Project Cost Estimation & Budget Management Techniques

Project Cost Management

Project Cost Management is defined as the process of planning and controlling the project cost effectively. It defines what costs are required for each deliverable. The cost of the project can be estimated from various process sources (Examples below)

• Creating Work Breakdown Structure (WBS)
• Develop Schedule
• Plan human resources
• Identifying risks

The inputs of cost management include,

• Project management plan
• Project charter
• Enterprise environmental factors
• Organizational process assets

While, the output of this is

• Cost Management Plan.

Creating estimation and costing for project is an extremely crucial part of any project management. Various things are taken in consideration while calculating budget for project like labor costs, necessary equipment acquisition, material costs, etc.

What is Project Cost Estimation?

Project Cost Estimation is defined as the process of approximating the total expenditure of the project. The accuracy of the cost estimation depends on the accuracy and details of the project scope, which is the scope baseline. The scope will also define any constraints like date, resources or budget. The risk register will help to calculate estimate types of costs, the expenses made behind the contingent action and the expenses made to cope with risks.

To estimate the cost of project you have to categorize various cost types into categories like

• Labor cost
• Equipment cost
• Cost of supplies
• Travel cost
• Training cost
• Overhead cost, etc.

Techniques used to estimate project cost

To estimate project cost formally there are few methods (techniques) used as follows:

• Analogous Estimating

  This estimating technique is based on expert judgments and information based on similar previous projects. Where previously done similar project cost is considered with plus or minus of 20% for existing project.

• Parametric estimating

  Past data or record is used to estimate cost for the current project.

• Bottom-up estimating

  Once you have defined the scope of the project, it is the most reliable form of technique. In this technique, based on WBS, you estimate the cost for each resource or deliverables.

Likewise, there are other methods (techniques) which could be useful for estimating cost like PERT estimating, vendor bid analysis, etc.

Project Budget Planning

The main purpose of this activity is to allocate and authorize the monetary resources required to complete the project. The main output for determining the budget includes cost performance baseline. It not only specifies what cost will be incurred but also when costs will be incurred. The inputs for determining budget includes

• Activity cost estimates
• Basis for estimates
• Scope baseline
• Project Schedule
• Resource calendars
• Contracts
• Organizational process assets

The output of this process is

• Cost performance baseline
• Project funding requirements
• Project document updates

The project budgeting is performed in parallel with the project scheduling process. It is highly dependent on three component -

• Cost estimation
• Task durations
• Allocated resources

During project budgeting, project manager communicates with different people responsible for managing the work efforts as well as estimating project costs.

He will use various project prospects like work breakdown structure of the project, the cost estimates, historical data and records, resource information, and policies.

Without risk assessment, the budgeting process is not completed. Risk assessing process considers factors like time shortage, availability of resources, development team experience, the technology used, etc. The risk assessment can be an amount between 25 and 30 percent of the overall project cost.

Project Quality Management Plan

The quality management process group consists of three processes,

1. Plan Quality

Plan Quality process involves identifying which standard quality are relevant to the project and how to fulfill them. It also includes identifying quality metrics and standard measures for project processes, regulatory compliance requirements, product functionality, documentation, etc.

The inputs of the plan quality management includes

• Project management plan
• Stakeholder register
• Risk register
• Requirements documentation
• Enterprise environmental factors
• Organizational process assets

The output for the quality management is

• Quality management plan
• Process improvement plan
• Quality metrics
• Quality checklists
• Project documents updates

1. Quality Assurance

This stage includes mainly two activity, first analyzing project quality and improve project quality. It is a process of auditing the quality requirements and the results from quality control measurement to ensure that quality standard is maintained throughout the process. The input for this will be same as the output of plan quality management while the

The output of this process will be

• Change request
• Project management plan
• Project documents updates
• Organization process assets updates

1. Quality Control

This will be conducted to control quality throughout the project life cycle. It defines how the quality standard can comply with the defined quality standards. The output of Quality Assurance will be the input for Quality Control. While the output will

• Quality control measurements
• Validate changes
• Verified deliverables
• Work performance information
• Change request
• Project management plan
• Project documents updates
• Organizational process assets updates

Project Human Resource Management

HR management includes the process of organizing, managing and leading the project team. It is comprised of the people with allocated roles and responsibilities for completing the project. The HR management will deal with four processes.

1. Develop human resource plan: This stage defines the project roles and responsibilities, project organization charts and staff management plan

   The input for this will

   • Project management plan
   • Activity resource requirements
   • Enterprise environmental factors
   • Organizational process assets

The output for this will be

• Human resource management plan

1. Acquire project team:

   This stage confirms the availability of the human resource and obtaining the team necessary to complete project activities. The input for this stage would be the output from the previous step. While the output of this stage would be

   • Project staff assignments
   • Resource calendars
   • Project management plan updates
2. Develop project team:

   In this stage, the focus is improving the team efficiency, team member interaction and enhancing overall team and project performance. The input for this stage would be the output from the previous step. While the output for this stage would be

   • Team performance assessments
   • Enterprise environmental factors updates
3. Manage project team:

   This process includes tracking team member performance, resolving issues, providing feedback and managing a team to optimize project performance. The input for this stage would be the output from the previous step. While the output for this stage would be

   • Change request
   • Project management plan updates
   • Project document updates
   • Enterprise environmental factors updates
   • Organizational process assets updates

Project Communication Management

Here, Project Communication does not mean interacting verbally with each other, but transmitting project related information effectively with the project team, stakeholder, project managers, etc. It should address risk actions and assessments, project plans, meeting management and actions, reviews and walk-throughs, etc.

This segment cover mainly five areas

1. Communicating with Stakeholders

   It is the process of developing an approach to communicate with stakeholders efficiently and understanding their requirements. The input for this would be

• Project management plan
• Stakeholder register
• Enterprise environmental factors
• Organizational process assets

While the output for this will be

• Communication management plan
• Project documents updates

1. Manage Communications

   It is the process of storing, distributing, collecting, and retrieving of project information in accordance with a communication plan. The input of this stage would be

• Enterprise environmental factors
• Organizational process assets
• Work performance reports
• Communication management plan

While the output would be

• Project communications
• Project management plan updates
• Project documents updates
• Organizational process assets updates

1. Control Communications

   It is the process of controlling and monitoring communication throughout the entire project lifecycle. The input for this stage would be

• Project management plan
• Project communications
• Issue log
• Work performance data
• Organizational process assets

While the output of this stage would be

• Work performance information
• Change requests
• Project management plan updates
• Project document updates
• Organizational process updates

Summary

Cost management is the process of planning and controlling the project cost effectively. It helps you to record and track the expenses made after the project.

To see that your project is completed in a given timeline and budget, we will see what risk factor needs to mitigate in next tutorial.