The cost estimating process involves attaching cost estimates for each task, activity or work package. All types of costs should be estimated, and they may include overhead charges, cost of risks efforts, cost of resources associated with the project, such as the materials, training, labour, equipment and computers, cost of quality efforts. The types of costs can be grouped into direct, indirect, variable and fixed costs.
Cost estimates are usually prepared employing the bottom-up, parametric modelling and analogous (top-down) estimating methods. Of the three methods, the bottom-up method is the most accurate and it is based on the detailed analysis of the work breakdown structure. It also provides a strong basis for project performance measurement, monitoring and control. The extent of the accuracy for the overall budget of a project depends on range used in preparing the estimates. The definitive estimate with a range of +/-10 is the most accurate.
Inputs into the cost estimating process include but are not limited to the project management plan, time management plan, project schedule, cost management plan, the scope baseline, commercial databases, the human resource management plan, project management costs, the risk register, enterprise environmental factors, organisation process assets and historical records. The estimates derived from these inputs are added together to produce the cost budget. Tools and techniques used during the process include reserve analysis, project team members and any robust project management software application. Outputs from this project are activity cost estimates and the basis for such estimates.
Cost budgeting
Once the cost estimating process has been completed, the project team and the project manager determine the total cost needed to complete the project. This is achieved by a process called cost aggregation. All tasks and activities costs are added up into work package costs. Work package costs are then added up into chart or control account costs and the control accounts costs are ultimately rolled up into project costs. The final cost baseline is arrived at by adding the approved contingency reserves to the project costs. The cost baseline is a time-phased budget and can be described and shown in a graph as an S-curve.
To arrive at the total budget cost, the management reserve is added to the cost baseline. The final budget is further subjected to a series of checks and balances. For instance, the budget is compared to the initial amount allocated to the project in the project charter. If there are considerable differences, the project manager will need to justify why the budget amount should be adopted or if there is any need to tinker with the figures embedded in the budget.
It is worthy to note that before the project manager can come up with the total budget, he or she should perform risk management tasks which will include the reserves. The main difference between the management and the contingency reserves is that the project manager has powers over the contingency reserves while the management reserves are extra funds put aside to cover unforeseen events and risks to the project and are only to be used with the express approval of the sponsor or senior management. Inputs into the cost budgeting process include the work breakdown structure, cost estimates, risk management plan, contracts, sub contracts, project schedule and the time management plan.
Cost control
During the execution of a project, there is the tendency for the project cost to increase as time goes on. This requires strategic oversight, monitoring and control. Project cost control is needed to ensure the project is completed and delivered within the framework of the budget. Cost control consists of monitoring, control and measuring of expenditures against the cost baseline as project execution proceeds and taking corrective and preventive measures if there are negative variances.
The various ways the project team and manager employ in monitoring and controlling costs include the earned value management method, the reserve analysis method and the progress reporting method. Each method has its own pros and cons but the way to go depends on the project manager. The earned value methodology is widely accepted as the most beneficial and accurate to predict how well and on course the project is going. It is used in performance reviews to effectively measure project performance against the cost, scope and schedule baselines. Collectively, these three baselines are referred to as the performance measurement baseline. The earned value (EV) technique is used to calculate the estimate at completion (EAC), estimate to completion (ETC) and variance at completion (VAC) and also to know at any point in time during execution if the project is going to have budget overruns or not. All of these monitoring and controlling methods result in the use of the integrated change control mechanisms if there are noticeable variances.
Inputs into the cost control process include the cost baseline, schedule baseline, scope baseline, performance measurement reports, cost management plan, change requests, status reports and a host of cost management software applications like Ecosys, Epoch, Prism, Excel and the Primavera Unifier.
Time management or the schedule management describes the decomposition of work packages into smaller tasks and activities. Before the budget can be developed, the work breakdown structure must be complete. Effective and efficient time management is very important to project cost management and project cost control. The principal motivation for this is the fact that the cost of a project could sky-rocket if the project team is incapable of meeting project milestones or deadlines. The longer the project drags on, the more money that is spent and that informs why the schedule has to be properly managed and monitored.
Conclusion
Cost as one of the major project constraints is of tremendous importance. Without it there will be no project. It should be given all the attention it deserves. For this reason money cannot be the root of all evils because it brings laudable projects and dreams to reality.
Ayodele Akingbade
