“Men do not understand how great a REVENUE is ECONOMY” – Cicero
“Everybody has a plan until they get punched in the face” – Mike Tyson
Cost can be described as the fundamental benchmark and attribute with which tasks, activities, work packages and assets are compared and measured. Cost is the value of an activity or asset and it is a frequently used term mainly in relation to its monetary value. Cost elements can be grouped into the following core areas, namely, cost centres, labour, material, inventory, equipment, subcontracts, overheads and other commitments. Cost elements can be additionally organised into direct, indirect, variable and fixed costs in order to comprehend how they impact the overall cost of an asset or activity and also to get a better understanding of how they can be monitored and controlled.
In order to have a historical perspective and reporting of disbursements and expenditures and for the various other costs to be recorded, monitored, controlled and reported, there has to be a proper cost accounting system. This is as far as the project cost accounting and management are concerned. The cost accounting structure and the current working estimates along with the cost baseline provide the basis for the project progress and performance measurement. How businesses approach cost accounting and how cost accounting data are classified and summarized vary from business to business. All of the data are distributed into codes or charts of accounts, derived from the work breakdown structure, for easy segregation and identification. These codes of accounts are configured to support the recording of cost data in the general ledger.
Alternative methods of recording project cost data for easy classification and control apart from the general ledger are the activity-based costing (ABC) and the work breakdown structure (WBS). The ABC method for cost accounting gives more lucidity than the general ledger would, to the project team and allows the project manager to know exactly what the main cost drivers are.
Cost management process
The project cost management process comprises all the essential requirements needed to perform, within agreed limits, the budget for a project. All the procedures that are employed for the cost management process are closely related and interconnected with each other. The process starts from the development of the project charter, the project management plan, the risk management plan and the cost management plan right up to when the project wraps up. The process also involves resource planning, value analysis, cost estimation, cost budgeting, cost engineering and cost control.
The cost management plan
The cost management plan process involves planning how the entire project cost is going to be managed, monitored and controlled. The plan will detail exactly how the cost of the project will be planned, executed and how to best manage the cost baseline, control costs, prepare status reports, do performance measurements, do forecasts and manage variances. The way the cost management plan is developed varies widely from business to business. Each business has its organisational policies, process assets and enterprise environmental factors which influence a lot of funding decisions. Some businesses use this process to determine how the project is to be funded, either through company coffers, equity or from borrowed funds. Other funding decisions could be in respect of ways project resources should be financed.
Also, the cost management plan is used to determine the techniques, ways and means of project viability and its return on investment. The overall outcome of this process is the budget plan which is part of the eventual project management plan. The budget plan must include funding decisions, cost documentation methods, cost change control procedures, cost estimating methodologies, cost performance measurement methods, reporting formats, cost elements classifications, control accounts and control thresholds. Inputs used to develop the cost management plan include the project management, risk management, time or schedule management, quality, procurement and the human resource management plans, amongst others.
Resource planning
Prior to embarking on this process, the value analysis procedure must have been carried out and a decision is made to continue with the project. Value analysis or engineering is the process of assessing a project’s economics and feasibility. It is the process of finding out if what is to be gained from executing the project is worth the cost.
Resource planning is the diligent selection of resources that are needed to do a thorough job and complete the entire project. The resources which are required for the project to be done include personnel, materials, tools and equipment, consumable supplies, time and funds. When the work breakdown structure (WBS) and the cost breakdown structure (CBS) are integrated, some of the above resources could be combined and can form or are part of the control accounts. Resources are applied and deployed based on the project manager’s judgment and experience. Every resource must be must be taken into consideration and inputted into the cost breakdown structure. Certain resources are much more important than others because they are very crucial to the successful completion of a particular project.
Major inputs into this process include the scope statement which describes the project goals, work breakdown structure – a graphical illustration of all work that is to be done up to the work package or activity level, organisation process assets, historical information and estimates of activity durations. Outputs of the resource planning process are the entire resource requirements needed for the project.
Cost estimating
Once the required resources have been determined, the process used to attach monetary values to them must begin. According to the AACEi, cost estimating is defined as “a predictive process used to quantify, cost and price the resources required by the scope of an asset investment option, activity or project”.
Ayodele Akingbade
