What Is Project Cost Management? against schedule and scope.

Calculate key
performance indicators such as Cost
Performance Index (CPI) and Schedule
Cost management is the process of planning and Performance Index (SPI) to measure cost
managing the budget of a business or project. In the efficiency and schedule adherence.
case of a project, it helps the project manager estimate - Change Management: Track and manage
what the project will cost and set controls to reduce the changes that impact project costs. Update the
chances of the project going over budget. Work Breakdown Structure (WBS) and
associated budgets accordingly when scope
A work breakdown structure (WBS) is a visual, changes occur to ensure accurate cost tracking
hierarchical and deliverable-oriented deconstruction of a and forecasting.
project. - Regular Reporting: Generate regular cost
reports to communicate project financial status
to stakeholders. Provide insights into cost
At the top of the work breakdown structure is your final performance, trends, and forecasts to support
deliverable (in this instance, the construction project). decision-making processes.
- Risk Management: Identify and mitigate cost-
related risks proactively. Monitor risk triggers
Immediately beneath that is the next WBS level, which and assess their potential impact on project
are the main project phases required to complete the costs. Allocate contingency reserves within the
project. budget to address unforeseen expenses.
- Continuous Improvement: Continuously
review and refine cost tracking processes based
The third and lowest level shows work packages.
on lessons learned. Identify areas for
improvement and implement corrective actions
Most WBS charts have 3 levels, but you can add more to enhance cost management effectiveness.
depending on the complexity of your projects. By leveraging the Work Breakdown Structure (WBS)
as a framework for cost tracking, project managers
can ensure better visibility, control, and
Each of those five project phases—initiation, planning, accountability over project expenditures, ultimately
execution, control and closeout, also act as control improving project outcomes and delivering value to
accounts and branch off the main deliverable at the top. stakeholders.
Once decided, they are then broken down into a series CONTROLLING COSTS WITH WBS
of deliverables. 1. Baseline Establishment: Use the Work Breakdown
Structure (WBS) to establish a baseline budget by
For example, the initiation phase includes site evaluation allocating costs to each work package based on detailed
work and creating the project charter cost estimates. This serves as a reference point for cost
control activities.
2. Regular Monitoring: Continuously monitor actual costs
- Tracking Costs Using WBS against the baseline budget for each work package.
- Assign Cost Codes: These codes link each Track expenditures in real-time to identify cost variances
task or activity to specific cost elements, such as and deviations from the planned budget.
labor, materials, equipment, and overhead. 3. Variance Analysis: Conduct variance analysis to
- Budget Allocation: based on the estimated identify the root causes of cost discrepancies. Compare
costs derived during the Work Breakdown actual costs to budgeted costs and analyze the reasons
Structure (WBS) development phase. This behind any deviations. Determine whether variations are
establishes a baseline against which actual due to scope changes, resource overruns, inefficiencies,
costs will be compared. or external factors.
- Track Actual Costs: Record actual costs 4. Cost Optimization: Utilize the Work Breakdown
incurred for each work package throughout the Structure (WBS) to identify opportunities for cost
project lifecycle. optimization. Analyze cost data at different levels of the
- Cost Aggregation: Aggregate actual costs at WBS hierarchy to identify areas where costs can be
different levels of the Work Breakdown Structure reduced or resources can be utilized more efficiently.
(WBS) hierarchy. 5. Change Management: Implement robust change control
- Cost Performance Analysis: Compare actual processes to manage scope changes and their impact
costs to the budgeted costs for each work on project costs. Assess proposed changes against the
package. Calculate variances to identify areas baseline budget and evaluate their implications before
where costs are over or under budget. Analyze approving or rejecting them.
the reasons behind these variances to 6. Earned Value Management (EVM): Integrate EVM
determine corrective actions. techniques with the Work Breakdown Structure (WBS) to
- Earned Value Management (EVM): Implement assess cost performance in relation to project progress.
EVM techniques to assess cost performance Calculate key performance indicators such as Cost
 Performance Index (CPI) and Cost Variance (CV) to Noun vs. Verb
measure cost efficiency and predict future cost trends.
7. Resource Allocation: Optimize resource allocation The WBS focuses on the deliverables of the project.
based on cost data derived from the Work Breakdown Those deliverables might be a product, service, or result.
Structure (WBS). Allocate resources to work packages Think of the WBS as being filled with nouns — things
based on their priority and cost-effectiveness to ensure the project will produce.
optimal utilization of project resources.
8. Risk Management: Proactively identify and mitigate The Project Schedule focuses on tasks to be performed
cost-related risks using the Work Breakdown Structure in the project. Think of the Schedule as being filled
(WBS) as a risk assessment tool. Identify potential cost with verbs — actions the team will perform to build
drivers and develop contingency plans to address risks
those work packages.
that may impact project costs.
9. Cost Reporting: Generate regular cost reports using
data from the Work Breakdown Structure (WBS) to Scope vs. Time
communicate cost performance to stakeholders. Provide
clear and concise updates on project expenditures, cost The WBS focuses on the scope of the project. It
trends, and forecasts to support decision-making provides a detailed breakdown of the project’s
processes. deliverables and the work required to produce them. The
10. Continuous Improvement: Continuously review and WBS answers the question: “What needs to be built?”
refine cost control processes based on lessons learned
from previous projects. Identify areas for improvement The Project Schedule focuses on time. It outlines when
and implement corrective actions to enhance cost tasks will be performed, establishing a timeline for
management effectiveness. project activities. The Project Schedule answers the
By leveraging the Work Breakdown Structure (WBS) question: “When will tasks be done?”
as a framework for cost control, project managers
can effectively manage project expenditures, Graph vs. Timeline
minimize cost overruns, and ensure the successful
delivery of projects within budget constraints
The WBS is structured hierarchically, with the project
broken down into major deliverables, sub-deliverables,
Project Schedule?
and work packages. This hierarchical structure ensures
that all aspects of the project are identified and
A PROJECT SCHEDULE is a timetable that organizes organized systematically. The WBS looks like a graph
