Project – Cost Management Basics

When it comes to managing the project in terms of cost, some project managers are not sure or confident in where to begin and what to manage.

An outline of the building blocks can be shown by the following graphic;

As with any part of management, it begins with a good foundation of planning and understanding the elements to be managed.  In the case of cost management, it would be the elements of cost for the project.

Begin with Resource Planning;
Resources are people, equipment, tools, functions, and any other element of cost that will be necessary to execute the Project.  To help think through what the elements of cost are, consider the work scope and statement, the work breakdown structure (WBS), the activities/tasks associated with the WBS, and the resources required to launch, develop, and execute the project.

Once this is laid out and well planned, one can associate the cost to each step of the progression for project completion.

Cost Estimating;
Estimating the cost can be established by various methods.  Some common approaches are either a bottoms-up estimate or to take a past similar project and use it’s history to build the elements of cost.  This portion of planning takes time and one will never cover every aspect of the cost, however, by applying cost logic to the activities of the WBS, one can have a baseline set of costs from which to measure, monitor and control.  During the execution of the project will provide opportunities for fine tuning and planning knowledge for the next project.

Cost Budgeting;
This is where the fun begins by setting the baseline cost plan and creating an earned value management (EVM) tracking tool.  With that, your business systems require a cost collection tool within your finance system.  Typically, the Project Manager will work with the Cost Accounting function to establish a set of general ledger (GL) cost code accounts to collect and charge against during the execution of the project activities, materials, outside services, travel, etc.  The GL is paramount to have well established at the onset of the project and a means of collecting cost against the plan.

Having that set up, the project manager/team can then set up the project ‘S’ curve of spend.  ‘A cumulative baseline expenditure over the project time period’.  One can be creative to develop a dataset of cost elements that rolls up to the cumulative baseline cost spend profile.  This would be very useful when collecting actuals against the activities to see where the costs are incurring for management and control.

From there, EVM is relatively easy to maintain and becomes an instant tool to report against for cost control.

Cost & Change Control;
I have found that the tools and techniques described above are a very good and structured process in which to monitor, control/manage and report out on costs.  In my view, it is an essential tool and process for the Project Manager to fully understand the health and progression of project execution.

If one has good reporting and tools to measure with, one can be pre-emptive to guide the activity to be on track.  Should productivity exceed the plan, then perhaps this is an indication that the estimating was a bit generous and it is actually costing less than planned.  This of course nearly never happens, but it could.  If that is the case, them some re planning and baseline adjustments are in order.

Typically, it goes the other way and one needs to be able to dig and apply some due diligence in order to understand the cost spend, assess the progress made associated with that spend and then to manage, control and re-plan if necessary.  This is key in being able to report to oneself and upward within the organization.  By doing so, this will never leave the Project Manager in a position of ‘not knowing’ the status of their project.  In the end, it is the operating income (i.e. bottom line) and likely reason why the project is being performed in the first place.  Control that, and success will be realized.

This is a brief take on cost management and at LYNX Business Management Group Inc., we are available to help you and your organization.

I hope you found this blog informative.