Dr. Jana Jagodick Polytechnic of Namibia, 2012 Project Management Chapter 10 Project Cost Management

Dr. Jana Jagodick Polytechnic of Namibia, 2012

Project Management

Chapter 10

Project Cost Management

Cost management• Cost management

• Resource management

• Methods for cost management

• Other important cost management terms

Cost management• Costs are one of the critical elements of

project management, and project cost management entails resource planning, cost estimating, cost budgeting, and cost auditing and control.

• Cost management involves predicting the way in which money is spent on the project and to have the cash available at the right time

• You need to know the resources you need to work out a cost estimate

Resource management• Resource management entails the way

in which resources are optimally and cost-effectively utilised in order to obtain the required project outcome

• Good resource management not only saves time and costs, but it frees up resources to utilise on critical issues as the need arises

Project resourcesYou need 7 resources in a project…..

What are they?People MoneyEquipmentFacilitiesMaterials & SuppliesInformationTechnology “all means/efforts that go into

producing the outcome of a project”

Resource management:• resource planning

• resource definition

• resource allocation

• resource aggregation

• resource aggravation

• resource levelling

• resource smoothing

Resource planningCertain aspects/elements should be considered in

the resource planning process:• WBS as the primary input• Historical records of similar projects and expert

judgement• The project aim (justification & objectives)• Availability of the specified resources• The policies of the performing organisation

regarding staffing, procurement etc.

Resource definition• After the initial planning phase one has

to decide which resources to use.

• It is impossible to look at all the different resources and therefore only the essential resources, those that can be tracked, should be chosen.

• Often a resource definition includes an estimate of resource availability

Resource allocation• Resources are allocated to some of

the activities in the WBS

• Each task is taken in isolation and resources are allocated, giving preference to critical (path) activities.

• A resource demand profile can be drawn up covering the whole duration of the project

Resource aggregation• Through the use of resource aggregation,

the estimated requirement for resources can be compared with availability

What do you

need?What

have you got?

Resource aggravation• In a situation where the demand for

resources is higher then availability, the PM must, with the help of a resource histogram, resolve this problem by reallocating resources or lengthening the time frame.

Resource levelling• It is a process by which you should

ensure that the project never demands more resources than you have available

• Using a resource histogram levelling can be done in two ways: a task can be delayed or repositioned

e.g. Move from August to September when the resources

will become available

Sequencing the tasks in order of

priority…….

Resource hierarcihies• In projects, where the use of one

resource is dependent/linked to the use of another resource, resource hierarchies have to be established, to ensure that the necessary resources are available.

Resource smoothing• The project manager should try and use

resources optimally and smooth the demand for major resources by:– using subcontractors – peaks & troughs– do critical tasks first– shift resources from task to task– check through the logic of the project

Resource levelling v smoothing• Levelling – changing the tasks in time or

changing the priority of the tasks – so that peaks and troughs in demand are smoothed out

• Smoothing – managing the resources so that peaks and troughs in resource availability are smoothed out

Resource calendars• For the management of human

resources it is useful to draw up a resource calendar to see when these resources are available.

Cost Estimates• Cost estimates - quantitative

assessment of the likely costs of the resources required to complete project activities and are normally expressed in units of currency (N$) or units manpower (hours/days)

Developing Cost Estimates

• A number of methods/techniques can be used for cost estimation, by using information from these WBS, resource rates, activity duration estimates, historical information and a chart of accounts

Developing Cost EstimatesActivity Duration Resource Cost per

unit/ resource

Total costs

Compile business plan

10 days Gerson $100 per day $1000

Do risk analysis 15 days Rudolph/

Esther

£100 per day per resource

Buy 2000 bricks 2 weeks Susan (temp) $1.00 per brick

Pay weekly wages for temps

1 day Sylvia $300 per week (1 temp)

Methods for Cost Estimating

• top-down estimating (analogous)

• parametric modelling

• activity-based costing

• bottom-up estimating

• Earned Value

Top down estimating• Uses rules of thumb or cost estimating

relationships

• Can use the actual cost of a similar project as the basis for estimating the cost of a current project

• Good where there is limited information on a current project

• But many projects are different

Parametric Modelling• Uses project characteristics in a

mathematical model

• Models may be simple (e.g. building a house can be estimated by cost per m2 of space) or can be complex

• Can be expensive to run (uses costly software) and can be highly inaccurate because the factors may not be scaleable

Activity based costing (ABC)

• Cost based on how much it costs to do certain activities

• Can be fairly accurate compared with other costing models

Manufacture garments

12 hours $100 per hour $1200

Pack garments

Ship garments

Bottom up estimating

• Uses a detailed WBS and needs pricing of each activity that make up the project

• Time consuming and can be costly – especially if there are many small work items to be costed

• Usually good accuracy

1.2 1.3 1.4

1.2.3.1

1.2.3.2

Earned Value

• Earned value – estimating task cost• Growing in popularity as one of the best

ways to estimate cost• Start using a cost method of the type shown

previously – ABC, parametric etc• Next, when tasks are completed, compare

estimate to actual costs• Work out cost variance• Build in to future cost estimates

Cost estimate considerations• Most cost estimates turn out to be too

low!• A contingency factor should be built

into any cost estimate to allow for a change of scope and/or planning, technical considerations and changing assumptions

• With the help of a spread sheet (available in most PM software), changes can be accommodated and implemented and various sensitivities can be run

Project Budgets - Steps• determine and set clear objectives

• accurate costs must be attached to each objective

• the expected income must be estimated

• income v expenditure (feasibility)

• produce the final budget

Cost Management Plan• The cost management plan

describes how cost variances will be managed, can be formal or informal, and is part of the overall project or business plan

Cost estimating• Cost estimating - an estimate of the

costs of the resources by adding individual project elements into a project total

• This estimate is known as the benchmark or baseline

Project Selection• Important cost or money factors

which will finally influence the selection of a project are:– cash flow– risk– resources

Business Plan• A business plan is a crucial element in

project management in order to secure support or funds for a project.

• An important part of the business plan are cost estimates which are essential to secure funding

Dr. Jana Jagodick Polytechnic of Namibia, 2012 Project Management Chapter 10 Project Cost Management

Documents

Jana Trojáková Humusoft

Nooksack-Fraser Transboundary Nitrogen Project: Goals ...€¦ · Nooksack-Fraser Transboundary Nitrogen Project: Goals, Results & Links to PSNSRP DAVID HOOPER, JIAJIA LIN, JANA COMPTON

Bilash Jana-CV

Tarak Kumar Jana - Lg Marketing Project

Jana - Photoshoot

Information Memorandum - JANA

Jana Compton - Nitrogen

Jana maddux cheers

Dr. Jana Jagodick Polytechnic of Namibia, 2012 Project Management Chapter 1 Project Management Context

Dr. Jana Jagodick Polytechnic of Namibia, 2012 Project Management Chapter 5 Project Integration Management

Kanada jana antaranga

Miles & Jana Wedding Photos

portfolio Jana

Dr. Jana Jagodick Polytechnic of Namibia, 2012 Project Management Chapter 7 Project Time Management Part 1

jana marec 2013

Jana Overview_International

Dr. Jana Jagodick Polytechnic of Namibia, 2012 Project Management Chapter 3 Project Management for Strategic Goal Achievement

Dr. Jana Jagodick Polytechnic of Namibia, 2012 Project Management Chapter 12 Project Risk Management

Project Management Chapter 9 Project Quality Management Dr. Jana Jagodick Polytechnic of Namibia, 2012

Sounds of Data Silence jana@naralogics.com @jeggers jana@naralogics.com