PROJECT COST

MANAGEMENT
Prepared by:

AR. RYAN MARTIN C. DE GUZMAN, M. Arch, RMP

PROJECT COST MANAGEMENT/ project budgeting includes the
processes required to ensure that the project is completed within
the approved budget
The following major processes are:

1. RESOURCE PLANNING – people, equipment, materials and

quantities of each to be used to perform project activities.
2. COST ESTIMATE – developing an approximation (estimate) of the
costs of the resources needed to complete project activities.
3. COST BUDGETING – allocating the overall cost estimate to
individual work activities. Relating cost estimates to schedule and
producing time-phased cost and cash flow projections.
4. COST CONTROL – controlling changes to the project budget.
Controlling cost in relation to schedule and changes to the project
budget.
 •These processes interact with each other and with the
processes in the other knowledge areas as well. Each
process may involve effort from one or more individuals
or groups of individuals, based on the needs of the
project. Each process generally occurs at least once in
every project phase.
•Project cost management is primarily concerned
with the cost of the resources needed to complete
project activities. However, project cost management
should also consider the effect of project decisions on
the cost of using the project’s project.
•Project cost management should consider the
information needs of the project stakeholders – different
stakeholders might measure project costs in different
ways and at different times.
RESOURCE PLANNING involves determining what
physical resources (people, equipment, and materials) and what
quantities of each should be used to perform project activities. It
must be closely coordinated with cost estimating. For example:
 A construction project team will need to be familiar with local
building codes. Such knowledge is often readily available from
local sellers. However, if the local labor pool lacks experience
with unusual or specialized construction techniques, the
additional cost for a consultant might be the most effective way
to secure knowledge of the local building codes.

Assigning resources to activities enables resource histograms to

be constructed. By plotting resource needs, for example
manpower requirements, against time, it is easy to see when
specific resources are overallocated and in which periods the
available resources are underutilized.
Inputs to Resource Planning
1. Work breakdown structure (WBS) – identifies the project deliverables and
processes that will need resources, and thus is the primary input to resource planning.
Any relevant outputs from other planning processes should be provided through the
WBS to ensure proper control.
2. Historical information – information regarding what types of resources were
required for similar work on previous projects should be used if available
3. Scope statement – contains the project justification and project objectives, both
of which should be considered explicitly during resource planning.
4. Resource pool description – knowledge of what resources are potentially
available and necessary
5. Organizational policies – the policies of the performing organization regarding
staffing and the rental or purchase of supplies and equipment must be considered
during resource planning
6. Activity duration estimates – Good estimates of activity duration’s are crucial in
project scheduling. They underpin all the outputs of the scheduling process, for
example the estimated project duration, the critical path, and the schedule baseline.
The project manager and team members have to agree on a time estimate for every
activity in the project.
There are three ways to estimate activity durations:
1. Use historical data. Experience is a good predictor of future
events. The more historical data that is available for an activity, the
easier it is to predict its duration for the current project.
2. Time the activity. It may be possible to do a trial run of an
activity and establish an estimate based on the results. For example,
if a design activity is repeated ten times in the same project, it may
take a month to do the first time, three weeks to do the second
time, and by tenth time the design team may reduce it to four or
five days. Learning curve charts can be used to help correct for this.
3. Use a probabilistic method. If an activity has never been done
before and cannot easily be tested before the project, then a
number of estimates can be arrived at using expert judgement or
simulation techniques and a probability assigned to each one. A
frequently used probabilistic method is the weighted average
technique. This method can be used in any situation where
significant uncertainty exists.
Tools and Techniques for Resource Planning
1. Expert judgment. Expert judgement will often be required to assess the
inputs to this process. Any group may provide such expertise or individual
with specialized knowledge or training and is available from many sources
including:
 Activity owners (the people who will do the work during project
implementation)
 Knowledge workers from other units within the performing organization
 Consultants
 Professional and technical associations
 Industry groups
2. Alternatives Identification
3. Project Management Software. Project management software has the
capability to help organize resource pools. Depending upon the sophistication of
the software resource availability and rates can be defined, as well as resource
calendars.
Example: Primavera, Microsoft Project, and Excel
Outputs from Resource Planning

