Project Cost Management

To build upon your understanding of the importance of negotiation and conflict resolution within Project Politics, we will discuss how to manage project costs and financials that are essential for the development of your organization's project.

Click on the video below to begin 'Module 5: Project Cost Management'. Click "CC" on the bottom-right corner of the video to view closed captions or alternatively, read the transcript below the video.

When you complete this module, scroll to the bottom of this page for further instructions.

Project Cost Management Defined

After watching the video you will have learned that project cost management is a critical project element, and meeting project budgets is a broad objective of all projects.

Project Cost Management is a series of activities for estimating, allocating, and controlling costs within the project.

It allows determining and approving a budget for the project and controlling spending. For example, in construction project cost management it is vital to estimate cost of materials, equipment, salary of workers, etc. In IT project cost management it is critical to estimate cost of software development, salary of IT staff, etc.

Key Terms

Here are some key terms that are important to know when working with project cost management

• Cost overrun: This is the actual cost that exceeds the estimated cost in the budget, also known as a cost increase or budget overrun.

• Estimation: In a project context, estimation is the way to make accurate budgets or timelines for a project. There are various techniques in estimating to help you get the most accurate predictions of cost and time.

• Actual expenditure: The sum of costs paid from a budget.

• Analogous estimating: This technique uses historical project data to prepare time and cost estimates. It is considered the most inaccurate estimation technique.

• Bottom-Up estimating: This calculation computes total time and cost estimates for projects by preparing individual estimates for each of a project’s activities and adding them together. Bottom-up estimating is considered the most accurate estimation technique.

• Cost benefit analysis: A Cost benefit analysis is used to weigh project costs against anticipated tangible project benefits.

• Opportunity cost: The opportunity cost of a particular course of action is the loss of potential gains from all alternative courses of action.

• Total cost of ownership (TCO): The total cost of ownership estimates the sum total of direct and indirect costs incurred in the purchase, operation, and maintenance of an asset through its life.

Types of Project Costs

There are several types of project costs. The following three are the most commonly used in project management.

• Variable and fixed: Variable costs vary based on the amount of output, while fixed costs are the same regardless of production output. Examples of variable costs include labor and the cost of raw materials, while fixed costs may include lease and rental payments, insurance, and interest payments.

• Direct and Indirect: Direct costs are costs that can be directly attributed to a specific project, e.g. labor, raw materials, and equipment rental costs. Indirect costs are costs that cannot be directly attributed to a specific project, e.g. management, general administration, rental and utility costs.

• Opportunity: Opportunity cost is the loss of potential future return from the second best unselected project.

Estimation Process

The process of cost estimation determines an amount of resources required to accomplish project activities. It involves the approximation and development of costing alternatives to plan, perform and deliver the project.

It focuses on finding and allocating optimal expenses for the job.

The process is vital to determining whether the project will be successful, whether the goals and objectives will be achieved and whether the deliverables will be produced: the scope is developed and on-budget and on-schedule; the quality expectations are met; and the expected benefits are received by stakeholders

Cost Management Plan

This plan details how project costs will be planned, funded, and controlled. It is a part of the project management plan.

To do so, develop the project scope and execution strategy. This provides the basis for the integrated cost management process, which also covers the subject of schedule planning, cost estimating and budgeting, resource planning, value analysis and engineering, risk management, and procurement planning.

There are four steps to know for cost management:

1. Resource planning

2. Cost estimating

3. Cost budgeting

4. Cost control

Problems that can occur with cost estimates

Like other variables in project management, there can be problems that can occur. Some problems in cost management include the following:

• Quantifying cost impacts

• Resource constraints

• Quality of available data

• Consistency

What’s Next?

Now that you have gained an understanding of what is involved in Project Cost Management, the next lesson will guide you through the process of utilizing decision-making standards and procedures to ensure project success. Before you move on to the next module, let's take a quick quiz!

Click the button in the bottom-right corner of the webpage labeled "Module 5 Quiz" to proceed.