Cost Management

Project costs are closely linked to time management. In order to control the costs it is crucial to have a good time management in place. In the last post we looked at Time Management and noted that

• estimates should be done by people who do the work
• for estimating tasks/WBS we should use historical information if possible

In connection with cost management we should add

• costs should be managed to estimates (that applies also to time, scope and resources)
• a cost baseline should be kept and only be changed when an approved project change occurs
• corrective measures should be taken once we determine that we encounter cost issues

From a Project Management point of view it is important to look at cost, time and scope (triple constraint). To practice this in a real project the Project Manager should not just accept time and cost requirements from Management. The Management guidelines will set a framework. It is up to the Project Manager to confirm these guidelines or reconcile any differences. In case of differences the communications management will be a key success factor.

The following input is needed before a cost estimate can be created

• Work Breakdown Structure (WBS) incl. tasks
• Timeline (Network diagram) that shows how the project will flow from end-to-end including all dependencies
• available Resources (in-house, contractors etc.)
• Risks associated with the project (e.g. Risk Management Plan)

The output of the cost estimate should be a cost management plan.
The following cost estimating methods are common

1. Analogous estimates - Managers provide estimates based on similar projects or previous experience
2. Bottom-up estimates - Subject Matter Experts provide estimates

There are several more methods (e.g. parametric estimates, computer estimating tools, earned value analysis) to come up with cost + time estimates.
Once we have the cost estimates we can distinguish between the following types of cost:

• variable cost - cost that changes with amount of work or production (e.g. material cost)
• fixed cost     - cost that does not change with amount of work or production (e.g. car rental)
• direct cost    - cost that can be directly attributed to the project (e.g. wages)
• indirect cost  - overhead costs (e.g. taxes)

For the project manager it is important to understand how good or bad the estimates are that they get. During the initiating phase an estimate will most likely be less accurate since not enough or inaccurate information is available. This first estimate though sets the expectation and hence it is important to communicate at least if this requirement requires a large, medium or small effort. And yes, you need to specify what large, medium and small means (e.g. <=10 days development --> small).
Be careful with this first feedback. Try to understand the requirement good enough to set the expectations correctly, NOT to provide an accurate estimate.

As the project moves forward more information becomes available and the estimates need to be refined (the estimate becomes more accurate). It is up to the Project Manager to provide an overview of ALL requirements and their related estimates. At that point a prioritization will most likely be needed since not all requirements can be addressed within the projects time, cost and scope limits.

It is the Project Managers responsibility to ensure the project sponsor (and other stakeholders as needed) have phase appropriate information about costs to ensure a successful project. This requires a good communication management. Note that without good communication a lot of the other areas become less valuable. Communication is the glue that holds all project management pieces together!