1. Resource Requirements. The output of the resource

planning process is a description of what types of
resources are required and in what quantities for each
element, the lowest level of the WBS. Resource
requirements for higher levels within the WBS can be
calculated based on the lower-level values. These
resources will be obtained either through staff acquisition
or procurement.
COST ESTIMATING involves developing an approximation
(quantitative assessment) of the costs of the resources needed to
complete project activities.
• Costs must be estimated for all resources that will be
charged to the project. This includes, but is not limited to, labor,
materials, supplies and special categories such as inflation
allowance or management reserve. Cost estimates often benefit
from being refined during the course of the project to reflect
additional detail that becomes available as time goes on.
• When a project is performed under contract, care should
be taken to distinguish cost estimating from pricing. Cost
estimating involves developing an assessment of how much will
it cost the performing organization to provide the product or
service involved.
• Costs estimating includes identifying and considering
various costing alternatives.
Inputs to Cost Estimating
1. Work breakdown structure. It is used to organize the cost
estimates & to ensure that all identified work has been estimated. A
WBS can be used to help allocate responsibilities to the project
participants, create a schedule and perform a through assessment of
project risks. It is also a top-down, deliverable-oriented representation
of all areas of work involved in a project.
2. Resource requirements. Resource requirements are described in
Section 1.1.3.1
3. Resource rates. The individual or group preparing the estimates
must know the unit rates (e.g. staff costs per hour, bulk material per
cubic yard) for each resource to calculate project costs. If actual rates
are not known, the rates themselves may have to be estimated.
4. Activity duration estimates. This will affect cost estimates on
any project where the project budget includes an allowance for the cost
of financing (i.e. interest charges).
5. Estimating publications. Commercially available data on cost
estimating.
6. Historical information. Information on the cost of any categories
of resources is often available from one or more of the ff. sources:
o Project files
o Commercial cost-estimating databases
o Project team knowledge
7. Chart of accounts. A chart of accounts describes the coding
structure used by the performing organization to report financial
information in its general ledger.
8. Risks. The project team considers information on risks when
producing cost estimates, since risks (either threats or opportunities)
can have significant impact on cost. The project team considers the
extent to which the effect of risk is included in the cost estimates for
each activity.
Tools & Techniques for Cost Estimating
1. Analogous estimating
Also called top-down estimating; means using the actual cost of a
previous, similar project as the basis for estimating the cost of the
current project. Analogous estimating is a form of expert judgment.
quantifiable, less costly that other techniques, but it is generally less
accurate.
2. Parametric modeling
Involves using project characteristics (parameters), such as weight,
volume, lines of software code and so on, to predict project costs.
Models may be simple or complex. Both the cost and accuracy of
parametric models vary widely. They are most likely to be reliable when
the historical information used to develop the model is accurate. The
characteristics are readily quantifiable, and it is scalable (that is, it works
for a large project as well as small ones). Insurance companies use
parametric estimating techniques based on the area of ‘living space’ to
estimate the cost of rebuilding houses.
3. Bottom-up estimating/ Definitive estimating
This technique involves estimating the cost of individual activities or
work packages, then the summarizing or rolling up the individual
estimates to get the project total. The cost and accuracy of bottom-
up estimating are generally higher than for other techniques. The
project management team must weigh the additional accuracy
against the additional cost. Building contractors use bottom-up
estimating to prepare detailed bills of quantities before tendering
for work.
4. Computerized tools
Such as project management software, spreadsheets &
simulation/statistical tools, are widely used to assist with cost
estimating.
5. Other cost estimating methods
For example, vendor bid analysis.
Outputs from Cost Estimating
1. Cost estimates (Cost Estimating Worksheets)
Quantitative assessments of the likely costs of resources required to complete project
activities; may be presented in summary or in detail.
2. Supporting detail
Should include the following:
• A description of the scope of work estimated; often provided by a reference to the
WBS
• Documentation of the basis for the estimate; i.e., how it was developed.
• Documentation of any assumptions made.
• An indication of the range of possible results; for example, $10,000 ± $1,000 to
indicate that the item is expected to cost between $9,000 & $11,000.
3. Cost Management Plan
The cost management plan describes how cost variances will be managed (e.g. different
responses to major problems than to minor ones). A cost management plan may be
formal or informal, highly detailed or broadly framed, based on the needs of the project
stakeholders. It is subsidiary element of the project plan.
COST BUDGETING involves allocating the overall cost
estimates to individual activities or work packages to establish a
cost baseline for measuring project performance. Reality may
dictate that estimates are done after budgetary approval is
provided, but estimates should be done prior to budget request
wherever possible.
Inputs to Cost Budgeting
1. Cost estimates (Cost Estimating Worksheets)
2. Work breakdown structure
3. Project structure
Planned start & expected finish dates
4. Risk Management Plan
Includes cost contingency which can be determined
on the basis of the expected accuracy of the estimate.
Tools & Techniques for Cost Budgeting

