CO$T

MANAGEMENT
Process of estimating, budgeting and
controlling costs throughout the project
Project Cost
life cycle, with the objective of keeping Management?
costs within the approved budget.

Project Success
 Delivers on the requirements & scope

 Execution quality is of a high standard

 Completed within schedule

 Completed within budget.

What exactly meant by Cost Management?
It is the process of planning and controlling the costs associated
with running a business.

It includes collecting, analyzing & reporting

cost information for effectively budget
forecast and monitor costs.

Cost management overall is a complicated

process. However , critical knowledge area.

It can be broken down into four area

Resource planning, Cost estimation, Cost
budget, Cost control
Key Element of Cost
Cost management plans keep all project costs in one place, including
direct and indirect costs.

A project manager will track these costs

to ensure there are no budget overruns.

5 Type of costs
 Direct cost
 Indirect cost
 Fixed cost
 Variable cost
 Sunk cost
Direct Cost
 Linked to doing the work of the project.
 Most common type of cost that a business/organization incur.
 Direct costs associated with the production of a product or service.
 Include items such as the raw materials needed to create a
product, the cost of labor, and any distribution or delivery costs.

 A car manufacturer's direct costs would be the

costs of the raw metals and materials and the
wages of the employees who make the cars.
 This could include hiring specialized contractors,
buying software licenses or commissioning and
testing the new prototype car.
Indirect Cost
 These costs are not specifically linked to project but are the cost of doing
business overall.
 Indirect costs are expenses that the company still has to pay that aren't directly
related to production.

 Heating, lighting, office space rental, stocking the

communal coffee machine and so on.
 An indirect cost of manufacturing cars would
include the electricity used to power the
machines and the factory.
 You can relate this cost to production, it's not
directly related because the car company uses
electricity for all aspects of its business.
Fixed cost
 Fixed costs are everything that is a one-off charge.
 Not linked to how project duration.
 Costs of a business that don't vary over time
 Don't change depending on output.
 They're generally one of the easiest costs to work out.

Company has to spend on rent for a building.

Even if the company produces 10 times the
amount of product it usually does, its cost of
rent won't change. The only time when this cost
might change is if the company moves to
bigger premises.
Variable cost
 Opposite of fixed costs - charges that change over project duration.
 Type of business expense that varies with production.
 If the level of production/Scope increases, the variable costs increase.
 if the level of production /Scope decreases, the variable costs also decrease.
 These costs can include direct labor costs or sales commissions.

 It's more expensive to pay staff salaries over a 12 month project than a 6
month one. Or Machine hire over 8 weeks is more costly than for 3 weeks.

 For example, a company that offers sales commissions to

each salesperson would see an increase in its variable
costs if its sales increase. But if the company sees a drop
in sales, it would also see a drop in the amount of
commission that it would have to pay.
Sunk cost
 Costs that have already been incurred.

 They could be of any of the types of cost , but the point is

that they have happened. These costs are often
forgotten in business cases, but they are essential to
know about.

 Historic and can't be reclaimed, but businesses don't

have to consider these costs in future business decisions.

 While the business can't recover this money, it may be

able to make a profit as a result of spending the money.

 A car manufacturing company might spend £10,000 on

new equipment. This is a sunk cost, but the new
equipment can help the company make more cars over
time, which can increase its profit. This is why businesses
often don't consider sunk costs when making decisions.
OK !! Now
you know
what is
Cost & it’s
type.
 Cost Management Processes
01

Plan Cost Determine

Management budget

03

Estimate Cost Control Cost

02 04
Plan Cost
Management
Process that establishes the policies,
procedures, and documentation for
planning, managing, expending, and
controlling project costs.
Plan Cost Management

01
Plan Cost
Management
INPUT TOOLS GOAL

Estimate
• Project Management Plan • Expert Judgment • Cost Management Costs 02
• Project Charter • Analytical Techniques Plan
• Enterprise Env. Factors • Meetings
• Organizational Process
Assets.

