Project Cost Management Guide 2024

Introduction to Project Cost Management

Project cost management is the system of estimating, budgeting, and controlling fees all through the changing project lifecycle, with the goal of preserving fees in the authorized budget.

The successful projects step is:

- It transports the requirements and scope

- Its implementation quality is of a high standard.

- It's finalized within the schedule.

- It's completed within budget.

Therefore, project cost management is one of the main supporting keys of project management that works for relevant the domain, manufacturing, retail, technology, construction, and so on. It assists to create a financial baseline for the project management to make a benchmark of the current status of their project cost and realign the directions if required in the whole project lifecycle.

Importance of Project Cost Management

Project management is easy to understand for the whole project lifecycle. For real-life example. You have decided to cook a new dish at home. First thing is to set up the budget. Now you are aware that how much to spend on the dish. If it's required you might decide to cook some sub-dish for the main dish which works secondary.

In the same way, the main project is primary as a high-level and the sub-project is secondary as a sub-level. But the budget of expenses is different for both levels of project management. The Project manager's budget might create fault-finding decision making such as the best designer to hire who can finish the project end-to-end and find some useful elements to work for the smaller budget.

Without a re-set budget, it's impossible to get the expected results and it would lead the Project manager in an inaccurate direction. Large organizations work on multiple projects, and they find lots of changes in initial assumptions and additional unexpected cost problems further.

A project manager can implement efficient cost management practices by:

- A project manager sets intelligible expectations with stakeholders.

- Control scope creeps due to clarity established with the customer.

- Track progress and respond with corrective actions rapidly.

- Maintain scheduled margin, increase ROI and avoid devaluing the cost of the project.

- Initialize the data to benchmark for upcoming projects and track long-term cost trends.

Project Control Management Methods

Project cost management follows some important steps in the process. And the following are projected resource planning, cost estimation, cost budgeting, and cost control. It is possible for the projects to change the resources in the middle of the progress to force the budget to be adjusted.

Project Resource Planning

The first step in project cost management is project resource planning. It identifies the required resource to execute and complete the process. Examples of resources are experts such as employees and manufacturers and equipment such as clothing, material, and other specialized.

Resource planning is done at the beginning of the project lifecycle, and to begin any actual work in the project lifecycle till its end.

Work breakdown structures (WBS) need to keep it ready for the project manager to get the work started. It is important for the project manager to glance at each subtask in the WBS and the number of workers involved and what is material is needed to complete the task of the project lifecycle process. All this basic skill knowledge is required to become a Project manager.

It is possible for the project manager to come up with an accurate and complete inventory for all resources by adopting the task level where they already received input for future budget costs in the project lifecycle.

Few steps to consider in the process:

1) Examine the historical data-previous schedules and efforts before concluding sub-tasks and the corresponding resources.

2) Receive feedback from small and midsize enterprises (SMEs) team members and approach to work for the project by avoiding the past data to use.

3) Utilize the time on resource management required. This might impact cost estimation. And this resource would available to use in a project lifecycle schedule.

However, all the planning stages need to be accounted the project manager. For example, an organization that does not contain the relevant resource for the process and expects the contractor or the trainer to finish the process sooner would definitely impact the cost of the process.

Cost Estimation

Project management Cost estimation and budgeting is the process of evaluating the costs and gathering all the resources to execute the project. Basically, it performs on cost calculation.

Resource requirement - it helps to get the output from the previous step.

Cost of each resource - staff and vendor cost, material cost and etc.

Requirement of durations of each resource.

List of expectations.

Developing risk

Previous project costs and industry benchmarks

Reporting structures and the company’s financial health.

Most of these difficult steps involve cost management. The project manager needs to consider the following factors such as fixed and variable costs, overheads, inflation, duration, and value of the money.

There are two categories of employment. One is top-down and the other one is bottom-up.  Top-down works when the past costing data is available. The project manager usually works with the top-down project in which they have experience. Some organizations normally avoid using bottom-up which they do not have much experience with.

The cost estimation world is a decision enabler to do planning stages and setting other project factors and etc. in many places project team brings multiple solutions for the project budget and cost management to help them to decide where it's supposed to use. In the same way, costing methodologies uses activity costing, job costing, and life costing to perform better in cost management during the whole project lifecycle.

The project lifecycle works better for the project to complete the end-to-end process. In many IT projects, the cost of maintenance is ignored often. But project lifecycle costing takes long-term account costing till the end of the project's lifecycle. It works similarly in manufacturing projects to reach the future goal by servicing the cost and replacing the charges.

It is possible for the estimation team to evaluate and reduce costs. And it helps the project for value engineering cost to bring down.

Cost Budget Project Management

Cost budgeting is part of estimation and its own separate process. It is the process of assigning the cost to the project and works for tasks or modules, for a specific time period. The budgets eventually arrange the places to manage the unexpected costs.

Let’s say for example if the project runs for one or two years. The project manager considers deciding the first two-quarters of the results of the budget allocation and the time of the function. if the results are better they even use the same method in the future or else they might not consider the same procedure for upcoming projects. Basically, the project manager decides to discuss the previous section's estimation methods to use the WBS.

