Project cost management entails four major processes, which are closely related: resource planning, cost estimation, cost budgeting and cost control.

There are three main tools and techniques the project manager can employ for the planning of resources:

• Expert Judgment
• Identification of alternatives
• Project management software

The project manager should be set to plan the resources as soon as the inputs to resource planning are available. The project manager should review the scope of works and the resources available. By doing this, the project manager is able to use his experience to examine if the resources available are in line with the requirements of the project. The project manager can consult an expert to help with this examination of the resources.

The project manager can identify alternative approaches to enable him make sure the resources established are complete and are suitable for the project. Alternatives identification refers to identification of any technique that can result in a different approach for planning the resources. For example, value analysis is a different approach that permits for a less costly method of work execution to be found out.

The project manager can use software to ease the process of planning resources. The project manager should however update information into any software with care as any error can have an adverse effect on the project delivery with regards to time and cost.

The output of the resource planning process is to establish the resources required for the project execution. The project manager should be able to identify the required resources on employing any of the above mentioned tools and techniques to the inputs made available. The resources required are acquired through acquisition of staff, materials or equipments.

In some cases, the project site and services that will be required (for example, carpentry) are also considered to be resources that the project manager should plan for. A failure to plan for such services can have an adverse effect on the cost management process. The project manager can consult experts to review the scope of works and identify such unique details of the project. The consultation of an expert can go a far distance in preventing additional cost and delay in time during the lifespan of the project.

3.0        COST ESTIMATION

The process of estimating the cost and budgeting serves as the bridge that links the phases of planning and execution. Cost estimation can be defined as the process that specifies the project cost. The process of cost estimation can be carried out through various methods. Some of these methods enable the project manager to establish the overall cost of the project while other methods enable the project manager to establish the cost of a specified activity to be carried out. However, some of these methods specifically relate to workers involved in the project. For an accurate estimation of the project cost under such methods, the project manager has to be familiar with the percentage of payment each worker is entitled to as well as the number of workers needed for successful completion of activities within an allocated time. The tool and technique employed by the project manager for the process of cost estimation depends on the inputs made available to the project manager. These inputs are as follows:

• Work Breakdown Structure
• Resource requirements
• Cost rates of the resources
• Duration of activities
• Estimating publications
• Historical information
• Chart of accounts
• Risk

For the estimation of the cost of an activity, the project manager uses the resource requirements, cost rates of the resource and the duration of the activity. Inputs such as the estimating publications, available historical data and risk information enables the project manager in the selection of a method that will provide the most accurate project cost estimate. Other inputs such as the account charts help in allocating project costs to the different accounting categories. The work breakdown structure is a very important input for the process of cost estimation. With this input, the project manager can compare the estimates of activities to the activities in the work breakdown structure to realize project tasks not included.

The project manager can employ any of the methods listed below for the cost estimation process depending on the inputs available:

• Analogous estimating: This method is also referred to as top-down estimating. This method of cost estimation is based on the historical information available to the project manager. It uses the actual cost of past projects of a similar nature to the project to be executed to estimate the cost. This method of estimation depends on the expert judgment of the project manager. The method is less time consumption but less accurate compared to other methods of cost estimation. The top-down method of estimation is suitable for projects whereby a quick cost estimation is required to gain an overall idea of the cost of the project. The method is also suitable for projects that are similar in information and the project manager overlooking the cost estimation process possess the expertise.

• Parametric modeling: This method of cost estimation is based on mathematical models. These models are based on parameters of the project available to the project manager. These parameters are based on the works completed and thus could be simple or complex. A complex parameter could be a simple parameter in conjunction with adjustment factors. These adjustment factors, which are based on the project conditions, can further possess modifying factors. These modifying factors depend on additional conditions. The factors that define the model must be accurate.

