Project Management Lecture 7 Cost Management and Budgeting

Lecture 7- Cost management and budgeting Project cost management  Is a core area of project management focused on planning, estimating, budgeting, funding, managing and controlling the costs of a project.  The main aim is to ensure it is completed within the approved budget Importance of project cost management  Budget control: Ensures that the project stays within approved budget  Financial planning: Helps in planning the allocation of resources and funds across different project phases  Risk mitigation: Identifies financial risks and manages proactively  Stakeholder confidence: Provides transparency and builds confidence with stakeholders by ensuring that costs are controlled  Performance measurement: Allows for tracking the financial health of the project and enables timely corrective actions. Key components of cost management Cost management are broken into four key processes: 1. Cost estimation 2. Resource estimation 3. Cost control 4. Cost monitoring and reporting 1. Cost estimation   Involves predicting the financial recourses required to complete a project It is the process of quantifying the costs associated with all project activities, including materials, labor, equipment and overhead. Types of costs  Direct costs o Expences that can be directly attributed to a specific project, task or activity. These costs are directly associated with the production of goods and services within the project.  Indirect costs o Expences that are not directly traceable to a specific project or activity (administrational costs, office supplies, rent etc.) 2. Resource estimation   Apart from money, a project requires a lot of resources in place, and these include labor, equipment, technology, tools Helps allocate resources effectively and ensures the project has the necessary financial backing Importance of resource estimation  Efficient resource allocation: Ensures that the right number of resources is allocated to each task, preventing both shortages and excesses.  Cost control: Helps in creating a more accurate project budget by estimating the costs associated with resources.  Schedule accuracy: Facilitates the development of a realistic project schedule by estimating the time required to complete tasks with the available resources  Risk mitigation: Identifies potential resource-related risks early, such as resource shortages or skill gaps, allowing for proactive management.  Stakeholder confidence: Builds confidence among stakeholders by demonstrating that the project is well-planned with adequate resources. Risk reserves  Are critical component of project management, providing a financial buffer to address unforeseen risks that could impact the projects scope, schedule or budget.  They are essential for ensuring that the project can withstand uncertainties without derailing its progress or exceeding its budget. There are two categories of risk reserves: contingent reserve and management reserve. Contigent reserve  Contingency reserves are funds set aside to cover identified risks that are known and have been analyzed  These risks are typically documented in the risk register and have quantifiable probability and impact. 2 types of contingent reserve A) Percentage added costs: bases on likely hood of a risk project manager can add buffer to the estimated costs. More suited for smaller projects. B) Expected monetary value: it is a quantitative risk analysis technique used in project management to assess the potential financial impact of risks on a project. It involve calculating the average outcome of a set of uncertain future events, weighted by their probabilities of occurrence. Management reserve  A management reserve is a specific amount of the project budget or time that is set aside to cover unforeseen work or unexpected risks that were not identified during the project planning phase.  This reserve is distinct from the contingency reserve, which is allocated for known risks with identified probabilities and impacts.  Provide a financial and time cushion for the project manager and are controlled at a higher level of the organization. Budgeting estimates  Are crucial in project management for determining the financial requirements needed to complete a project.  These estimates are used to develop a project budget, which serves a financial plan to manage and control costs throughout the project lifecycle.  Accurate budgeting estimates help ensure that the project is adequately funded and can be completed within the allocated resources. Methods of budget estimation  Top-down approach o Is a method of planning and estimating where the overall project objectives and deliverables are determined first, and then the project is broken down into smaller components and tasks. o This approach begins at “the top” level with a broad overview and works its way “down” into more detailed aspects of the project.  Bottom-up approach o Start by estimating the cost of individual activities and resources, then aggregate these costs. This method is detailed and can give you more precise control over budget. Other types of budget estimates  Parametric estimating: Using statistical relationships between historical data and other variables. o Particularly used in research projects when you have reliable data from previous similar projects, and it helps create more accurate data-driven estimates.  Analogous estimating: Comparing the current project with past projects that are similar in scope and nature.  Expert judgement estimating: A qualitative technique where experienced professionals or subject matter experts provide insights and estimates based on their knowledge and experience. o This method is especially useful when there is limited historical data, or t-he project is unique and doesn’t fit neatly into other estimation models. 3. Cost control Involves monitoring, analyzing and regulating the costs associated with a project to ensure that the project stays within the approved budget.  Effective cost control helps project manager avoid budget overruns, identify cost variances early, and take corrective actions to bring the project back on track financially. Purpose of cost control  Ensure budget adherence: The primary goal of cost control is to ensure that the project is completed within the approved budget.  Minimize cost overruns: By monitoring costs closely, project managers can identify and address potential overruns before they become significant.  Improve cost efficiency: Cost control helps identify areas where cost savings can be achieved without compromising the quality or scope of the project.  Facilitate decision making: Accurate cost data allows project managers and stakeholders to make informed decisions about resource allocation, scope adjustments and project priorities.  Best practices for cost control  Develop a detailed cost management plan  Use contingency reserves wisely: allocate contingency reserves for known risks and ensure they are used only when necessary.  Engage in continuous monitoring: regularly review cost data to identify potential issues early and take corrective action promptly.  Communicate with stakeholders: keep stakeholders informed about the project’s financial status and any potential risks to the budget. Cost structuring Cost structuring is the process of organizing and categorizing the costs associated with a project in a systematic way. Cost structuring leads to a cost breakdown structure (CBS). Cost breakdown structure is to break the costs into tasks, and then break it into all the costs related to the tasks.