Planning, Estimating & Budgeting – Oh My!
Project cost management includes planning, estimating, budgeting, & controlling costs. These processes interact with each other, and occur in one or more phases of the project. Cost management planning occurs early in the project, so that coordination of the processes will be efficient & coordinated. Efficient management of the project depends on the accuracy of these processes & tools.
According to the Project Management Institute (PMI) Project Management Body of Knowledge (PMBOK), these are some of the important inputs to the cost management processes:
- Cost Estimating
- Organizational process assets
- Work Breakdown Structure (WBS)
- WBS Dictionary
- Cost Budgeting
- Project scope statement
- Activity cost estimates & supporting detail
- Project schedule
- Resource calendars
- Cost Control
- Cost baseline
- Project funding requirements
- Performance reports
- Approved change requests
Cost estimating starts with determining the most appropriate costing strategy or methodology. Depending on the information available at the time of the estimate, there are various estimating techniques to be applied for the most accurate outcome. The following examples are a few of the most commonly used practices.
Analogous or Benchmark Estimating – this type of estimate uses costs of a similar project as the basis. This technique is often used where there is little known of the detail of the project & relies on expert judgment for accuracy.
Bottom-up Estimating – these estimates start at the individual work package level. All of the lower-level cost estimates are then aggregated, or rolled-up, to determine the overall cost of the project.
Parametric Estimating – statistical analysis of historical data is used in this estimate. Costs are assigned per unit of measure to calculate the overall cost. For example, a known local rate for each yard of concrete is applied to the total yards in a project.
Cost budgeting assigns the estimated cost to each facet of the project. Budgets are assigned to each activity for labor, materials, subcontracts, etc. These costs are aggregated at each successive level of the WBS to determine the overall project budget.
Each project should determine the management reserve, or contingency, that should be applied to the budget. This reserve is to allow for risks, unknown changes, & other allowances. The higher the risk of a project, the higher the contingency should be. Of course, this is a fine line, as funding constraints & restrictions will apply pressure to keep the project budget within certain limits.
Cost control is an iterative process that compares the actual costs incurred against the project cost baseline. In an Earned Value Management System (EVMS), there are several techniques that can be applied to analyze variances & make adjustments as necessary.
Cost Variance (CV) – this is a comparison between the earned value (EV) (the budgeted costs incurred for the work that has been completed) & the actual costs incurred.
Schedule Variance (SV) – this calculation compares the earned value & the planned value (PV) (or the budgeted cost of work scheduled to be completed).
These values can be converted to efficiency factors & used to estimate the overall cost & schedule performance of the project.
With proper monitoring & use of these project cost processes, project managers will have better control. Using these tools correctly will lead to early identification of issues & will allow management to be proactive in their application of corrective actions. Bad news doesn’t get better with age, & neither does identification of poor performance! The earlier issues are raised, the more options available for improvement.