COST MANAGEMENT

SESSION 8
DR. KHALID AHMAD KHAN
PROJECT COST MANAGEMENT

Project Cost Management is primarily concerned with the cost of resources needed to
complete project activities.

The cost management planning is done early in the project planning phase and sets the
framework of the cost management processes so that performance will be efficient and
coordinated.

Project Cost management should consider the stakeholder requirements for managing
costs.
 How the costs be aggregated:
Each control account is
The work breakdown
Each control account has assigned a unique code or
structure (WBS) will be
a unique code account Cost is controlled at the account number(s) that
used to provide the
that links directly to the control account level. links directly to the
framework for the cost

COST
accounting system performing organization’s
management plan
accounting system

MANAGEMENT
PLAN
Variance thresholds for monitoring cost
performance may be specified to indicate an
agreed-upon amount of variation to be allowed
before some action needs to be taken.
Estimate cost of all activities required to complete
the work related to the project.

PROJECT COST
Estimates include all factors including manpower, ESTIMATE
material to be used, equipment required, facilities,
information technology required, etc., and factors
that may be related to inflation.

Basis of estimates (BoE): Basis of developing the

estimates that are used in the estimating process
should also be part of the output, so that there is
a clear understanding on how the costs were
derived. These should include assumption,
constraints, range of possible estimates, and
confidence level of estimates.
Cost estimates are best possible estimates of costs that are
developed on the basis of the information available at the
time when estimates are made.

As the time passes, accuracy of estimates will increase as PROGRESSIVE

more information will be known about the project.
ESTIMATION OF
COSTS
Cost estimating is an iterative process which goes on as the
project progresses

A estimate of a project in the conceptual phase could have

rough order of magnitude (ROM) estimate in the range of -
25% to +75%. However later as things become clearer, the
estimates could narrow to a range of -5% to +10%.
COST ESTIMATE TECHNIQUES

1. Expert Judgment
• Expert advice will be solicited for carrying out estimating of costs.

2. Analogous estimating
• Also know as Top Down approach for estimation.
• It is done by using values from similar projects and historical information available.
• The information is adjusted to the present conditions.
• The method is not very accurate, is less costly and can be done in shorter period of time.
COST ESTIMATE TECHNIQUES

3. Parametric estimating
• In this method parameters are used for developing the costs. E.g. cost per sq. ft., cost per cubic
meter of concrete, cost per ton of steel, etc.
• This method is more accurate and is used for making bill of quantities (BOQ ).

4. Bottom-up estimating
• This is the most accurate method for estimating costs.
• Costing is done for each individual work package separately and rolled up to the control account
and up the total cost of the project.
• This method is more time consuming, hence more costly.
COST ESTIMATE TECHNIQUES

5. Three Point Estimates

• This estimation method is also called from Program Evaluation and Review Technique (PERT).
• The objective is to reduce the bias in estimation by using 3 values, optimistic (O), pessimistic
(P), most likely (M).
• There are 2 equations that are used for calculating the estimated costs:
• Triangular distribution: (O+M+P)/3 and
• Beta distribution: (O+4M+P)/6
• Generally the beta distribution equations is used for estimation.
RESERVE ANALYSIS

1. Contingency reserves
• Contingency reserves are for uncertain events that are known. These are called known-unknowns.
• This means that you know that there could be unknown event in future. E.g. Rain in monsoons,
non-availability of manpower for construction during the cutting of wheat season, so you keep
some contingency in reserve for that event if it happens. If the event happens then the contingency
reserve is used.
• This contingency reserve is added to the cost baseline of project.
2. Management reserves
• Management reserves is kept by the management and are for unknown-unknowns.
• Management reserves are not part of the project cost baseline.
BUDGETING

• The process of aggregating the

estimated costs of individual
activities or work packages to
establish an authorized cost
baseline
• The project budget is developed
from the cost estimates and the
schedule. This is done by adding all
the costs of all work packages and
adding these together to form the
budget.
COST BASELINE
 Cost baseline is the project budget that has been approved.

COST BASELINE It does not include the management reserve.

After cost baseline is approved, any changes in the cost baseline can
only be done through Integrated change control process.

If management reserve are required to be used for any project work,

the change control procedure is used to get approval to move the
management reserve funds into the cost baseline. Justification may
be provided for this purpose.
Cost Baseline Step 3
development Management
Step 2 Reserve

Work package
Step 1 contingency
reserve
Activity
contingency
Total Budget

Amount
reserve
Cost Baseline
Including

Total
or
Control Project Mngt.
Work Account Budget for Reserve
Package cost Project
Activity cost estimate Manager
Estimates

Budget Components
COST BASELINE,
EXPENDITURES,
AND FUNDING
REQUIREMENTS
 Q&A
DRKHALIDKHAN.ORG