Project cost management
The project budgeting process includes two basic steps. The first is estimating the costs of project activities, and the second is the distribution of costs over the period of implementation of each activity.
The first step is called cost estimating: Cost estimates are based on an analysis of the activities that have been created and estimates of the resources that will be used.
The second step is called cost planning: the more the project plan is integrated, detailed, studied and closer to reality, the less effort is required to control and the more the plan matches reality.
cost control
The main objective of cost control is to ensure that the project is completed within the planned cost and duration, which is based on following up and measuring the work and comparing it with the project plan, and then taking the necessary steps to adjust any deviation, if any, which include:
• Cost estimation.
• Cost accounting.
• The cash flows of the project.
• Direct costs of work.
• Fixed costs.
• Incentives, penalties, and profit-sharing.
Importance of cost control
The nature of projects is characterized by a dynamic style, so the deviation from the plan must be detected as soon as possible and corrected to reduce the side effects on the rest of the project activities. Among the most important factors that make project control necessary are the following:
The different projects and the nature of the different activities of the same project.
Diversity of the workforce and lack of permanence.
resource scarcity.
Circumstances beyond the management's control such as strikes, weather conditions, material outages...
Cost Types
Variable Costs: They change with the change in the volume of work being performed.
Fixed Costs: The costs that are fixed throughout the project.
Direct Costs: The costs directly related to the project.
Indirect Costs: The costs that are indirectly related to the project.
Costing Elements
Labor: The costs of the various categories of labor in the project are estimated as well as the hourly cost.
Materials: The cost of materials to be used by the project is estimated.
Subcontractors and consultants Estimate the costs of the work that will be implemented by external parties or the costs of consultancy that the project will need.
Equipment and facility rental: rental of special equipment, tools, or facilities during some phases of the project.
Travel costs: to cover travel costs and requirements in order to make the project a success.
Contingencies plan: costs are estimated to meet unexpected future contingencies.
Allocating the total budget
Estimation from top to bottom: The current project compares with previous projects similar to the current project, its components and therefore in terms of cost. This is called indicative estimation or empirical estimation and is designed to provide approximate estimations without having to use a lot of supporting detail.
Bottom-up estimation: This is a very detailed estimation and uses the WBS to generate activity-cost (as well as schedule) estimates. The bottom-up estimate can be very accurate if there is enough historical data on which the estimates are based.
Parametric estimation or modeling is based on the use of a parameter and repeated identical units of work. If the cost of one unit of labor is $100, then the costs of X units will be X * $100.
Cost Control
Measure and analyze performance costs for each activity or package of work to identify activities that require corrective action.
Determine the nature of corrective actions to be taken.
Reviewing the project plan, including adjustments in costs and times required for corrective actions.
The project team focuses on activities or work packages that have a negative cost variance and a CPI of less than one. The team also focuses on two types of activities when considering corrective actions related to the negative skew of the cost variance (cumulative earned value of work performed CEV is less than CAC.
Comparing Actual Costs (CAC) with Planned Costs (CPC)
The project team documents all the actual costs of the project activities on a regular and periodic basis, whether in terms of the cost of materials used or working hours for each worker in each work package.
Costs are also recorded for each purchase issued even if the materials are not received or the planned work item has not yet been executed which is called Committed cost
After data is collected about actual costs, including booked costs, they are aggregated for all work packages and compared with planned costs.
Determine the earned value of the work performed CEV
Earned value of the work performed can be defined as the value of the work that was actually performed on the ground. It is the indicator that must be continuously calculated at each stage of performance appraisal. Whereas comparing the actual cumulative cost (CAC) with the cumulative planned cost (CBC) shows only the comparison regarding the money spent, but may not show the true reality of what was implemented in the project.
The project team documents the actual costs on a regular basis during project implementation, to work
On determining the actual value of the work performed by determining the percent complete, the team then converts these percentages into monetary values by multiplying these percentages by the planned total costs:
CEV= TBC * PERCENT COMPLETE
performance cost indicators
Cost performance index: It describes the cost efficiency by comparing the cumulative earned value of the work performed with the cumulative value of the actual costs disbursed to the project. This indicator is calculated as follows: CPI = 𝑪𝑬𝑽/𝑪𝑨𝑪
It requires the intervention of corrective measures when the ratio becomes less than 1 ie 100%.
Cost variance (CV): A measure of performance costs that includes the difference between the cumulative earned value (CEV) of work performed and the actual cumulative cost (CAC), which appears in the following relationship:
CV = CEV - CAC
It can be said that the acquired value of the executed work is not commensurate with the actual cost of the project
Cost Forecasting
Based on the analysis of costs at each stage of project implementation, it is possible to estimate the actual total cost of some project packages or the whole project when the work packages or the whole project are completed.
There are three methods for estimating the total cost at completion (FCAC). These methods are:
1- The first method: assumes that the remaining work of the project will proceed at the same pace of efficiency, that the project has followed throughout the previous period, and it is calculated in this way: FCAC = TBC/CPI
This method is identical to the following formula: FCAC = TBC x (CAC/CEV)
2- The second method: assumes that regardless of the cost efficiency, the remaining activities of the project will be implemented according to the planned costs according to the following formula: TCAC = CAC + (TBC - CEV)
3- The third method: assumes re-estimating the cost-efficiency of all the remaining activities of the project, especially when the continuous deviation in the actual cost from the planned cost is observed and it is estimated as follows:
TCAC = CAC + Re-estimate the cost-efficiency of all remaining activities of the project