03 Determine
Budget

Control
Cost 04
Estimate Costs
Process of developing an
approximation of the cost
of resources for the
project activity.
Estimate Costs
Plan Cost
01 Management

INPUT TOOLS GOAL

• Scope Baseline
• Expert Judgment
Analogous Estimating
• Activity Cost Estimates 02
• Project Schedule
• • Basis of Estimates Estimate
• Parametric Estimating • Project Document Costs
• Risk Register
• Bottom-up Estimating Updates
• Cost Management Plan
• Three Point Estimating
• Human Resource
• Reserve Analysis
Management Plan
• Cost of Quality
• Enterprise Env. Factors
• Org. Process Assets
•
•
Vendor Bid Analysis
Group Decision Making
03 Determine
Budget
Tech

Control
Cost 04
Cost Estimation
• Expert Judgement

Estimation Methods • Analogous Estimating

• Parametric Estimating
• Bottom-up Estimating
• Three-point Estimating
• Data Analysis
• Project Management Information
• Decision making
Cost Estimation method for Project
Four major cost estimation techniques used to develop cost estimates
Analogous Estimating
Parametric Estimating
Bottom-up Estimating
Three-point Estimating

 Cost estimate depends upon a number of factors.

 Some organizations, require all projects to be budgeted
with specific policies
 others may depend on expertise of project team.
 Many organizations might work off of rough estimates in
the earliest stages
 Then at later stages work on more exact estimates.
Analogous Estimating
Calculates the expected costs of a project-based upon the known costs associated with a
similar project that was completed in the past.

This method of estimation relies upon a combination of historical data and expert
judgment of the project manager.

Because no two projects are exactly the same,

analogous estimating does have its
limitations.

As such, it is often leveraged in the earliest

stages of project planning, when a rough
estimate can suffice.

Analogous estimating can also be used when

there is relatively little information about the
current project available.
Parametric Estimating
 Historical data and statistical modeling are used to assign a
dollar value to certain project costs.

 Determines the underlying unit cost for a particular component

of a project and then sales that unit cost as appropriate.

 It is much more accurate than analogous estimating but

requires more initial data to accurately assess costs

 Parametric estimating is often used in construction.

 A typical new home will cost a certain number of

dollars per square foot. If this average cost, the
margin of error, and the square footage of a new
project are known, then parametric estimating will
allow them to identify a budget that should
accurately fall within this range.
Bottom-Up Estimating
 A larger project is broken down into a number of smaller
components.

 Cost estimated specifically for each of these smaller work

packages.

 Because of granular look at individual tasks within a

project, this technique allows for a very accurate
estimation process.

 For example, if a project includes work that

will be split between multiple departments
within an organization, costs might be split
out by department. Once all costs have been
estimated, they are tallied into a single larger
cost estimate for the project as a whole.
Three-Point Estimating

 Estimator identifies three separate estimates for the

costs associated with a project.

 First point : an “optimistic” estimate, where work is

done and funds spent most efficiently;

 Second point :an “pessimistic” estimate, where work

is done and funds spent in the least efficient manner

 Third point : “most likely” scenario, which typically

falls somewhere in the middle.

 Estimation are not
fortune telling exercise .
Estimation are estimates with some degree of inaccuracy .
4 Principles of Cost Estimation
1. Accuracy of the estimate depends heavily on the level
of project scope definition.

2. Cost estimation provide decision-makers means to

make investment decisions, choose between
alternatives and to set up the budget.

3. Estimating is done by breaking down the total scope

of a project in manageable parts, to which resources
can be assigned and cost. There are standardized ways
of breaking down a project, like the Work Breakdown
Structure (WBS) and the Cost Breakdown Structure
(CBS).

4. A cost estimate is more than a list of costs. It also

includes a detailed Basis of Estimate (BOE) report that
describes the assumptions, inclusions, exclusions,
accuracy and other aspects that are needed to
interpret the total project cost. Otherwise, it would be a
meaningless number.
An accurate estimation
method can be the
difference between a
successful plan and a
failed one.
Advantages of Cost Estimation
• Accurate planning: Cost estimation helps predict future
expenses accurately
• Increased profit margins: Advance information on
expected expenditure helps in regulating costs.
• Efficient and improved resource management:
Increased insights into the expenses helps in proper
allocation and implementation of the fund or money
reserve at hand sanctioned for manufacturing a particular
product.
• Built a reputation in business: Better management of
funds, resources, and efficient production of goods at the
end leads to a stronger reputation built amongst the
market contenders. Thus, it is helpful for a business to
grow satisfactorily.
Determine
Budget
Allocate the money to work
packages and aggregate
the total cost of the work
packages.
Determine Budget
Plan Cost
01 Management

INPUT TOOLS GOAL

Estimate
• Cost Management Plan
• Cost Aggregation
• Reserve Analysis
• Cost Baseline Costs 02
• Scope Baseline • Project Funding
• Funding Limit Requirements
• Activity Cost Estimates
Reconciliation • Project Document
• Project Schedule
• Expert Judgment Updates
• Resource Calendars
• Historical Relationships
• Risk Register
• Agreements/Contracts
• Basis of Estimates 03
• Org. Process Assets Determine
Budget

