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Project Cost Management processes are used to manage and control costs on projects. 

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Quick reference

Project Cost Management

Project Cost Management processes are used to manage and control costs on projects.  Cost management is closely coupled with a company’s financial accounting system and these project management processes are often tailored to be compatible with the company financial system.

When to use

Cost management processes are used throughout most of the project lifecycle.  As soon as project planning starts, some of the processes are used and they continue through the final project cost performance report.

Instructions

Project Cost Management

“Project Cost Management includes the processes involved in planning, estimating, budgeting, financing, funding, managing, and controlling costs so that the project can be completed within the approved budget.” PMBOK® Guide

The project cost management processes are focused on the cost of the project resources used to accomplish the work of the project.  They are not focused on the long term business impact to the organization because of the results of the project.  In some organizations, the financial accounting system requires that all cost management activities be conducted by a selected department or group.  In those cases, the project costs management activities may be done by individuals who are not part of the project team.  On small projects, the Estimate Costs and Determine Budget activities are often so intertwined that it is virtually impossible to separate them into separate processes.

Project Integration Management Processes

There are four Project Cost Management Processes.  They relate to each other as shown in the diagram below.  The four processes are:

  • 7.1 Plan Cost Management: “The process of defining how the project costs will be estimated, budgeted, managed, monitored and controlled. ” PMBOK® Guide
  • 7.2 Estimate Costs: “The process of developing an approximation of the monetary resources needed to complete project work. ” PMBOK® Guide
  • 7.3 Determine Budget: “The process of aggregating the estimated costs of individual activities or work packages to establish an authorized cost baseline.” PMBOK® Guide
  • 7.4 Control Costs: “The process of monitoring the status of the project to update the project costs and managing changes to the cost baseline.” PMBOK® Guide

 

Project Cost Estimating

One of the most difficult tasks for many project managers and core team members is creating cost estimates.  People take money very seriously.  They do not want to underestimate an activity, miss their target and be foreced to go “begging” for more money.  But they also do not want to over-estimate an activity and be forced to “give money back.”  Add to this that the uncertainty in projects often means that it is impossible to accurately predict what will happen on a project.  It is no wonder project team members are often uncomfortable providing cost estimates.

The table below lists the various techniques that can be used to create a cost estimate along with a brief description of the technique and the type of activities for which that technique is appropriate.

Definitions are taken from the Glossary of the Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) – Sixth Edition, Project Management Institute, Inc., 2017, Pages 702, 704, 706, 713, and 715. PMBOK is a registered mark of the Project Management Institute, Inc.

