Project Cost Management

Ensuring Project Success Through Effective Cost Control

What is Cost Management?
• Cost management is the process of estimating, budgeting,
and controlling project costs.

• It begins during planning and continues throughout the

project lifecycle to ensure projects are completed within
the approved budget.
Why ?
Project Price Breakdown

PROJECT PRICE

TOTAL PROJECT COST PROFIT

DIRECT COST INDIRECT COST CONTINGENCY

Material Labor Equipment Project G&A

Cost Cost Cost Overheads Overheads
Types of Costs to be considered while budgeting a project:
• Skilled or Semi-Skilled labours
Labor Cost • No. of personnel to be employed, hourly rates, salary
• Labor Overheads like health benefits, insurance, pension, etc.,
• Specific equipment and suppliers needed for executing the project
Material Cost • Building, Manufacturing or Infrastructure projects may have higher Material costs
• Some projects like software development, may have little or no Material costs

• Provides expertise on contract

Sub-contractors • Consultants, Marketing communications professionals , or an Industrial
designer or a specialized software engineer, etc.,

Equipment & • Rentals of equipment or office

Facility • Offsite project team deployment

Travel • Business travel expenses like car rentals, airfare, hotels and meals, etc.,
Direct Cost / Hard Costs in Construction
Direct Cost v/s Indirect Cost
Direct Cost v/s Indirect Cost
Why is it Important to Define Direct Cost & Indirect Costs?
• You should define your direct and indirect costs for your records.
• Direct costs directly affect product costs, taxes, and profits.
• Controlling the direct costs gives the business an edge in the market and keeps the
price competitive.
• For projects, controlling the direct costs allows a project manager to reduce the
expenses associated with the project while delivering a superior product.
• Direct costs affect product design, price, and quality.
• On the other hand, controlling indirect costs is crucial in ensuring business operation
for an organization, and most times, these costs are distributed among different
projects.
Fixed Cost v/s Variable Cost
Direct and Indirect Cost Chart
Elements of a Cost Management Plan

• 1. Resource Planning
• 2. Cost Estimating
• 3. Cost Budgeting
• 4. Cost Control
• 5. Post-Project Cost Accounting
Elements of Project Cost Management?
 2.1 Estimating methods
• Find a similar project or task and assume this one will be the same or similar
Analogous
• The more experience the estimator has, the better this works
estimate • Learn from each project
• DPCI (Darnell-Preston Complexity Index) can help with benchmarking

Parametric • Parameters such as number of square feet for a building; number of kitchens,
estimate bathrooms, etc. for a house.

Bottom-up • Estimate each item or task and add them together

estimating • Generally more accurate but takes more effort to create
Cost Budgeting

• Creating a detailed project budget that outlines how much

will be spent, on what, and when.

• This includes establishing a baseline for monitoring.

• Key inputs include the project budget document and

stakeholder analysis.
Importance of budget planning
• Cost is one of the three project constraints

• A budget is a plan or forecast

• Cost management also includes tracking and managing variances

from the planned expenditures

• Detailed estimates are important

 Cost Control
• Monitoring actual costs against the budget, making
adjustments as necessary, and communicating with
stakeholders about budget status and variances.

• Key inputs include project management tools and universal

reporting tools.
Post-Project Cost Accounting
• Calculating cost variance and evaluating the project's total
costs compared to the budget.

• Conducting post-mortem meetings to learn from

discrepancies and improve future cost estimates.
Methods for Calculating Project Costs

• Hourly
• Flat Rate
• Cost Plus
• Value-Based Pricing
Hourly Costing

• Paying for the amount of work done, measured in hours.

• Effective for projects with flexible or uncertain scope as it

allows adaptability.

• Example: Software development project where the team's

cost is calculated based on hours worked.
Flat Rate Costing
• Agreeing on a total project cost upfront.

• Ideal for projects with well-defined scope and deliverables.

• Example: Marketing campaign with a fixed price covering

all aspects of the project.
Cost Plus Pricing

• Charging the actual costs of the project plus a markup or

additional fee.

• Used in long-term projects where costs cannot be

accurately estimated upfront.