1. Cost budgeting tools and techniques

The tools & techniques described previously for
developing project cost estimates are used to
develop budgets for activities or work packages as well.
Outputs from Cost Budgeting

1. Cost baseline (PMBOK).

The cost baseline is a time-
phased budget that will be
used to measure & monitor
cost performance on the
project. It is developed by
summing estimated costs by
period & is usually displayed in
the form of a s-curve as
illustrated in FIG.7-2.
COST CONTROL is concerned with:
a) Influencing the factors that create changes to the cost
baseline to ensure that changes are agreed upon,
b) Determining that the cost baseline has changed, and
c) Managing the actual changes when and as they occur

Cost control includes:

 Monitoring cost performance to detect & understand variances from plan.

 Ensuring that all appropriate changes are recorded accurately in the cost
baseline.
 Preventing incorrect, inappropriate, or unauthorized changes from being
included in the cost baseline.
 Informing appropriate stakeholders of authorized changes.
 Acting to bring expected costs within acceptable limits.
Inputs to Cost Control
1. Cost baseline. The cost baseline is described in Section 3.1.3.1
2. Performance reports
Provide information on project scope & cost performance, such as which
budgets have been met & which have not; may also alert the project team
issues that may cause problems in the future.
3. Change requests
May occur in many forms:
 Oral or written
 Direct or indirect
 Internally or externally initiated
 Legally mandated or optional
 Changes may require increasing the budget or may allow decreasing it.
4. Cost management plan. The cost management plan was described
previously
Tools & Techniques for Cost Control
1. Cost change control system
Cost change control system defines the procedures by which the
cost baseline may be changed. It includes the paperwork,
tracking systems, and approval levels necessary for authorizing
changes.

2. Performance measurement
Performance measurement techniques help assess the
magnitude of any variations that do occur. Earned Value
Management (EVM) is especially useful for cost control. An
important part of cost control is to determine what is causing the
variance & to decide if the variance requires corrective action.
3. Earned Value Management (EVM)
3 independent variables:
3.1 Planned value – the physical work schedule to be performed, including
the estimated value of this work (previously called the Budgeted Costs of Work
Scheduled, BCWS), as compared against;
3.2 Earned value – physical work actually accomplished, including the
estimated value of this work (previously called the Budgeted Costs of Work
Performed, BCWP);
3.3 Actual cost incurred – to accomplish the Earned Value; the relationship
of (2) Earned Values less (1) Planned Value constitutes the Schedule Variance
(SV). The relationship of (2) Earned Value less (3) Actual Cost constitutes the
Cost Variance (CV) for the project.

CV is the difference between actual expenditure and the earned value:

CV = BCWP – ACWP
ACWP means Actual Costs of Work Performed. A positive CV indicates a lower
actual cost than budgeted for the control period, while a negative CV
indicates a cost overrun.
Outputs from Cost Control
1. Revised cost estimates
Modifications to the cost information used to manage the project.
Appropriate stakeholders must be notified as needed.

2. Budget updates
Changes to an approved cost baseline.

3. Corrective actions
Anything done to bring expected future project performance in
line with the project plan.
4. Estimate at completion (EAC) (Cost Forecast – PMBOK)
Forecast of likely total projects costs based on project performance & risk
quantification.

5. Project closeout
Processes and procedures should be developed for the closing or canceling
of project.

6. Lessons learned
The cost of variances, the reasoning behind the corrective action chosen, &
other types of lessons learned from cost control should be documented so
that they become part of historical database for both this project & other
projects of the performing organizations.
Reference:

• Gardiner, P. D. (2005). Project Management – A Strategic

Planning Approach . United Kingdom: RED GLOBE PRESS.