How to Deliver Effective Project Cost Management

project cost management those are words that sometimes strike fear into the hearts of a project manager and because they have that kind of air of mathematical magic and mystery but actually it's quite straightforward but it's also a vital discipline because if there is almost certainly nothing your project sponsor your boss or your client or certainly their finance director will care more about than your budget how you spend it and how you keep it under control so in this video I want to look at how you can deliver effective project cost management [Music] mentally I divide project cost management into two disciplines on the one hand we've got estimating and budgeting and on the other hand we've got monitoring and controlling that budget the PM is project management body of knowledge defines project cost management as one of its ten central knowledge areas and it splits it into four basic processes the first is to plan your cost management which is effectively the wrap around the framework for everything we're going to talk about today the second is estimating costs and the third is planning your budget those two things I'm going to pull together into one discussion and the fourth process is controlling costs which takes into account of the monitor of the control of the reporting and dealing with exceptional issues like cost overruns and requests for change so the first thing to think about is your project cost management plan this is the overarching a framework within which you're going to manage costs on your project it's one of two essential financial management documents or anything but the smallest projects the other one of course being your business case we've got a video about that if you need to learn about business case your cost management plan is an important document because it gives your client your sponsor your boss a strong indication of your ability to understand how much money you're going to spend you're going to control that expenditure and how you're going to account for it once you've spent it for smaller projects your project cost management plan may be just an element in a wider project plan but clearly as your project gets bigger you may want to separate this out into its own document and of course with the two principal elements of your cost management plan are on the one hand budgeting and estimating and on the other hand monitoring and controlling if the first sets out how you're going to create a budget the process you're going to use for estimating the elements of the budget that you're going to have and a second is the monitor and control process of the mechanisms you're going to use to track expenditure on your project and keep everything under control so this document is fundamentally an important part of your project governance there may be other components that you need to bring in because of the nature of the guidelines that policies the procedures within your organization or set out by your PMO your project program or portfolio management office so the first thing you need to think about is establishing the costs for your project and this is about estimating and budgeting and I know that the PMI separate these into two processes within their pim bot guide I think of them as highly integrated but it's important to note that estimating is one of the hardest disciplines for project managers I've written a guide about how to estimate on a project and I'm not going to talk about that in any great detail here however I am going to talk about the essentials of what needs to go into a project budget but before we do that let's answer the question why do we need a budget for our project at all why do we need to estimate our costs and put them into a formal document well firstly you'll use your budget as the basis for creating your investment appraisal at your business case the document that will justify whether or not your project is viable secondly it's important in calculating the funding requirement how much money your project needs to secure either internally or potentially borrowed from the lending markets now of course therefore it's essential to have a proper budget if you're to win approval from within your organization moving forward your budget is also going to be important in framing negotiations with suppliers either for goods or for services once you've got those contracts in place your budget is part of the process of controlling the costs from those contractors and let's not forget the importance of reporting actually giving your sponsor your boss client good information about how things are proceeding and the final thing I'd mention is the importance of having a good budget in establishing the success criteria for your project how you will measure either success or failure of your project one of those elements is the extent to which you hit your budget and stay within your contingency or indeed the extent to which you don't need your contingency at all the best way to do estimating on a project is task by task so we typically build our budget using a tool like a spreadsheet and we start from a work breakdown structure a list of all the tasks that need to get done or if you're based in the US a list of the products that need to get created once you've got your work breakdown structure you can do your estimates line by line and there are also different types of a budget item and so your spreadsheet could be in a form of a table each task could have different budget headings assigned to it different types of expenditure typical categories have expanded to include the following first this time contractor or consultant time is usually charged either by the hour or by the day secondly there's the time of your own people of the people within your organization who are working on the project now not every organization accounts by the time of its staff on a project but my advice is that it is always good practice to do so even if you don't need to make contributions for their time through the internal systems so I would budget for that and but have that as a very separate budget heading so that if your organization doesn't need to account for it you don't include it in the business case but tracking people's time gives you an indication of how effective you are in managing your project next of course we've got the costs of materials supplies and products that go into making your project work and then of course and we've got the costs of acquiring and using assets often lease costs or higher costs or maybe internal recharges there may be other direct costs to your project such as travel or printing or marketing of some sort you may need to purchase some equipment too and finally there are taxes and foreign exchange costs which may not be recoverable so for those you need to speak with your finance team to understand what you need to include there are other costs as well these are indirect costs which cannot be attributed solely to your project but the organization may want your project to account for a portion of those indirect costs to give a sense of how much the project in really costing the organization and some organizations treat the time cost of their own employees in that way however more typical examples include things like premises costs software licenses office equipment telecoms charges insurance and banking costs things like foreign exchange and interest rates and finally if there may be some form of general administrative overhead and for using the facilities within the organization when you're building your budget it's also important to take account of uncertainties things you don't