PROJECT

MANAGEMENT PHASES
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CHAPTER 8

PHASE II:
PLANNING THE PROJECT- PART 4
PROJECT COST MANAGEMENT
 PROJECT COST MANAGEMENT
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PROJECT COST MANAGEMENT DEALS WITH THE PLANNING, MANAGING AND

CONTROLLING OF PROJECT-RELATED COSTS WITH A VIEW TO COMPLETING THE
PROJECT WITHIN THE STIPULATED BUDGET

COST ESTIMATING – THE GOAL OF COST ESTIMATING IS TO DEVELOP AN

APPROXIMATION OF THE COSTS WHICH ARE TO BE UTILIZED ON PROJECT
RESOURCES FOR PROJECT COMPLETION

COST BUDGETING – INVOLVES AGGREGATING THE ESTIMATED COSTS OF PROJECT

ACTIVITIES OR WORK PACKAGES WITH A VIEW TO DEVELOPING THE COST BASELINE

COST CONTROL – SEEKS TO INFLUENCE THOSE FACTORS THAT CREATE ADDITIONAL

COSTS AND TO CONTROL CHANGES TO THE PROJECT BUDGET
 SOME ASPECTS TO CONSIDER IN ESTIMATING PROJECT COSTS
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 COST ESTIMATES CAN BE MEASURED IN TERMS OF UNITS OF CURRENCY

(PAK. RUPEES, EUROS, DOLLARS ETC.) OR EXPRESSED IN TERMS OF

RESOURCE CONSUMPTION, FOR EXAMPLE, THE NUMBER OF MAN-
HOURS OR MAN-DAYS REQUIRED TO COMPLETE PROJECT ACTIVITY X

 COST ESTIMATES CAN BE REFINED IN THE COURSE OF THE PROJECT AS

MORE INFORMATION BECOMES AVAILABLE

 COST ESTIMATES IDEALLY MUST TAKE INTO ACCOUNT VARIOUS

FACTORS, SUCH AS PROJECT-RELATED RISK, INFLATION ETC. AND

THEIR POTENTIAL FUTURE IMPACT ON COST DEVELOPMENT
 SOME CONSIDERATIONS AFFECTING THE QUALITY OF COST
ESTIMATING
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1. PEOPLE FACTOR – COST ESTIMATING ACCURACY DEPENDS ON

THE SKILLS OF THE ESTIMATING INDIVIDUALS

2. TIME FACTOR – LONGER PROJECT DURATIONS OFTEN

COINCIDE WITH INCREASED UNCERTAINTY OF COST ESTIMATES

3. PROJECT STAGE – IN EARLIER STAGES OF A PROJECT, COST

ESTIMATES WILL OFTEN BE LESS ACCURATE THAN AT LATER
STAGES WHEN INFORMATION BECOMES MORE AVAILABLE

4. PADDING – ADDING COST TO COVER FOR UNCERTAINTY OR

RISK

5. MISCELLANEOUS FACTORS – DIVERSE FACTORS WHICH CAN

AFFECT COST ESTIMATING
 APPROACHES TO COST ESTIMATING
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THERE ARE 2 BASIS APPROACHES TO COST ESTIMATING USED IN

PRACTICE:

 THE MACRO (TOP-DOWN) APPROACH – USED OFTEN IN THE

INITIAL OR CONCEPTUAL STAGE OF A PROJECT WHEN WORK
ELEMENTS HAVE STILL TO BE DEFINED. USUALLY PROVIDES A VERY
ROUGH ESTIMATE OF THE PROJECT COSTS. USEFUL IN
DETERMINING WHETHER THE PROJECT MERITS MORE FORMAL
PLANNING AND SUBSEQUENTLY MORE DETAILED COST ESTIMATES.

