PMP Training: Project Cost Management Overview
PMP® Exam Prep: Overview of Project Cost Management
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This definition is taken from the Glossary of Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) - Sixth Edition, Project Management Institute Inc., 2017.
This lesson is the introduction and overview of the Project Cost Management Knowledge Area.
We review the definition, glance at the four processes (Plan Cost Management, Estimate Costs, Determine Budget and Control Costs), and we discuss trends, agile and tailoring considerations for the knowledge area.
We answer the question "When can you estimate the cost of a project with 100% precision?".
Until Next Time,
Cornelius Fichtner, PMP, CSM
President, OSP International LLC
[00:00] [Logo shown]
Hello, and welcome to this free lesson from The Project Management PrepCast™. I am Cornelius Fichtner and I am your lead instructor. And at this point, you probably expect I am going to tell you how great the PrepCast is, right? Well, don’t take it form me. Instead, here are the voices and testimonials from a number of our students so that you hear what they had to say.
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[01:35] Lesson Overview
Hello and welcome to The Project Management PrepCast™ your cost-effective way of preparing for your certification. I am instructor, Cornelius Fichtner.
In this lesson, you’ll get an overview of the Project Cost Management knowledge area. The objective of cost management is to provide the information to allow you to complete your project within the approved budget.
In this lesson, we go through the definitions of the processes that belong under this knowledge area. We also discuss some generalizations about changes and cost over the life of the project. And finally, we examine some of the latest trends in costing. This lesson may look nice and light but it’s very informative.
[02:18] Follow Along on Pages: 231-234 and 674
If you would like to follow along in the PMBOK® Guide, please turn to pages 231 to 234, as well as page 674. Page 674 by the way summarizes the key concepts for this knowledge area. Let’s get started, shall we?
And the best place to start is the definition. Project Cost Management includes the processes involved in planning, estimating, budgeting, financing, funding, managing and controlling costs so the project can be completed within the approved budget.
With all the charts, graphs, equations, acronyms, the key aspect of this knowledge area is not to make you a mathematician or an accountant but to help you complete the project within the budget that you determine.
[03:09] Cost Management Processes
To achieve this, there are four processes defined in Project Cost Management. You’ll get the details for each in separate lessons. Right now, our goal is to give you a high level understanding.
As with most knowledge area, the first process is planning. Plan Cost Management is defined as the process of defining how the project cost will be estimated, budgeted, managed, monitored and controlled. The process generates the approach of how the team conducts the other three processes that follow in this knowledge area.
So after we have a plan and a bunch of data from other knowledge areas, we need to estimate the cost of the activities, resources and such. This is done in the Estimate Cost process. It’s defined as the process of developing an approximating of the monetary resources needed to complete project work. It directly feeds and is often confused with the next process, which will help us in determining the budget.
The definition of the Determine Budget process is the process of aggregating the estimated cost of individual activities or work packages to establish and authorize cost baseline. The primary output being the cost baseline of more commonly known as the budget.
Finally, there is the process where you will spend a lot of your time as a project manager, that is Control Cost. The formal definition is the process of monitoring the status of the project to update project cost and manage changes to the cost baseline.
Having only four processes makes this knowledge area sound small but you’ll find that you spend a lot of time working on this topic. It seems some of your stakeholders are pretty picky about money.
[05:10] Processes and Process Groups
What about process groups you ask? I was hoping you would ask that. In a nutshell, three processes in the Planning process group and the last is in the Monitoring and Controlling process group.
The three Planning processes are Plan Cost Management, followed by Estimate cost and finally Determine Budget. The Monitoring and Controlling process is of course Control Cost. These four processes are used to establish and control the cost on your project.
[05:42] Common Questions
There are three questions that we project managers hear time and again. First: How much is this going to cost? Second: Since you are doing this work, could you maybe also do…? And you can end the question with whatever you would like. And then finally: When do you think you are going to get done with this?
The answer to all of these questions is ‘it depends’.
[06:08] Choreographing Success
You see, Cost Management is like choreographing a troop of dancers. You need to get the different people sometimes speaking different languages to make their moves harmoniously. Your team needs to get the right data and information to the right people at the right time to make them happy.
You need to make sure that you know what your project is trying to produce. This sounds too simple but has the biggest effect on cost and is often poorly understood. You should find the right resources, people, equipment and material to do the work and manage them effectively. The wrong resource or managing them poorly can squander significant funds.
Although you can generally complete a project quicker if you add additional or more qualified resources, there is a limit to that both practically and financially. You and your stakeholders should understand that changing project or product scope almost always adds cost. And although everyone likes the best, increasing quality or using higher-grade material increases cost.
