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Lecture 3 – Plan Cost Management

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Project Cost & Financial Management

MS (PM)

Scheme
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 Costs ( Direct & Indirect)

 What is Project Cost Management?

 Key Concepts for Project Cost Management

 Project Cost Management Processes

 Plan Cost Management Process

 Inputs
 Tools & Techniques
 Outputs

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Cost
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 Cost is an amount of expenditure (actual or estimated) incurred on or

attributable to a given thing.

 Costs are estimated for all resources used on the project including: labor,
materials, equipment, services, software, hardware, facilities, contingency costs.

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What is Project Cost Management?

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 The processes involved in:

 Planning the costs

 Estimating the costs
 Budgeting of project
 Financing the project
 Funding the project
 Managing the costs & budget
 Controlling the costs & budget

 So that the project can be completed within the approved budget.

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Key Concepts for Project Cost Management

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 Mainly concerned with cost of resources needed to complete project activities.

 Consider the effect of project decisions on the subsequent recurring cost of

using, maintaining and supporting the product, service, or result of the project
(life cycle costing) – e.g. limiting the number of design reviews can reduce the
cost of the project but could increase the resulting product’s operating costs.

 Different stakeholders measure project costs in different ways and at different

times – e.g. the cost of an acquired item may be measured when the acquisition
decision is made or committed, the order is placed, the item is delivered, or the
actual cost is incurred or recorded for project accounting purposes.

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Key Concepts for Project Cost Management

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 In many organizations, predicting and analyzing the prospective financial

performance of the project’s product is performed outside of the project.

 While in others, such as a capital facilities project, Project Cost Management

can include this work.

 When such predictions and analyses are included, Project Cost Management
may address additional processes and numerous general financial management
techniques such as:

 Return on investment,
 Discounted cash flow
 Payback analysis
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Project Cost Management Processes

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 Plan Cost Management – The process of defining how the cost will be
estimated, budgeted, managed, monitored and controlled.

 Estimate Costs – The process of developing an approximation of the monetary

resources needed to complete project work.

 Determine Budget – The process of aggregating the estimated costs of

individual activities or work packages to establish and authorize cost baseline.

 Control Costs – The process of monitoring the status of the project to update
the project costs and manage changes to the cost baseline.

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Project Cost Management Processes

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Plan Cost Management

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 The process of defining how the project costs will be estimated, budgeted,
managed, monitored, and controlled.

 The key benefit of this process is that it provides guidance and direction on
how the project costs will be managed throughout the project.

 This process is performed once or at predefined points in the project.

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Plan Cost Management

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Plan Cost Management

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 The cost management planning effort occurs early in project planning and
sets the framework for each of the cost management processes so that
performance of the processes will be efficient and coordinated.

 The cost management processes and their associated tools and techniques
are documented in the cost management plan.

 The cost management plan is a component of the project management plan.

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Inputs of Plan Cost Management

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1. Project Charter

 Provides preapproved financial resources from which detailed project costs

are developed.

 Also defines project approval requirements that will influence the

management of the project costs.

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Inputs of Plan Cost Management

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2. Project Management Plan

 Project management plan components include but are not limited to:

 Schedule Management Plan – Establishes the criteria and the activities for
developing, monitoring, and controlling the schedule and provides processes
and controls that will impact cost estimation and management.

 Risk Management Plan – Provides the approach for identifying, analyzing,

and monitoring risks, as well as the processes and controls that will impact
cost estimation and management.

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Inputs of Plan Cost Management

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3. Enterprise Environmental Factors (EEF)

 Organizational culture and structure can influence cost management.

 Market conditions describe what products, services, and results are available in the
regional and global markets.
 Currency exchange rates for project costs are sourced from more than one country.
 Published commercial information, e.g. resource cost rate information
 Published seller price lists are another source of information.
 PMIS provides alternative possibilities for managing cost.
 Productivity differences in different parts of the world can influence project costs.
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Inputs of Plan Cost Management

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4. Organizational Process Assets (OPA)

 Financial controls procedures (e.g., time reporting, required expenditure and

disbursement reviews, accounting codes, and standard contract provisions);

 Historical information and lessons learned repository;

 Financial databases; and

 Existing formal and informal cost estimating and budgeting-related policies,

procedures, and guidelines.

