Project Development and

Management 2
Project Cost Management
Doreen Taylor ID# 1225339
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Objectives

 Understand the importance of project cost management.

 Explain basic project cost management principles, concepts, and terms.

 Understanding the different cost management Processes

 Understand the benefits of earned value management and project portfolio

management to assist in cost control.

 Summary
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The Importance of Cost Management

 No project starts without a budget.

 Project success is decided by how well the project cost has been handled in the project.

No project starts without a budget. Project success is decided by how well the project cost has

been handled in the project. Many times it happens that, the project may not be completed within

the project cost. It means that when compared the Project Cost vs. Project Profit, Project Cost

might have exceeded and it is of course considered as a project failure.

Hence it’s very important to come up with the correct cost estimation needed for the project.

To come up with accurate cost estimation, it’s requiring to understand the types of project costs

involved in the project.

What is Cost and Project Cost Management?

 Opportunity Cost is a resource sacrificed or foregone to achieve a specific objective, or

something given up in exchange.

 Costs are usually measured in monetary units, such as dollars.

 Project cost management includes the processes required to ensure that the project is

completed within an approved budget.

Basic Principles of Cost Management

 Tangible costs or benefits are those costs or benefits that an organization can easily

measure in dollars.

 Intangible costs or benefits are costs or benefits that are difficult to measure in monetary

terms.

 Direct costs are costs that can be directly related to producing the products and services

of the project.

 Indirect costs are costs that are not directly related to the products or services of the

project, but are indirectly related to performing the project.

 Sunk cost is money that has been spent in the past; when deciding what projects to invest

in or continue, you should not include sunk costs.

 Learning curve theory states that when many items are produced repetitively, the unit

cost of those items decreases in a regular pattern as more units are produced.

 Reserves are dollars included in a cost estimate to mitigate cost risk by allowing for

future situations that are difficult to predict.

 Contingency reserves allow for future situations that may be partially planned

for (sometimes called known unknowns) and are included in the project cost

baseline.
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 Management reserves allow for future situations that are unpredictable

(sometimes called unknown unknowns).

Project Cost Management Processes

 Plan cost management: This is the process that establishes the policies, procedures, and

documentation for planning, managing, expending, and controlling project costs. The key

benefit of this process is that it provides guidance and direction on how the project costs

will be managed throughout the project.

 Cost estimating: Developing an approximation or estimate of the costs of the resources

needed to complete a project.

 Cost budgeting: Allocating the overall cost estimate to individual work items to establish

a baseline for measuring performance.

 Cost control: Controlling changes to the project budget.

Plan Cost Management

This is the process that establishes the policies, procedures, and documentation for planning,

managing, expending, and controlling project costs. The key benefit of this process is that it

provides guidance and direction on how the project costs will be managed throughout the

project.
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Plan Cost Management inputs, tools & techniques and outputs

Cost Estimates
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Types of Cost Estimates

Cost Estimation Tools and Techniques

 Basic tools and techniques for cost estimates:

 Analogous or top-down estimates:Use the actual cost of a previous, similar

project as the basis for estimating the cost of the current project.

 Bottom-up estimates: Involve estimating individual work items or activities and

summing them to get a project total.

 Parametric modeling:Uses project characteristics (parameters) in a mathematical

model to estimate project costs.

 Computerized tools:Tools, such as spreadsheets and project management

software, that can make working with different cost estimates and cost estimation

tools easier
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Cost Budgeting

 Cost budgeting involves allocating the project cost estimate to individual work items over

time.

 The WBS is a required input for the cost budgeting process because it defines the work

items.

 Important goal is to produce a cost baseline:

 A time-phased budget that project managers use to measure and monitor cost

performance.
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Cost Control

 Project cost control includes:

 Monitoring cost performance.

 Ensuring that only appropriate project changes are included in a revised cost

baseline.

 Informing project stakeholders of authorized changes to the project that will affect

costs.
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Earn Value Management

 Many organizations around the globe have problems with cost control.

 EVM is a project performance measurement technique that integrates scope, time, and

cost data.

 Given a baseline (original plan plus approved changes), you can determine how well the

project is meeting its goals.

 You must enter actual information periodically to use EVM.

 More and more organizations around the world are using EVM to help control project

costs.

Earn Value Management Terms

Formulas
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Summary
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 Project cost management is traditionally a weak area in projects, and project managers

must work to improve their ability to deliver projects within approved budgets.

 Main processes include:

 Cost estimating

 Cost budgeting

 Cost control

References
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Project Management Body of Knowledge (PMBOK GUIDE) 4TH EDITION. (2008). Newtown Square,

Pennsylvania, USA: Project Management Institute.