PROJECT MANAGEMENT CYCLE:PROJECT COST MANAGEMENT

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PROJECT COST MANAGEMENT
Processes

Project cost management involves four processes:

1. Resource planning

2. Cost estimating

3. Cost budgeting

4. Cost control

These processes are designed to provide an estimate of the cost required to complete the project scope, develop a budget based on management policies and strategy, and ensure that the project is completed within the approved budget.

Description

To complete the project activities, different resources are required. Labor, equipment, and information are examples of resources required to perform in-house activities, while money is required for out- sourcing. The estimated amount of required resources as well as the timing of resource requirements are based on the activity list and the schedule. Resource allocation is performed at the lowest level of the WBS—the work package level—and requirements are aggregated to the project level and the whole-organization level. A comparison of resource requirements and resource availability is the basis of finite resource-allocation procedures (models) that assign available resources to projects and activities based on management’s strategy and priorities. Resource planning results in a detailed plan specifying what resources are required for each work package. Applying the resource rates to the resource plan and adding overhead and outsourcing expenses allows a cost estimate of the project to be developed. The cost estimate is the basis for budgeting. Based on the schedule, cost estimates are time phased to allow for cash flow analysis. Furthermore, additional allocations are made, such as the management reserve required to buffer against uncertainty. The resulting budget is the baseline for project cost control.

Due to uncertainty, cost control is required to detect deviations and decide how to react to such deviations and change requests. The cost-control system is based on performance measures, such as actual cost of activities or deliverables (milestones) and actual cash flows. Changes to the baseline budget are required whenever a change in the project scope is implemented.

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