We previously looked at Scope, which told us "What and Where". Then we looked at Time, which told us "When". This section deals with Cost, answering the question "How Much Money?" Taken together, Scope, Time, and Cost are often referred to as the "Triple Constraints" or the "Triple Threats". These 3 knowledge areas are the ones most people think of when they consider the success of a project.
Managing Cost in a project is a big part of project success because money spent is very visible to a wide audience. Even people who do not understand the technicality of your project will understand how much money you spent. Project Cost Management is an area that is worth getting good at. Let's look at how to do this well.
Before we begin, be aware that some Project Management pitfalls are inherent to budgets and costs. Here are 4 of them:
Overly restrictive budgets eliminate creativity, empowerment, and discretion. Good opportunities can be lost when the Project Manager does not have authority to alter the budget somewhat.
Performance evaluation of the Project Manager on budget (Cost) alone will lead to poor project results. Cost is only one of the triple threats and only one of the 11 Project Management knowledge areas. (SEE Link Below)
Over-attention to budgets can lead to the "We have to spend it all" syndrome. Money spent just to use up the budget is seldom the best use of available funds.
Belief that costs cannot be controlled. "It will cost whatever it will cost." Wrong! Costs can and must be controlled. We will look at some TECHNIQUES for doing that in the Monitor & Control Section CLICK HERE .
Professional Project Managers make their reputation on planning and controlling project costs. Here is how to make an effective Cost Plan. The Key Elements of Effective Planning apply to all project Planning , so look at this for review.
Many lessons learned in managing Time are also applicable to managing Cost. As a Professional Project Manager it is your responsibility to create a realistic Cost Plan. Cost Plans are usually reported as a Project Budget.
It takes only 5 steps to make a great Cost Plan. Here they are:
1) Previously, when making your Time Plan, you started with your Scope Baseline which contains a Work Breakdown Structure (WBS), with its lowest level comprised of deliverable work packages. You then decomposed the WBS work packages into Activities, and applied estimated times to the Activities. To make a Cost Plan, start by applying estimated costs to these Activities. I like to use Estimating Sheets as working documents to collect Costs estimates. Then Activity Costs can be added to Activity Lists as a main document, or broken out as an Activity Cost list when required.
You will find that some work packages are best cost-estimated at the Activity or sub-Activity level while others are best cost-estimated at the work package level. This choice depends largely upon whether the work package will be produced by your project team, or the work package is purchased as a completed item.
2) The second step is to look at your Time Plan. If you worked on Time planning first, your Time Plan is in the form of a Schedule. The Time Plan affects the Cost Plan in matters of:
number of personnel hours needed. More hours will cost more money.
hours/ shifts/ overtime costs
seasonal variability of material costs
cost of finance charges
"rush" requirements which usually cost more than the standard delivery times
stand-by time such as lag time
I am sure you can think of others.
3) Thirdly, look into the Resources needed (materials, humans, equipment, and supplies). You already looked at Resources to make your Time Plan. This time you are looking at the Costs associated with those Resources. In addition to labor rate (Cost per hour), some Resources require transportation, accommodation, storage, meals (for humans, of course), special taxes, and so on.
4) You are now ready to assign Cost estimates to the Activities and work packages. Use a consistent unit of measure (dollars, yen, pounds, etc). The TECHNIQUES used for estimating Time are equally suitable for estimating Cost, and they are discussed here. Insert the Estimated Costs into your Activity List and onto your Project Budget.
5) In addition to a Project Budget, in some organizations you will be expected to forecast cash flow. That is, you will need to state when you need the money and how much you need each time period (say, each month). The Project Cost will change over the life of your project, almost always increasing. It is important to realize how the cost of certain items will vary with Time or with Work Done. A description of Cost variability is given here.
In summary, there are 5 steps to make a great Cost Plan. They are:
Decompose WBS and define Activities
Look at the effect your Time plan has on Costs
Look at how Resources impact your Cost plan
Estimate the cost of Activities and work packages.
Forecast cash flow.
A flow diagram of the 5 Cost Planning Steps is given here.
Estimating is a little bit art and a little bit science. At best it is never perfect and that's Ok. Here are some some useful Cost estimating tips to consider.
Interesting thought: While we can draw some similarities between Time and Cost, there is clearly one difference that is inescapable. We can stop spending money by (for example) stopping the work, but Time never stops.
What are the benefits of a good budget? Try this little quiz to find out.
For more complex projects you will want to develop a Cost Management Plan. This is a document that describes how Cost will be managed on your project. A Cost Management Plan can establish the following:
units of measure. Usually monetary denominations. Be careful with currency that sounds alike such as Canadian dollars and US dollars.
level of precision. The degree of round up or down. For some projects reporting to the nearest $1000 is close enough.
level of accuracy (level of certainty). The acceptable range of an estimate. This depends upon how far advanced the project is. Plus or minus 10% usually considered quite accurate.
linkage to existing organizational procedures and policies. Projects operate within organizations, and these organizations usually have rules for spending money.
control thresholds. How much latitude are you as the Project Manager allowed to go off target, before needing further authority to spend money.
rules to measure work done. If your project is paying by amount of work done, the rules to measure that work must be clear to all.
PROJECT BUDGET COMPONENTS
The figure below illustrates the levels that comprise the total project budget. Starting on the right side, as Project Manager you obtain estimates for each Activity. You might add a contingency amount to each Activity cost estimate, to manage Risk. Contingency is discussed more fully HERE
The Activity estimates are gathered (rolled up) into their Work Package and Planning Package estimates. An overall contingency amount is placed on the sum of these estimates to cover identified risks, also called known-unknowns (discussed in the Risk section). At that level we have reached the project baseline against which your performance as Project Manager will be measured.
Your Sponsor, Boss, or Client likely has added some buffer called Management Reserve to your baseline to allow for genuine surprises also called unknown-unknowns. (discussed in the Risk section). The Project Manager usually requires special authorization to access the Management Reserve.
After planning, you will want to begin Monitoring and Controlling the outcomes of your project. CLICK HERE and follow the links to find out how to monitor and control Cost.