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  • 00:05 Hi, I'm Ray Sheen.
  • 00:06 Let's take a few minutes to look at the project cost management knowledge area.
  • 00:12 The project management body of knowledge, the PMBOK Guide, defines this as
  • 00:16 Project Cost Management includes the processes involved In planning,
  • 00:20 estimating, budgeting, financing, funding, managing and controlling costs, so
  • 00:24 that the project can be controlled within the approved budget.
  • 00:28 The cost management processes are concerned with the cost of the resources
  • 00:33 on the project, not the long-term cost to the business that this project may have.
  • 00:37 That information would have been in the business case.
  • 00:41 On small projects, the cost estimating and
  • 00:43 cost budgeting processes are often being combined.
  • 00:46 The same person is doing both activities, so
  • 00:48 as the estimates are done, they are placed into the budget.
  • 00:52 In some organizations, some of the Project Cost Management activities
  • 00:56 are done outside the project team by a finance organization.
  • 01:00 When that happens, the project manager must stay in close communication with that
  • 01:03 organization during the budgeting process.
  • 01:06 There are four project cost management processes.
  • 01:09 Let's take a look.
  • 01:10 First is plan cost management.
  • 01:13 This is our typical policy and procedure planning process.
  • 01:16 It identifies the approach and documentation required for
  • 01:19 the other processes.
  • 01:21 Estimate cost is just that, a process where cost for
  • 01:24 each activity are estimated using the resource and
  • 01:27 duration estimates from the time and resource management processes.
  • 01:31 Determine budget will take those cost estimates and
  • 01:34 combine them with the scope baseline, project schedule and risk register
  • 01:38 to create a time-based plan for how the money will be spent on the project.
  • 01:42 And finally, is control costs.
  • 01:45 This process monitors the spending status and
  • 01:47 ensures that the project stays within the approved baseline.
  • 01:51 There are a number of cost estimating techniques
  • 01:54 that are mentioned in the PMBOK Guide.
  • 01:56 Let's talk about them and when it would be appropriate to use each one.
  • 01:59 First is expert judgement.
  • 02:01 This relies on experience of the individual and
  • 02:03 is typically used to determine which of the other techniques should be used for
  • 02:08 a specific project deliverable or task.
  • 02:10 Next is analogous estimate.
  • 02:12 This is the most common estimating approach.
  • 02:14 It relies on experience from a previous project.
  • 02:17 It's often used early in the planning process before we have detailed
  • 02:20 information.
  • 02:21 Another common approach is parametric estimating, which uses a formula.
  • 02:26 It's typically used for standard work that is well understood so
  • 02:29 that the formulas have been created and verified.
  • 02:32 The formula is often in the form of so much money per hour or per item.
  • 02:37 The bottom up estimating is used when there's detailed planning information.
  • 02:41 All the details are estimated at the detailed level,
  • 02:44 which is usually more accurate and then these are added up to the total project.
  • 02:49 Next is three point estimating.
  • 02:51 This is used when there are high levels of uncertainty.
  • 02:54 Three estimates are created, an optimistic, pessimistic and
  • 02:57 most likely estimate.
  • 02:59 The project planned is created for
  • 03:00 each scenario to determine best case, worst case and most likely conditions.
  • 03:04 Alternative analysis is appropriate when
  • 03:07 comparing the costs of two mutually exclusive paths.
  • 03:11 The cost and risk for each path is estimated, then a judgement is made.
  • 03:15 This is often the approach used for make buy analysis.
  • 03:18 A reserve analysis takes the initial estimate and adds a factor based upon
  • 03:22 the levels of unknown such as adding 10% or 20% to an estimate.
  • 03:27 Cost of quality Is estimating the amount of rework, scrap, failures or
  • 03:31 returns that are expected and adding those factors into the estimates.
  • 03:35 This is typically used for projects that are being done on contract and
  • 03:39 that will need to record a bill for all costs.
  • 03:42 Project management software is becoming popular.
  • 03:45 Its primary benefit as an estimating tool is to integrate the estimates from
  • 03:48 the above techniques and then address the risk factors by asking what if, and
  • 03:53 changing the estimates to see the impact.
  • 03:56 One last technique is group decision making, like brainstorming, DelFi, and
  • 04:00 nominal group technique, these bring others into the estimating process to
  • 04:04 leverage their insight and experience.
  • 04:07 This typically will improve the accuracy of the estimates.
  • 04:11 Let's look at how these cost management processes are linked together.
  • 04:14 We start with the Plan Cost Management.
  • 04:16 This process creates the Cost Management Plan
  • 04:19 that is incorporated into the Project Management Plan.
  • 04:22 And just like with the other knowledge areas,
  • 04:24 the Project Management Plan is an input to the other processes and
  • 04:28 to the original process of plan and cost management.
  • 04:32 When we look at the other processes,
  • 04:33 we see that estimating costs creates a cost estimates in the basis of estimates
  • 04:38 that become a part of the project documents that are controlled.
  • 04:42 The determined budget creates the cost baseline,
  • 04:45 which is incorporated into the Project Management Plan.
  • 04:48 And control costs will generate cost forecasts,
  • 04:51 which are also controlled as project documents, and
  • 04:54 it will provide updates to the Project Management Plan throughout the project.
  • 04:58 We can also see that estimate costs, determine budget and
  • 05:00 control costs are updating project documents throughout the project.
  • 05:06 The cost or budget is normally considered to be the third side of the project
  • 05:10 management triple constraint triangle.
  • 05:11 Although these processes looked relatively simple, money is a touchy subject and
  • 05:17 you need to be proficient in the use of these processes.

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