tasks, resources and due dates in an ideal sequence with summary levels at the top and more detailed nodes
so that a project can be completed on time. A project as you work down.
schedule is created during the planning phase and
includes the following: The Project Schedule is organized chronologically,
with tasks arranged in the order they need to be
completed. It includes start and finish dates, milestones,
 A project timeline with start dates, end and dependencies, providing a clear timeline for the
dates and milestones project’s progression. The Project Schedule progresses
from left to right across the page, demonstrating the life
 The work necessary to complete the
of the project from kickoff to completion.
project deliverables
 The costs, resources and Usage in Project Phases
dependencies associated with each
task The team builds the WBS during the planning phase to
 The team members that are define and organize the project scope. It’s used
responsible for each task throughout the project to ensure all deliverables are
accounted for and that work is progressing as planned. If
 a scope change is approved, the team should update the
WBS to reflect it.
Key Differences Between a WBS and a Project
Schedule After the team builds the WBS, they move right into
building the schedule. The Project Schedule is used
Project managers need to understand the distinctions during both the planning and execution phases. Initially,
and proper uses for Work Breakdown Structures and it helps in planning the sequence and duration of tasks.
Project Schedules. While both tools are useful, they During execution, it is used to monitor progress, manage
serve different purposes and focus on different aspects timelines, and make adjustments as necessary to keep
of the project. the project on track.
 Integration of the WBS and the Project Schedule 5. Monitoring and Control: Risk management and cost
management go hand in hand during the project
While the WBS and the Project Schedule have different execution phase. Project managers continuously monitor
focuses, they are complementary tools that work best and control risks to ensure that they do not adversely
when used together. The WBS provides the detailed impact project costs. This involves tracking risk events,
scope of work required, while the Project Schedule assessing their impact on project costs, and taking
outlines when these tasks will be completed. corrective actions as necessary.
In summary, risk management and project cost
You can start with the WBS to identify and organize all management are closely intertwined. Effective risk
management helps in identifying, quantifying, and
the tasks needed for the project. Once the WBS is
responding to potential risks that may impact project
complete, you can use it as a basis to develop the
costs. By integrating risk management into project cost
Project Schedule. Assign start and finish dates, establish
management processes, project managers can enhance
dependencies, and set milestones based on the detailed
tasks outlined in the WBS. cost control, improve budget accuracy, and increase the
overall success of the project.
A HUMAN RESOURCES PLAN in project management INPUTS
Project Management Plan?
The general purpose of the human resources plan in project
management is to ensure that the project has the necessary The Project manager creates the project management
specialists with the right skills and knowledge to complete plan following inputs from the project team and the
the work and that they are motivated to do their best. This key stakeholders.
includes identifying the workforce requirements, recruiting
and choosing employees, training and developing them,
managing performance, and providing support during A Project management plan is a formal, approved
transitions such as changes in leadership or project scope. document that defines how the project is executed,
monitored, and controlled. It may be a summary or a
RELATIONSHIP BETWEEN RISK AND PROJECT detailed document and may include baselines,
COST MANAGEMENT subsidiary management plans, and other planning
documents. This document is used to define the
Risk and Project Cost Management are closely approach the project team takes to deliver the
interconnected in project management. The relationship intended project management scope of the project.
between the two can be summarized as follows:
1. Identification of Cost Risks: Risk management A project charter is an elevator pitch of your project
involves identifying potential risks that may impact the objectives, project scope, and project responsibilities
project's cost. This includes identifying risks related to in order to get approval from key project
cost estimation, budgeting, resource allocation, and stakeholders. In the charter, you should provide a
procurement. By identifying these risks early on, project short, succinct explanation of the main elements of
managers can take proactive measures to mitigate their your project before you get started. By creating a
impact on project costs. project charter before getting started on other, more
2. Quantification of Cost Risks: Once risks are identified, in-depth project planning documents, you can get
project managers assess their potential impact on approval or course-correct if necessary.
project costs. This involves quantifying the likelihood and A project charter is one of many project planning
severity of each risk event and estimating the potential materials you can create.
cost impact. This information helps in prioritizing risks
and allocating resources for risk response planning. Project charters vs. project plans
3. Cost Contingency Planning: Risk management plays a A project charter should only include three elements:
crucial role in determining the level of cost contingency your project objectives, scope, and responsibilities.
required for the project. Contingency reserves are set Once your charter has been approved, you should
aside to cover unforeseen risks that may impact project then create a project plan. Your project plan builds on
costs. The risk management process helps in identifying your project charter to provide a more in-depth
and quantifying risks, which in turn helps in determining blueprint of the key elements of your project.
the appropriate level of contingency reserves. There are seven key elements in a project plan:
4. Risk Response Planning: Risk management involves
 Goals
developing strategies to respond to identified risks.
 Success metrics
When it comes to cost risks, project managers can
develop specific response plans to address potential  Stakeholders and roles
cost overruns or budget constraints. These response  Scope and budget
plans may include alternative sourcing options,  Milestones and deliverables
renegotiating contracts, or revising the project schedule  Timeline and schedule
to optimize costs.  Communication plan
ENTERPRISE ENVIRONMENTAL FACTORS can be
defined as conditions that aren’t under the immediate
control of the project team or project management office.
These constraints include the cultural, political, legal and
environmental landscape in which the project is being
executed. These can influence the outcome of the
project, program or portfolio so they must be managed.