• Example: Construction project where the contractor

charges for actual costs plus a fixed percentage as profit.
Value-Based Pricing

• Focusing on the value or benefit the client receives rather

than the cost of the project itself.

• Ideal for projects where the outcome has a high perceived

value.

• Example: Consulting firm charging a percentage of the

revenue increase they helped the client achieve.
Budget Management Summary
• Cost estimations may be used to choose between
options
• Managing the budget includes
• Estimating costs and setting a budget
• Determining when the budgeted costs should occur
• Tracking expenditures
• Managing variances between the budget and the expenditures
• Methods of Estimating
• Analogous, Parametric, Bottom-up
• Managing the Budget
• Budget timeline
• Budget variances
Budget Management Summary (continued)
• Budgeting and Cost Management are important activities for project
managers
• There are several methods for estimating the costs
• Estimated costs may be used to choose between options
• Project progress and budget management are closely related and can be
managed with indices: BCWS, PV, SV, AC, CV, SPI, CPI, ETC, BAC and
EAC
• Contingency funds allow for the unexpected
• Reporting to the team and to management are important components in
budget management
Cost Management Check List:

• Clearly define the project scope, deliverables, and objectives.

Define the Project • Identify all project stakeholders and their expectations.
Scope • Create a work breakdown structure (WBS) to decompose the
project into manageable tasks.

• Use appropriate cost estimation techniques (e.g., analogous

estimating, parametric estimating, three-point estimating) to
Estimate Project determine the cost of each task.
• Consider all project costs, including labour, materials,
Costs equipment, travel, and overhead.
• Include a contingency budget to account for unexpected costs.

Create a Project • Allocate the estimated costs to individual tasks and activities.
• Develop a detailed budget that outlines all project expenses.
Budget • Ensure that the budget is realistic and achievable.
Cost Management Check List:
• Create a comprehensive cost management plan that outlines the
Develop a Cost strategies and procedures for controlling project costs.
• Include a risk management plan to identify and mitigate potential
Management Plan cost risks.
• Establish a baseline budget and schedule for the project.

• Regularly monitor project costs and compare them to the

Implement Cost baseline budget.
• Analyse cost variances and investigate any significant deviations.
Control Measures • Implement corrective actions to address cost overruns or
underruns.

• Communicate project cost information to all stakeholders on a

regular basis.
Communicate and • Encourage open communication and collaboration among project
team members to identify cost-saving opportunities.
Collaborate • Hold regular project reviews to discuss cost performance and
make necessary adjustments.
Cost Management Check List:

• After the project is completed, conduct a post-project analysis

Conduct Post- to review the actual costs against the estimated costs.
• Identify lessons learned and best practices for future projects.
Project Analysis • Use the post-project analysis to improve cost management
practices in future projects.

• Involve project stakeholders in the cost management process to

ensure buy-in and support.
Additional Tips to • Use project management software or tools to track project
costs and monitor progress.
Consider • Continuously review and update the project budget and cost
management plan as the project progresses.
Conclusion

• Effective cost management is essential for project success.

• It involves continuous monitoring and adjustment to stay within
budget while achieving project goals.
• By leveraging automation, management software, and real-time
dashboards, teams can optimize costs and ensure project profitability.
Project Management (PM): Module 3, Session 4
• Session 3 : Project Cost Management

• Current Module : Project Cost Estimating Market, Technical, Financial & Economic Feasibility.
Financial Economic Appraisal of a project, Social Cost Benefit Analysis in India - Estimation,
Budgeting & Trade-Offs, Tracking & Monitoring using S-Curves.
• Current Session: Project Cost Management

Session 4 Learning Objective:

1. Learn Cost Control techniques like S-Curve Analysis
 Control Cycles – A General Model

• Goes beyond overall scope

Setting a development
• Take Corrective Actions to Goal • Includes Project Baseline plan
remove deviations
• Sometimes, it may involve
banning a nonperforming
project

Taking Measuring
Action Progress

• Clearly define what to

measure
• Get right information on
Comparing project progress
• Compare with Project Goal actual
and Baseline performance
• Conduct Gap Analysis w.r.t. with planned
performance
Project Goals/Objectives
Monitoring Project Performance: 3 popular methods

1. S-Curve Analysis
2. Control Charting (Trending Gantt Chart)
3. Earned Value Management (EVM)
The Project S-Curve: A Basic Tool
• The Project S-Curve: Visual representation
of the cumulative progress of a project
over time.
• It typically illustrates how costs,
resources, or performance accumulate
throughout the project lifecycle.

