COST MANAGEMENT PLAN:
One of the most important roles of the Project Manager is to develop The Cost Management Plan based on the project scope, schedule, resources, approved project charter and other information, using estimating techniques, in order to manage project costs. This effort occurs early in project planning and sets the framework for each of the cost management processes so that performance of the processes will be efficient and coordinated.
1) Estimate Costs :: Aapproximation of the monetary resources needed to complete project activities.
2) Determine Budget :: Aggregating the estimated costs of individual activities or work packages to establish a cost baseline.
3) Control Costs :: Monitoring the status of the project to update the project budget and managing changes to the cost baseline.
The ability to influence cost is greatest at the early stages of the project, making early scope definition critical. Faulty estimates mean missing deadlines and breaking budgets, two of the main symptoms of project failure. Being a skilled estimator is a crucial part of setting schedules, establishing budgets, managing resources and running a thriving team and business. A definite estimate, however, is the most expensive to create.
The Project Cost Plan may be formal or informal, highly detailed or broadly framed, based upon the needs of the project. It includes the standards to use throughout the project for monitoring, such as define units of measure; stakeholder requirements for capturing costs; its level of accuracy and amounts for contingencies; the Work Breakdown Structure (WBS) with different codes for each Control Account (CA); the variance control thresholds, or deviance percentage before action is needed; the Earned value management (EVM) rules of performance measurement techniques to be used (e.g., weighted milestones, fixed-formula, percent complete, etc.); and the Estimate at completion (EAC) forecasts equations, and other tracking methodologies; reporting formats and process descriptions to be used.
Some Project Cost Plans might include the prediction and analysis financial performance of the project addressing additional processes such as return on investment, discounted cash flow, and investment payback analysis. On some projects, especially ones of smaller scope, cost estimating and cost budgeting are so tightly linked that they are viewed as a single process, but the tools and techniques for each are different:
TECHNIQUES FOR COST AND DURATION ESTIMATIONS:
A cost estimate is a quantitative assessment of the likely costs for resources required to complete the activity. Costs are estimated for all resources that will be charged to the project. This includes, but is not limited to, labor, materials, equipment, services, and facilities, as well as special categories such as an inflation allowance or contingency costs. Cost estimates should be refined during the course of the project to reflect additional detail as it becomes available. The accuracy of a project estimate will increase as the project progresses through the project life cycle.
- Analogue estimation: It uses a combination of historical information and expert judgment, estimating individual tasks and then combining them into an overall project estimate. It basically uses a similar past project to estimate the duration or cost of your current project and it is generally not as accurate as other estimating techniques.
· Top down approach: work-breakdown structure (WBS) Starts with the project goal or final deliverable, and breaks it down into smaller planning work packages, which will be further refined into greater detail, and then work items are assigned to team members. It describes the big-picture of how the project contributes to the organization, in which major tasks are quickly identified, and the details are later refined by the project team. The downside is that details might be missed without a detailed review by the project team. Regarding duration estimation, a great level of detail isn’t known and there are many assumptions made with potential inaccuracies. The benefit of using the top-down approach here is that funding and resource planning can be done quickly through consensus. The trade-off is that project cost and schedule dates aren’t as accurate.
· Bottom up approach: Starts with the team members identifying the tasks and then organizing them into specific groups or work packages. The team brainstorming is a useful technique to build teamwork. Ideas get flowing and tasks can be written down on sticky note pads or index cards, and can then be logically grouped into categories that make up each work package. As it is based on direct input from experts who will be implementing the project, there is a greater chance that a team member will identify possible conflicts. This technique is useful for developing detailed project budgets, schedules and monthly forecasts. And, it helps define the specific resource skills needed during key phases of the project in order to get a more accurate schedule. The tradeoff of using a bottom-up approach is that it is more time consuming.
Project managers use both of these approaches to master their project estimation skills. The challenge is in accurately predicting the future and being right, and the bigger and more complex a project is, the hazier that future is.
- Parametric estimation: A more accurate technique for estimating cost and duration, uses the relationship between variables to calculate the cost or duration. It is determined by identifying the unit cost or duration and the number of units required for the project or activity. The measurement must be scalable in order to be accurate.
- PERT estimation: It is a 3-point estimation value, which improves the estimation accuracy and therefore reduces the Project Risk, by providing a better result than just a single point estimate. PERT, or Program Evaluation and Review Technique, is calculated using a weighted average. It is based on the expected value of a task, determining 3 different values: The Optimistic Value (O), the Pessimistic Value (P) and the Most Likely Value (M). The Mean can be determined by the following formula:
It differs for the simple average mean which formula would be: E_SA=(O+P+M)/3
PERT assumes that the underlying distribution is a beta distribution. The “simple average” assumes a triangular distribution. PERT estimates are more close to ‘Most Likely’ value. Some Project Managers believe that a PERT Estimate yields better results.
There is a difference between estimation and commitment. Often, the person requesting the estimate doesn’t differentiate between these two terms. You’re asked for an off-the-cuff estimate for a particular task and before you know it, your guesstimation turns into a formal project, with your rough estimate leading the way. Gets worse, you’re asked to deliver the project even faster than your original estimate, with no further discussion. Just because a project has been given an estimate, that doesn’t mean it’s worth committing to. PM should never pressure team members to come up with a number you want rather than the number they believe in. This would set everyone up for failure. It also encourages a defensive culture. Nobody wants to put his or her head on the block. The protective mechanism will be to over-estimate work.
- cost management planning, including project budgeting tools,
- scope management techniques,
- change management planning,
- Communications planning
- Human resource planning
- Lean and efficiency principles
- Procurement planning
- Quality management planning
- Requirements gathering techniques (planning sessions, brainstorming, and focus groups)
- Regulatory and environmental impacts assessment planning
- Risk management planning, Scope deconstruction (e.g., WBS, Scope backlog) tools and techniques
- Scope management planning
- Stakeholder management planning
- Time management planning, including scheduling tools
STAGE 3 :: EXECUTING OF THE PROJECT:
During the execution phase, it is necessary to keep continuous improvement processes, pay close attention to the Elements of a statement of work and the Interdependencies among project elements, Project budgeting tools, Contract management, Quality standard tools and Vendor management techniques.
STAGE 4 :: MONITORING AND CONTROLLING THE PROJECT DEVELOPMENT
In this stage, the project manager will measure performance measurement through tracking techniques (e.g., EV, CPM, PERT, Trend Analysis), and process analysis techniques (e.g., LEAN, Kanban, Six Sigma), as well as pay close attention to the financing of the project principles, the project control limits (e.g., thresholds, tolerance), implement project monitoring tools and techniques and best practices and quality standards (e.g., ISO, BS, CMMI, IEEE), quality validation and verification techniques, through quality measurement tools (e.g., statistical sampling, control charts, flowcharting, inspection, assessment). It will also be necessary to identify and analyze risks and prepare risk response.
STAGE 5 :: CLOSING THE PROJECT
For this last stage, the project manager will use techniques for project review techniques and transition planning, such as archiving practices and statutes, compliance (statute/organization), contracts closure requirements, close-out procedures, performance measurement techniques (KPI and key success factors) and feedback.
Source: ©2015 Project Management Institute, Inc.
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