Project Cost Management

Project Cost Management is one of the ten Knowledge Areas that lay the foundation
of project management. According to PMBOK® Guide – Sixth Edition,

Project Cost Management includes the processes involved in

planning, estimating, budgeting, financing, funding, managing, and
controlling costs so the project can be completed within the
approved budget.
Project cost management is particularly concerned with the cost of various resources
that are required to complete the project activities. It assists the project manager in
foreseeing the project expenses and thus taking precautionary actions to mitigate the
chances of over expenditure. Cost management acts as an umbrella process that
covers the entire project life cycle, beginning from its initial planning phase until its
completion and handover.

The cost is generally estimated during the project planning phase and must be
approved by the upper management before its execution begins. As the project
gradually enters into the execution phase, all the expenses made are tracked and
properly documented to keep expenses within the agreed budget. After project
completion, this document is then used to compare the deviations between the
predicted and the actual costs incurred. These results are further used as references
for the curating cost management plans and budget in the future.

When we talk about cost, in terms of project management, there can be five types of
costs incurred:

1. Fixed Cost: Fixed costs are those type of costs that are static and do not
fluctuate throughout the project lifecycle.
2. Variable Cost: Variable costs are the costs that have a high tendency to
variate depending on the duration of a project.
3. Direct Cost: Direct costs are the type of expenses which are directly linked to
the project budget.
4. Indirect Cost: Indirect costs are those costs which are not particularly linked
to your project but is shared across multiple projects.
5. Sunk Cost: Sunk costs are the costs that have already been incurred, but
have failed to generate any value for the project’s objectives.

By implementing effective project cost management, you will get a cost baseline
which will help you in managing all the above-mentioned costs better. It will give you
a proper direction for better decision making and avoid out-running the project
budget.

In the next, section of this project cost management article, I will be discussing the
benefits you can avail with cost management.

Cost Management Benefits

The list of benefits of including Cost Management in your project
management framework is pretty long. I have picked up a few of the most intriguing
ones:

 It controls the costs of the specific processes/ activities which in turn helps in
gaining control over the complete business cost.
 With proper cost management, you will be able to accurately estimate the
future expenses and thus put your efforts towards generating the expected
revenues.
 Cost management helps in predefining the expenses of all the project
activities which are then maintained as business records.
 It prevents the over expenditure on any one business components and thus
maintains the budget balance.
 It helps you in prioritizing your project tasks by strictly limiting the financial
flow. Because of this, you will focus more on the activities that are actually
needed in the project.
 It also reduces the extra expenses as all the expenses need to be approved
by the manager before they are actually made.

Project Cost Management Processes

Project Cost Management is one of the most important Knowledge Areas. It involves
the following 4 processes:

1. Plan Cost Management

2. Estimate Costs
3. Determine Budget
4. Control Costs

1. Plan Cost Management

Plan cost management is the initial process of project cost management where you
will be defining how the costs of the project will be estimated, budgeted, managed,
monitored and controlled. Generally, techniques like WBS(Work Breakdown
Structures) or historical data of similar kinda projects are used for defining the cost
resource requirements which include time, material, labor, equipment etc. This
process gives a rough outline of the number of resources involved and shows the
optimum path to manage the project costs throughout the project lifecycle. Thus, the
plan cost management process is performed at some specific predefined point in the
project.

Below I have listed down the various inputs, tools and techniques, and outputs
involved in this process:

Inputs Tools & Techniques Outputs

1. Project Charter 1. Expert 1. Cost Management

2. Project Management Judgement Plan
Plan 2. Data Analysis
 o Schedule
Management
Plan
o Risk
Management
3. Meetings
Plan
3. Enterprise
Environmental Factors
4. Organizational Process
Assets

2. Estimate Costs

This is the second process of the project cost management plan that helps in
estimating the cost of the resources required for project completion. Since cost is an
important variable that ensures project success, you have to be very careful while
producing the estimated amount of the total project cost. Throughout the project
lifecycle, this process is performed at periodical intervals. A project manager uses
various methods to estimate costs depending on the amount of information available.

