Cost management is the process of planning and controlling the budget of a business. Cost management is a form of management accounting that allows a business to predict impending expenditures to help reduce the chance of going over budget. AWS Cost Explorer helps you visualize, understand, and manage your AWS costs and usage over time. This is done via an intuitive interface that enables you to quickly create custom reports (including charts and tabular data) that enable you to analyze your cost and usage data, both at a high level and for highly-specific requests.
Is one of the 10 and it involves necessary processes to finish the project within the approved budget. Its aim is described in as “to define the necessary budget to execute the project and its aim is to monitor and control the project costs to match the approved budget”.
Plan cost management process is the first process of cost management knowledge area. In this article, we are going to find out what is plan cost management process and what should be included in cost management plan.
What is Plan Cost Management Process? Plan cost management is the process of establishing policies, procedures, and documentation for planning, managing, expanding and controlling project costs. There will be several project resources in a project and several different types of materials will be needed, there might be necessary tool and equipment as well.
Plan cost management process aims to plan, manage and control of these expenses in a project as you may also find out in an. Example of a cost management plan for a construction project For instance, for a construction project, several civil engineers, construction workers will work. Several materials such as cement, wood, steel etc.
Will be used and tools and equipment like trucks, bulldozer, hammers etc. Will be needed. The Major Output of Plan Cost Management Process Cost management process mainly aims to determine the cost of each activity and determine the budget of the project. Then, management and control of the project budget to complete the project on the determined budget respectively. The major output of the plan cost management process is Cost Management Plan. Cost Management Plan provides guidance and direction on how the project costs will be managed throughout the project. For instance, you will be able to see how much money you will need in a certain phase of the project with the help of plan cost management process. What Questions Are Answered in Cost Management Plan?
Cost management plan briefly describes how to estimate costs, how to determine the budget. After the budget is determined, how to manage and control costs are outlined in the cost management plan.
Cost Management plan answers two main questions. “How will I go about planning cost for the project?
” Cost management plan will guide you on how to estimate costs for each activity, each deliverable and how to construct the overall project budget respectively. “How will I manage the project to the cost baseline?” After the budget of the project is determined, cost baseline is taken. Cost baseline shows the initial cost estimate of the project.
If nothing changes in the project, or if there won’t be any approved change requests, it is expected that the determined project budget will be met. Cost management plan will guide you on when to spend on what throughout the project and ensure you meet the determined project budget. As many management plans, cost management plan is also part of the which helps to meet the project goals and objectives as a whole.
What Should Be Included in a Cost Management Plan? There are 6 items that should be included in Cost Management Plan. Units of measure: You will estimate costs based on the amount you need from a material. And these units might change depending on the country or project. For instance, in US or UK, generally, inches are used for length or foot-square is used for the area of a space. However, in European countries, meters are used for length and meter square is used for the area of a space.
Since units of measure is a critical aspect to determine and estimate the cost, it must be included in the cost management plan. Levels of precision: They must be included in cost management plan as well. For instance, what will be the number of decimal places during calculations?
This might come to you a trivial point. But if you consider the mega projects, millions of materials are used, and the level of precision might cause significant variances in total. Control thresholds: They must be included in the cost management plan as well.
For instance, what will be the amount of budget variance to take action to get back on track? If you are managing a 1 million-dollar project, and if you set $20,000 as control thresholds, this means, you need to take corrective actions if you are more than $20,000 behind the schedule. Rules of performance measurement: Such as earned value management technique or percent completion method for activities must be included in the cost management plan. Earned value management is the most common technique used to measure cost performance of a project, and abbreviated as EVM. Either EVM or any other method that will be used in performance measurement must be mentioned in the cost management plan.
Percent completion method for activities must be included in the cost management plan as well. For instance, how do you consider an activity in progress? Generally, there are 3 assumptions for activities in progress. The first approach considers them as not started. The second approach considers them as 50% complete.
The third approach considers them as 100% completed. How activities in progress will be considered must be included in the cost management plan. Reporting formats: They must be included in the cost management plan.
How frequent will you be reporting about cost performance of the project? What will be the format for cost reporting?
For instance, you will report a brief high-level cost report to senior management in every 2 weeks, and a detailed report in every month. These must be cleared out in the cost management plan. Additional details: Such as strategic funding choices, cost recording procedure etc. Must be included in the cost management plan as well. In case you need additional budget for your project, how to find sources should be mentioned in the cost management plan.
If there are corporate tools or application that keep track of costs and expenses in a project, these must be described in the cost management plan as well.
Cost Management Overview The PMP exam can have 10-15 questions. More than half of the questions on Earned value require you to perform calculations. In this chapter, we will have an in-depth understanding of this concept so that the exam becomes easy for you. And Cost Management are strongly connected. Many of the topics covered in Cost Management are covered in Time Management as well. In Time Management we studied the creation of work packages.
