Cost

All About Project Cost Management

By Truong, Jaquille, Tyler, and Kelsey

Planning Cost Management

When getting started with project cost management, the first thing to consider is how the cost of the project will be managed. Planning for cost management will include:

Level of accuracy sets guidelines for rounding costs.
Unit of measure describes which unit of time will be used to describe cost measurements.
Organizational procedure links are unique codes that are assigned components in the work breakdown structures that relate to the project cost accounting that project teams need to understand and use properly.
Control thresholds are the amount of cost that is allowed to deviate before something must be done.
Rules of performance measurement outline the rules of how measurements are taken and define those rules.
Reporting formats would describe how to format the cost reports and how frequently it should be reported.
Process descriptions describes how all of the cost management processes will be performed.

Estimating Costs

The next plan of action is for one to determine the estimation cost. The cost estimation for every project activity is developed alongside the tools, equipment, materials, etc. Based on the group's determined estimation, the overall budget for the project will be estimated. During each phase of the project's life cycle, as the project scope is defined, the cost estimating process is generally applied. Typical forms of cost represented during this process are:

Fixed cost: Defined as a business cost that collates to rent with a continuous service of a particular product. Some examples include:

Rent
Property taxes
Weekly payroll
Car Insurance

Material/Variable cost: The form of an expense that varies in a certain amount depending on the volume of the goods and services developed by a business. Some examples include:

Packaging cost
Car gas
Sale Commission
Raw materials

Semi-variable cost: The combination of both fixed cost and a variable cost all in one.

Cell phone charges
Internet service charges
indirect labor/materials

Total cost: The sum of all costs listed above being that of the fixed, variable, semi-variable for a specific level of output.

Building lease

Direct costs can be easily traced down to the designated unit of the product. This can be some direct piece of rate wage or commission.
Indirect cost: The opposite of direct means that the cost cannot be traced to a product unit. This can be some insurance or payroll.

Determining the Budget

So now we must determine the budget for the entire project. This step allows the user to understand the cost estimate and allows the project manager to divide the funds into the appropriate areas. The main goal of this is to produce a baseline for measuring project performance and to estimate the funds needed for the project. This process can change a lot of things. This process can cause items in the project documents update to be removed, added, or modified based on the budget, the overall scope statement and project schedule can be changed as well. Steps include

Finding out about the budget,
Creating a cost baseline
Creating the control accounts
Determining the Work package cost estimates
Determining the Activity cost estimates

Controlling Costs

By now you've already learned about planning cost management, estimating costs, and determining the budget, and now we have finally reached the last aspect of project cost management which is controlling costs. Controlling costs is basically defined as the aspect of project cost management that deals with controlling any changes to the project's budget. The inputs for controlling costs includes things such as the project management plan and work performance data, while the outputs include things such as the work performance information, cost forecast, and project document updates. Various tools are used in this aspect of cost control such as data analysis and project management information systems. However, one specific project performance measurement technique that is used is Earned Value Management.

Project managers, and the teams they work with, can use this technique to predict and determine if the project is meeting not only the scope and time goals accurately, but also the cost goals. This can be calculated by entering information (which comes from a WBS) and then comparing it to the baseline that was given. With Earned Value Management three values are calculated based on a project WBS:

Planned value

Planned Value is the approved budget assigned to scheduled work. Ideally, you would calculate the Planned Value before continuing with any work because this would also serve as a baseline

Planned Value can be used to calculate not only Schedule Variance, but Schedule Performance Index as well.

ACtual Cost

Actual Cost is the total cost that is accrued for the work done on an activity. In the simplest of terms, it is how much money that you have spent to date.

Actual Cost is very easy to find because it is simply the amount that has been spent.

Earned Value

Earned Value is the value of the work that has been completed to date. Each of the three elements of Earned Value Management are very important, however, Earned Value is slightly more significant because it shows you the value that has been earned from the money that has been recently spent.

Earned Value can be calculated by taking the percentage of completed work and multiplying it by the project’s budget.

Earned Value Formulas

Earned Value Calculations Example

Although many of this may seem very confusing, looking at an example of each of the three aspects of Earned Value Management and how they're applied can help to clear things up. The image on the right is an example of earned value calculations after one week for one specific activity, and the one on the left shows the formulas used to calculate each of the specific costs. There are a few terms that are new and haven't been discussed so let's go over them:

Cost Variance can be found by subtracting the actual cost from the earned value.
Schedule Variance can be found by subtracting the planned value from the earned value.
Cost Performance Index (CPI) is found by dividing the earned value by the actual cost. This is used to determine the projected cost for completing a project. If the percentage for this is under 100%, then the project is over budget. However, if the percentage is over than 100% , then the project is under budget
Schedule Performance Index (SPI) is found by dividing the earned value by the planned value, and it can be used to determine how long it will take to complete the project. If the percentage for this is over 100%, then the project is ahead of schedule, and if it's lower than 100%, then the project is behind schedule.

Sources

Schwalbe, Kathy. Information Technology Project Management. Cengage, 2019.
says:, Kevin Molina, et al. “Planned Value (PV), Earned Value (EV) & Actual Cost (AC) in Project Cost Management.” PM Study Circle, 18 Aug. 2020, pmstudycircle.com/2012/05/planned-value-pv-earned-value-ev-actual-cost-ac-analysis-in-project-cost-management-2/.

Page updated

Report abuse