• The S-Curve gets its name from its

characteristic "S" shape, which reflects
the typical pattern of project progress:
• Slow initial growth,
• Rapid acceleration during the main •The horizontal axis represents time.
work phases, and
• A tapering off as the project nears •The vertical axis represents cumulative
completion. costs, work hours, or project deliverables.
The Project S-Curve: Shape and Structure

•Initial Phase: At the beginning of a project, progress

is slow as planning and preparatory activities take
place. This part of the curve is relatively flat.

•Acceleration Phase: As the project progresses, work

becomes more efficient, leading to rapid progress.
This is represented by the steep upward slope of the
"S".

•Final Phase: Near the end of the project, progress

slows again as final tasks are completed, resulting in
the curve levelling off.
The Project S-Curve: A Basic Tool
The Project S-Curve: A Basic Tool
Application of The Project S-Curve:
•Performance Monitoring: By comparing actual progress against the planned S-Curve, project managers can
identify discrepancies and take corrective actions.
•Forecasting: The S-Curve helps predict future project performance based on current trends, allowing for
proactive management of potential issues.
•Resource Management: It assists in visualizing resource allocation over time, ensuring that resources are
utilized efficiently throughout the project.
•Schedule Management: The S-Curve provides insights into how work is progressing relative to the planned
schedule, helping to identify delays or bottlenecks.
•Cost Control: It allows project managers to monitor expenditures against the planned budget, facilitating
timely adjustments to stay within financial limits.
•Risk Management: The S-Curve can be used to track the cumulative impact of risks on project performance,
enabling prioritization of mitigation efforts.
Real-World Examples of S-Curve Application
• Construction Projects: In construction, the S-Curve is commonly used to track the
progress of building projects, helping to predict costs and timelines for various
construction phases.

• IT Projects: For software development, the S-Curve aids in managing complex timelines
and resource allocation, ensuring alignment with initial project plans.

• Product Development: The S-Curve assists in monitoring team performance and

predicting resource needs during the product development lifecycle.

• Infrastructure Projects: Large-scale infrastructure initiatives, such as highways or

bridges, benefit from the S-Curve by providing an overview of project lifecycles and
aiding strategic decision-making.
Benefits of Using the S-Curve
•Visual Clarity: The S-Curve provides a clear, visual representation of project progress,
making it easier for stakeholders to understand complex data.

•Early Issue Detection: Deviations from the expected S-Curve can signal potential
problems early, allowing for timely intervention.

•Improved Communication: The graphical nature of the S-Curve enhances communication

with stakeholders, fostering better collaboration and understanding.

•Resource Optimization: Aligning resource allocation with the S-Curve's projected

demands helps prevent bottlenecks and ensures a smooth workflow.

•Benchmarking: Historical S-Curve data can serve as benchmarks for future projects,
improving planning accuracy and expectations.
Drawbacks of the S-Curve
•Assumption of Predictability: The S-Curve assumes a predictable environment, which may
not hold true due to unforeseen challenges.

•Data Dependence: The accuracy of the S-Curve is heavily reliant on the quality of the data
used. Inaccurate or outdated data can lead to misleading projections.

•Limited Scope: The S-Curve primarily focuses on time, cost, or performance, potentially
overlooking other critical factors like stakeholder dynamics or external influences.

•Resistance to Change: Stakeholders may resist changes to the S-Curve, especially if it

indicates delays or increased costs, necessitating effective communication to manage
expectations.
The Project S-Curve: Example
Activity Wk. 5 Wk. 10 Wk. 15 Wk. 20 Wk. 25 Wk. 30 Wk. 35 Wk. 40 Wk. 45
Design 6 2
Engineer 4 8 8 8
Install 4 20 6
Test 2 6 4 2
Total 6 6 8 12 28 8 6 4 2
Cummul. Cost 6 12 20 32 60 68 48 78 80
Budgeted Cost for Project (in ‘000 $)
90
78 80
80 74
68
70
60
60

50

40 32
30
20
20 12
10

0
10 15 20 25 30 35 40 45
Project Management (PM): Module 3, Session 5
• Module 4: Monitoring Project Performance using S-Curves
• Current Session: Milestone Analysis & Tracking Gantt Chart

Session 5 Learning Objective:

1. Learn how to carryout Milestone Analysis &
2. How to track Projects using a Tracking Gantt Chart
Monitoring Project Progress using Milestone Analysis:
Milestone:
An event or a stage of the project that represents a significant accomplishment on
the road to project’s completion

What can be a Milestone?