These work packages were further bifurcated as activities. In multiple projects, cost estimates are created basis these activities.
Cost Management System
However, in large projects, cost estimates are created at control account level. This level will be equal to a work package level or higher than that. PLAN Though the Cost Management Plan is a required part of the Project Management Plan, unlike time and scope management, it is not listed as a part of the formally defined cost management process. The Develop Project management Plan in Integration Management involves the creation of the cost management plan.
“Cost” and “Budget”, these two words are used interchangeably in the exam. It is important to note that the step of creating the cost management plan exists irrespective of where it is created. Cost Management Plan focuses on:.
Planning cost for the project. Managing project to the cost. Control cost. Manage cost variances Cost management plan forms a part of a project management plan.
Like other project management plans, even cost management plans requires proactive thinking. Some important steps involved in cost management plan are:.
The way in which the cost estimates should be stated. Cost estimates accuracy levels. Instructions for identifying, tracking and reporting cost performance. Reporting formats. Bifurcation and definitions of direct and indirect costs. Maximum cap for cost expenditure.
Change control procedures required for cost changes LIFE CYCLE COSTING Life cycle costing is taking into consideration the whole life of the product, and not just the cost of the project. For example, a product costs $50,000 which has a very low maintenance cost ($5000) over its life period.
An alternate product is available for $38,000 however, has higher maintenance cost amounting to $50,000 over the products life. As a project manager, would you prefer reducing the cost of the project by saving $12,000 (by buying the alternate product)? – remember, this increases the maintenance cost for the company by $45,000. Or would you take into consideration the entire life cycle costing of the product and forgo $12,000 for a future saving of $45,000 for the company? You will be going with option 1 considering the Life Cycle Costing of the product i.e. Though it costs more initially, the maintenance costs are much lesser. VALUE ANALYSIS Value analysis focuses on decreasing the cost of the project without any degradation in scope and performance levels.
A systematic identification of various functions, assignment of values to those functions and identifications of less costly resources and activities to be performed maintaining the performance levels is done in value analysis. Value Analysis concurs with value engineering. COST RISK Any risk related to cost such as procurement risk, cost management risk is termed as cost risk. This risk is not just covered in risk management and requires to be covered in all phases of the project. ESTIMATE COSTS This process is related to estimating cost for each identified activity of the project. The costs required to complete the project involve:.
Quality efforts. Risk efforts. Project management activities. Resources. Direct and Indirect Costs. Overhead costs TYPES OF COST There are two types of cost: Variable cost: As understood by the name, these costs vary with the amount of work being done.
For example, the cost of raw material, labor wages, etc. Fixed cost: These are non-variable costs. These costs are fixed and include set up cost, working capital, lease (rent), etc.
A cost can be direct or indirect cost: Direct Costs: The costs that can be directly attributed to the work done in the project is considered as Direct Costs. Example include: travel and entertainment expenses, stationary cost, labor salaries, etc. Indirect Costs: The overhead items or costs incurred that cannot be apportioned to a specific project or activity and can be used for multiple projects are termed as Indirect costs. INPUTS TO ESTIMATING COSTS Following are the inputs that help in estimating costs better and quicker:. Scope Baseline: Scope baseline includes the project scope statement, WBS and WBS dictionary. It helps in allowing the project manager to know what is in scope and what is out-of-scope.
Project Schedule: A schedule is required before a budget is created. The project schedule contains the list of activities, the allocated resources and the time when work will occur.
Cost expenditure can be controlled if the project team is aware of the timing on when to buy the product. The other way that it can be controlled is when project expenditures are made in a time-phased manner.
Thus, a schedule can affect cost. Likewise, the cost can also affect the schedule. If an activity is to be executed on a project when the cost of purchasing the raw material is very high, the activity may need to be preponed or postponed for the reasons to accommodate the surge in price. Resource Plan: The system to reward project members, rates of labor required and a number of resources required for the project and their cost are arrived at by the resource plan. This plan enables the project manager to keep the resources motivated to work achieving savings and still ensuring the cost of the project is controlled.
Risk Register: Risk is an effective contributor to reducing time and money associated with the project. Cost is required for the work required to manage and control risks. These costs can also lead to more risks such as cost risks. Thus, the risk is both an input and output of Estimate Cost process. Historical Records and Lessons Learned: Historical records from past projects are extremely helpful to make the cost calculations and the estimates easier. The templates provided by these records help in executing these efforts faster and quicker.
Enterprise Environmental Factors: Estimation of costs is done by the conditions prevailing in the marketplace and the costs required for commercials. Products are procured from several vendors. It is also advisable for the project manager to review these sources and understand the effort of estimation. Project Management Costs: Project management efforts also require costs.
The expense of the project manager, status reports, change analysis, execution, etc is included in these costs.