Monday, April 6, 2009

Project Cost Management

What Is Project Cost Management?

There are many processes to managing a projects cost. The ultimate goal is to complete a project successfully within an approved budget. Having a well defined plan, accurate time & cost estimates and a realistic budget to work with are all elements to keeping a budget on track. Although this doesn't come naturally to all project managers, it is an integral part of a project that is a major undertaking. It is a very demanding & detail oriented task that needs to be under control at all times.

Every single part of a project has a monetary value. Whether it be direct costs that relate to producing the products and services (labour costs are often a large percentage) or indirect costs, such as the electricity used to perform the work, or even paper towels for the team to wash their hands. A cost management plan developed in the early stages will help manage cost variances on the project.

Throughout the project it will be critical to utilize financial experts within your organization to create estimates of costs and benefits of the project throughout its entire life cycle. Being able to discuss project information in financial terms as well as technical terms will also help to keep stakeholders interested and on board with the project.

The 3 Project Cost Management Processes are:

  1. Cost Estimating - this involves developing an estimate of the cost & resources needed to complete a project. You can then gauge all changes, activity costs and updates against this estimate to start narrowing your margin.
  2. Cost Budgeting - is allocating the overall cost estimate into individual work items to establish a baseline for measuring performance. Knowing the monetary amount allocated for each item will help to prepare a budget with finer details.
  3. Cost Control - by having control over changes made to the project budget you will be able to measure project performance, fore-casted completion date, requested changes and recommended changes to name a few so that everything is working together for the benefit of the client- and yourself in the long run.

Having a basic understanding of the terminology that is used for budgeting a project is mandatory. Pretty much everyone understands what a profit is- revenues minus expenditures. The goal is to have a profit at the end of the project. One way to help keep the cost under control is to continuously update your cost estimates.

There are 3 cost estimates that are the fundamentals of managing a budget. They are:

  1. Rough Order Of Magnitude (ROM) - Otherwise known as a "ballpark" or "guesstimate". This type of estimate is done in the very early stages of a project, usually before it's even officially started. This type of estimate is often 3 or more years prior to a projects completion.
  2. Budgetary Estimate - allocates money into an organization's budget. Many companies have their budgets developed at least 2 years into the future. Providing a budgetary estimate will ensure that the money within the organization has been allocated for each specific project.
  3. Definitive Estimate - should be the most accurate estimate of project costs. It is used for making many purchasing decisions and should provide the most accurate estimate for determining a projects final costs. It is also the most up-to-date estimate created one year or less prior to project completion.

Keep in mind that it is much more cost-effective to invest money on defining user requirements and performing early studies to determine what elements are needed in a project, rather than waiting for problems to appear after the implementations.



Reflection

Cost management was an integral part of being self employed as a delivery person. There were many aspects to consider before undergoing this project.

Things I had to consider were:
  • Mileage and the price of gas. What would it cost me to travel this distance and how many stops would I have to make. If the price of gas increased is there a system set in place for a gas allowance.
  • Payment-What is the rate of payment for each route and are there increases for additional deliveries or is there an annual increase.
  • Estimate repairs to the vehicle per year. By communicating with other people who have driven this route for a period of time you can come up with a rough estimate of what your repair expenses would be. Of course driving habits and if you do regular maintenance need to be considered. If you are a person who drives without worrying about your vehicle and you do infrequent maintenance then your costs will increase.
  • The type of vehicle that you need will determine the cost output for the vehicle. Are you going to use a 4 wheel drive, an all wheel drive or a 2 wheel drive. Obviously going to a 4wheel or all wheel drive will increase your basic car payments but you also have to consider reliability in the winter and if they can handle the roads better, therefore making the cost of repairs less.

After all this information was obtained and documented I then decided that there was a profit to be made and did deliveries for 3 years. Basically, what I ended up calculating was revenues vs. expenses. Looking back I can see where I did 3 different estimates:

  • Rough Order of Magnitude -where I considered the job and very roughly figured out in my head if it might be worth it.
  • Budgetary Estimate - done on paper after discussing revenues and expenses with a knowledgeable person.
  • Definitive Estimate-taking all revenues and expenses into consideration and including my personal living expenses at home such as mortgage, utilities, groceries and other costs.

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