichwecancontinuetomeasureandevaluatetheprojectcostperformance.Ifnotforthebudget,thetotalestimatedcostwouldremainanabstractfigure,anditwouldbedifficulttomeasuremidway.Evaluationofprojectperformancegivesanopportunitytoassesshowmuchbudgetneedstobereleasedforfuturephasesoftheproject. Anotherreasontofirmupbudgetsisthatorganizationsoftenrelyonexpectedfuturecashflowsfortheirfunding.Duringtheinitialphases,theprojectmanagerhasalimitedfinancialpoolandhastosettargetsaccordingly.It’ssimilartobuildingthefoundationandonefloorofthehouseintheinitialfewmonthsandlatercompletingtherestoftheproject,asyousavemore. 4.CostControl Costcontrolistheprocessofmeasuringcostvariancesfromthebaselineandtakingappropriateaction,suchasincreasingthebudgetallocatedorreducingthescopeofwork,tocorrectthatgap.Costcontrolisacontinuousprocessdonethroughouttheprojectlifecycle.Theemphasishereisasmuchontimelyandclearreportingasmeasuring. Alongwiththecostbaseline,thecostmanagementplanisanessentialinputforcostcontrol.Thisplancontainsdetailssuchashowprojectperformancewillbemeasured,whatisthethresholdfordeviations,whatactionswillbedoneifthethresholdisbreached,andthelistofpeopleandroleswhohavetheexecutiveauthoritytomakedecisions. Earnedvaluemanagement(EVM)isoneofthemostpopularapproachestomeasuringcostperformance.Let’stakeanexample. Attheendofaweek,youmeasuretheprogressoftaskXandfindthatit’s25%complete.Now,howdoyouassessifyouareontracktomeetthetaskbudget? First,aprojectmanagercalculatestheplannedvalueforthistask(attheplanningstage).Let’ssay,TaskXhasabudgetof$4000andisexpectedtobe50%completebytheweek. Plannedvalue(PV)oftaskXbytheweek=$4000*.5=$2000 Earnedvalue(EV)oftaskXbytheweek=$4000*.25=$1000 Now,youalsodeterminetheactualcost(AC)ofthework,whichinvolvesothervariablessuchasequipmentandmaterialcosts(say,$800). Schedulevariance=EV–PV=$1000–$2000=-$1000. Costvariance=EV–AC=$1000–$800=$200. Thenegativeschedulevarianceindicatesthatthetaskisfallingbehind,butthepositivecostvarianceindicatesthatit’sunderbudget. Whiledealingwithhundredsoftasksinhugeprojects,costcontrolcanprovidetheleveloftransparencythatdecisionmakersrequiretorespondquicklytothesituation. ProjectCostSoftware Costmanagement,similartootheraspectsofprojectmanagement,getscomplexwithmanyvariablesinplay.Theprocessitselfiselaborate,needingattentiontodetailalongwitharigorousapproach.Theuseofprojectmanagementsoftwarecansimplifythisprocessconsiderably. Let’slookatafewadvantagesofusingprojectcostmanagementsoftware: Automationofcumbersomequantitativeanalysisduringestimationandmeasurementhelpsavoidmanualerrors Integrationofdataacrossplanning,estimation,budgeting,andcontrolenablescontinuousmonitoringandquick,proactiveresponses,ratherthanone-offinterventions Decision-makingismadeeasierascostsoftwarehelpsevaluatealternatesolutionsusingscenarioforecastingandwhat-ifanalysis ClearandeasyreportingintheformofdashboardsandotherrichUIs Thecomplexityofmulticurrencymanagementinprojectsacrossdifferentgeographicallocationsissimplifiedwithprojectcostsoftware Manyprojectcostsolutionsallowthird-partyintegrations,sodatacanbepooledandanalyzed Benchmarkingandstandardizationarepossiblewiththeavailabilityofperformancedataacrossmultipleprojects CostManagementandEnterpriseProjectPerformance Inthe2018PMIPulseoftheProfessionReport,41%ofrespondentssaidthattheirprojectsareofhighcomplexity.It’snosurprisethenthat40%ofthesurveyparticipantsconsider“investingintechnologytobetterenableprojectsuccess”astheirtoppriority. Costmanagementiscloselytiedtothecapabilityofanorganizationtosucceedincurrentaswellasfutureprojects.Investinginreliablecostmanagementsoftwarecanresultinhugesavings.Agoodsolutiontocostmanagementwillnottreatitasasiloedfunctionbutleverageitasintegraltoprojectandportfolioperformance,andcorrelatedataacrossprojects.   Visittheseadditionalresourcesformoreinformationonprojectcostmanagement: Product:EcoSys Solutions:ProjectPortfolioManagement,ProjectControls&ProjectManagement,EarnedValueManagement ProcessArea:CostControl Blog:6BestPracticesforProjectControls,FoundationsofGoodEarnedValueManagement   RelatedResources&News Video 5ReasonsYourProjectSoftwareisFailingYou(Video) On-DemandWebinar AchievingTotalCostManagementwithEcoSys On-DemandWebinar AmazingOutcomes!HowEnterpriseProjectPerformanceDrivesResults SecretsofHighPerformingProjects Learnhowprocesses,technologyandtrustimpacttheperformanceoflarge-scaleprojects. DownloadReport CanTechnologyDriveBetterProjectOutcomes? LearnhowEnterpriseProjectPerformancesoftwarecangiveyouacompetitiveadvantage. DownloadeBook WhichProjectExperienceAreYouLiving? What’sthedifferencebetweenthelifeofsomeoneusinganEPPsystemvs.disconnectedtools? FindOutNow KnowledgeProjectCostManagement:Steps,BasicsandBenefits SchedulinginProjectManagement:AGuidetoProjectScheduling ConstructionProjectManagement:Definition,Processes,andMore EarnedValueManagement:TheBasics ProjectPredictability TheUltimateGuidetoConstructionDocumentManagement ProjectControls:KeyElements,BenefitsandChallenges ContractManagement:Stages,ChallengesandBenefits ProjectPortfolioManagement(PPM):KeyElements,BenefitsandBestPractices RecentBlogs SimplifyingCost,PerformanceandScheduleSynchronization IstheEnigmaofScheduleandCostManagementFinallyAbouttobeSolved? 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