financial calculations, budget planning, costs definition, dollars, clock, gameProject cost management is one of the most important sections of the Project Management Book of Knowledge (PMBOK) and seeks, from a theoretical and practical point of view, to determine and control the costs involved in the project execution. This is an important area of knowledge since no project can be considered without having set aside sufficient resources for its execution.

For this, time is an influential factor, since the cost estimation will in principle require a project working with timelines; that is, short-term goals are proposed for each phase.

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It should be considered that if the total period for the delivery of a project is taken as an independent variable, there will be different risks associated with costs as a dependent variable. Namely: if you decide to carry out the project in the shortest possible time, you will be incurring the maximum cost, which requires impeccable coordination between all processes and a very high risk exposure in the appearance of deficiencies in coordination. If, on the other hand, the decision is made to extend the duration, the exposure to environmental risk increases: external circumstances are more likely to affect the initial budget.

How to estimate the costs of a project

The actions that revolve around this go beyond a mere quantitative estimate by a manager or project management team, since internal and external aspects that directly influence the achievement of the project must be carefully estimated.

Obviously, costs cannot be estimated without an exhaustive and accurate collection of requirements. The first reference of the project manager, therefore, is the Work Breakdown Structure (WBS).

  • Define the cost of each requirement. In many cases, these requirements will have a known cost and a trusted supplier; in other cases they will be more difficult to determine and should be roughly estimated;
  • Define the amount of work needed to complete all requirements and the cost per hour of each type of worker involved. This calculation serves as the baseline for the human cost of the project.
  • From the total of the two sums, the project manager must make the necessary adjustments related to the project inconsistencies and its plan, taking into account the duration of the project and how it affects the organization of the tasks. Estimation of costs. This implies the calculation of various circumstances and factors available and foreseeable during its lifetime, such as risks and price increases (in case of products involved), rents, materials, equipment, facilities, etc. For this, a "Reference Line" is created based on the time that they estimate the tools and economic resources that would be provided to each activity. This connects the aspects as mentioned above.

 The more narrow the scope, the more reliable the budget will be for the project. Of course, the project manager should not impose his estimates, but rely on a team of experts and experts in this field, who should evaluate the tasks that create the plan, and perform these assessments.

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From Utopia to Facts

The area of knowledge of the project costs is not exclusively financial, but requires techniques, specialized analysis and knowledge that allow to be aware of all the factors that can modify a project. These include execution schedules, the assessment of possible risks, coordination of meetings with stakeholders, which may need to address suggestions that affect the scope or mode of delivery, respect for the internal policies of a company, Attention to market conditions, experience in similar past projects, etc. Among the more strictly financial aspects are exchange control and fiscal aspects, which can be especially complex in international projects, inflation, and the corporate structure of financial control.

Also, turning information into knowledge requires tools that facilitate an approximation to the facts.

  • Units of measure: Depending on the object to be monitored, it will be estimated whether it can be measured with units of time (man hours, days, weeks, months), metric units (meters, centimeters, millimeters, tons, liters), and even in units of payment (monthly, fortnightly, single payment, etc.).
  • Accuracy: It varies according to the scope of the project, rounding figures around each aspect or phase that gives certainty of the costs that will be required for each one.
  • Cost limits: It is essential to determine this amount so that, in each cost review, there is a precondition
  • Cost limits: It is essential to determine this amount so that, in each cost review, there is in advance a conditioning of what is going to be required in each case. With this tool it is intended to keep the investment within the premeditated parameters and, if not, to take the corresponding corrective actions.
  • Measurement of the effort granted: These are performance indicators that are analyzed in the costs.
  • Management of information about cost management: Stakeholders should be fully and regularly informed of the management that is being carried out, either periodically (daily, weekly, fortnightly, monthly) and by providing reports Or any other ordinary means of communication.

Determination of the budget

Taking as a starting point the costs related to each activity, each of the estimates is added individually or jointly, to stabilize the reference line or cost, for the sole purpose of determining the budget of a project, Which will influence the funds allocated to it.

Costs control

It is necessary to monitor the consumption of costs in any situation of the project and to update them, if necessary, according to the cost baseline adjustment that was created. Any increase that is deemed relevant in project costs should be reviewed under an integrated perspective of the changes. However, its effectiveness lies in the management of the baseline, which maintains the cost performance and estimates the deviations occurred.

The aforementioned constructs the way towards an effective estimation of the costs of the project from the beginning. Successful budgeting is not as important as accurately picking up activity notifications. From the exhaustive control of deviations, it is possible to allocate the necessary resources to compensate for the unplanned under-coverage.

