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Thursday, 25 January 2007 20:39

Project Cost

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What is a Project Cost? Each resource in the project must be accounted for and assigned to a cost category. Categories include the following:

  • Labor costs
  • Material costs
  • Travel costs
  • Supplies
  • Hardware costs
  • Software costs
  • Special categories (inflation, cost reserve, and so on)

 

Kinds of Cost

  • Direct costs - These are costs that attributed directly to the project and cannot be shared with operations or other projects.
  • Variable costs - Costs that vary depending on the conditions within the project.
  • Fixed costs - Costs that remain the same throughout the project.
  • Indirect costs -These costs can be shared across multiple projects that use the same resources—such as training room or piece of equipment.


What is Project Cost Management?

Estimating schedule activity costs involves developing an approximation of the costs of the resources needed to complete each schedule activity. In approximating costs, the estimator considers the possible causes of variation of the cost estimates, including risks. Cost estimating includes identifying and considering various costing alternatives. For example, in most application areas, additional work during a design phase is widely held to have the potential for reducing the cost of the execution phase and product operations. The cost estimating process considers whether the expected savings can offset the cost of the additional design work. Cost estimates are generally expressed in units of currency (dollars, euro, yen, etc.) to facilitate comparisons both within and across projects. In some cases, the estimator can use units of measure to estimate cost, such as staff hours or staff days, along with their cost estimates, to facilitate appropriate management control. Cost estimates can benefit from refinement during the course of the project to reflect the additional detail available. The accuracy of a project estimate will increase as the project progresses through the project life cycle. For example, a project in the initiation phase could have a rough order of magnitude (ROM) estimate in the range of -50 to +100%. Later in the project, as more information is known, estimates could narrow to a range of -10 to +15%. In some application areas, there are guidelines for when such refinements are made and for what degree of accuracy is expected. Sources of input information come in the form of outputs from the project processes in Chapters 4 through 6 and 9 through 12. Once received, all of this information will remain available as inputs to all three of the cost management processes. (Refer to section 7.1 in the PMBOK)

Project Cost Management includes the processes involved in planning, estimating, budgeting, and controlling costs so that the project can be completed within the approved budget.

  • Cost Estimating – Developing an approximation of the costs of the resources needed to complete project activities.
  • Cost Budgeting – Aggregating the estimated costs of individual activities or work packages to establish a cost baseline.
  • Cost Control – Influencing the factors that create cost variances and controlling changes to the project budget.

Project Cost Management is primarily concerned with the Cost of Resources needed to complete schedule activities. However, Project Cost Management should also consider the effect of project decisions on the cost of using, maintaining, and supporting the product, service, or result of the project.

The cost management processes and their associated tools and techniques vary by application area, are usually selected during the project life cycle definition, and are documented in the cost management plan. For example, the cost management plan can establish:

  • Precision Level - Schedule activity cost estimates will adhere to a rounding of the data to a prescribed precision (e.g., $100, $1,000), based on the scope of the activities and magnitude of the project, and may include an amount for contingencies.
  • Units of Measure - Each unit used in measurements is defined, such as staff hours, staff days, week, lump sum, etc., for each of the resources.
  • Organizational procedures links - The WBS component used for the project cost accounting is called a control account (CA). Each control account is assigned a code or account number that is linked directly to the performing organization’s accounting system. If cost estimates for planning packages are included in the control account, then the method for budgeting planning packages is included.
  • Control thresholds - Variance thresholds for costs or other indicators (e.g., person-days, volume of product) at designated time points over the duration of the project can be defined to indicate the agreed amount of variation allowed.
  • Earned value rules - Three examples are:
  1. Earned value management computation formulas for determining the estimate to complete are defined
  2. Earned value credit criteria (e.g., 0-100, 0-50-100, etc.) are established, and
  3. Define the WBS level at which earned value technique analysis will be performed.
  • Reporting Formats - The formats for the various cost reports are defined.
  • Process Descriptions - Descriptions of each of the three cost management processes are documented.


Note: Costs associated with projects are not just the costs of goods procured to complete the project. The cost of the labor may be one of the biggest expenses of a project. The project manager must rely on time estimates to predict the cost of the labor to complete the project work. In addition, the cost of the equipment and materials needed to complete the project work must be factored into the project expenses.

 

 

Read 5533 times Last modified on Thursday, 10 December 2009 21:34

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