There are two types of parametric modeling:

• Regression analysis
• Learning curve

The regression analysis is based on historical information. This approach to parametric modeling is aimed at estimating future costs. This estimation of future costs depends on variables within a value to estimate the variable in another value. This approach is fully dependent on mathematical statistics to establish the connection between variables.

The learning curve is based on the view that workers learn as they complete their assigned activities. The workers tend to find ease in the completion of their activities as they complete them. The estimation of cost with this approach is considered parametric as the formula used is on the basis of activities that are repeated. The workers tend to gain experience as they complete the activities, thus leading to a decrease in cost and time for completion of activities.

• Bottom-up estimating: This method of cost estimation considers each component of the work breakdown structure to determine the cost of the project. This method is very time consuming and costly compared to other methods. However, the cost estimate tends to possess a high degree of accuracy. This method of cost estimation tends to make the project team more dedicated to the project, as they are aware of the cost of each activity to be carried out.

• Project management software

Once the project manager has employed any of the methods above for cost estimation, he should be able to arrive at a cost estimate, develop supporting detail (such as description of the project scope) and a cost management plan.

The process of cost estimation is undertaken to establish a cost estimate for resources needed to carry out activities embedded in a project. For a project manager to estimate cost accurately, he has to look beyond implementing tools and techniques based on inputs to realize an output. The project manager has to consider factors such as the environment the project is executed, management of risks and the client.

The scope of work of the project has to be understood to a very high extent for effective estimation of cost. However, as the client can request for a change during the lifespan of the project, a deep understanding of the scope of work cannot be regarded as the best approach for cost estimation (Owens et al, 2007). It important for the project manager to estimate cost based on a full understanding as well as open communication of all areas of the project. The cost can be estimated more accurately if the project manager can be provided with a large scale of information regarding the project during and after the process of cost estimation.

Furthermore, an accurate cost estimate can be realized if the project manager can effectively manage changes made to the inputs. The project manager can efficiently understand information he is provided with based on his experience and knowledge. However, the project needs effective communication in collaboration with experience and knowledge for an accurate cost estimation to be realized.

The effective management of the scope of work, which can change during the lifespan of the project, can contribute to an accurate estimation of cost. It is necessary for the project manager to make assumptions about the scope of work wherever possible. Owen et al (2007) cites that projects experience cost overruns either due to spending beyond the budgeted figure for works to be completed or adding to the scope of works without the provision of additional cost by the client. In the case of improper management of the scope of work, the estimated cost tends to be inaccurate as the project rolls through its lifespan. Owens et al (2007) further cites that scope can be effectively managed through the following techniques:

• Establishing a standard practice for making a change to the scope of works
• Establishing the roles and responsibilities of the project team regarding to scope change
• Establishing who provides the additional cost for the scope change
• Outlining changes to the scope as a list of work items
• Keeping a historical data for future use

The human factor plays a major role in the process of cost estimation. The people involved in a project can be regarded as the most important resource for project execution. These people can be affected by various external factors outside the project. These factors include the culture of the organization, attitude, skills, client characteristics and burnout (Owen et al, 2007). The project manager has to take this into consideration when making cost estimates by establishing a relationship between the work capacity of the human and time to complete an activity. Moreover, multitasking an individual can only do harm to the entire project, as it is possible the duration of the project will be extended.

The project manager should avoid been pushed to provide a cost estimate for works by the client. Providing a cost estimate in the earliest stages of a project before the design is completed can expose the project manager to incomplete information regarding the project, which on the other hand leads to an inaccurate cost estimate and thus, uncertainty. However, Owens et al (2002) identifies three types of cost estimation during the process of production:

• Pre-calculation estimates
• Intermediate estimates
• Post-calculation estimates

Pre-calculation estimates are cost estimates of the future that are done before the commencement of the production process. This type of cost estimation is used for decision-making based on cost. Intermediate estimates are cost estimates done during the production process (construction) in order to control the cost of the project. Post-calculation estimates are cost estimates used to throw reflection on the costs that were actually incurred as well as cost accounting. Post-calculation estimates can be used as pre-calculation estimates for future projects. Thus, giving the project manager a boost in accurately estimating cost.

