introduction
Plan Cost Management is the process that establishes the policies, procedures, and documentation for:
- planning,
- managing,
- expending,
- and controlling project costs.
The key benefit of this process is that it provides guidance and direction on how the project costs will be managed throughout the project.
plan cost concepts
In mapping out your cost management plan, you’ll need to do a lot of different calculations, practice many formulas and triple check your math when you’re done. But that being said, these actions go by many specific names. Let’s define them.
Work Breakdown Structure:
- Similar in style to the waterfall method or a simple hierarchical flow chart, this is a product-oriented layout of work, tasks and activities to be done by the team members.
Cost Baseline:
- This is created by estimating your costs against the general time period that your project will take place. Your cost baseline is ultimately what you’ll use to compare your performance, usually illustrated on an S-curve.
Control Threshold:
- Just as you set your baseline, your cost threshold is the highest or lowest spend your project is allowed to go. Anything above or below that is deemed unacceptable.
Level of Precision:
- This unit of measurement will show how steep your cost estimates will be rounded down or up. Your level of precision will additionally be defined by the scope and total size of your project.
Earned Value Measurement:
- This equation helps project managers to better measure the amount of work that has already been performed on said project as accurately as possible.
Three-Point Estimation:
- Using this formula, you’ll get three figures. The first would be your best guess (BG) on the amount of work an activity would take if it was performed 100 times. The second would be your pessimistic (P) estimate, which is how long the project would take and how much it would cost if all the negative risks occurred. And your third is your optimistic (O)estimate if all of the positive risks occurred.
Bottom-Up Estimation:
- This formula involves using the smaller estimates of your project, and then aggregating those into a sum total to determine your overall project cost estimate.
Analogous Estimation:
- This estimate is calculated by comparing all past projects cost estimates and measuring them against your current project’s time and cost. This is typically done when there are few project details available.
Parametric Estimation:
- This estimate is calculated by tying a cost to each task and mapping that cost against the projects timeline. However many tasks there are will help you find your total cost estimate. This can be done in ProjectManager.com by using our online Gantt chart. Here, you can assign a cost to each task, and as the project is completed, the total cost is automatically calculated and compared to the budget.
Questions that cost plan answers
This plan answers two main questions
“How will I go about planning cost for the project?”
- The plan will guide you on how to estimate costs for each activity, each deliverable and how to construct the overall project budget respectively.
“How will I manage the project to the cost baseline?
- ”After the budget of the project is determined, cost baseline is taken.
- Cost baseline shows the initial cost estimate of the project.
- If nothing changes in the project, or if there won’t be any approved change requests, it is expected that the determined project budget will be met.
- Cost management plan will guide you on when to spend on what throughout the project and ensure you meet the determined project budget.
Plan Cost Management : Inputs-Techniques - Outputs
Inputs
- pm plan
- project charter
- OPA
- EEF
Techniques
- expert judgment
- analytical techniques
- meeting
Outputs
- cost management plan
Plan Cost Management : Inputs
Project Charter
The project charter, the output of process 4.1 Develop Project Charter, may contain pre-approved financial resources from which the detailed project costs are developed, such as a certain budget within the organization.
Project Management Plan
The other knowledge area plans that may impact the creation of the cost management plan:
- Schedule management plan–certain processes and controls may impact cost estimation and management. For example, crashing a schedule to reduce the estimate of the duration of an activity usually has the impact of increasing the cost estimate for that activity. This is because “crashing” means adding resources to get an activity done more quickly, and those additional resources will add to the cost of that activity.
- Risk management plan–there are processes and controls that may impact cost estimation and management. For example, 11.5 Plan Risk Responses may cause additional costs to the project which are justified by the reduction of risk to the project. For example, if certain data is critical to a company, then in developing a new system to use that data, the additional cost of a “mirror server” may be incurred to always make sure the original data is never lost or destroyed. The extra cost is justified because the negative impacts of losing that data would be catastrophic for the project.
