Cost Management Knowledge Area

6/21/2013 Carsten Howitz Project Management

The cost of a project should be planned, quantified and measured. The job of the project manager is to tie the cost to activities and resources and build the estimates accordingly.

Most projects start out with a high-level budget before we know the detailed costs. The project manager often gets a budget for the project. However, instead of blindly accepting the budget the project manager needs to review the scope of the work and the duration estimates created in the Time Management knowledge area in order to come up with a realistic budget. Budgeting by working from the detailed level is called a bottom-up approach and is much easier than working from the top down.

The overall recommended approach for detailed planning is to create the scope, then create the schedule and finally create the budget. In my opinion any other sequence will not make any sense.

This article will cover all the areas needed to successfully manage the cost of the project.

Cost Estimating

This process is part of the planning process group. This process is not only executed during the planning process but will be revisited many times during the project life cycle.

In order to be able to do any cost estimating we need to know the scope and the resource and duration estimating. Without that we won’t be able to do any cost estimations. There are many options for cost estimations.

Estimate Type Range
Order of Magnitude -50% to +100%
Conceptual -30% to +50%
Preliminary -20% to +20%
Definitive -15% to 20%
Control -10% to 15%

So which one should we use to create the estimate? It all depends on the need. In the beginning where we only have a high-level scope we will only be able to do an Order of Magnitude estimate and later when the scope is more detailed we can create a Definitive or even a Control estimate. The rule of thumb is that, the closer we are to spending money for an activity the more precise the estimate will be.

In order to do the estimate we will utilize the Project Management Plan, Project Scope Statement and the Work Breakdown Structure

Cost Budgeting

Many ask what the difference between estimating and budgeting is. Isn’t that the same? I agree that this can be confusing but a budget is also known as the cost baseline. It takes the cost estimate and maps it back to the dates on a calendar.

The cost baseline allows the customer to better plan for the expenses for this project including the cash flow. In order to be able to create the budget we must have the schedule developed and the cost estimating completed.

Most projects maintain some kind of financial reserve to protect against cost overruns. Typically projects will carry a 10-20% contingency reserve (or management reserve) that can be used for unforeseen events or risks

Cost Control

This process is part of the Monitoring and Control process group. This process is primarily concerned with cost variance. A cost variance can either be positive (good) or negative (bad). The process ensures that the cost stays on track and that any change is detected whenever it occurs.

Like so many other processes in the process framework, this process is revisited and executed many times during the project life cycle. Typically Cost Control is performed weekly during implementation where the project cost typically peaks, and monthly during the planning phase.

In order to determine how the project cost is performing we utilize Earned value Management. Please refer to my article on Earned Value Management for more information.

In most of my articles regarding project management I often say that the particular subject is important. However, Cost Management is extremely important simply because the customer is always very focused on price. Any price increase will be more obvious to the customer unlike other project management areas.

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