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knowledge treeThis is the third article in a series devoted to the 10 areas of knowledge covered by PMBOK since its 5th edition. Read more on the two articles already publishedon project integration:

The 10 areas of knowledge. 1: Project integration management

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The areas of knowledge are listed by importance

The areas of knowledge recognized in the PMBOK are practical subdisciplines that can be described as a set of methodological component, the sum of which covers the total domain of project management expertise. In contrast with the six phases of a project, the areas do not follow a cronological logic, but are rather sorted by importance. That explains the fact that project integration, almost a meta-area of knowledge that extends across all the rest, appears first and not last. Without component integration, there is no project beyond its parts. In other words, integration is a necessary condition for the existence and survival of a project. We're not even talking about results, efficiency and success.

That's where the next area of knowledge comes in. Now that a project exists, we want to do something specific with it. Project scope management allows to properly fulfill the two most basic conditions for a project to yield the result expected:

  • The project includes all the work needed
  • The project excludes everything that is not strictly necessary

In other words: while integration consists in giving life and sustaining a project as a complex artifact, scope management controls the causal relationships between project components and the final result. If the idea of a project starts with the final results, scope management includes all the causal factores that explain that future state.

The benefits of proper scope management are self-evident: by following the processes included in the area, the project manager will increase the chances of success and facilitate a clear work structure for the project team.

Due to the causal nexus implicit in the notion, scope can refer to:

  • Product scope : functional requirements to be delivered to the client.
  • Project scope, a broader term that often extends to include product scope. Project scope refers to the "how" (the means) rather than to the "what" (the product), and includes all the piececs that need to be take into account throughout the project lifecycle, including risks and management alternatives.

Project scope management

Project scope co-depends from the two other variables in the famous triangle: time and effort. The three variables exert a reciprocal influence, so that (at least theoretically) a larger scope can be tackled with a longer time devoted to the project or with a larger number of resources devoted to it.

The processes included in this area are thus tools to define the scope triangle with the maximum accuracy. Beyond the creation of a scope management plan, the processes include:

  • Requirement collection
  • Scope definition
  • Creation of a Work Breakdown Structure(WBS)
  • Scope validation

Of course, as we'll see in coming articles, risk management has an enormously important role in scope protection: it forsees possible situation that may alter it, and design mitigation responses.

Fine-tuning the scope definition

An accurate definition of the project scope improves time estimates, the efficacy of budgeted costs and the resources needed, forming a baseline against which all subsequent performance metrics and monitoring activities will be tracking. At that stage the scope also connects with the important area of project communication, which is vital to prevent the scope from gradually expanding.

Project Scope Statement

This detailed statement includes the following:

  • Objetives
  • Project scope and qualities
  • Project requirements, conditions or delivery capacity
  • Limits
  • Results
  • Acceptance criteria
  • Budget
  • Initial organization
  • Initially defined risks
  • Programmed milestones and important dates
  • Cost estimates

Work Breakdown Structure

This logical method to decompose the work needed into its smallest possible pieces is vital. Starting from the scope statement, it groups all tasks in a diagram and enables the work of creating a detailed gantt chart with dates, estimated costs, required resources, and possible change scenarios.

Work Breakdown Structure (WBS)

WBS can easily become the soul of the planning process - the whole team participates in its definition so no level or task are left behind.

WBS Dictionary

Project scope management consolidates around this imperative document, which contains both the statement and the WBS and extends to a detailed description of work packages with their objectives, assignments, dates, acceptance criteria, assumptions, assigned resources and dependencies.

This instrument of permanent consultation shows the different relationships between work packages and consolidates the scope baseline.

Recommendations

Beware the kitchen sink syndrom!

One of the clichés in project management but unfortunately an invariably common risk, scope creep is also known as "Kitchen sink syndrome". Projects are particularly vulnerable to scope creep when they are large and/or innovative. In the latter case, for example, it's understandable that some of the basic requirements in the WBS may become black boxes with more complexity than initially estimated.

Realism is no time waste

That's the reason why an extraordinary effort to compile realistic requirements can avoid so many problems later down the road. It might seem counterintuitive to spend hours trying to properly understand the dimensions of a secondary area within the project - but if major areas have dependencies with it and as a consequence the critical path is accepted, a delay in the project start will surely be compensated with better time control throughout the execution.

Descriptive and permanent communication with the project team and stakeholders substantially supports scope management. Don't think that it's a waste of time to talk to a technician about apparently nimble aspects of her routine: it may help you steer the complexity of your project with dexterity.

Control, control, control

Project monitorization requires the adoption of tools that immediately identify deviations with estimated times. If you lack visibility of the time your team members are devoting to their tasks, or if your financial management is not properly connected with the project advance you will immediately benefit from ITM Platform advantages.

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