Both being beyond the control of the project team, and

even the organization that initiated the project, enterprise
environmental factors can affect the outcome of the
project, both negatively and positively. These enterprise
environmental factors are even broader in scope as they
can occur within the organization initiating the project
and outside of it.

That’s why project managers and their teams need to

take time to identify enterprise environmental factors that
might influence their projects and figure out an action
plan to mitigate or respond to them in a timely, effective
manner. This systematic analysis of external and internal
environmental factors is part of the larger strategic
management of a project, program or project portfolio.

AN ORGANIZATIONAL PROCESS ASSET is a tangible

resource that’s used to guide the management of an
organization’s projects and operations. These tangible
assets can be templates, contracts, processes, reports
and financial statements which are usually managed by
the project management office (PMO).

Officially defined by the Project Management Institute’s

Project Management Body of Knowledge (PMI’s
PMBOK) as “the plans, processes, policies, procedures
and knowledge bases specific to and used by the
performing organization,” operational process assets
influence the management of a project.

Besides the examples above, an operational process

asset can be any practice or knowledge from anything
used to execute or govern the project, even lessons
learned from previous projects, programs or project
portfolios. Organizational process assets may also
include schedules, risk data and earned value data.

THE OUTPUT WILL BE THE COST MANAGEMENT

PLAN