Therefore, those three questions: “How much will it cost?”; “Could you also do this other work?”; and “When will you be done?” can have different answers depending on their context.
[07:28] Timing of Cost Processes
Money is almost always central to running a project. It is usually the case that money is the primary constraint. Stakeholders seem to be more concerned about cost than nearly anything else. The old saying is quite true: Money makes the world go round, and your project run.
You cannot develop a reasonable project budget until you know what you are building, the materials that go into it, who will be working on it, what they cost, and where the money will come from to pay for it. Therefore there is a lot of work to get done before being able to start estimating what it will cost. However, if you wait too long, your stakeholders will lose confidence in your capabilities, the project’s viability or both. Hence, cost planning has to happen early and is usually done in progressive steps of refining the cost within tighter ranges of confidence.
[08:29] Project Uncertainty
The problem is that your knowledge about the project is very low when the project starts. The number of unknowns or project uncertainty is super high at the beginning. Uncertainty decreases only after you start defining scope, identifying resources and understanding activities and their durations. Unfortunately, your stakeholders want to know the cost as early as possible.
[8:57] Ability to Change
Because of this uncertainty, project and product scope changes. It should be no surprise to hear that cost and scope are tightly linked. Increased the scope and you almost certainly increase the cost. It is also understandable that the best time for a project team or stakeholders to influence the project scope and therefore cost is early on. For example during early planning and design, you can see this nicely here in this graphic: The ability to affect scope curve.
The team’s ability to affect project and product scope decreases overtime. This is because expectations are set and some key decisions have already been made that anchor the project path. For instance, changing the number of engines in a new airplane design or the number of floors in a house, or switching from buying software to developing it yourself. Those big decisions should be made early on in the project. Those are so big that it is difficult to change them even within just a few weeks of the project starting.
This is true even for adaptive projects, ones that allow for change. Although they are designed to handle most changes better than predictive methodologies, some changes to base components in the project become more difficult the change, the longer the project has been running.
[10:26] Cost of Change
There is one more major factor – Cost of Change. The cost of doing a change increases rapidly as your project progresses. This cost of change curve here shows you the relative cost in the early stages of the project and how the same change would cost more later on in the project.
Think about it, planning to make a two-story house isn’t cheap, but if you wait until the roof has been put on it to finally say: Oh you know what, you need another story on top of that” it’s far more expensive. You would have to remove all or part of the roof, build another story on top of it and then replace the roof again. In fact, your foundation may not even be designed to handle the extra weight.
Again, this is true even for adaptive projects, those that allow for change. Although the cost for change may be lower than in predictive, a change later on in the project generally costs more. The answer is obvious. The earlier you make such scope-related design changes and decisions, the less expensive the project will be. Procrastination causes cost to skyrocket.
[11:47] Solve the Cost Management Puzzle
How will you get answers to the key project cost management questions to solve this puzzle? Consider the stakeholder requirements. We cannot stress enough the importance of the role of stakeholders in Cost Management and they should be involved at the very start during Cost Management Planning. Stakeholders influence how project costs are measures. For example, stakeholders may have a say in the method of cost estimation.
Stakeholder requirements also impact the timing of cost recognition on the project. For example, do we record cost in accounting at the point in time when cost are committed to, or do we wait until the actual money exchanges hands? Consider cost of resources needed to complete the project activities. Project managers are heavily concerned with the cost directly charged to the project. However, different cost horizons should also be considered. We not only manage costs, which are incurred during the duration of the project, but also consider the full product life cycle.
Today’s decision on the project can affect cost after the project completes. For example, spending more time and effort during the project to make sure that we have a user-friendly product will have the effect of reducing customer inquiries for service. Thereby, we are saving on long-run product support costs. Your project is just one piece of a large corporate puzzle that includes operations and support. You are not an island.
[13:32] Financial Performance
Finally, our lessons on costing finance and performance talk in a lot more depth than the PMBOK® Guide. Predicting and analyzing the potential financial performance of the project and its product may or may not be within the scope of the project.
At times, it may seem that every stakeholders want to see numbers in a different way. That is because stakeholders come from different backgrounds and have different needs. Hence, there will be a multitude of different ways you may need to represent the numbers.
Also depending on project type though, if the project is very financially focused such as a capital facilities project, you may need to. Luckily for you, however, many organizations have separate departments or personnel to perform this function outside of the project. But you still need to understand what they are doing so you can communicate with them and understand their concerns.
Some financial management techniques include return on investment, discounted cash flow, investment payback analysis. These techniques have their specific purpose and formulas to help the project manager and relevant stakeholders make project cost decisions.