Next
I have listed down the inputs, tools & techniques and output involved in the estimate
costs process:

Inputs Tools & Techniques Outputs

1. Project Management 1. Expert Judgement 1. Cost Estimates

Plan 2. Analogous 2. Basis of Estimates
o Cost Estimation 3. Project Document
Management 3. Parametric Updates
Plan Estimation o Assumption
o Quality 4. Bottom-Up Log
Management Estimation o Lessons
Plan 5. Three Learned
o Scope Point Estimation Register
Baseline 6. Data Analysis o Risk
2. Project Documents o Alternative Register
o Lessons Analysis
Learned o Reserve
Register Analysis
o Project o Cost of
Schedule Quality
o Resources 7. Project
Requirements Management
o Risk Register Information
3. Enterprise System
Environmental 8. Decision Making
 Factors
4. Organizational o Voting
Process Assets

3. Determine Budget

Determine Budget is the third process of this Knowledge Area where the estimated
cost of individual activities or tasks is summed up to draw the cost baseline. The cost
baseline of the budget includes all the authorized funds that are essential for project
execution. This budget basically includes various reserves of contingency while
keeping the management reserves far at the bay. Cost baseline is an authorized
time-phased budget that is used as the initial point for monitoring and calculating the
project performance and progress. This process is executed at specific points in a
project which are generally predefined.

Below table contains the various inputs, tools & techniques and outputs involved in
this process:

Inputs Tools & Techniques Outputs

1. Project Management
Plan
o Cost
Management
Plan
o Resource
Management
Plan
o Scope 1. Expert Judgment
1. Cost baseline
Baseline 2. Cost aggregation
2. Project funding
2. Project Documents 3. Data Analysis
requirements
o Basis of o Reserve
3. Project documents
Estimates Analysis updates
o Cost Estimates 4. Historical o Cost
o Project Information
Estimates
Schedule Review
o Project
o Risk Register 5. Funding Limit
schedule
3. Business Documents Reconciliation
o Risk register
o Business case 6. Financing
o Benefits
Management
Plan
4. Agreements
5. Enterprise
Environmental factors
6. Organizational
process assets
4. Control Costs

Control costs is the final process of project cost management which is primarily
concerned with the measurement of variances of the actual costs from the proposed
baseline. Various methods and procedures are implemented here to track the project
performance and expenses against its progress rate. Meanwhile, all these variances
are recorded and compared with the actual cost baseline. Here, control costs
process will be responsible for explaining the reason for variance and further assists
the project manager in taking corrective actions to incur minimum costs. Thus it can
be concluded that via control costs process, a project manager can control entire
project expenses and close it within the agreed budget.

Control costs process makes use of various inputs, tools & techniques and outputs,
which I have listed in the below table:

Inputs Tools & Techniques Outputs

1. Work
1. Project Performance Informa
Management tion
Plan 2. Cost Forecasts
o Cost
3. Change requests
Managem 4. Project Management
ent Plan 1. Expert Judgement Plan Updates
o Cost 2. Data Analysis o Cost
Baseline o Earned Value
Management
o Performan Analysis Plan
ce o Variance
o Cost Baseline
Measurem Analysis o Performance
ent o Trend
Measurement
Baseline Analysis Baseline
2. Project o Reserve
5. Project Documents
Documents Analysis Updates
o Lessons 3. To-Complete o Assumption
Learned Performance Index Log
Register 4. Project o Basis of
3. Project Funding Management Informa
Estimates
Requirements tion System
o Cost
4. Work
Estimates
Performance Dat
o Lessons
a
Learned
5. Organizational
Register
Process Assets
o Risk Register

With this, we come to the end of this Project Cost Management article. There are 10
Knowledge Areas in the project management framework and Cost Management was
just one of them. If you wish to learn more about project management
framework or project management certifications, you can check my other articles as
well.