August 5, 2024 · 10 min read
After we determined the project scope and calculated duration, we have come to the last side of the project management triangle — project cost baseline. This comprehensive guide provides an in-depth understanding of cost management in project management, including estimation techniques, accuracy, and control measures.
The primary objective of cost management is to estimate the project cost and proactively manage finances, ensuring that a project is completed within its approved budget.
It is important to note that the project manager does not always manage the finances. While this can happen, it is not always the case. Often, especially in IT, you are given a team rather than a budget. In such a scenario, you need to focus on managing human resources.
In some situations, you may have a combination where you are given a team and a budget for purchases. Here, you deal with the cost management, but it isn't the overall project cost, just specific components.
There are two key terms that show up when discussing cost management. So, it is important to see the difference and not to get confused.
The project cost baseline is a time-phased budget serving as a benchmark for measuring cost performance, including authorized, estimated costs for scheduled activities. On the other hand, the project budget is the total funds allocated for the project, including the cost baseline, contingency reserves for identified risks, and managerial reserves for unforeseen risks.
Contingency reserves cover known risks like travel expenses or employee turnover, while managerial reserves address unknown risks and are added to the budget by a sponsor.
Managers primarily focus on the project cost baseline but often use "budget" to refer to it in common language.
A well-structured project budget template is essential for effective cost management and provides a clear financial framework for the entire project. Here is a project budget template in Google Sheets (you can download the file to open in Excel) so that you can get an outline of its key components.
Accurate cost estimation is crucial for effective cost management. Various techniques are employed to estimate project costs, each with its unique approach and application.
The first five methods of cost estimation are similar to duration estimating techniques explored earlier, meaning methods used for duration estimation can also be applied to cost estimation. Please refer to this blog article to learn more about them.
Now let’s explore the techniques that are only applicable for cost management:
The accuracy of cost estimates is paramount for successful project cost management. Initial estimates are often rough and may include a broad range of potential costs. Typically, such estimates have an accuracy of +/- 50%.
As the project progresses and more information becomes available, estimates should be refined to improve accuracy that can be around +25% to -10%, and even up to +/- 10% for the definitive estimates.
Achieving 100% accuracy is impossible and should be factored into estimates.
Controlling the project cost baseline is a crucial aspect of project cost management, ensuring that the project remains within its approved budget. This process involves several key activities:
Project cost management is a fundamental aspect of project management that ensures financial control and efficiency. By understanding the various cost estimation techniques, maintaining estimation accuracy, and effectively controlling the project cost baseline, project managers can deliver projects within budget and achieve financial success.
Overall, project costing is relatively straightforward for managers as it essentially derives from prior activities: time management and scope management. If you have correctly planned, understood who is doing what, and identified what to procure and from whom, creating a cost management plan and managing costs becomes simpler.
Yana Revushkina is a project manager with extensive experience in managing complex projects and leading diverse teams. With a strong background in quality management, Yana is dedicated to implementing strategies that enhance team performance and project outcomes. Her expertise lies in creating streamlined processes and fostering collaborative environments that drive success and innovation.