Cost Management – Part 1

Project Cost Management I

After creating the complete list of project activities and duration estimates, the question that’s forever on the mind of the top management is “How much is it going to cost? The purpose of the Cost Management is to answer that question. Every project has a budget, and part of completing a project successfully is completing it within the approved budget.

Plan Cost Management

This process establishes the policies, procedures, and documentation for planning, managing, spending and controlling project cost .It gives direction on how the project cost will be managed throughout the project.

Input Tools & Techniques Output
Project Management Plan Expert Judgment Cost Management Plan
Project Charter Analytical Techniques
Organizational Process Assets Meetings
Enterprise Environment Factors


Inputs of Plan Cost Management

The activities in Plan Cost Management process is primarily concerned with the costs of   resources, but you should think about other costs as well. For example, make certain to examine ongoing maintenance and support costs for software you’re considering for the project. All such information is covered in the Project Charter and Project management plan. Depending on the complexity of the project, this process might need the involvement of more than one person. For example, the finance person might not have expertise about the resources documented in the staffing management plan, so the project manager will need to bring in a staff member with those skills to assist with the activities in this process.

Output of Plan Cost Management

Cost management Plan

The cost management plan establishes the format and conditions you’ll use to plan for project costs. It also outlines how you will estimate, budget, and control project costs.

According to the PMBOK® Guide, some of the elements of this plan includes, but is not limited to, the following elements:

  • Level of accuracy: This refers to the precision level you’ll use to round activity estimates—for example, hundreds, thousands, and so on. Level of accuracy is based on the scope and complexity of the activities and the project itself.
  • Units of measure: This refers to the unit of measure you’ll use to estimate resources—for example, hours, days, weeks, or a lump sum amount.
  • Organizational procedures links: The Work Breakdown Structure and the identifiers associated with each component of the WBS provide the framework for cost management plan.These identifiers are called the code of accounts. A control account (CA) is a point where several factors such as actual cost, schedule, and scope can be used to determine earned value performance measures. The control account is what’s used in the Project Cost Management Knowledge Area to monitor and control project costs. The control account is typically associated with the work package level of the WBS, but there could be control accounts established at any level of the WBS. The control account also has a unique identifier that’s linked to the organization’s accounting system, sometimes known as a chart of accounts.
  • Control Threshold: Variance thresholds may be specified to indicate agreed upon amount of variation to be allowed. Document the threshold amount as a percentage of deviation allowed from the cost performance baseline.
  • Rules of Performance Measurement: In this component you will document where the control accounts exist within the WBS, the earned value management (EVM) techniques you’ll use to measure performance, and the equations you’ll use for calculating estimate at completion forecasts and other measurements.
  • Reporting Formats: The formats, type and frequency for various cost reports are defined.
  • Process Descriptions: Description of each other processes of this knowledge area is documented.
  • Additional details: Details like strategic funding choices and procedure for project cost recording.

Estimate Costs

Estimate Cost is the process of developing estimate for the resources needed to complete each activity. This includes weighing alternative options and examining risks and trade-offs. Alternatives include make-versus-buy, buy-versus-lease, and sharing resources across either projects or departments.

Input Tools & Techniques Output
Cost Management Plan Expert Judgment Basis of estimates
Project Schedule Analogous Estimating Activity cost estimates
Scope Baseline Parametric Estimating Project  Document updates
Risk Register Bottom up Estimating
Human Resource Management Plan Three point Estimates
Organizational Process Assets Reserve Analysis
Enterprise Environment Factors Group Decision making Techniques
Cost Of Quality
Vendor Bid  Analysis
Project Management software


Inputs of Estimate Costs

Cost Management Plan:

As already discussed above cost management plan would describe how costs will be managed and controlled and how changes to costs will be approved and managed throughout the project.

Project Schedule

Activity resource requirements and activity duration estimates of the Project Schedule must be considered when estimating costs. It is obvious that the duration estimates affect costs. For example, make certain you account for duration estimates that are calculated for resources who are scheduled to work for a per unit period of time. Duration estimates can be incorrect and can end up costing you more. For example, Mr. Sharma shifted to new home requiring a move of about 10 km. The moving company told him that the work will be performed on a per-hour basis. The person providing the estimate assured him he had been doing this for over 15 years and his estimates were typically right on the money. Unfortunately, the estimate given to Mr. Sharma was not correct. It took them almost twice the amount of time quoted, and the total ended up being almost twice the original estimate.

Human Resource Plan

Estimate Costs process; understand that the human resources plan includes elements such as personnel rates, project staffing attributes, and employee recognition or rewards programs. All of these elements should be considered when determining cost estimates.

Risk Register

The risk register is an output of the Identify Risks process. You should consider the cost of mitigating risks (identified in the risk register), particularly those with negative impacts to the project, when developing project cost estimates.

Enterprise Environmental Factors

 According to the PMBOK® Guide, the enterprise environmental factors you should consider in this process are market conditions and published commercial information. Market conditions help you understand the materials, goods, and services available in the market and what terms and conditions exist to procure those resources. Published commercial information refers to resource cost rates. You can obtain these from commercial databases or published seller price lists.

Outputs of Estimate Costs

Basis of estimate

It is the supporting detail for the activity cost estimates and includes any information that describes how the estimates were developed, what assumptions and constraints were considered. Also includes a range of possible results.

Activity cost estimates

Generally it is stated in monetary units—that reflect the cost of the resources needed to complete the project activities. Resources in this case include human resources, material, equipment, hardware, software or any IT need,

Project documents updates

Cost variances will occur and estimates will be re-evaluated as the project progresses. As a result, you’ll update cost estimates and ultimately the project budget to reflect these changes. The risk register may also require an update after cost estimates are complete.

Important point: Difference between pricing and Costs: The costs are centered on the resources needed to produce the product, service, or result of the project. The price your company might charge for the service includes not only these costs but a profit margin as well.

Questions & Answers

  1. You are a project Manager in a software firm. There was a temporary need for a P3 server with a certain specification for your project. Basis the information given below, what will be your decision
    • Rent – $ 1250 Installation cost + $250 rent per day
    • Buy – $ 1250 installation cost + $ 3500 one time cost + $75 per day Maintenance cost

    • A. Buy if required for less than 20 days
    • B. Rent if required for more than 25 days
    • C. Buy if required for more than 20 days
    • D. Rent if required for more than 20 days

    Correct Answer: The answer is option C, Buy if required for more than 20 days.
    Let the Server is required for x days
    Rent: Total=1250 + 250x
    Buy : Total=1250 +3500 + 75x
    Equate both to find the value of x
    1250+250x= 1250 + 3500 + 75x
    175x= 3500
    For first 20 days it will cost equally for both buy and rent.

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About Sparsh Goyal

A passionate IT professional, Sparsh Goyal boasts of 4.3+ years of experience. He has worked for various projects under AWS, Google Cloud Platform, Spring Boot, Python, Microservices, RESTful, RESTFUL APIs/SOAP, Scripting, Shell and JAVA. He is also working towards gaining proficiency in Oracle Cloud PaaS, DevOps, SaaS and Docker/Kubernetes. His primary and secondary skills validate his relentless pursuits of expanding his horizon and developing more as an IT person. He boasts of the following certifications: *Google Professional Cloud Security Engineer. *AWS Cloud Solutions Architect Associate. *Oracle certified JAVA programmer.
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