Cost Management Plan

All projects need money, there is no doubt in here. If this is the case we should discuss more the money that it takes for projects to fulfill themselves. Therefore there's no wonder that cost management is an important aspect of PM Exams. To manage costs we need to understand how we conduct the processes of projects around that money, how we're going to apply for our job. Controlling and using the funds of your organization for a project is a part of being a project manager. Therefore, cost management is of great importance both in terms of project Management and when preparing for project management exams such as pmp, capm, prince2.

Senior management always wants to track the project. Especially in terms of cost. In the scope of cost management earned value analysis is one of the tools that are used to evaluate if your projects are on track needless to say budgets and cost controls are key responsibilities for your role as project manager or scrum master. Considering that many projects fail due to exceeding costs, the sensitivity of senior management is very understandable and it should also be the project manager's sensitivity. Additionally, projects that fail due to cost considerations, usually fail in a destructive way. Therefore costs of the project should be managed closely.

Senior management generally wants only to see project progress communicated in terms of one simple thing. Another key principle for cost management is cost value engineering. Cost value engineering refers to getting more out of a project without sacrificing scope. As project managers, all things we have to do is estimating, budgeting the project and controlling costs. Therefore it's the project manager's responsibility to assure that project will be completed within the approved budget.

What is Cost Management?

Project cost management is all activities, ensure that a project remains within budget limits. It is the project management knowledge area, which includes processes for identifying cost management procedures, estimating project costs, determining project budget, and controlling costs.

Cost Estimation and Budgeting in Project Management

To estimate costs these methods are commonly used;
  • Analogous estimating
  • Bottom-up estimating
  • Three-point estimating
  • Parametric estimating
There is not a specific performance domain for cost. Assumptions are made and budget is created as a part of 
Cost is controlled as a part of;
All other performance domains have cost aspects to a certain level. In the project cost management knowledge area, the cost baseline, which is one of the three important project baselines, is developed.

Three of the four processes covered by this project management knowledge area are also in the planning process group, while the cost control process is in the monitoring and control process group.

Cost Management Tools in Project Management

A variety of different tools may be used in project management. Different types of tools and techniques used in different steps of cost management, including creation of cost management plan, estimation of costs, determining budget, and controlling costs of project.

Types of Costs

What is the cost? What different types of costs are there? There are a few different ways that we can classify costs and they all have their advantages and disadvantages. If we classify costs by behavior, you may think what does that mean to costs have behavior. They act in certain ways in relation to other activities. Let's classify the two types of costs here as fixed costs and variable costs. if we can determine how costs act so that we can make projections based on different levels of production. Therefore we have fixed costs. Fixed costs mean that as the production level rises the cost remains fixed. The other type is variable costs and variable costs are going to go up with each new unit of production.

Another method of classification of costs is by function. Simply asking the question of "What does that cost do? Why are we incurring this cost?" so we can have direct costs and indirect costs classified by function. Direct costs are going to be a cost that is traceable to a cost object. Therefore, if we're in a production cycle, the direct cost would be things like direct materials and direct labor. these are things that we can trace to a particular unit of inventory that we are producing.

Indirect costs are things that we can't trace and are not traceable to a cost object. Examples of that are going to be maintenance costs for multiple departments. we can't really have these indirect costs allocated specifically to a cost object.

What is a cost management plan?

A cost management plan creates a guidance to other processes that are related to cost aspect of a project. The cost management plan typically shows that, if cost estimation and budget creation will be treated as a single process or as two different processes, what will be cost measurement units (Dollars, euro, etc.), cost measurement methods and includes considerations such as the amount of rounding and how performance is measured.

Plan Cost Management Process

Plan cost process is a project management process in which a cost management plan is prepared to guide how, where, with what resources, and using what criteria the other three processes in the cost management knowledge area will be implemented.

In general, in this process, we will reveal a document that will describe how to manage the project cost, how to estimate the cost, how to create the budget, and how to monitor and control the cost, how to use measurement methods of the costs realized and provide some kind of guidance to the project team.
Plan cost management process is a part of the planning process group and cost management knowledge area. It is conducted once or at predefined points in the project management life cycle.

Inputs to the plan cost management process

  • Project charter: Since the summary budget contained in the project launch document will be included in the cost management plan, the launch document is used as input.
  • Schedule management plan: It involves everything related to the schedule that can affect the cost of the project.
  • Risk management plan: Project risks, as well as contingency and management reserves, are directly related with cost aspect of the project.
  • Enterprise environmental factors: EEF's like organizational culture, market conditions, currency exchange rates, any commercial information, PMIS are useful factors to use as an input.
  • Organizational process assets: Financial procedures used by the organization, historical data about cost management, lessons learned repository, financial databases, and sectoral guidelines about cost estimation and cost management are good examples of OPA in this process.

Tools and Techniques of plan cost management

  • Alternatives Analysis: When the subject is cost management, there are many points to make decisions and therefore evaluate alternatives. 
  • Meetings: Helps to get opinions and engagement of stakeholders and keeps the project integrated along with the efforts of the project manager.
  • Expert judgment: This is a very basic but useful tool to use as it reflects the opinions of people who have knowledge about the subject. Expert judgment can be gained from a large variety of professionals including independent consultants, cost accountants, representatives from the accounts
  • department, PMO members, former project managers, team members of different projects, etc.

See Also: