Topic 4 Project cost management

Project Cost Management is the continuous process allowing the overall financial management of the project, namely planning, monitoring and controlling the project’s budget from its initial planning phase to its completion. The process of Project Cost Management takes place when the project scope, timelines and deliverables are clear.

  1. Beginning WBS, Resource Planning is the first step in Project Cost Management. Here the resources necessary to complete the project’s planned objectives (broken down into activities and tasks, as analysed before) are estimated. Research data and historical information of comparable cases can be used to determine which resources shall be required to complete the project. Such resources include:
  • Staffing: who are the project team member, what specific capabilities are needed, and what is their relation to the project team (are they staff members or are they external collaborators?)
  • Equipment:what kind of equipment, infrastructure and materials are needed (e.g. machinery, software, supplies, input for deliverable production, etc.).
  • Marketing:what resources are needed to promote project objectives and results and carry out communications?.
  • Training:will additional training be required to cope with potential organizational changes arising from the project?.
  • Miscellaneous items:These are project-specific resource considerations (e.g. required travelling, engagement of external collaborators or counselling services, etc.).
  1. The second step is to Estimate Cost. Here, a variety of cost estimation techniques can be used to predict how much each work package and activity (e.g. historical information, market research, parametric models etc.). As estimates are based on data as well as on (informed) hypotheses, they should be continuously refined according for the information occurring during the project. To cover for uncertainties, a contingency cost should also be estimated.
  2. In Cost Budgeting, the cost estimates are allocated across time depending on when each cost will be incurred according to the project schedule. This way a financial document for the execution of the project is created (budget).

Spreadsheets can be used for budgeting, while cost assumptions must be noted and monitored to keep track of diversions from the budget. In order to implement the budget, approvals by the executives and/or stakeholders must be obtained.

Finally, note the difference between the project budget and the cost baseline. The latter is the approved, time-phased project budget. Elaborating, once the budget is set, for instance, 4 million euros, the sponsor isn’t going to hand you 4 million euros on day one of the projects. They’ll provide funds periodically during the project when they are needed. The time-phased budget tells them when you shall need these funds.

  1. The final step is Cost Control, namely the consequent monitoring of the cost baseline, to identify variances on time, take corrective action, and follow-up on results.