1. Completion of a deliverable (a combination of multiple project tasks)
2. An important activity on the project’s critical path
3. A specific date

Milestones are the road markers that we observe on our travels along the project’s
life cycle
Creating a Milestone Trend Analysis:
[Link] the key milestones in the project and set their planned dates during the project
planning phase.
[Link] the project progresses, determine and document the actual milestone achievement
dates.
[Link] the time deviation between the planned and actual milestone dates for each
milestone.
[Link] the time deviations in a milestone trend chart, where the time deviation is
plotted on the vertical axis and the reporting period is plotted on the horizontal axis.
[Link] the points representing the time deviations for each milestone to create a
trend line.
Interpreting Milestone Trend Analysis:
•If the trend line is horizontal, the
project is on schedule.

•If the trend line is trending upwards,

the project is experiencing delays.

•If the trend line is trending

downwards, the project is ahead of
schedule.
Interpreting the Milestone Trend Analysis
•The milestone trend chart provides insights into the project's schedule situation:

By regularly updating the milestone trend chart, project managers can identify patterns
and trends, such as:

Stable milestones: Milestones with consistent time deviations, indicating realistic

planning and a controlled schedule situation.

Increasing delays: Continuous increases in time deviations for one or more milestones,
suggesting potential risks or issues.

Sudden changes: Abrupt rises or falls in time deviations, often due to specific events or
decisions in the project.
Benefits of using Milestone Analysis as a form of Project Control:
• Milestones signal the completion of important project steps
• Milestones can motivate the project team
• Milestones offer points at which to reevaluate client needs and any potential
change required
• Milestones help coordinate schedules with vendors and suppliers
• Milestones indicate key project review gates
• Milestones tell other team members when their participation is expected to
begin
• Milestones can delineate the various deliverables developed in the WBS and
thereby enable the project team to develop a better overall view of the project
Tracking Gantt Chart:
MS Project Exercise on Milestone & Tracking Gantt Chart:
Earned Value Management (EVM): Reporting Project Progress
• Earned Value Management (EVM) is a project management technique
that
• Integrates project scope, cost, and schedule
• In order to assess project performance and progress objectively.

• 3 Basic measures:
• Planned Value (PV)
• Earned Value (EV)
• Actual Value (AV)

• It provides
• A quantitative measure of project performance,
• Enabling project managers to make informed decisions and
• Take corrective actions when necessary.
Core Concepts of Earned Value Management (EVM):
[Link] Value (PV):
a) Definition: The budgeted cost for work scheduled to be
completed by a specific date.

Calculation:
a) PV=Total Project Cost × Percentage of Planned Work

Example: If a project has a total budget of $100,000 and 40% of the

work is planned to be completed by month 2, then:
PV=100,000×0.40=40,000PV=100,000×0.40=40,000
Core Concepts of Earned Value Management (EVM):
2. Earned Value (EV):
Definition: The value of work actually performed up to a specific date,
expressed in terms of the approved budget.

Calculation:
EV=Total Project Budget × Percentage of Actual Work Completed

Example: If 30% of the work is completed by month 2:

EV=100,000×0.30=30,000EV=100,000×0.30=30,000
Core Concepts of Earned Value Management (EVM):
3. Actual Cost (AC):
Definition: The actual costs incurred for the work completed by a
specific date.

Example: If the actual costs incurred by month 2 are $35,000, then AC =

$35,000.
Key Performance Indicators (KPIs) of EVM:
EVM uses several key performance indicators to assess project health:

1. Cost Performance Index (CPI):

• Definition: A measure of cost efficiency.
• Calculation: CPI = EV / AC
• Interpretation: A CPI greater than 1 indicates under budget; less than 1
indicates over budget.