The client is usually the main source of funding for a project. It is important for the project manager to understand the client in terms of funding to realize an accurate cost estimation process. The project manger should help the client understand the benefits of cost estimation to the project and the client by permitting more time for enough information to be generated for the cost estimation process or better yet budget flexibility to enhance the process.

4.0        COST BUDGETING

A cost budget for the project can be developed once the cost estimates of tasks and the overall project has been established. The cost budget defines how the project funding will be spent. The project funding will be spread out over the lifespan of the project, as all tasks are not carried out at the same time. The cost estimates, tasks embedded in the work breakdown structure, available resources and the funding have to be merged with the schedule of the project to apply funding to the tasks and resources. Cost budgeting tends to give equilibrium between the funding, resources that are available and the rates at which the funds will be spent. The cost baseline, which is used to measure performance, is developed from the spending plan of the project funding. Irregularities from the cost baseline are a major indication of warnings and require the intrusion of management to put the project back on course.

The inputs to cost budgeting are similar to the inputs to cost estimation as this processes are closely related:

• Cost estimates
• Work Breakdown Structure
• Project schedule
• Risk management plan

Similarly, the methods the project manager can employ for the process of cost budgeting are the same as those in the process of cost estimation. Thus,

• Parametric modeling
• Analogous or Top-down budgeting
• Bottom-up estimate
• Project management software

The project manager can use contingency and allowance budgeting to have room for risks and increase in cost along the lifespan of the project. The information made available to the project manager in the early stages of the project make cost budgeting a difficult task. This can be blamed heavily on the inexistence of project schedules and design in detail. However, the project manager can engage in the development and communication of a process of cost build-up. The project manager has to understand the components of budgeting (contingency estimates, base estimates, allowances and budget reserves) for this build-up process (Owens et al, 2007). Base estimates are cost estimates that have a tendency to occur if risk is absent. However, any project is liable to face risks, thus there is need for additional budgeting. A contingency reserve can be established whereby cash is portioned out to the task to safeguard that the likelihood of an overrun in cost is the same as an under run in cost. The sum of the base estimate and contingency reserve is the expected value (Owens et al, 2007).

A precision in the additional budgeting can be achieved if the project manager sets up some amount of risk reserve into the budget. This risk reserve is established through risk identification and its assessment. This identification and assessment of risk permits the project manager to acquire a deep understanding into areas of the project liable to cost overrun. The sum of the risk reserve and estimate budget gives the controlled estimate. The project manager has to clearly communicate the approach it intends to employ for building up cost. If the basis for budget build up are clearly stated, the methods for cost budgeting can be effectively improved.

5.0        COST CONTROL

It is important for the project manager to recognize the reasons why a change in cost occurred during the lifespan of the project. The process of cost control looks to establish ways in which a change in cost should be allowed to occur or prevented. A project manager has the responsibility to develop a variance report on the reasons why change in cost occurred. The project manager can be at ease of making future project decisions if the reasons for cost change can be established. A disregard for variances in cost can have adverse effects on the project in terms of budget shortages, additional risk or problems with the project schedule. The process of cost control permits the project manager to evaluate problems and take actions accordingly.

The project manager must depend on inputs for a successful implementation of the cost control process, which is a continual process. These inputs include:

• Cost baseline: This is the cost the project is expected to incur. The cost baseline indicates the amount to be spent throughout the project lifespan. As mentioned above, the cost baseline can be used for the measurement of project performance.

• Performance reports: The performance report is centered on the cost performance, scope of the project and the planned performance against the actual performance. However, these reports vary depending on the needs of the stakeholders.

• Change requests: The project manager has to examine the costs in instances where a change in the scope of the project is requested. However, a request for changes may lead to a cut in the project cost.

• Cost management plan: This plan defines the management of variances in cost.