Enterprise Environmental Factors
Among the factors listed in the PMBOK guide, the ones that are most pertinent are:
- Organizational culture and structure can influence cost management. For example, whether a project exists in a functional, matrix, or projectized organizational culture environment will have an effect on how decisions are made with regards to the costs of the project.
- Market conditions will describe the costs of products, services, or results similar to the ones being proposed to be created by the project, and will therefore set a benchmark for their pricing.
- PMIS (project management information system)-used as a tool to create the project budget, the software is considered an EEF by PMIS. The data created by the organizational from previous projects using that software, however, are considered Organizational Process Assets (see below)
- Published commercial information on resource costs provide standard costs for resources commonly used on the project.
Organizational Process Assets
- An organization’s financial control procedures (what accounting codes are to be used when keeping track of expenses on projects, etc.)
- Historical information and lessons learned repository, especially from projects which are similar to the one being proposed
- Policies, procedures, and guidelines specifically for cost estimating and budgeting
Plan Cost Management: Tools and Techniques
Expert Judgment
Who is going to assist your project team in creating the cost management plan? Experts with specialized knowledge of:
- Creating the budget on previous similar projects
- Cost estimating and budgeting techniques that are used in the application area in general
- Earned value management
Data Analysis
What kind of options will be considered for funding the project? Will it be self-funding from the organization’s overall budget, funding with equity, or funding with debt? Alternatives analysis will help decide which option will be best for the organization, as well as how to acquire project resources (should you use your own resources, purchase them, rent or lease them?).
Meetings
Meetings should be held by the project team with experts invited to help the team use the data analysis techniques mentioned above in order to help put together the cost management plan.
Analytical Technique
Analytical Technique include :
- RoI return Of Investment : technique to measure potential profitability of an investment , by calculating profit received in relation to cost
- Payback Period : when project will return its cost
- net present value NPV :
Plan Cost Management: Outputs
Cost Management Plan
There is only one output, the Cost Management Plan, which as explained in an earlier post, gives guidelines that help with all of the other cost management practices. The PMBOK Guide simply lists them in no particular order, but I’m grouping them based on the process they are associated with.
Estimate Costs
- Units of measure–this will be in dollars or the base currency of whatever country the project is being done in
- Level of precision–how will the cost estimates be rounded up or down
- Level of accuracy–what is the acceptable range, usually expressed in terms of plus or minus percentage, for determining realistic cost estimates.
Determine Budget
- Organizational Procedures links–the Work Breakdown Structure is the framework which can be used to determine the overall budget based on estimates of the costs of individual work packages.
Control Costs
- Rules of performance measurement–Earned Value Management or EVM is a tool used in monitoring the performance of a project, including whether it is ahead of, on, or behind schedule. The rules of how EVM will be used on the project should be specified, usually using one of the two measures Schedule Performance Index (SPI) or Schedule Variance (SV).
- Control thresholds–once a variance is detected, the threshold should be set (usually in terms of a percentage deviation from the baseline plan as expressed in the SPI) ,so that any amount of variation above that threshold will cause certain actions to be taken.
- Reporting formats–when the work performance reports are sent to the stakeholders, the formats of those reports, which stakeholders receive them, and the frequency of those reports should be specified
Cost management Plan components :
Cost management Plan Including :
- how project manager going to plan , manage , control project cost
- unit of measure : hour day week , kilo ten , dollar riyal .. etc
- level of accuracy : at initiation phase ROM rough Of magnitude estimate is about -25% to 75% , later when more information available definitive estimate will narrow -5% to +10%
- organizational procedure link : each (control account ) in cost aggregation has unique assigned account number
- control threshold : the amount of allowed cost variance before take action
- rules of performance measurement: EVM formulas (CV,EV,CPI ,ETC,EAC)
- reporting format
- process description
- additional details
- how the project will be fund : internally or bank or joint venture
- how recourses will fund : buy or leased
