Basic of Cost Management

        Project Cost Management includes the processes involved in planning, estimating, budgeting, financing, funding, managing and controlling costs so that the project can be completed within the approved budget.

Major process group for cost management

• Plan Cost Management
• Estimate costs
• Determine Budget
• Control Costs

1. Plan Cost Management

        Plan Cost Management is the process of defining how the project costs will be estimated, budgeted, managed, monitored, and controlled.

        The Cost Management Plan describes how costs will be estimated, structured, and controlled. It can include cost information such as units of measure, precision and accuracy levels, variance control thresholds, and performance measurement criteria.

2. Estimate Costs

        Estimate Costs is the process of developing an approximation of the monetary resources needed to complete project work.

Some of the techniques used for estimating costs are:

•    Analogous Estimating involves comparing the actual cost of previous, similar projects to estimate the cost of the current project.

•    Parametric Estimating involves using a statistical relationship between historical data and other variables to calculate activity cost estimates.

• Bottom-up Estimating involves estimating the cost of work packages or individual schedule activities using the lowest level of decomposed work. Detailed cost estimates are then aggregated or “rolled up” to higher levels for reporting and tracking purposes.

• Three-Point Estimating can be used to improve the accuracy of activity cost estimates by using three values (Pessimistic, Optimistic, and Most Likely), instead of one to account for estimating uncertainty. A common way to calculate a Three-Point Estimate is to use the PERT formula, which weights the Mostly Likely value four times more than the other two.

Data Analysis techniques used when determining and refining Cost Estimates are:

•    Reserve Analysis is used to establish cost reserves for the project. In this process, Contingency Reserves are considered.

•    Contingency Reserves are additional costs added to activity cost estimates due to identified risks associated with those activities

•  Cost of Quality involves making assumptions about the costs associated with the quality management activities of the project (i.e., prevention, appraisal, and failure costs).

Types of Estimates:

• Rough Order of Magnitude (ROM) estimates vary from -25% to +75% as compared to the actual cost. This type of estimate is often prepared pre-project or during project initiation.

• Budget estimates range from -10% to +25% and are typically created in the planning phase.

•  Definitive estimates range from -5% to +10% and are created during project execution when more detailed is known about the project.

3. Determine Budget

        Determine Budget is the process of aggregating the estimated costs of individual activities or work packages to establish an authorized cost baseline.

        The activity Cost Estimates are aggregated to Work Package or control account levels, and then eventually for the entire project so that a Cost Baseline can be created. The technique used to do this is referred to as Cost Aggregation.

        Reserve Analysis is used in this process to determine the Management Reserves for the project.

Management Reserves are meant to address unforeseen work or risks

    The Cost Baseline is the approved version of the time-phased project budget, excluding any management reserves, which can be changed only through formal change control procedures and is used as a basis for comparison to actual results.

    When  using  Earned  Value  Management  (EVM),  the  Cost  Baseline  is  referred  to  as  the Performance Measurement Baseline (PMB), which is an approved integrated scope-schedule- cost plan for the project work against which project execution is compared to measure and manage performance.