Project cost management may be defined as management of the processes involved in planning, estimating, and controlling costs so that the project can be completed within the approved budget.

·         Cost Estimating

·         Cost Budgeting

·         Cost Control

Approximate costs are developed for complete schedule activities after consideration of risks and all causes of risks and possible cost variation. This quantitative assessment process generates a Schedule Activity Cost Estimate.

Various alternative estimates are identified and considered. All additional costs are checked for justification in additional savings in the life cycle process. For example, in most application areas, additional work during a design phase is widely held to have the potential for reducing the cost of the execution phase and product operations.

Resources for which costs are estimated include infrastructure, labor, materials, equipments, etc. and special categories like inflation or contingency. If the performing organization does not have formally trained project cost estimators then the project team will need to supply both the resources and the expertise to perform project cost estimating activities.

There are different ways to look at the costs while estimating and controlling project costs.

A cost is either variable or fixed.

Variable Cost

A variable cost is any costs that change with the amount of production or the amount of work. Example: cost of materials, power, water and wages.

Fixed Cost

Cost that does not change as production changes is a fixed cost. Example: set up cost, rental or hiring of an equipment or machinery.

A cost can be either direct or indirect.

Direct Cost

Costs are directly attributable to the work on the project. Example: team travel, team wages, recognition, and costs of materials used on the project.

Indirect Cost

Overhead items or costs incurred for the benefit of more than one project are indirect costs. Example: Corporate Tax, Fringe Benefit Tax, and House keeping Services including security services.

Opportunity Cost

The Opportunity given up by choosing a choice of project over another project is an opportunity cost. For example, if we need to select one of the following two projects:

-Project A with an NPV $60,000

-project B with an NPV $50000

then opportunity cost of selecting Project A is $50,000.

Sunk Cost

Sunk costs should not be considered when deciding on reviving or continuing with a troubled project. Sunk costs are the ones which were already spent on the project earlier and will not be considered when the revival plan decision is made.

Analogous Estimating

Analogous cost estimating means using the actual cost of previous or similar projects as the basis for estimating the cost of the current project.

Analogous cost estimating

This is used when there is a limited amount of detailed information about the project.

It uses expert judgment, is less expensive and is less accurate but reliable in similar project situations.

Determine Resource Cost Rates

Actual per unit human and material resource rates are collated or estimated.

Quotes, contracts, commercial database, seller published price lists are used and appropriate

Escalation rates and inflation are incorporated.

Bottom-up Estimating

Individual schedule activities are estimated to the smallest detail. All costs are then aggregated and used for reporting, tracking and control purposes. Here, the individual activity cost consciousness is of prime importance.

Parametric Estimating

This technique uses historical cost with current project variables that are determined. This is a highly accurate method as it requires clarity in current project variables.

Project Management Software

Widely Available cost estimation applications can be used for faster estimation of alternatives.

Vendor Bid Analysis: Vendor Bid analysis is another technique to benchmark costs. If a project is won in a competitive bid, more details may be considered for cost estimation and control purposes.

Reserve Analysis

Reserves or Contingency allowances are used to deal with uncertainty or “knowns-unknowns” and these are added to the cost estimates, thus sometimes overstating project costs.

Options vary between grouping similar activities and assigning a single contingency reserve for that group to a zero duration activity. This activity may be placed across the network path for that group of schedule activities. As the schedule progresses, the reserve can be adjusted.

Creating a buffer activity in the critical chain method at the end of the network path as the schedule progresses, allows the reserve to be adjusted.

Cost of Quality

Cost of quality can also be used to prepare the schedule activity cost estimate.

Cost budgeting involves aggregating the estimated costs of individual schedule activities or work package to establish a total cost baseline for measuring project performance. The project scope statements are prepared prior to the summary budget. However, schedule activity or work package cost estimates are prepared prior to the detailed budget requests and work authorization.  

Cost Aggregation

Schedule activity cost estimates are aggregated and grouped by work packages, which may be then grouped by higher levels as per levels set by the WBS, then finally by the entire project.

Reserve Analysis

Reserves or Management Contingency allowances are used to deal with uncertainty –“known unknowns.” The reserve is added to the project budget, but not distributed as budget because they are not a part of earned value calculations.

Parametric Estimating

The parametric estimating technique involves using project characteristics (parameters) in a mathematical model to predict total project costs. Both the cost and accuracy of parametric models vary widely. They are most likely to be reliable when:

the historical information used to develop the model is accurate

the parameters used in the model are readily quantifiable

the model is scaleable, such that it works for a large project as well as a small one

Funding Limit Reconciliation

Funds are reconciled and based on the results and new limits are set and WBS components are adjusted. This may impact allocation of resources to the project. If costs are used in the schedule development process, the process is repeated with new constraints and a new baseline is derived.

Project cost control includes:

Influencing the factors that create changes to the cost baseline

Ensuring requested changes are agreed upon

Managing the actual changes when and as they occur

Assuring that potential cost overruns do not exceed the authorized funding periodically and in total for the project

Monitoring cost performance to detect and understand variance from the cost baseline

Recording all appropriate changes accurately against the cost baseline

Preventing incorrect, inappropriate, or unapproved changes from being included in the reported cost or resource usage

Informing appropriate stakeholders of approved changes

Acting to bring expected cost overruns within acceptable units

Project cost control searches out the causes of positive and negative variance and is part of the Integrated Change Control.