 THE MICRO (BOTTOM-UP) APPROACH – MORE ACCURATE

THAN THE TOP-DOWN APPROACH. AS PROJECT PLANNING ENTERS
THE ADVANCED PHASE, COST ESTIMATES ARE MADE AT THE WORK
PACKAGE OR WORK ACTIVITY LEVEL, WHICH ARE THEN ROLLED UP
TO ESTIMATE THE TOTAL PROJECT COST. USE OF EXPERIENCED
INDIVIDUALS CAN HELP PROVIDE HIGHLY ACCURATE ESTIMATES OF
RESOURCE USAGE AND TIME DURATION. THE BOTTOM-UP
APPROACH IS USEFUL AS A PROJECT CONTROLLING INSTRUMENT.
 COST ESTIMATING TECHNIQUES: THE MACRO
(TOP-DOWN) APPROACH
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Three selected examples of top-down cost estimating techniques:

Consensus Method – This method uses the pooled experience of senior or middle
managers to estimate total project duration and cost. This typically involves a meeting
where experts discuss, argue and ultimately reach a consensus as to their best
guesstimate.

Ratio Method – These are surrogates which are used to estimate project costs and
times. Examples: Number of square meters x cost per square meter = project cost of
building a factory warehouse; cost of a thermal power generating station = power
generating capacity (in MW) x average industry cost per 1 MW power generation
 Apportion Method – Extension of the Ratio Method. Money is
“Apportioned” out for segments of project work on the basis of historical
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project-related data. Example: The design phase of an aircraft prototype is
apportioned 40% of total project cost, the production and testing phase 45%,
and the marketing phase 15%.

COST ESTIMATING TECHNIQUES: THE MICRO

(BOTTOM-UP) APPROACH

Template Method – Uses a standardized cost estimating model based on

previous similar projects. Then, differences in regard to the new project are
noted, regarding time, resources and costs, and estimates made accordingly.
This provides a high degree of accuracy in cost estimating within a
comparatively short period of time. In conjunction with the use of a cost
estimate databases, this reduces the probability of estimating errors.
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Work Packages – Considered the most reliable project cost and time
estimating method. Work Package Mangers provide the requisite
information. In case there is uncertainty with regard to expectation of times
involved in completing a work package or activity, varying estimates can be
taken and then averaged out.
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 A HYBRID: PHASE ESTIMATING
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Phase Estimating is a cost estimating technique that utilizes both the macro
and micro approaches. This technique is used especially when the project in
question is characterized by an especially high level of uncertainty and
estimating costs and times becomes very difficult

In Phase Estimating, initially a macro estimate for the project is made and
this estimate is subsequently refined as the project phases are implemented.
Typical projects in which Phase Estimating is used are in the aerospace
industry, IT projects, new technology products and some construction
projects.
 MACRO ESTIMATE

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DETAILED ESTIMATE

JAN JUL JAN JUL

2008 2008 2009 2009
 COST BUDGETING
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Cost budgeting concerns the aggregation of the estimated costs of the

project work packages or project activities with a view to developing a
“cost baseline”, which serves as a reference for assessing project
performance. Cost estimate becomes budget when it is time phased.

TYPES OF COSTS FOUND IN A PROJECT:

1. DIRECT COSTS
a. LABOR
b. MATERIAL
c. EQUIPMENT
d. OTHER
2. PROJECT OVERHEAD COSTS
3. GENERAL & ADMINISTRATIVE COSTS
 Earned Value Management (EVM)
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• EVM is a project performance measurement

technique that integrates scope, time, and cost
data
• Given a baseline (original plan plus approved
changes), PM can determine how well the
project is meeting its goals
• PM must enter following information
periodically to use EVM
• Was a WBS item completed or approximately
how much of the work was completed?
• Actual start and end dates?
• Actual cost?
• One of the benefits of using EVM is the calculation
of Estimate At Completion (EAC). An EAC point
above and to the right of the Budget At Completion
(BAC) point means that the project is projected to
cost more and take longer than planned.

Earned Value (EV) = PV to date x Rate of Performance (RP)

RP = Ratio of actual work completed to the percentage of work planned to have
been completed at any given time

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EVM Formulas

 If CPI =1:the planned and actual costs are the same; <1: over budget;
>1: under budget
 If SPI =1: on schedule; <1 behind schedule; >1 ahead of schedule

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