Project Cost Management: A Managing Guide

Luc Nguyen

Oct 14, 2023

4 min read

By: Luc Nguyen

Within project management, one must always pay attention to cost. Whether it be to calculate, predict or consume, effective cost methods will allow a project to be successful and executed properly. You have come to the right place for a step-by-step guide on how to successfully implement cost management!

As we are diving right into project cost management, let's about what it is. It is essentially the process to ensure that a project team can complete a project within an approved budget. Projects have to be well definite, having accurate estimations and costs while maintaining a realistic budget that backs up those requirements. The project manager needs to ensure that these criteria can meet to the stakeholder's standards while trying to save on resources. There are four essentially processes to follow when implementing project cost management:

Planning Cost Management

Every good project comes from a good plan. Planning is the step that shouldn't be overlooked at all. This step is very crucial in determining the procedures, policies and proper documentation that will be used for the project. You can also implement resource planning, which is finding out what resources will be used in order to complete the project. How many team members do we need? How much will this cost? How much time will this take? These are some of the questions you should ask and answer yourself when you are planning out a project. When you finish this step, you should come out with a cost management plan which can help your further down the line. This information should be included within the cost management plan:

Level of Accuracy: Values should be realistic during planning that will make cost management successful.

Units of Measure: Hours, Days, Work hours are examples of units of measure.

Organizational Procedure Links: As teams use WBS, projects should follow any policies and rules implemented.

Control Thresholds: Variance is a factor that should always be accounted for. Therefore, thresholds can be created so that values can fall within expectations.

Rules of Performance Measurement: If you use EVM, it will allow you to see how the resources put into the project will measure out in terms of performance or criteria.

Reporting Formats: Reports are always good to have for any updates within the project that can affect costs.

Process Descriptions: Details are always important, something that could also keep stakeholders up to date.

Estimating Costs

Completing a project may take a lot of different resources in order to accomplish it. This step will allow you to estimate what resources you may need in order to complete the project. Factors that come into play may be resource requirements, price of resources, duration of each resource, and potential risks. Many groups argue that estimation may be the most difficult step within cost management. Going too under or over the budget may affect the completion of the project. You can also use PERT when estimating costs. PERT (program evaluation and review technique) is a method many teams use in order to look at things from a mathematical perspective. It helps visualize the amount of time a project may take to complete.

Example of a General PERT Chart

You can also look at cost estimation as a decision maker. You are still in the planning stages of the project, which means that everything is not set in stone. Whether it be to minimalize initial costs or future service costs, play with the costs as much as you can so that it can justify the creation of the project and it's purpose. Remember to also keep the stakeholders in mind when estimating costs so that they will benefit from the completion of the project the most. There are three types of estimates that could be created:

ROM (Rough Order of Magnitude) Estimate: This is an estimate of how much a project can cost. Although this is something that may seem natural, this is considered as the "very first estimate created." You can think of this as a ball park starting value, that can be near fifty to plus one hundred percent of the project's estimated cost.

Budgetary Estimate: This estimate is used to assign money to a budget. Budget estimates are normally created one to two years before the project is completed, which is between ten less to twenty-five percent more of the costs.

Definitive Estimate: This estimate is accurate for the costs of projects. Many decisions can be made based on availability of resources, such as money. Definitive estimates typically are the most accurate out of the three, making up about 5 percent less or 10 percent more than of the actual costs.

Determining the Budget

After estimating costs, you need to figure out how much it will cost to create the project. Budgeting determines the costs for each part of the project, sort of like a cost baseline. Figuring out the budget can also determine the longevity of the project as you implement future phrases or services to update or alter the project. As long as you can create the baseline, it allows you to see how the foundation can be laid out first. Take it as you are building a house. Although you have a budget for the house, you build a house from the group up first. Building the first layers can be very crucial so that you can alter it as you see it as you are completing it.

Controlling Costs

Many things can come up during project development. Changing aspects of the project can increase or decrease the costs of the project. Variance can always occur, so you should always take it into account for the project. Cost performance should always be monitored and informed to the stakeholders. You can use a tool such as EVM to help monitor this. EVM (earned value management) is a technique used to measure the time, cost and scope of a project. You can use this values to gauge the development of the project and to see if changes need to be implemented. EMV calculates three values from a project's WBS:

PV (planned value): This is the value that you can use to authorize costs to the work being done within the project.

AC (actual cost): This is the realized cost that is factored in the project.

EV (earned value): This is the value that values how much work is created from the budget being spent on it.