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Cost is one of the major aspects that powers a project toward success. Thus, it is very important to ensure that there is a sufficient supply of funds coming in from the correct sources at the correct time to meet all the project requirements. Thus, project managers use a systematic approach to manage the overall cost expenses of a project, which is popularly known as project cost management. Through this article, I will give you a detailed explanation of what exactly cost management is, how it is done, and what the processes involved are.
If you wish to master the concepts of Project Management, you can check out our structured PMP Certification Training program, which is guided by PMP-certified instructors.
Project Cost Management is one of the ten Knowledge Areas that lay the foundation of project management. According to PMBOK® Guide – Sixth Edition,
Project cost management is particularly concerned with the cost of various resources that are required to complete the project activities. It assists the project manager in foreseeing the project expenses and thus taking precautionary actions to mitigate the chances of over expenditure. Cost management acts as an umbrella process that covers the entire project life cycle, beginning from its initial planning phase until its completion and handover.
The cost is generally estimated during the project planning phase and must be approved by the upper management before its execution begins. As the project gradually enters into the execution phase, all the expenses made are tracked and properly documented to keep expenses within the agreed budget. After project completion, this document is then used to compare the deviations between the predicted and the actual costs incurred. These results are further used as references for the curating cost management plans and budget in the future.
When we talk about cost, in terms of project management, there can be five types of costs incurred:
By implementing effective project cost management, you will get a cost baseline which will help you in managing all the above-mentioned costs better. It will give you a proper direction for better decision making and avoid out-running the project budget.
In the next, section of this project cost management article, I will be discussing the benefits you can avail with cost management.
The list of benefits of including Cost Management in your project management framework is pretty long. I have picked up a few of the most intriguing ones:
Effective Project Cost Management is a crucial aspect of successful project delivery. Enrolling in PRINCE2 Training can equip you with the skills to master cost estimation, budgeting, and control within the framework, ensuring your projects stay on track financially.
Project Cost Management is one of the most important Knowledge Areas. It involves the following 4 processes:
Plan cost management is the initial process of project cost management where you will be defining how the costs of the project will be estimated, budgeted, managed, monitored and controlled. Generally, techniques like WBS(Work Breakdown Structures) or historical data of similar kinda projects are used for defining the cost resource requirements which include time, material, labor, equipment etc. This process gives a rough outline of the number of resources involved and shows the optimum path to manage the project costs throughout the project lifecycle. Thus, the plan cost management process is performed at some specific predefined point in the project.
Below I have listed down the various inputs, tools and techniques, and outputs involved in this process:
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This is the second process of the project cost management plan that helps in estimating the cost of the resources required for project completion. Since cost is an important variable that ensures project success, you have to be very careful while producing the estimated amount of the total project cost. Throughout the project lifecycle, this process is performed at periodical intervals. A project manager uses various methods to estimate costs depending on the amount of information available.
I have listed down the inputs, tools & techniques and output involved in the estimate costs process:
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Determine Budget is the third process of this Knowledge Area where the estimated cost of individual activities or tasks is summed up to draw the cost baseline. The cost baseline of the budget includes all the authorized funds that are essential for project execution. This budget basically includes various reserves of contingency while keeping the management reserves far at the bay. Cost baseline is an authorized time-phased budget that is used as the initial point for monitoring and calculating the project performance and progress. This process is executed at specific points in a project which are generally predefined.
Below table contains the various inputs, tools & techniques and outputs involved in this process:
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Control costs is the final process of project cost management which is primarily concerned with the measurement of variances of the actual costs from the proposed baseline. Various methods and procedures are implemented here to track the project performance and expenses against its progress rate. Meanwhile, all these variances are recorded and compared with the actual cost baseline. Here, control costs process will be responsible for explaining the reason for variance and further assists the project manager in taking corrective actions to incur minimum costs. Thus it can be concluded that via control costs process, a project manager can control entire project expenses and close it within the agreed budget.
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Control costs process makes use of various inputs, tools & techniques and outputs, which I have listed in the below table:
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With this, we come to the end of this Project Cost Management article. There are 10 Knowledge Areas in the project management framework and Cost Management was just one of them. If you wish to learn more about project management framework or project management certifications, you can check my other articles as well.
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