Budgeting creates a cost baseline for project costs to measure and evaluate the performance of the project. It helps the project to calculate the budget otherwise it is difficult to measure midway. It creates an opportunity to access and evaluate the project and how much budget needs to be released in the future.

Initially, the project manager would have a limited financial pool just to reach the set of targets accordingly. It works similarly to building the foundation to complete the project within a budget and save more.

Cost Control

It is the process of measuring the gap such as baseline, increasing the budget, or recusing the scope of work. In the project life cycle, cost control works as a continuous process and it receives the measuring report clearly and on time.

Earned value management (EVM) is one of the most popular methods of measuring cost performance.

At the end of the week, measure the progress of task X and find that it’s 25% complete. Let’s see how to assess the track to meet the task budget.

First, a project manager calculates the planned value for this task that is decided in the planning stage. For example, task X has a budget of $6000 and is expected to be 50% complete by the week.

Planned value (PV) of the task X by the week = $6000 * .5 = $3000

Earned value (EV) of the task X by the week = $6000 * .25 = $1500

Now determine the actual cost (AC) of the work, and other variables such as equipment and material cost (say $500).

Schedule variance = EV - PV = $1500 - $3000 = -$1500.

Cost Variance = EV - AC = $1500 - $500 = $1000.

The negative schedule variance indicates that the task is going back, and the cost variance indicates that the task is under budget. By handling the multi projects task, cost control can prove clearly to make a decision of required responding fast the solution. Therefore cost control clearly shows, how to control cost in project management using the above formula method.

Tools and Techniques to Estimate Project Cost

Budget estimation exceeds the project cost. Much false estimation leads to the project cost is down. There are some tools and techniques involved in project cost estimation. It is important to access the activities of the entire project from the initial stage of the project.

There are many tools and techniques used in projects and explain how to manage cost in project management, let’s discuss a few of them:

Expert Judgment:

The expert's comment takes the first step in estimating the project cost. Hence they have prior knowledge of similar kinds of projects and give valuable suggestions from their experience. And they can also advise using various tools and techniques for any kind of project.

Analogous Estimation:

It is important to visit the previous project that is completed by the organization to estimate the cost of the project. The analogous estimation technique uses the parameters such as scope, budget, duration, size, weight, and complexity of the previous projects. It measures the basic estimation of the current project. This technique is economical and less time-consuming. The exact estimation is lower than the other estimation technique that is completely based on historical data. It is applicable for the part of the project or the entire project techniques. 

Parametric Estimation:

The parametric estimation uses an algorithm to calculate the cost and activity to consider the historical data and the project variables. This technique is applicable for the complete project and the activities of other estimation techniques this works better for the technique to estimate the project cost management.

Bottom-Up Estimation:

The bottom-up estimation technique works for lower-level estimation and with the help of WBS, it creates higher-level estimation. In bottom-up estimation where the project manager prefers to work by having the previous project's knowledge.

Three-Point Estimation:

PERT- (Program Evaluation and Review Technique) refers to the technique of three-point estimation to take a risk in cost management.

There are three review technic and program evaluations in estimations:

M - Most likely: The realistic resources are collected to achieve the expected productivity.

O - Optimistic: based on the best-case scenario of estimation.

P -Pessimistic: based on the worst-case scenario of estimation.

Based on the above assumption, the expected time duration is calculated using two basic formulas.

Triangular Distribution - (O+M+P) / 3

Beta Distribution - (O+4M+P) / 6

Cost of Quality:

There are two types of cost quality is available. One is the cost of conformance that uses for budget requirements. And the other one is the cost of non-conformance that works for internal and external failures. Cost quality works equally to the cost of conformance and non-conformance. The PMP test cost 2022 is from $405 to $555. And the fee cost differs for the PMI member and Non-PMI members.

How to Manage Cost in a Project Management Software?

Cost management is the other aspect of project management and works with complex variables. The use of project cost management software is to simplify the process significantly.

Few advantages of using project cost management software:

Automation helps to analyze the quantity estimation and measurement to avoid manual errors.

Monitor continuous data across planning, estimation, budgeting, and control enable to receive a quick response.

Cost software helps the project manager to make a decision easier to evaluate the alternative solutions using scenario forecasting.

UIs and dashboards receive clear and easy reports.

With the help of cost software, the complexity of the geographical locations is simplified easily.

Group decision-making technique

It is better to involve those who are going to perform technical work, it helps to get more details on the work and estimate more accuracy. It depends on the nature of the product. Estimates never show the exact figure; it always displays the probable range. In the initial stage, the preliminary estimate ranges from -15% to +50%, and the magnitude estimation is between -25% to +75%. And the budget estimate falls in the -10% to +25% ranges.

Conclusion

By approaching cost control; systematically and attentively it is possible to increase the project lifecycle to success. It is necessary to follow the above steps to reach the project without any delay. Most experienced project managers follow these basic strategies. And it becomes easier to complete the project lifecycle within the budget and on time.

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