Project cost management

Project Cost Management (PCM) is a method that uses technology to measure cost and productivity through the full life cycle of enterprise level projects.

PCM encompasses several specific functions of project management including estimating, job controls, field data collection, scheduling, accounting and design. PCM main goal is to complete a project within an approved budget^[1]

Beginning with estimating, a vital tool in PCM, actual historical data is used to accurately plan all aspects of the project. As the project continues, job control uses data from the estimate with the information reported from the field to measure the cost and production in the project. From project initiation to completion, project cost management has an objective to simplify and cheapen the project experience. ^[2]

This technological approach has been a big challenger to the mainstream estimating software and project management industries.^{[3] [4]} Organizations that deliver Project Cost Management software include ARES Prism, EcoSys, Cleopatra Enterprise,^[5] Deltek, Hard Dollar Corp, and Monitor mpower, as well as numerous others.

Project Cost Management is one of the ten Knowledge Areas outlined in the A Guide to the Project Management Body of Knowledge (aka the PMBOK Guide). It is used during the Planning and Monitoring & Controlling Process Groups.

There are 4 processes in this knowledge area including

1. Planning Cost Management
2. Estimating Costs
3. Determining Budget
4. Controlling Cost

A key technique for Project Cost Management is Earned Value Management (EVM).

Process

The process of managing project costs is an activity for estimating costs, developing project budget and controlling spending. The project cost management process includes the following key steps:

Cost Estimation. It is the project cost management process step when the project manager cooperates with the financial department to estimate costs required for purchasing all necessary good/services and undertaking necessary activities to deliver the project. Project Cost Estimation is conducted at the planning phase. The project manager uses project cost management software to develop spreadsheets and make calculations.

Budget Determination. At this step of the cost management process, cost spreadsheets are used to develop the budget framework and determine the budget. The project manager can use project cost management software to work in collaboration with the financial department to determine items of the budget and sources of funding and then to allocate the budget. The step entails close cooperation with the project sponsor.

Spending Control. It is the step of the project cost management process when the allocated budget is reviewed and spending is tracked. The project manager takes responsibility for control spending and to ensure that the budget allocation is optimized and costs are fully covered with the planned and allocated budget.^[6]

Lesson Summary

Project cost management is traditionally a weak area of IT projects. IT project managers must acknowledge the importance of cost management and take responsibility for understanding basic cost concepts, cost estimating, budgeting, and cost control. Project managers must understand several basic principles of cost management to be effective in managing project cost. Important concepts include profits and profit margins, life cycle costing, cash flow analysis, sunk cost, and learning curve theory. Planning cost management involves determining the policies, procedures, and documentation that will be used for planning, executing, and controlling project cost. The main output of this process is a cost management plan. Estimating costs is a very important part of project cost management. There are several types of cost estimates, including rough order of magnitude (ROM), budgetary, and definitive. Each type of estimate is done during different stages of the project life cycle, and each has a different level of accuracy. Several tool and techniques can help you develop cost estimates, including analogous estimating, bottom-up estimating, parametric estimating, and computerized tools. Determining the budget involves allocating costs to individual work items over time. It is important to understand how particular organizations prepare budgets so estimates are made accordingly. Controlling cost includes monitoring cost performance, reviewing changes, and notifying project stakeholders of changes related to cost. Many basic accounting and finance principles relate to cost project management. Earned value management is an important method used for measuring project performance. Earned value management integrates scope, cost, and schedule information. Project portfolio management allows organization to collect and control an entire suite of projects or investments as one set of interrelated activities. Several software products can assists with project cost management. Enterprise project management software and portfolio management software can help managers evaluate data on multiple projects.^[7]

References

1. College, Kathy Schwalbe, Ph.D., PMP, Augsburg (2012). Information technology project management (Seventh edition. ed.). Boston, MA: Course Technology. ISBN 9781133526858.
2. Rad, P.F. (2002). Project Estimating and Cost Management. Management Concepts. ISBN 9781567261448. Retrieved 2015-09-14.
3. "Magic Quadrant for IT Project and Portfolio Management". gartner.com. Retrieved 2015-09-14.
4. "Practical Project Cost Management with Twproject | Twproject's blog". web.archive.org. Retrieved 2015-09-14.
5. "Project Cost Management Software – Cleopatra Enterprise | Cost Estimating & Cost Management Software". costmanagement.eu. Retrieved 2015-09-14.
6. http://www.mymanagementguide.com/project-cost-management-%E2%80%93-definition-process-and-software/.
7. • Kathy Schwalbe (2014). Information Technology Project Management = Cengage Learning. ISBN 978-1-285-84709-2..