Download - Basic Principles of Cost Management
BSBPMG504A Manage Project Costs
Basic Principles of Cost Management
• Project cost management is traditionally a weak area in many projects
• Project Managers must work to improve their ability to deliver projects within approved budgets
• This requires the ability to prepare detailed budgets with clearly documented assumptions
• Project Managers need to couple an overall understanding of cost management with a detailed understanding of organisational cost management polices and procedures
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Basic Principles of Cost Management
• Most Project Sponsors and senior project stakeholders have a better understanding of financial terms than project terms
• A primary focus will be the financial benefits of project outcomes and the overall business case for a project
• Project managers need to develop a sophisticated understanding of cost management in order to –
Prepare, track and monitor all cost elements associated with a project, and to
Manage the expectations of the Project Sponsor and stakeholders
BSBPMG504A Manage Project Costs
Organisational Process Assets
• It is critical that Project Managers understand the cost management policies and procedures within the organisation where they are executing the project
• These can differ vastly between organisations• Inform yourself of the policies and procedures, follow them
and document any assumptions
Adapated from PMBOK 4th Edition
Budgeting Policies& Procedures
Cost Policies& Procedures
Research &Development
Policies
Planning &Budgeting
Cycle
AccountingPolicies &
ProceduresCapitalisation
Policies
BudgetingTools &
Reporting
BSBPMG504A Manage Project Costs
Profit –revenue (income) minus expenses (costs)
Life Cycle Costing –considers the total cost of ownership for an asset and is
commonly applied to projects. Total of execution and development costs plus ongoing support costs.
Cash Flow Analysis –determines the estimated annual costs and benefits for a
project and the resulting annual cash flow.
Return on Investment – is the expected overall positive benefit of a project over a
defined time period. Included in a business case.
Cost Management Terms for Projects
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Cost Management Terms for Projects
Sunk Cost –Costs that have already been incurred, the money has been
spent in the past and cannot be recovered. Useful when deciding which projects to finish and which to cancel.
Contingency –Allowances for future situations that may be partially planned
for and are included in the project cost baseline.
Often related to overall project risk
Business Case –Process of analysing and documenting overall costs and
benefits, both quantifiable and unquantifiable. Supports project selection and prioritisation
BSBPMG504A Manage Project Costs
Different Types of Costs
• There are many different costs that need to be planned and tracked in order to fully manage the costs of a project.
• It is critical that a Project Manager understands ALL the types of costs that may be applied to their project budgets
OperationalCosts
VariableCostsFixed
Costs CapitalCosts
IntangibleCosts
TangibleCosts
IndirectCosts
DirectCosts
RunningCosts
SunkCosts
BSBPMG504A Manage Project Costs
Direct Costs or Tangible Costs –
Obvious costs that can easily be measured in dollars e.g. human resources, tools and equipment, interest charges
Indirect Costs or Intangible Costs -
Less obvious costs that are harder to quantify, these are often recharged or levied on the project by a central accounting area or relate to unquantifiable factors e.g. %age allocation for It support per head, loss of customer goodwill due to reduced service
Different Types of Cost
Many inexperienced Project Managers get caught out by Indirect Costs,these can be a major factor in cost overruns.
BSBPMG504A Manage Project Costs
Capital Costs –
Costs related to the purchase or creation of an asset that is used to create goods or provide services, these costs can be depreciated in the future. Often applied to the tangible end products of a project.
Operational Cost –
On-going support and maintenance (running) costs for a capital asset e.g. it might cost $100,000 to develop a new IT system and then $10,000 per annum of operational costs to maintain the IT system.
Different Types of Cost
Capital Costs need to be planned and tracked explicitly in order to depreciateassets and to claim tax, and research and development, concessions.
BSBPMG504A Manage Project Costs
Fixed Cost –
Costs that remain the same regardless of the size or duration of the project. They are independent of the project or business activity. E.g. rent, unlimited software licence
Variable Cost –
Costs that increase as the size or duration of the project increases. They are dependent on project or business activity. E.g. project staff salary costs will increase if the project is extended
Different Types of Cost
The impact on project Variable Costs should be includedin the impact analysis and approval of Change Requests
BSBPMG504A Manage Project Costs
Total Cost of a Project
• The total cost of a project equals the fixed costs plus the variable costs
• Fixed and variable costs can be made up of both direct and indirect costs
• Example fixed costs
Capital purchases
One off purchases
• Example variable costs
Salary costs
Overheads based on time
Fixed Costs
Variable Costs
Time
Tot
al C
ost
BSBPMG504A Manage Project Costs
Example Project Budget – High Level
BSBPMG504A Manage Project Costs
Example Project Budget - Detailed
BSBPMG504A Manage Project Costs
Staying on Budget
To stay on budget, Project Managers must – Be knowledgeable about internal cost management policies
Understand all the cost elements of the project
Prepare a detailed budget and carefully document assumptions
Diligently control Project Scope
Re-baseline the Project Budget after any Change Requests are approved
Ensure accurate capture of actual costs
Closely monitor the Critical Path activities
Urgently resolve or escalate risks and issues on the Critical Path
Renegotiate the baseline Project Budget whenever it changes due to external factors
Manage stakeholder expectations closely
Evaluate performance against the agreed and re-baselined Project Budget
BSBPMG504A Manage Project Costs
Project Cost Management Processes
PMBOK Project Cost Management Processes -
7.1 Estimate Costs
7.2 Determine Budget
7.3 Control Costs
Related processes from Project Integration Management –
4.2 Develop Project Management Plan
4.6 Close Project
PMBOK 4th Edition