The project manager has the responsibility of achieving the cost, time, performance and quality criteria of a project. Appropriate tools and techniques have to be employed by the project manager for the control of costs to realize a greater magnitude of project success. The project manager needs to be provided with the necessary information to be able to establish what occurred historically, what is occurring and predict the future more accurately. This information has to be accurate in order for the project manager to conquer any contradiction in cost and time so as to make good judgments.

The tools and techniques that the project manager can employ for the process of cost control are:

• Earned value analysis: This is a tool used for cost control. Owens et al (2007) cites that for the occurrence of the earned value analysis concept, some activities have to take place:

• The work breakdown structure has to be established
• The works have to be broken down in a way time and cost are allocated to each activity
• A baseline should be established

On the completion of the above tasks, the earned value analysis can commence. The earned value analysis lays ground for the project manager to be kept in the loop of dangers liable to occur. Owens et al (2007) went ahead to outline the steps involved in earned value analysis:

• Update the project schedule on the basis of project progress
• Update the actual costs related to project progress
• Compute graph key values, variances and ratios
• Examine results and take corrective actions

Although the earned value analysis can enhance the project manager to complete the project within the specified time and budget, some project managers opt not to use this tool for cost control. This can be due to the lack of fundamental skills for project management, commitment or inaccurate information regarding cost and time. The earned value analysis combines the schedule performance and the actual cost to gather a deeper understanding. This method of cost control provides the project manager with an early warning to dangers liable to take place in the future. In situations whereby results are misrepresented, as they do not relate project cost to the project schedule, the earned value analysis justifies this. Furthermore, the earned value analysis lays ground for a standardized unit of measure of project progress.

• Cost change control system: This system establishes ways in which the project manager can make changes to the cost baseline. It is important for the project manager to merge the cost change control system with the integrated change control system.

• Performance measurement: This enables the project manager to evaluate the extent of variations in cost that take place. It is necessary for the project manager to establish the extent of variations and the appropriate actions that should be taken to tackle it.

• Additional planning: The project manager should be very creative with the planning process so as to execute the project within the budget. Equilibrium between the cost and schedule is necessary for a project to be completed within an agreed time and budget. However, this equilibrium is a continual conflict during the lifespan of the project.

• Project management software

The outputs when the project manager employs any of the tools and techniques above are listed below:

• Revision of the cost estimates
• Budget updating
• Application of corrective actions
• Preparation for estimates at completion
• Calculation of estimates at completion
• Project closure

 

6.0        CONCLUSION

The cost of a project has to be properly managed, as it is a major dictator of project success or failure. Factors such as the cost of labour for project execution, cost of materials and equipments required contribute heavily to the cost of a project. Stakeholders want to be informed of the project cost in the earliest stages so as to determine whether to progress with the project or abandon it. However, it is important for the project manager to make the stakeholders understand the benefits of allowing time for acquisition of the necessary input in order to achieve an accurate cost of the project.

The resources required for a project is a major contributor to the main expenses of the project budget. The project manager should make sure the activities assigned to workers are worth the time to be spent carrying them out. An appropriate assignment of the resources to activities goes a long way to avoid waste.

7.0        REFERENCES

• Akintoye, A. 1998, Analysis of factors influencing project cost estimating practice, Glasgow, Vol. 18, Issue 1, pp. 77-89
• Owens, J., Burke, S., Krynovich, M., Mance, D. (2007), Project Cost Control Tools and Techniques [online], Available from: http://www.jasonowens.com/wp-content/uploads/2009/12/ProjectCostControlTools_and_Techniques.pdf [Accessed: 12.11.2012]
• PMI (2000), A Guide to the Project Management Body of Knowledge, PMI Inc, Pennsylvania
• Rad, P. (2002), Project Estimating and Cost Management, Management Concepts Inc, Virginia
• Schwalbe, K. 2006, Introduction to Project Management, Course Technology, Massachusetts