Cost Change Control System

A cost change control system, documented in the cost management plan, defines the procedures by which the cost baseline can be changed. It includes the forms documentation, tracking systems, and approval levels necessary for authorizing changes. The cost change control system is integrated with the integrated change control process.

Performance Measurement Analysis

Performance measurement techniques help to assess the magnitude of any variance that will I invariably occur.  The earned value technique (EVT) compares the cumulative value of the budgets cost of work scheduled (planned) to the actual cost control, resource management, and production.

An important part of cost control is to determine the variance, the magnitude of the variance, and to decide if the variance requires corrective action.

The earned value technique uses the cost control contained in the project management plan to assess project progress and the magnitude of any variations that occur. The earned value technique involves developing these key values for each schedule activity, work package, or control account.

Planned value (PV)

PV is the budgeted cost for the work scheduled to be completed on an activity or WBS component up to a given point in time.

Earned value (EV)

EV is the budgeted amount for the work actually completed on the schedule activity or WBS component during a given time period.

Actual cost (AC)

AC is the actual cost incurred in accomplishing work on the schedule activity or WBS component during a given time period. This AC must correspond in definition and coverage to whatever was budgeted for the PV and the EV (e.g. direct hours only, direct cost only, or all costs including indirect costs).

Estimate to complete (ETC) and estimate at completion (EAC)

The PV, EV, and AC values are used in combination to provide performance measures of whether or not work is being accomplished as planned at any given point in time. The most commonly used measures are cost variance (CV) and schedule variance (SV). The amount of variance of the CV and SV values tend to decrease as the project reaches completion due to compensating effect of more work being accomplished. Predetermined acceptable completion can be established in the cost management plan.

Cost Variance (CV)

CV equals earned value (EV) minus actual cost (AC). The cost variance at the end of the project will be the difference between the budget at the completion (BAC) and the actual amount spent.

Formula: CV=EV-AC

Schedule Variance (SV):

SV equals earned value (EV) minus planned value (PV). Schedule variance will ultimately equal zero when the project is completed because all of the planned values will ultimately equal zero when the project is completed because all of the planned values will have been earned.

Formula: SV=EV-PV

These two values, the CV and SV, can be converted to efficiency indicators to reflect the cost and schedule performance of any project.

Cost performance index (CPI)

A CPI value less than 1.0 indicate accost overrun of the estimates. A CPI value greater than 1 indicates a cost under-run of the estimates. CPI equals the ratio of the EV to the AC. The CPI is the most commonly used cost-efficiency indicator.

Formula: CPI=EV/AC

Cumulative CPI (CPI^c):

The cumulative CPI is widely used to forecast project costs at completion. CPIC equals the sum of the periodic earned values (EV^c) divided by the sum of the individual actual costs (AC^c).

Formula: SPI=EV/PV

The earned vale technique in its various forms is a commonly used method of performance measurement. It integrates project scope, cost (or resource) and schedule measures to help the project team assess project performance.

Forecasting includes making estimates or predictions of conditions in the project’s future based on the information and knowledgeable available at the time of the forecast. As the project progresses, the forecasts are adjusted.

The earned value technique parameters of BAC, actual cost (AC^c) to date, and the cumulative CPI^c efficiency indicator are used to calculate ETC and EA, where the BAC is equal to the total PV at completion for a schedule activity, work package, control account, or other WBS component.

Formula: BAC=total cumulative PV t the completion

Forecasting technique parameters to assess the cost or the amount of work to complete schedule activities is called the EAC. Forecasting techniques also help to determine the ETC, which is the estimate for completing the remaining work for a schedule activity, work package, or control account. While the earned value technique of determining EAC and ETC is quick and automatic, it is not as valuable or accurate as a manual forecasting technique based upon the performing organization providing the estimate to complete.

ETC is based on the new estimate. ETC equals the revised estimate for the work remaining as determined by the performing organization. This more accurate and comprehensive completion for all the work remaining considers the performance estimate to complete all the work remaining and the performance or production of the resource to date. 

Alternatively, to calculate ETC using value data, one of the two formulas is typically used:

ETC based on atypical variances. This approach is most often used when current are seen as atypical and the project management team expectations are that similar variance will not occur in the future. ETC equals the BAC minus the cumulative earned value to date (EVC).

Formula: ETC= (BAC - EVC)

ETC based on typical variances. This approach is most often used when current are seen as typical of future variances. ETC equals the BAC minus the cumulative EVC (the remaining PV) divided by the cumulative cost performance index (CPIC).

EAC using a new estimate. EAC equals the actual costs to date (AC^c) plus a new ETC is provided by the performing organization.

Formula: EAC=AC^c + ETC

In this article, I have delved into the important points of project cost management. Without proper planning of cost management, deliverables may happen, but chances of over shooting the budget always remain. So it is very critical that we need to keep a strict vigil on various processes involved in estimation, budgeting and control in a project so as to ensure its completion within the allotted time frames and budget.