Topic 7 Project Cost Management

CIS 3003 : Project Management
Topic 7 : Project Cost Management
• Importance and Principles of Project Cost Management
o Project cost management is the activities used to estimate, allocate, and

control charges of a project. It produces an approved budget, monitors
prices throughout the project, and gives a basis for selections to control
unexpected or greater costs
▪ Project cost management includes the techniques required to ensure
that the undertaking is performed inside an approved finances
o Cost is a resource sacrificed or foregone to attain a unique goal or
something given up in exchange
▪ Costs are typically measured in economic units like peso or dollars
Basic Principles of Cost Management

o Tangible costs or benefits are those expenses or benefits that organization
can easily measure in peso or dollars.
o Intangible costs or benefits are costs or benefits that are challenging to
measure in financial terms.
o Direct costs are costs that can be directly associated to producing the
products and offerings of the project.
o Indirect costs are expenses that are not at once associated with the
products or services of the project, however, they are indirectly associated
with performing the project..
o Sunk cost is money that has been spent in the past; when deciding what
projects to invest in or continue, you should not include sunk costs.
o Most members of an executive board higher recognize and are greater

involved in economic terms than IT terms, so IT project managers should
communicate their language
▪ Profits are revenues minus expenditures
▪ Profit margin is the ratio of revenues to profits
▪ Life cycle costing considers development + support costs for a project
▪ Cash flow analysis determines the estimated annual costs and
benefits for a project and the resulting annual cash flow
Source: Information Technology Project Management, Sixth Edition
• Cost Estimating
o Cost estimation in project management is the technique of forecasting the
financial and different resources needed to complete a challenge inside a
defined scope.
o Cost estimation accounts for each aspect required for the project—from
materials to labor—and calculates a total amount that determines a
project’s budget.
o An initial value estimate can determine whether an organization greenlights

a project, and if the project moves forward, the estimate can be a issue in
defining the project’s scope. If the cost estimation comes in too high, an
employer may also figure out to pare down the venture to in shape what
they can afford. (It is also required to start securing funding for the project.)
Once the project is in motion, the cost estimate is used to control all of its
affiliated prices in order to hold the project on budget.
There are two types under cost estimation:

• Direct Cost
o Direct labor
o Direct materials
o Commissions
o Piece rate wages
o Manufacturing supplies
• Indirect Cost
o Production supervision salaries
o Utilities
o Quality Control
Project managers must take cost estimates seriously if they want to

complete projects within budget constraints
It ’s important to know the types of cost estimates, how to prepare cost

estimates, and typical problems associated with IT cost estimates
Source
https://www.wrike.com/project-management-guide/faq/what-is-cost-estimation-in-project-management/
• Cost Budgeting
o Cost budgeting is a tool to estimate the costs or essential efforts for
projects, work packages, or things to do in project management.
o Cost budgeting includes the estimation of costs, placing a constant budget,

and managing and controlling the actual costs (compared to the estimated
ones).
o The costs then have to be allocated to the things to do or work applications

in a project. A carefully carried out agenda and aid design enable a more
precise cost budgeting.
Changes to the cost plan be made in the following cases:

▪ There are scope changes
▪ A new cost budget is more realistic
▪ If the planned costs are not sufficient for a particular task
Source https://www.inloox.com/project-management-glossary/cost-budgeting/
• Cost Control
o Cost control involves not only managing the budget, however also planning,
and making ready for potential risks. Risks can set tasks again and
occasionally even require surprising expenses.
Cost Control Techniques
▪ Planning the Project Budget

o Ideally, you will need to make a budget for the project at hand at
the outset of the planning session. This is this budget that you
will use to deal with all the payments that need to be made and
the expenses you would incur over the life cycle of the project.
Therefore the making of this budget requires a lot of work and
critical thought.
o You will also have to leave room for changes like every other
budget, because the costs may not stay the same right
throughout the project era. At all times adhering to the project
budget is crucial to project benefit.
▪ Keeping a Track of Costs

o It's equally important to keep track of all real costs as is any
other technique. Here, it is best to plan a time-based budget.
This will help you keep track of a project's budget at each of its
phases. The actual costs would need to be tracked against the
periodic goals set in the budget. Such milestones may be
monthly or weekly, or even quarterly, if the project lasts for a
long time.
▪ Effective Time Management

o The reason is that if you are unable to meet the project
deadlines, the cost of your project could continue to rise; the
longer the project is dragged on for, the higher the costs
incurred, which effectively means the budget will be exceeded.
▪ Project Change Control

o Power over project change is just another important technique.
Change management systems are important to consider any
potential changes that may arise during the course of the
project.
o This is because each change in the scope of the project will
affect the deliverables deadlines, so that the changes can
increase the cost of the project by increasing the effort required
for the project
▪ Use of Earned Value

o Similarly, it is very helpful to use the accounting technique
commonly known as 'Earned Value' to identify the value of the
work done up to now.
o This is especially useful for large-scale projects and will help
you make any quick changes that are absolutely essential to
project success.
Source: https://www.tutorialspoint.com/management_concepts/project_cost_control.htm

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CIS 3003 : Project Management

Topic 7 : Project Cost Management

• Importance and Principles of Project Cost Management

o Project cost management is the activities used to estimate, allocate, and

Basic Principles of Cost Management

o Most members of an executive board higher recognize and are greater

o An initial value estimate can determine whether an organization greenlights

There are two types under cost estimation:

Project managers must take cost estimates seriously if they want to

It ’s important to know the types of cost estimates, how to prepare cost

o Cost budgeting includes the estimation of costs, placing a constant budget,

o The costs then have to be allocated to the things to do or work applications

Changes to the cost plan be made in the following cases:

Cost Control Techniques

▪ Planning the Project Budget

▪ Keeping a Track of Costs

▪ Effective Time Management

▪ Project Change Control

▪ Use of Earned Value

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