The PMI Training Series: Understanding Cost Management in Project Management
Out of all the responsibilities a project manager has, in the way of planning a project, scheduling processes, commencing production and delivering the finished product; cost management is ongoing and constant. In fact, it is an essential element of any project, regardless of the financial backing and available resources.
Alongside time management and quality/scope affirmation, cost management makes up the core of the project management function set. Throughout the product’s life cycle, cost management remains a steady point if focus, being the one fac6or that ultimately determines how successful and seamless the other aspects of the project, and the final product or service, are going to be. After all, the ‘bottom line’ is always important for the client/owner.
In this article, we will take a look at some of the basic functions of a project manager, while pursuing cost management, as well as the processes and steps taken to do so, towards Project Cost Management.
Cost Management Elements
The project manager, while performing cost management, at any stage of the product’s life cycle, is responsible for the following:
- Cost Control
All of the above serve a singular purpose within the project management scope, and that is to reduce the costs of production, and to stay within the planed and approved budget. Although different cost management activities are performed at different stages of the life cycle, there is a consistent effort to reduce costs.
Project Cost Management Steps
Any type of project, be it a product or service, has to go through a project management phase. This begins with a discussion between the client and the project manager, in which the specifics are exchanged, right before commencing production.
Following are the processes that take place during this initial stage.
1) Planning the Resources
Resources can vary in form and type, however, regardless of their nature, they are integral to the existence of the project. At the very start, these resources (financial, technical, human etc.) need to be determined, in terms of quantity and specification. Project managers can utilize previous project information, external data regarding similar projects, and/or WBS (Work Breakdown Structures), to determine how many and which physical resources the project will require.
The required labor, time, materials, equipment etc. will comprise of the resource pool, to be provided by both the client and production company/firm. Once you, as a project manager have finalized the type and amount of resources needed, the next stage can begin.
After the resources have been planned, their associated costs will automatically be summarized. There are a number of cost estimation methods that a project manager can use, to determine the project activity costs. How much information regarding the resources is available, will determine the method of cost estimation to be used.
On the surface and preemptively, current project costs can calculated using the following elements:
- Market costs of technical resources and equipment.
- Complete cost reports of previous projects, if available.
- Cost reports of similar projects, as performed by similar companies with equivalent resources.
- Parametric calculation models, which represent the characteristics of the project mathematically.
The cost estimates can further be refined when more information becomes available as the project moves along. Information coming from the human resources will be most valuable in this respect.
All of the above results in a unit cost estimate that is detailed and accurate. To cope with any uncertainties in the estimates, and to make sure that the project is not derailed by any sudden costs as a result of unclear estimates, project managers can reserve some cost as a security. The exact amount of cost that needs to be reserved will be determined through escalation and formation of contingencies.
3) Creating the Budget
The project schedule, along with the cost estimates, can be used to create the budget for the project. The budget is an overview of the total and periodic costs that the project will incur. On the surface, the cost estimates appear the same as the total budget of the project, once combined. This is not so, since both represent different factors.
The budget differs from the cost estimates in the way that the latter distributes the costs over the entire time period, during which the costs are incurred. On the other hand, the former alludes to the individual cost of every activity or work package.
Project Cost Control
Although cost control can be considered the next step after creating the budget, it is a process that continues from the start to finish of the project life cycle. Cost control entails measuring flux in the baseline cost, and when needed, taking the appropriate corrective action, so that the actual cost of the specific process does not exceed the allocated finances. It also means reducing the incurred costs through effective process streamlining, automation etc.
There are several software-based cost control tools available for project managers to control the total project costs, and keeping the production within budget. Additionally, PMI training can be a major assistance for prospect and active project managers looking to conclude projects par excellence.