For the successful and timely completion of a project, Project Cost Management is very critical. For a project manager, it is very important to estimate, budget and control the project cost efficiently. Any glitch in this process may lead to slowdown the overall progress of the project in the absence of fund. While, in some cases the project can stop completely. So, as a project manager you must estimate, budget, monitor and control the project cost minutely to ensure project cost remain within budget. Therefore, for a project manager it is necessary to understand and follow the project cost management process thoroughly.
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What is a Cost Management Process?
In Project Management, cost management process includes estimating, budgeting and controlling of the project cost. The cost management process enables a project manager to forecast the expenses, which help to avoid budget overrun by applying required controls. Simultaneously, project manager needs cost management to report project budget status to the board members and stakeholders on regular basis.
Before starting a project, first we must estimate and take necessary approvals for the budgeted cost from relevant authorities. This activity is the part of project planning phase in project management process.
Moreover, during project implementation, we document project cost and various learnings. This we do to keep actual project cost within budget. After completion of the project, estimated project cost and actual costs are compared and recorded. This document provides us the benchmark for future project cost estimation and control.
For cost management process, we require work breakdown structure (WBS) of project to start with cost estimation and budgeting process. Apart from WBS, we also need estimation of resources and project activity schedule. Let us discuss the elements of cost management process in following section.
Cost Estimating
In planning phase of the project management, cost estimation is most important process. Before starting a project, you need to estimate the cost and get it approved from relevant authorities. Estimation of the project cost enables sponsors to get insight whether they should invest into a project or not.
So, to estimate project cost with accuracy we need, project scope statement, which clarifies what is in scope and out of scope. Other than this WBS (work break down structure), provides detailed activity list up to the lowest level of the project is required. The most direct method of project cost estimation is based on WBS. Here we are estimating the cost at lowest level and summing it all towards upside to the top. Cost estimates we express in terms of currency to facilitate comparison both within and across projects.
In starting phase of the project, cost estimates are less accurate, but as project progresses through the life cycle, accuracy of the project cost estimates increases. The project cost includes cost of labour, material, machine/equipment (like, reactor costing, heat exchangers costing, distillation column costing, etc.), services and other facilities. Apart from this other cost includes inflation, allowances, contingencies, interests, taxes & freights, etc.
Cost Budgeting
A project cost budget is the total projected costs which we need to complete a project over a scheduled duration. This we use to estimate how much cost of the project we will need for every phase of the project.
In project cost management process after cost estimates, we do cost budgeting exercise. For this purpose, we need project schedule, resource planning and list of possible risk during project as input. Based on budgeting we set project cost baseline, which is a cash out flow on weekly, monthly or yearly basis. This baseline we require to measure and monitor the cost performance of the project.
Cost Controlling
So, after cost budgeting we have project baseline, which we use to monitor and control the project cost. The process of cost control includes, monitoring of cost performance to identify and understand the variances. Also, project manager needs to ensure that all the appropriate changes are recorded and unwanted/unauthorized changes are prevented in the cost baseline. Moreover, project manager informs about the authorized changes to the relevant stakeholders. In simple words, by cost control a project manager put his/her efforts to bring expected costs within budget limits.
In cost control process as a project manager, we are looking for the reasons of both positive and negative variances. And, take appropriate action to keep project cost within limits.
Change Management
All the project in it’s life cycle can go through changes, which can be because of various reasons like technical, legal, economical, environmental, etc. To carryout these changes we require a Change Control Board (CCB), this board oversee the change process. And, this CCB includes representatives from all the concerned parties including users, operation, finance, suppliers, technical, etc.
The CCB (Change Control Board) reviews the meetings for change controls. Which determine whether change request is valid or not? Also go through the details to understand the technical & financial feasibility of the proposed change.
It is very important to understand that change control is a tool to keep the track & record of all changes in a project. Also, it is equally important to ensure the validity & authenticity of implemented change. Because every change means additional cost to the project.
Earned Value Management System (EVMS)
In project management, earned value management system or EVMS is a tool to measure the performance of a project. In any projects there are thousands of activities and their progress we measure against time and cost. We check whether that particular activity is running as per the schedule or not. Moreover, we check the cost variance (i.e., difference between actual coat v/s baseline cost).
EVMS has three key independent values, which we use to identify the performance and progress of the project. The various values are as below:
Planned Value (PV) – this is the budgeted cost of work scheduled or BCWS. The BCWS is the physical work which was planned to be completed within budgeted cost and duration.
Actual Cost (AC) – actual cost of work performed (ACWP). This is the total cost, which actually incurred in completing the actual work.
Earned Value (EV) or Budgeted Cost of Work Performed (BCWP) – This is the sum of budgeted costs for the physical work that actually completed. Which is estimated based on % completion of scheduled work.
Below figure can help us to understand earned value analysis:
Example for EVMS
Let us consider below example to understand the EVMS tool in project management. Below are the details of a distillation column installation project for solvent recovery. This project is planned to complete in 8 months and Rs. 350 lacs. Let us assume we are reviewing this project in 5th month.
In above table we can see in 5th month there is 70% completion of budgeted work. Therefore, BCWP will be 275*70/100 = Rs. 192.5 lacs. So, various insights for this project will be as below,
Scheduled Variance (SV) = BCWP – BCWS = 192.5 – 275 = -82.5 lacs
Cost Variance (CV) = BCWP – ACWP = 192.5 – 305 = -112.5 lacs
% efficiency = BCWP*100/ACWP = 192.5*100/305 = 63.1%
Therefore, we find that this project actually completed 63.1% against 70% budgeted completion. So running by (70-63.1)*100/70 = 9.86% behind the schedule. Also, there is cost overrun by 112.5 lacs. Other valuable information, which we can estimate using EVMS are in below section.
As we saw above this project is running behind the schedule, so expected completion time based on current performance will be = Planned Time/(BCWP/BCWS) = 8/(192.5/275) = 11.4 months.
Forecasted expected actual cost (EAC) of the project (with current performance),
EAC = BAC/efficiency = 350/0.631 = 554.7 lacs
Forecasted expected cost of the project (with 55% performance from 6th month),
EAC = ACWP + ((BAC – BCWP)/efficiency) = 300 + ((350 – 192.5)/0.55) = 586.4 lacs
Forecasted expected cost of the project (with 100% performance from 6th month),
EAC = ACWP + ((BAC – BCWP)/efficiency) = 300 + ((350 – 192.5)/1.0) = 457.5 lacs
So, this way we can estimate various indicators and get insight about project.
Conclusion
In project management process, cost management is very important area, as we discussed in this article. First, we need to estimate the cost and then prepare the budget for the project. This budget tells us what and when is required to complete the scheduled activities. Once budget is ready, we require to monitor and control the project progress with respect to the project baseline. This control is very crucial to complete the project within budgeted time and cost as well. This we saw in EVMS example also, if there is delay in project it will increase the project completion cost also. Thanks for reading..