For this week's blog post, we will focus on the aspects of project cost management. Project cost management is defined by Kathy Schwalbe as “the processes required to ensure that the project is completed within the approved budget (Schwalbe G.8).” In your role as a project manager, knowing, understanding and adhering to the budget given to you specific project is a key area in planning out how the project will be undertaken. Cost management can be broken down into a 4 step process:
● Planning cost management
● Estimating cost
● Determining the budget
● Controlling cost
In this blog, we will look at how you as a project manager will determine the budget. However before we focus on our main topic I wanted to talk about how waterfall budgeting works compared to agile budgeting. After that, I want to talk a little bit about planning cost management and estimating cost, just to give a baseline and finally after we focus on determining the budget we will briefly talk about controlling cost bringing the whole process to completion.
Waterfall vs Agile Budget
When you looking at budgeting with a waterfall approach you should be aware that you're budgeting everything in advanced. Waterfall budgeting focuses on a top-down, single "person", strictly controlled approach that is decided at the beginning of the project. On the other hand, Agile budgeting, while still be done in advance, allows you to budget while you go allowing for budget changes based on things such as efficient work in one scope leading to excess in the budget. Agile budgeting is broken down into sprints which is then aligned with the with the timetable and structure of the project. Agile budgeting also takes the budgeting power out the hands of just person for example it can have the project manager and scrum master review and agree on the budget which is backlogged and used under the agreed upon budget constraints.
Planning Cost Management
The first step of this process, planning cost management, focuses on developing the most efficient cost management plan possible. This is where project managers and key stakeholders use experience and data analysis to document how project cost should be budgeted throughout the project. A few things to consider when planning budget cost would be:
● Use data of similar projects that were previously done
● Consider any previous lessons learned
● Consult experts
● Created a budget baseline
● Breakdown the project into tasks
Estimating the Cost
For the next step of project cost management, you should be looking at estimating the cost. You’ve done the research, looked at the data and constructed a budget based on the breakdown of the project. Now it’s time to look at those task breakdowns and estimate the cost of each task based on all the resources needed for those tasks. When determining the estimates, you should acknowledge what type of estimate each resource is. There are 3 different types of cost estimates: rough order of magnitude (ROM), budgetary estimated, definitive estimates. Below is a table giving a brief description of each of these estimate types
As you can imagine, cost management can be a hassle to deal with. Luckily there are estimating software packages and other techniques that can be used to go through the estimating process. That being said, this part of the process can cause many problems if not done properly. Some things that Ms. Schwalbe informs project managers to look out for include (Schwalbe 298):
● Estimates are done too quickly
● People lacking estimating experience
● Human beings are biased toward underestimation
● Management desires accuracy
This is an image showing the flow of project budget management. Plan cost management and cost estimates need to be done first in order to determine the budget and the control cost. The diagram other aspects of project management that go into determining the budget as well as what those determination proceed to flow into after that step
Determining the Budget
Next is the main focus of this blog, determining the budget. After both the cost planning and estimating processes are completed it’s time for you and your project management team to determine the budget. Determining the budget consists of allocating cost estimates to individual material resources or work items over time (305). During this process you will be focusing on making a cost baseline in order to measure team project performance while also figuring out the funding requirements of the project. Creating a cost baseline and acquiring information about funding can lead to changes within previous cost management documents, such as resource reallocation within the project’s schedule. To start this off you and your team should create the cost baseline, which is “a time-phased budget that project managers use to measure and monitor cost performance.”
This image is an example of a project baseline for a year's time. The table shows 6 major categories that are supplemented into smaller categories when necessary to estimate the cost of specific areas in the project’s development providing the monthly and category totals
When making a cost baseline make sure to include contingency reserves (also known as “unknowns”), which is extra money that is set aside just in case something goes wrong or if there are any unplanned but predictable cost increases. Another type of reserves called management reserves (“unknown unknowns”) are reserves that can be requested by a project manager if there needs to be a change made within the project that is outside of the scope of the project. Management reserves are not included in determining the task budget but are included in the overall budget. Below is an image showing how the project budget can be broken down.
In the image you see the total project budget on the far left. The total budget consists of the cost baseline plus management reserves. The control accounts consist of work package cost estimates plus the contingency reserves. Finally the work package cost estimates consist of the activities cost estimates plus the activity contingency reserves. The budget is incrementally broken down for a cost efficient project.
Controlling Costs
The final part of budget management is Controlling costs. This includes monitoring cost performance, ensuring that only appropriate project changes are included in a revised cost baseline, and informing project stakeholders of authorized changes to the project that will affect costs (307). Once this step is started, it will be a continuous process done throughout the project. That being said I would suggest that you and your team find the best procedure or software possible to give your management team consistent, timely budget development reports. There are several techniques and tools that can help you control cost during your project.
Overview
Following the 4 steps of project budget management thoroughly can be the difference between having a concise budgeting plan and underestimating the budget for a large project. Planning cost management and cost estimates should be done at the beginning of this process and documented for the project management team and stakeholders. Once those are done, you should focus on determining the budget. Not doing this step in a very thought out logical manner can lead to delays in the project and most likely increases in the project's cost. Also by determining the budget effectively this can help with controlling the cost, since there is a strong chance that you're prepared for some mishaps that could come up.
Works Cited
Iryna Viter. “Creating a Project Budget – A Complete Guide for 2021”.Forcast. https://www.forecast.app/blog/how-to-create-a-project-budget. 9 Oct 2021
Schwalbe, Kathy. Information Technology Project Management. Boston, MA: Course Technology, 2019. Print.
Watt, Adrienne. Project Management:Budget Planning. BCcampus, 2014. Pressbooks https://ecampusontario.pressbooks.pub/projectmanagement/chapter/chapter-12-budget-planning-project-management/
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