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Tools & Techniques of Plan Cost Management

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1. Expert Judgment

 Expertise should be considered from individuals or groups with specialized

knowledge or training in the following topics:

 Previous similar projects;

 Information in the industry, discipline, and application area;

 Cost estimating and budgeting; and

 Earned value management

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Tools & Techniques of Plan Cost Management

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2. Data Analysis

 A data analysis technique that can be used for this process includes but is not
limited to alternatives analysis.

 Alternatives analysis can include:

 Reviewing strategic funding options such as: self-funding, funding with

equity, or funding with debt.

 Consideration of ways to acquire project resources such as making,

purchasing, renting, or leasing.

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Tools & Techniques of Plan Cost Management

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3. Meetings

 Project teams may hold planning meetings to develop cost management plan.

 Attendees may include:

 Project manager
 Project sponsor
 Selected project team members
 Selected stakeholders
 Anyone with responsibility for project costs
 Others as needed
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Cost Management Plan

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 The cost management plan describes how the project costs will be planned,
structured, and controlled.

1. Units of Measure

 Each unit used in measurements is defined for each of the resources.

 These units may include:

 Staff hours, staff days, or weeks for time measures

 Meters, liters, tons, kilometers, or cubic yards for quantity measures or
 Lump sum in currency form

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Cost Management Plan

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2. Level of Precision

 This is the degree to which cost estimates will be rounded up or down (e.g.,
US$995.59 to US$1,000), based on the scope of the activities and magnitude
of the project.

3. Level of Accuracy

 The acceptable range (e.g., ±10%) used in determining realistic cost estimates
is specified, and may include an amount for contingencies.

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Cost Management Plan

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4. Organizational Procedures Links

 The work breakdown structure (WBS) provides the framework for the cost
management plan, allowing for consistency with the estimates, budgets, and
control of costs.

 WBS component used for project cost accounting is called the control account.

 Each control account is assigned a unique code or account number(s) that links
directly to the performing organization’s accounting system.

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Cost Management Plan

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5. Control Thresholds

 Variance thresholds for monitoring cost performance may be specified to

indicate an agreed-upon amount of variation to be allowed before some action
needs to be taken.

 Thresholds are typically expressed as percentage deviations from baseline plan.

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Cost Management Plan

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6. Rules of Performance Measurement

 Earned value management (EVM) rules of performance measurement are set –

for example, the cost management plan may:

 Define the points in WBS at which measurement of control accounts will be

performed;

 Establish the EVM techniques (e.g., weighted milestones, fixed-formula,

percent complete, etc.) to be employed; and

 Specify tracking methods and EVM computation equations for calculating

estimate at completion (EAC) forecasts for validity check on bottom-up EAC.

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Cost Management Plan

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7. Reporting Formats

 The formats and frequency for the various cost reports are defined.

8. Additional Details – may include but are not limited to:

 Description of strategic funding choices,

 Procedure to account for fluctuations in currency exchange rates, and

 Procedure for project cost recording

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Classes of Work
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Work Measurement Methods

31 Work Type / Measurement
Description
Method

Work is credited with a specific percent as soon as it

Fixed Formula starts and remaining work is credited when it finishes as
per chosen formula, e.g. 50/50, 25/75, 0/100, 0/40/60

Discrete Milestone are weighted to reflect a verifiable

Work Weighted Milestone
accomplishment of milestone against the whole.
Entails an estimate of the percent complete of the BAC
Percent Complete
at each measurement point.
Physical Measurement Evaluation of work progress is related to physical nature.
Measured as percentage of related discrete work,
Apportioned Effort
quality assurance, inspection & inspection activities
Level of Effort Measured based on the passage of time.
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Work Measurement Methods

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Some Questions
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Some Questions
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