Project Cost Management
Last updated: 2022-02-16
Project cost management corresponds to chapter 7 of the PMBoK Guide (A
Guide to the Project Management Body of Knowledge, 2009) of PMI. Based
on the description given in the PMBoK, it comprises all management
processes that ensure estimating, planning, and controlling the entire
project cost as it is necessary in order to create the project results
Here, with project cost management, we refer to managing the project cost in implementation and closure phase and focus on monitoring and controlling the project cost. In general, an integral part of project controlling in project implementation phase is making sure that the actual cost of work is equal or close to the planned project cost. We make sure that we identify changes of project scope or time schedule as early as possible and quote them in form of change requests that cover all corresponding additional cost including those of extension of time (EOT). These change requests shall be fair for all involved parties. For preparation of a suitable change process during project planning, please refer to sub-section Contract Management.
In most cases, scope creep - additional, un-planned work – leads to time delays and additional costs (cf. sub-sections Project Scope Management and Project Time Management).
If not covered by a corresponding change order based on the change
process, we shall avoid any scope creep. Otherwise, we end up in a claim
situation: we implement the change anyway, take and file all available project records of that case, and try to settle compensation for it in terms of extension of time (EOT) and additional cost later.
we encounter problems following our plan due to mistakes or errors. We
misinterpret or misunderstand certain requirements or specifications and
do not estimate and plan enough resources and / or duration for a work
package; while implementing the plan, mistakes and errors happen, we
need to correct them and have to repeat parts of the work. In either
case, we need more time and resources than originally planned which
leads to cost overrun. In other cases, things are easier than expected,
and we need less time and resources than planned resulting in cost
As a practical tool of project cost management in terms of monitoring the accumulated cost on work package level, we apply simple comparison of actual cost with planned cost.
Project Cost Management
In this example the blue line represents planned accumulated cost for
the entire project of 20 days duration. The red line shows the actual
cost until day 12. In general, we assume that the actual cost (AC) fits
to the cost of work and work results until day 12.
In order to obtain this AC we need project time sheets. Contemporary time sheets are an essential part of the project records
– not only for project time and project cost management but also for
all claim-relevant events and problems. So, we have to make sure that
all those who contribute to our project keep records about time spent,
work done, and results achieved, for each individual work package.
Earned Value Analysis
Earned value analysis (EVA)
is another convenient tool to support project cost management. To show
the project status in terms of its cost, we determine how much work is
done (or results achieved), and express it in terms of its Dollar value.
This we call earned value (EV). Then we compare EV with the amount of
work that should be done already (results that should be achieved
already) which is planned value (PV) at that point in time. We can
Cost Variance: CV = EV – AC,
Cost Performance Index: CPI = EV / AC.
- CV = 0 or CPI = 1 at a certain point of time indicate that earned value and actual cost are in-line. We are within the cost budget.
- CV < 0 or CPI < 1 at a certain point of time indicate that earned value is less than actual cost. We are over cost budget.
- CV > 0 or CPI > 1 at a certain point of time indicate that earned value is higher than actual cost. We are under cost budget.
Earned Value Analysis in Project Cost Management
To the example above we add the green line, representing EV by day 12:
On day 12, AC = 10,000, EV = 7,400,
leading to CV = EV – AC = 7,400 – 10,000 = - 2,600 < 0,
or CPI = EV / AC = 7,400 / 10,000 = 0.74 < 1; our project is over budget.
comparison of AC with PV and the results CV and CPI, obtained with EVA,
only serve as indicators of cost overrun. In order to cure problems we
have to go down to the work packages and apply problem solving
Predicted Project Profit
Another aspect of project cost management is predicted project profit.
If we know the project's revenue and its planned value (PV) at the time
of project completion, earned value (EV) and actual cost (AC) at a
earlier time, we can estimate or “predict” its profit at project
Predicted Project Profit
Here, we assume that the current trend of how earned value and actual
cost develop for the remainder of the project duration continues (this
formula leads to a very conservative prediction). If we express profit
as a percentage we obtain:
Predicted Rate of Project Profit
In the example above we assume project revenue of 18,000 at the time of
project completion, corresponding to total cost PV = 14,800. On day 12
we have AC = 10,000 and EV = 7,400.With these figures, we predict the
rate of project profit being -11.1% at project completion.
Project cost management requires a combination of different tools since one alone usually shows only part of the status:
- EVA, as indicator of cost overruns (or savings) on project level
- Predicted project profit on project level
- Problem solving techniques for affected work packages
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