The world is always changing and even though you may think that methods around costing are static, maybe even boring, there are many aspects of the field that are changing mostly based around core project methodology.
Adaptive methodologies are changing how costs are determined. Some projects are simply given a bucket of money and told to product what they can. Others determine the cost of each iteration based on the projected work and continue doing iterations until the product is developed or the team decides the project is non-viable, which usually happens very early on in the project.
Outsourcing is continuing to become more prevalent as a way to accelerate deliveries and share risks and rewards. This entails not only different costs, but also different investment returns. As vendors who share in a risk, also share in the profit. Not all changes are earth shattering. You have heard little about earned value management and you will hear a lot more about it during the lessons on Project Cost Management.
One area, which is gaining traction, is called Earned Schedule. This is a different way of looking at schedule variances that is not expressed in dollar amounts as it is done in classical earned value. Of course as trends are rather well trendy, new ones can creep up at any time.
We have already talked about a couple of areas where Agile and Adaptive processes come in to play. These methodologies are designed to reduce the effects of change and leave the detailed scope and hence cost planning until the start of an iteration.
For each iteration, the team works with stakeholders to determine what is of the most value to the stakeholders and that becomes the focus. Therefore, the original estimates are lightweight and details are added at the time of execution only. All of these factors heavily change how costing is done and as I said earlier, the projects assignment may be just to see what you can get done for a specific amount of money.
In my many years of running projects, I have yet to see two run exactly the same way. Organizations have special processes or new ideas. They may have special needs in estimating based on their products or customer’s requirements. They may not even have a formal costing process that is especially true if it is a younger company or the complete opposite may be true and they have very strict costing and cost control processes. What the Cost Management processes provide is a set of tools for you to use in various situations to meet your stakeholders’ needs.
[17:46] Final Words on Cost Management
We are getting close to the end of this lesson and want to finish off by looking at the importance of Cost Management on your project and how you as the project manager are involved. Managing cost is vital for any business, project or program. It should be a high priority for the project manager and is essential for overall project success.
As many experienced project managers know, managing project cost can be challenging with so many variables involved in a project. Every project activity affects cost. A decision made regarding scope and schedule has the potential to adversely impact project’s cost. Therefore, a project manager must always pay attention to them. It is likely that there is no single answer or solution to a Cost Management question as every project situation is unique.
However, there is no need to panic. Use the processes, tools and techniques for project cost management we introduced you to and you shall see the more work done on all the Cost Management plans, the more effective the project estimates, budgets and controls, the higher the likelihood that you can effectively manage costs and get to project success.
[19:06] When are Costs Known?
Here is a fun question for you: At what time is it possible to precisely determine the cost of any project? I’ll give you a hint here. There’s only one correct answer to this and it is the same moment on any project. The answer is that the only time you have 100% knowledge of what the cost of any project is, is when that project is finished. This may be obvious but still important to remember. Estimates are only guesses and that is all we are doing in this knowledge area, determining estimates and making decisions based on how we perform to those estimates.
[19:49] Review Question
And after this fun question, here is a serious review question for you: Which document sets the format and establishes criteria for planning, structuring, estimating, budgeting and controlling project costs? Is it (a) financial management plan? Is it (b) the consolidated cost and control plan? Is it (c) the asset management plan? Or is it (d) the Cost Management Plan? I’ll give you a few moments to think about the answer here. If you need more time, press ‘pause’.
Did you get it? Well the name of the document was a big hint. The correct answer is D, the Cost Management Plan. You’ll find more about the Cost management plan in the next lesson of our series.
Here are your takeaways from this lesson: To estimate cost which is the basis of controlling them, you need to understand what you are building, who will build it, the time allotted to complete it and what materials you need. But cost is almost always the most important factor on any project and one of the first project parameters your stakeholders want to know about. You will almost always feel pressured to provide a cost before you have a good understanding of the details of the project. This means that there is a high chance that the project will change. Those changes are easier to do at the start of the project and we need to be thorough in planning.
This is true if you are running on a predictive or an adaptive methodology. Even though the latter is designed to accommodate change. Changes also impact the cost of the project far more as the project progresses. Changes late in the project can heavily affect the overall project cost especially if we are talking about a core project change.
Lastly, there are hundreds of project methodologies. In our lessons, we learn a lot about Earned Value Management. PMI is a strong supporter of that particular methodology. Hence, you should know it. However, many organizations use far less rigorous methodologies. As you learn about Earned Value, think about how it can apply in a general sense to your projects. And that concludes our overview of Project Cost Management.
Until next time.
[End of presentation]