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Cost Management

Project Cost Management

What is Project Cost Management, why bother and why is it so important?

Project Cost Management (PCM)

What is PCM?

·         You might think that PCM is managing the "costs" on your project

·         The reality is that you must manage everything else that incurs cost

·         Because if you don't, the costs will just keep on climbing

·         Whether you like it or not!

 

So, what is PCM?

Project Cost Management is

·         The placing of responsibility on those in charge of any aspect of the project

·         E.g. the managers, designers and implementers

·         To perform their respective roles and responsibilities within prescribed limits

·         Specifically, agreed cost allowances or budgets

·         Then collecting cost data and comparing it to the corresponding allowances

·         And taking appropriate management action

·         To contain the final results

 

How would you define PCM?

Project Cost Management may be defined as

·         The process of placing responsibility on the project's designers and implementers

·         To perform within agreed budget limits

·         Either under contract

·         Or, through verbal commitment

·         The collecting of actual cost data in a suitable format

·         Comparing that to corresponding budget data

·         And taking corrective action as necessary

·         Throughout, and as appropriate to, the project life span

 

What does PCM encompass?

As with time management

·         You have to carefully manage what you do with the money available

·         PCM is another vital function of project management that includes

·         Resource planning

·         Cost estimating

·         Cost budgeting

·         Cost control

·         Change control

Is it that simple?

·      No, it certainly is not!

·      Two simple but essential principles must be clearly understood:

1. There must always be a basis for comparison

2. Only future costs can be controlled

·      Therefore, PCM involves

·         Careful project planning

·         Especially a WBS extended to the activity level

·         Estimating the costs of the planned resources

·         Converting that estimate to a viable control budget

·         Monitoring expenditures as work proceeds, and

·         Modifying the approach if the findings are not satisfactory

 

That sounds easy? - 1

Not really. There are a number of challenges, such as:

·         First and foremost, the problem of managing project scope

·         As we discussed in Issacons 1125 - 1137

·         A lack of understanding generally that estimates are no better than just best available assessments

·         And only as good as the data they are based on

·         An unrealistic expectation of accuracy

·         Hence an estimate should be expressed as a range, not as a single number!

 

That sounds easy? - 1

Not really. There are a number of challenges, such as:

·         First and foremost, the problem of managing project scope

·         As we discussed in Issacons 1125 - 1137

·         A lack of understanding generally that estimates are no better than just best available assessments

·         And only as good as the data they are based on

·         An unrealistic expectation of accuracy

·         Hence an estimate should be expressed as a range, not as a single number!

 

That sounds easy? - 3

Still more challenges . . .

·         The difficulty of getting people to peer into the future, or commit themselves

·         During progress of the actual work

·         They feel they have more important things to do

·         Like getting the work done!

·         Some people think you can control costs simply by turning off the money taps

·         There is a tendency to ignore risks, and

·         The result of "political interference" to get a project approved

 

Why bother with cost management?

The fact is, cost management is essential if you want to

·         Keep people on their toes

·         High-light misuse or wastage of resources

·         Track budget change approvals

·         Finish a project within approved budgets

·         Avoid unwelcome surprises

·         For your corporate or financial sponsor!

 

Why is PCM so important?

PCM has a high profile in project management because

·         Financial management is a way of life in all organizations

·         Financially successful organizations depend on strict financial control

·         And the corporate accounting to support it

·         They are comfortable with the idea of budgeting and expenditure

·         Most people understand the consequences of the money running out

·         Cost is seen as a major metric of successful project management

The most significant aspect of PCM

From a project perspective, it is important to understand that

·         Cost, or rather money, is simply the common denominator, or metric, for bringing together disparate types of resources

·         I.e. accounting for use of labor, materials, equipment

·         For management and control purposes

·         However, like time, money itself should not be considered as a resource

·         Unlike in corporate financial management

·         Where money is the central purpose and is treated like a commodity