Spiralling costs can be a project manager’s worst nightmare. If there isn’t adequate control over project costs they can start to take on a life of their own, where new cost items appear without any knowledge of how they got there or justification over why the project should pay for it.
We’ve all heard about projects that have gone over budget – the Big Dig, the Sydney Opera House, the London Olympic games (or wait, isn’t that every Olympic games). Your project might not be on the same scale but running over budget can have the same consequences, relative to the size and influence of your career. It is one of the central facets of project management and most important jobs of the project manager.
The Project Management Body of Knowledge contains a knowledge area for Project Cost Management, and its four processes are as follows:
- Plan Cost Management.
This planning phase establishes the policies and procedures for budgeting and controlling project costs.
- Estimate Costs.
Each project task must be broken down and estimated to determine its cost to the project. Individual units, such as man-hours, mileage, equipment, and anything of cost must be estimated and aggregated into a task cost. The resource needs of each task are planned in detail to allow a strong estimate.
- Determine Budget
Once each task has been assigned a cost, the overall project budget is determined by aggregating each task cost. Contingencies are added to each task or to the entire project as necessary, and financing and other fixed project costs are considered.
- Control Costs
During the execution phase, the project costs are tracked and project changes initiated as required. Monitoring is often done via earned value analysis, whereby the project’s cost variance is calculated, which gives the project manager an overall glance at the project’s current cost status. If it is over budget relative to the tasks performed, action can be taken to get the project back on track. The Cost Variance can also take the form of a Cost Performance Index.