know examples include fluctuations in the cost of raw materials foreign exchange rates foreign exchange rates and interest rates inflation external risks like weather and events and finally uncertainties in time and materials contracts with consultants and contractors fixed fee contract is highly predictable but if you take on consultants or contractors on a time and materials basis then they will charge you for the time they use and whilst they may give you estimate you won't know exactly how much you're going to be spending on them until you receive their invoice it does make sense to put in control mechanisms in the contract but that's a topic for another video we handle all this by putting contingency into our budget possibly contingency under a number of different headings and by the way the PMBOK guide refers to contingency in this sense as reserves governance is clearly an important part of project cost management certainly you need some mechanism on a large project for financial review and whilst the PM is project management body of knowledge is lamentably light certainly in its sixth edition on project governance we can look to a colossus prince2 methodology for the best guidance in governing a project wisely and one of the things that prince2 recommends is that for large projects that are spending large amounts of money or subject to high levels of public scrutiny or oversight is that the project has where they cause a senior financial officer which mirrors the role of the senior responsible officer on the project now in Preta terms that's very similar to what most of us think of as a project sponsor the senior financial officer has a level of responsibility for the project but targeted solely on its financial accountability now it's not the responsibility of the SFO to carry out project cost management but it is their responsibility to oversee that process and to take checks and to work with the project manager to make sure that she or he is doing that aspect of their job well and properly another thing that prince2 is very strong on that appears in many project management methodologies is the idea of project gateways or stage gates and the idea of using those checkpoints on your project to validate the level of cost control to observe the extent to which the project is running on or over or behind budget and then to make appropriate recommendations at that point when we talk about monitoring and controlling what we're doing is separating out of the initial process of observing how much is being spent against budget and the controlling process of taking corrective steps if expenditure is not where it should be if I'm honest for most small projects a good well-constructed spreadsheet is the best tool to use for monitoring and controlling our projects and it can also have use as a reporting tool however spreadsheets and are dangerous as your projects get bigger and more complex many spreadsheets have small errors in them you need a more carefully validated tool and also a spreadsheet that you understand because you built it may not be understandable to me if I need to take over your project for whatever reason so as your project gets bigger you need some dedicated tool there are some standalone project cost management tools built especially for the project environment likewise many financial management tools used in large organizations have project capability the ability to set up a project to load up the work breakdown structure to allocate costs against each item and therefore to use their internal financial management tool as your project cost management tool but many project managers will prefer a dedicated project management tool that acts as a project management information system but also integrates with all of the other planning capabilities I'm not the right person to advise you on the best project management tools are software to use but what I can say is there are a number of things a good project management information system needs to be able to do if it's going to support you properly in good project cost management it needs to be able to gather to record and to store safely all of your project cost information both the budget and the outer be able to collect that information and allocate it into budget headings in the ways that will suit you in understanding your project and it needs to give you the tools you need to analyze your expenditure and your costs to really understand what's going on and finally a good project management information system needs to be able to present the information clearly so that you can use it both for reporting and for face-to-face presentations another tool which is frankly outside the scope of this video his earned value management or sometimes referred to as earned for how you analysis and again we have a video on that but it is important for you to understand the potential of earned value management to support you in good project cost management whatever tools you use whether it's earned value management or tools embedded in your project management information system you need to be able to create friends of expenditure to analyze those trends and to produce forecasts and based on those forecasts you need to be able to select appropriate actions and make recommendations to the governance structures within and around your project if things go wrong you need to be prepared to make changes to your budget to your plan to your baseline and to put those changes through a rigorous process of change control you also need a mechanism to reflect what's happening and your risk register your issue log and a mechanism to draw down on contingencies if you have them and finally if things do start to go wrong you need to incorporate what's happening into your review of lessons learned so that they don't continue to go wrong in the future the final thing to mention is the need to tailor your project cost management approach to the nature of your project and to the culture of the organization within which it works clearly the most significant tailoring decisions are based on firstly the scale and complexity of your project the bigger your project is the more robust your project cost management probably needs to be and secondly the nature of the project management approach that you're taking crudely on the one hand you may be taking a highly planned predictive approach and on the other hand you may be taking a highly adaptive agile approach and clearly your project cost management approach needs to be tailored to that project cost management is one of the most important skills that a project manager can have project cost overruns are common but is this cause for a defeatist attitude no instead you mr. hands with determination to understand project cost management and to apply a rigorous process to your project if you've enjoyed this video please do give it a thumbs up and why not subscribe to our channel and hit the bell to make sure you don't miss any of our future videos and I'll look forward to seeing you in the next one

Channel: Online PM Courses - Mike Clayton

Views: 33,100

Keywords: project cost management, cost management, plan cost management, monitoring project expenditure, project costs, controlling project costs, project cost control, project expenditure, estimate costs, project budget, project cost, project budget management, categories of cost, budget management, Mike Clayton, Project Management, OnlinePMCourses, estimating costs, budget control, determine budget, control costs, financial review, EVM, TCPI, financial management, Project manager

Id: 7bXcc7AYajo

Length: 18min 40sec (1120 seconds)

Published: Thu Feb 20 2020