Project Cost Management 

What is it and what are the principles

Introduction

If you have ever thought about building your dream house one day from the ground up, you should know that it takes good planning to make that happen. Someone is defining the scope of the project by defining the tasks, outputs, and deadlines. They also build a schedule to keep everyone on track to try and make the project run smoothly and satisfy the customers wants and needs. In alignment with the scope and schedule, this person will also make sure that they are staying in the budget approved by the client. This is where project cost management takes place. These requirements are what you will have to perform as a project manager. In this article, I will help you understand what project cost management is and the basic principles of cost management.

What is Project Cost Management?

As a project manager, cost management is an important step in the cycle of a project. You and the project team must know the approved budget of the stakeholders and be able to control and manage costs for a project to be successful in this step. Project cost management is the process of estimating, budgeting and controlling costs throughout the project life cycle, with the objective of keeping expenditures within the approved budget (Hexagon). Be sure that your project is well defined, has an accurate schedule, accurate cost estimates, and a realistic budget that you were involved in approving

1. Planning Cost Management. 

This is the development of the cost management plan where you determine policies, procedures, and documentation that will be used for planning, executing, and controlling project cost (Schwalbe).

2. Estimating Cost. 

You estimate the cost of resources for a project to be completed. In this process you will generate activity cost estimates, basis of estimates, and project documents updates (Schwalbe).

3. Determining the Budget. 

This process involves allocating the overall cost estimate to individual work items to establish a baseline for measuring performance. This gives you a cost baseline, project funding requirements, and project document updates (Schwalbe).

4. Controlling Costs.

This process involves controlling changes to the project budget. The main outputs of the cost control process are work performance information, cost forecasts, change requests, and project management plan updates, and project documents updates(Schwalbe).

The Basic Principles of Cost Management

A couple of the first principles are profit/ profit margin. Profit is the amount of money made minus the amount of money spent. For a company to increase their profits, they will either increase revenue or decrease expenses. If possible, they will try to do both. Profit margin is the ratio of profits to revenue. If you have a one hundred dollar revenue and a two dollar profit, then you have a two percent profit margin. 

The next principle is life cycle costing. Life cycle costing is the overall view of the cost of a project in its life cycle. As a project manager, it helps you develop an accurate path of a project’s financial costs and benefits. Life cycle costing considers the total cost of ownership, or development plus support costs, for a project (Schwalbe). If a project will take a year to finish but it will be implemented for seven years, then the life cycle of that project is seven years. When you are making financial decisions for a project, get assistance from financial experts for the life cycle and reference it often. 

Cash flow analysis is a method for determining the estimated annual costs and benefits for a project and the resulting annual cash flow (Schwalbe). When selecting a project to invest in, management will consider cash flow as consumers will not buy if their pockets are low. You will determine net present value by conducting cash flow analysis.

Tangible and intangible cost and benefits determine how well an organization can define the estimated costs and benefits for a project (Schwalbe). Tangible costs and benefits are easy to measure in dollars, while intangibles are difficult to measure in dollars. 

Direct costs are directly related to the creation of products or services for a project. Direct costs can be controlled and should be one of your focuses. An example of direct costs are the costs of hardware and software and the salaries of the people working on the project. Indirect costs are indirectly related to performing the work. This could include water, electricity, storages, paper towels, etc. As a project manager, you should not focus on indirect costs since you cannot control them. 

Money that has been spent in the past is called sunk cost. Do not include sunk costs when deciding on projects to invest in or continue. Instead of falling into a trap of spending more money on a failing project, let the sunk cost be forgotten. 

Learning curve theory is when the repetition of making a product eventually lowers the cost of production. A product will always be more expensive when it is first produced. This theory can also refer to the time it takes for a product to be produced. The more experienced workers get, the less time it takes for products to be completed.

Conclusion

After learning the concept of project cost management and the principles, you should have a basic understanding on why cost management is important. As a project manager you have to be able to bridge the gap between technical and financial terms to executives and stakeholders. Consider these principles and the many more that you can find to make an effective cost management plan for every project you take on. 

Resources

Information Technology Project Management Textbook, e9, Schwalbe, Kathy.

"Project Cost Management: Steps, Basics and Benefits" 

https://www.ecosys.net/knowledge/project-cost-management/

"Life Cycle Cost Analysis"

https://corporatefinanceinstitute.com/resources/accounting/life-cycle-cost-analysis/