Chapter Eleven. Project Cost Management


The PMBOK describes project cost management as "the processes involved in planning, estimating, budgeting, and controlling costs so that the project can be completed within the approved budget." As one of the triple constraints, cost is often the single most important indicator for the sponsor. (The triple constraints are cost, time, and quality.) When beginning a project, it is always a good idea to understand the mindset of the sponsor. The sponsor is likely to value one of the triple constraints more than another, and often cost will be the most important of the three constraints. If cost is the most important constraint for the sponsor, you should be sure to give status reports that show how close you are to the budget; keeping the sponsor informed of his/her major concern is important for the success of any project.

There are also times when you have little or no control over the cost of the project, such as when you are an internal project manager and all the resource costs are supplied and monitored by the organization in which you work. You do not have a great deal of control over whom you use on the project or the wages they are paid if you are working within an organization.

The opposite of this is the contracted project manager who comes from an outside organization to run a project. In this case, the project manager will be expected to run the budget that he or she has been given by the contracted organization. There are cases where you will bring your project team with you, which gives you a good mechanism for controlling your costs. There are also situations where you come in as a project manager to manage a specific project and use resources from the contracting organization. This does not happen often, but it is possible. In any case, knowing how to establish a baseline for costs is an important factor in project management success. The PMBOK shows three processes through which you need to go in order to establish your budget.

Q.

Cost, time, and quality are known as:

 

A.

Triple constraints

 

B.

Three chapters of PMBOK

 

C.

Tactical measurements

 

D.

Project indicators


The answer is A. Although these are also three chapter headings in PMBOK, they are known together as the triple constraints.

The three processes in Project Cost Management are Cost Estimating, Cost Budgeting, and Cost Control. In each process, it is important to construct a realistic budget. As with all of the knowledge areas, the various processes overlap and interact during the project. They should not be thought of as discrete processes without interaction with the others.

Life cycle costing and value engineering techniques are ways of looking at projects that are not included in the three processes mentioned earlier. The life cycle costing techniques look at a broad overview of the project rather than the narrower views that are shown in the four processes of this knowledge area. There are trades that can be made in the cost of the project, which are done in life cycle costing. For instance, if you decide not to run tests on every iteration of an IT project, you will cut the cost of the project. However, that cost may be shifted to the customer because the product of the project may not perform as anticipated. Life cycle can also look at costs that occur after the project has been completed. Costs can be incurred or left out of the project that will affect the maintenance phase of the project. Quality issues such as testing may be included in this life cycle analysis. In this case, the customer may require that you do rework to handle any omissions that happen because of lack of complete testing. But this example shows how life cycle costing is a broader consideration in project cost management than those we are about to explore.

Value engineering techniques are done to give the project manager the best possible engineering tasks to reduce cost during the project, to improve the quality of the work as well as the final performance of the project's product, and to optimize decision making. Value engineering is also called value analysis or value management.

Q.

Looking at a broad overview of the project costs is known as:

 

A.

Auditing

 

B.

Life cycle engineering

 

C.

Life cycle costing

 

D.

Value engineering


The answer is C. Life cycle costing looks at the entire project and is a technique that helps determine the most cost-effective ways of managing the project.

Q.

Value analysis and value management are other names for:

 

A.

Profitability

 

B.

Life cycle management

 

C.

Life cycle costing

 

D.

Value engineering


The answer is D. The planning of engineering tasks to reduce cost, improve quality, and maximize product performance is value engineering. Value engineering also helps to give clear data from which good decisions can be made.

As we look at the three processes in depth, keep in mind that you need some basic understanding of general management cost evaluation techniques such as ROI, discounted cash flow, and others for the exam. These will be discussed later in this chapter. Although it is not the purpose of the PMP certification to make you a CPA, the various cost techniques are useful to know because sponsoring organizations use these techniques to help decide whether to go forward with projects. The general management cost techniques are also helpful because they provide potential results against which a project manager can manage. Get to know them, and they will be helpful on more than just the examination.

Q.

ROI and discounted cash flow are two examples of:

 

A.

General management cost evaluation

 

B.

Value management cost techniques

 

C.

Project management cost evaluation

 

D.

General cost techniques


The answer is A. Various techniques are used in general management to make decisions about the use of capital; these are two of them.

Another factor that a project manager should consider in project cost management is the concept of direct and indirect costs. If you are being rewarded for bringing the budget under control, you need to know which costs you have control over and which costs are not within your control. Costs that result from the execution of the project are called direct costs. These costs are directly related to the project being run. For instance, any hardware that is specifically used for the project is a direct cost to the project because money would not be spent on the hardware if the project were not being done. As you are doing your budgeting for the project, be aware of the costs that will be directly linked to the execution of the project. This is particularly important if you are being compensated based on your ability to finish the project within budget. You can control direct costs in most cases; you cannot control indirect costs, so your compensation should be linked only to direct costs.

The indirect costs on a project are costs that would occur whether the project was being done or not. For instance, you are not responsible for the electricity bills if you are doing the project in your organization's facilities. You have no control over these (other than making sure you turn out the lights at night), but it is a cost to the company. Heating is another example. The heating of the building is not something that occurs because of a specific project. It is an indirect cost because it is not linked directly to the project. The project manager has no control over indirect costs and should not be rewarded or penalized because of these costs.

Q.

Heating and electricity are examples of ________ costs.

 

A.

Strategic

 

B.

Tactical

 

C.

Direct

 

D.

Indirect


The answer is D. The costs of heating are not controllable by the project manager and do not occur because the project is being executed. This makes them indirect costs.

Q.

The project manager can have control over ________ costs.

 

A.

Strategic

 

B.

Tactical

 

C.

Direct

 

D.

Indirect


The answer is C. Costs that are directly incurred because the project is being executed are directs costs. In some cases the project manager has control over the costs, and in some cases the organization itself will control the costs. In any case, the costs occur only when the project is going on.

The processes that we are about to discuss may overlap on smaller projects. Cost estimating and cost budgeting are very closely linked and for some projects may be seen as a single process. PMBOK presents them as separate processes so that all of the inputs, tools and techniques, and outputs of each breakdown can be seen and managed.

The control of costs is made easier when early planning is done well. All of the major documents such as a requirements document will give the project manager a clearer look at the potential costs of the project. A good scope definition and WBS are critical components in controlling costs because they show the overall scope of the project as well as the tasks that need to be done to complete the project.

Q.

Cost control is easiest to do ________ the project.

 

A.

Early in

 

B.

Late in

 

C.

In the middle of

 

D.

After


The answer is A. The earlier you have good plans from which to work, the easier it is to control your costs and perform good cost planning. If there is no clarity about the work to be done, there will be no clarity about the costs to be incurred.



Passing the PMP Exam. How to Take It and Pass It
Passing the PMP Exam: How to Take It and Pass It: How to Take It and Pass It
ISBN: 0131860070
EAN: 2147483647
Year: 2003
Pages: 167
Authors: Rudd McGary

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