2. Schedule Performance Index (SPI):

• Definition: A measure of schedule efficiency.
• Calculation: SPI = EV / PV
• Interpretation: An SPI greater than 1 indicates ahead of schedule; less
than 1 indicates behind schedule.
Reporting Progress: Earned value management

Planned Value PV (BCWS) The authorized budget assigned to scheduled work

(Budgeted Cost of Work Scheduled)
Earned Value PV (BCWP) Measure of the work performed against PV
(Budgeted Cost of Work Performed)
Actual Cost of work performed AC (ACWP) Realized cost for the work performed on an activity
during a specific time period. Cumulative total costs
incurred (Actual Cost of Work Performed)
Schedule Variance SV = EV – PV Difference between Earned Value and Planned Value.
It is the amount by which the project is ahead or
behind the delivery date at a given point of time
Cost Variance CV = EV - AC Difference between the Earned Value and Actual cost
of the work performed.
It is the amount of budget deficit or surplus at a given
point in time
Reporting Progress: Earned value management

Schedule Performance Index SPI = EV / PV The rate at which project performance is meeting
schedule expectations up to a point in time
Cost Performance Index CPI = EV / AC The rate at which project performance is meeting cost
expectations during a given period of time
Budgeted cost at completion BAC This value represents the total budget for a project

Estimate completion EAC = AC + The expected total cost of completing all work on the
Estimated cost project. This is the projected (forecasted) total cost
to complete all based on project performance to that point of time.
remaining work
Human Factors in Project Evaluation and Control:
Human factors play a critical role in the success of project evaluation and control.
These factors encompass the attitudes, behaviors, skills, and interpersonal
dynamics of the project team and stakeholders. Understanding and managing these
human elements can significantly influence project outcomes.

1. Effective communication
2. Team Dynamics
3. Emotional Intelligence
4. Motivation & Engagement
5. Conflict Resolution
6. Diversity & Inclusion
Key human factors in project evaluation and control:
Effective Communication
•Importance: Clear communication is essential for conveying project goals,
expectations, and progress. Miscommunication can lead to misunderstandings,
delays, and conflicts.

•Strategies: Establish clear communication channels (e.g., regular meetings,

updates).
•Use collaborative tools (e.g., Slack, Microsoft Teams) to facilitate real-time
communication.

•Example: A project manager sets up weekly video conferences to ensure that

team members in different locations remain aligned on project objectives and
timelines.
Key human factors in project evaluation and control:
2. Team Dynamics
•Importance: The relationships among team members can impact collaboration,
morale, and productivity. A cohesive team is more likely to succeed than one with
interpersonal conflicts.

•Strategies: Foster a positive work environment through team-building activities.

•Recognize individual contributions to boost morale.

•Example: During a stressful project phase, a manager organizes a team outing to

enhance camaraderie and relieve tension.
Key human factors in project evaluation and control:
3. Emotional Intelligence (EQ)
•Importance: Project managers with high emotional intelligence can better
understand their own emotions and those of their team members, leading to
improved conflict resolution and motivation.

•Strategies: Encourage open discussions about feelings and concerns.

•Train managers in emotional intelligence skills.

•Example: A manager notices tension between two team members and mediates a
discussion to resolve their differences constructively.
Key human factors in project evaluation and control:
4. Motivation and Engagement
•Importance: Motivated team members are more productive and committed to
project success. Understanding what drives each individual can enhance
engagement.

•Strategies: Conduct regular check-ins to understand team members' needs.

•Offer incentives or recognition programs to acknowledge achievements.

•Example: A project manager implements a rewards program for meeting

milestones, boosting overall team motivation.
Key human factors in project evaluation and control:
5. Conflict Resolution
•Importance: Conflicts are inevitable in any team setting. How they
are managed can significantly affect project progress and team
morale.

•Strategies: Establish clear conflict resolution processes.

•Train team members in negotiation and mediation techniques.

•Example: When conflicts arise over resource allocation, the project

manager facilitates a meeting where all parties can express their
concerns and collaboratively find a solution.
Key human factors in project evaluation and control:
6. Diversity and Inclusion
•Importance: Diverse teams bring varied perspectives that can enhance creativity
and problem-solving. However, diversity can also lead to misunderstandings if not
managed well.