Control
Cost 04
Control Costs
Influencing the factors that create
cost variances and controlling
changes to the project budget.
Control Costs
Plan Cost
01 Management

INPUT TOOLS GOAL

Estimate
• Project Management Plan
• Earned Value Management
(EVM)
• Work Performance Costs 02
• Project funding Information
• Forecasting • Cost Forecasts
requirements
• Performance Reviews • Change Requests
• Work Performance Data
• TCPI • Project Management,
• Organizational Process
• Reserve Analysis Project
Assets
• Documents, Org.
Process Assets 03 Determine
Budget
• updates

Control
Cost 04
Role Cost Performance and Report
Measuring Performance
Because all projects are anticipated to have specified goals,
and productivity is not necessarily equal to performance, this is
a stage for monitoring job completion and its obtained value,
which must be coordinated with the outcomes ahead of time.

It is vital to clarify how the progress of each work is to be

regarded based on its cost from the planning phase, as human
resources and salaries typically account for the majority of a
project's budget.

Reporting
Implementing reporting protocols, frequency, and format
throughout all stages of a project cost management plan is
critical, especially when considering the document as a critical
part of the project management cycle, as well as the fact that
reporting can be extremely useful in detecting budget
deviations.
Factors affect Cost Control
Cost of Materials
The entire cost of all supplies and equipment necessary for a project is referred to as
the cost of materials.

Cost Variance
Any price disparities between the project's actual cost and the budget you've set are
referred to as cost variance. For example, if you have a $1,000 budget for a project but
the actual cost is $1,500, the cost variance is $500 because the difference between
the budget and the actual cost is the difference between the budget and the actual
cost.

Return on Investment (ROI)

Return on investment (ROI) measures how profitable a project is in relation to the
amount of money invested. A high return on investment (ROI) indicates that the
initiative generated more revenue than it cost.

Labor Costs
The cost of labor is the total of all wages paid to project employees, including
employee perks and taxes. Because a project may require numerous employees
working at the same time, it's vital to factor in the cost of labor when budgeting for it.

Real Cost
The real cost is the sum of all expenses incurred by a project from the start to the
finish. This covers labor costs, materials costs, and any other project-related costs.
Other Techniques for Cost Management
Inventory Control
One of the most important sources of revenue is inventories. To begin,
make a list of inventory requirements, quantity checks, vendor costs,
and so on.

Outsourcing
This is one method for putting staff in third-party responsibilities,
particularly for one-time initiatives. It prevents the employer from
having to account for the expense.

Utilize Technology to the Fullest

Technology can assist in streamlining operations and hence cost
management. Deliver higher-quality products with less time spent and
better productivity with the newest cutting-edge technologies.

Market Sense
It's crucial to stay on top of market developments. It is necessary to
maintain ongoing contact with vendors and ensure that contract
renewals coincide with price trends.

Organize Time
Cost Management Tools
 Companies use project cost
management software to monitor
the profitability of the projects
they deliver.

 This type of software allows

businesses to estimate the cost of
delivering different types of
projects, identify actual costs, and
compare them to calculate profit.
Benefits of Cost Management
 Control of project-specific costs, & business costs.
 Forecast future expenses and costs
 Predetermined costs as records for the company.
 Assists in necessary cations for set objectives & goals.
 Analysis of the company's long-term patterns.
 Actual costs can be compared to anticipated costs
 Helps company in making an acquisition
 Cost Management Process Overall

Is the process that establishes The process of developing The process of aggregating The process of monitoring
the policies, procedures, and an approximation of the the estimated costs of the status of the project to
documentation for planning, monetary resources individual activities or work update the project budget
managing, expending, and needed to complete packages to establish an and managing changes to
controlling project costs. project activities. authorized cost baseline. the cost baseline.
 Weighted Milestones
Milestone assigned a budget value
earned at the completion of that
milestone

Cost of Quality
Cost that is incurred to achieve
product/service

Reserve Analysis
Cost/Schedule contingency/reserve analysis
used to cover any unforeseen risks or
changes to the project

Cost Performance Baseline

A time phased budget that will be used as a
basis against which to measure, monitor, and
control overall cost performance on the project.

SUMMARY
Project Budget
Constitute the funds authorized to execute
the project.
Next :
How we manage
Quality ?

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