•Strategies: Promote an inclusive culture where all voices are heard.

•Provide training on cultural sensitivity and teamwork.

•Example: A project team includes members from various cultural backgrounds; the
manager organizes workshops on cultural awareness to foster understanding.
Key human factors in project evaluation and control:
7. Feedback Mechanisms
•Importance: Regular feedback helps individuals understand their performance and
areas for improvement. It also fosters a culture of continuous learning.

•Strategies: Implement structured feedback sessions (e.g., performance reviews).

•Encourage peer-to-peer feedback as part of the team culture.

•Example: After completing a project phase, the manager conducts a retrospective

meeting where team members share insights on what worked well and what could
be improved.
Key human factors in project evaluation and control:
Conclusion
Human factors are integral to effective project evaluation and control. By focusing on
communication, team dynamics, emotional intelligence, motivation, conflict
resolution, diversity, and feedback mechanisms, project managers can create an
environment conducive to success. Recognizing that projects are ultimately about
people allows for better management practices that lead to improved outcomes.
Understanding these human elements not only enhances individual performance but
also contributes significantly to overall project success.
Leadership Qualities of a Successful Project Manager:
A successful project manager must possess a variety of leadership
qualities that enable them to effectively guide their teams and ensure
project success.

Strong Leadership Abilities

•Description: Effective project managers inspire and motivate their
teams, providing clear direction and fostering a sense of purpose.
•Example: A project manager leading a software development team
might hold regular meetings to communicate the project's vision and
encourage team members to contribute their ideas, creating an
environment of collaboration.
Leadership Qualities of a Successful Project Manager:
2. Excellent Communication Skills
•Description: Clear communication is essential for ensuring that all
stakeholders are aligned and informed throughout the project lifecycle.
•Example: A project manager at a construction firm might use visual aids
and regular updates to keep both the site workers and upper
management informed about progress and any changes in plans.

3. Emotional Intelligence
•Description: Understanding and managing one’s own emotions, as well
as those of team members, is crucial for fostering a positive team
environment.
•Example: A project manager who notices a team member struggling
with workload might offer support or reassign tasks, demonstrating
empathy and understanding.
Leadership Qualities of a Successful Project Manager:
4. Decisiveness
•Description: The ability to make timely, informed decisions is vital for
keeping projects on track.
•Example: When faced with a critical decision about resource allocation,
a project manager quickly assesses the situation, consults with the
team, and makes a choice that minimizes delays.

5. Problem-Solving Skills
•Description: Project managers must be adept at identifying issues
quickly and developing effective solutions.
•Example: If a supplier fails to deliver materials on time, a project
manager may negotiate with alternative suppliers to ensure the project
timeline is not affected.
Leadership Qualities of a Successful Project Manager:
6. Attention to Detail
•Description: A meticulous approach to planning and execution helps
prevent oversights that could derail the project.
•Example: A project manager reviewing project plans may catch
discrepancies in timelines or budgets before they escalate into larger
issues.

7. Time Management and Organizational Skills

•Description: Managing multiple tasks efficiently while meeting
deadlines is crucial for project success.
•Example: A project manager uses tools like Gantt charts or project
management software to organize tasks, deadlines, and resources
effectively.
Leadership Qualities of a Successful Project Manager:
8. Adaptability
•Description: The ability to adjust plans in response to changing
circumstances or new information is essential in dynamic project
environments.
•Example: During a tech rollout, if user feedback indicates that certain
features are not functioning as intended, an adaptable project manager
may pivot the development focus to address these concerns promptly.

9. Integrity
•Description: Honesty and ethical behavior foster trust within the team
and among stakeholders.
•Example: A project manager who openly communicates challenges or
setbacks rather than hiding them demonstrates integrity, encouraging a
culture of transparency.
Leadership Qualities of a Successful Project Manager:
10. Passion for Continuous Learning
•Description: Successful project managers are committed to ongoing
professional development, staying updated on industry trends and
methodologies.
•Example: A project manager regularly attends workshops or obtains
certifications in new project management techniques, applying this
knowledge to improve team performance.