One of the critical components of managing a project is understanding, developing and managing project costs.
If your project costs are not estimated or managed correctly, this will result in a very poor outcome for the project manager and, ultimately, the project itself.
Below are recommended questions to assess a PM’s abilities and skills in successfully managing project costs. We’ve also included the answers that reflect a strong understanding.
Q. What are some of the components of tracking costs of a project?
The following are the core components; however, some others are listed at the end for reference.
- The agreed cost of completing the project (usually set by an approved business case)
- Most of the time, the Budget does not include a component of Risk or uncertainty associated with the project. This is where having a contingency comes into play. Contingency can be applied overall or per cost item, and the amounts can be percentage or quantity based. The common methods for calculating contingency are deterministic or probability.
- Forecast Costs
- A forward view of anticipated costs that the project will incur. Forecast costs should be reviewed/adjusted regularly as cost items can change or move earlier/later.
- Actual/Committed Costs
- Costs incurred by the project (paid) or that have been committed (contractual agreement locking in payment for items/services).
- Types of Cost
- Capex – or Capital expenditure (Capex is used to acquire new, improved, or additional assets – new products, equipment and increased efficiency)
- Opex – or Operational expenditure (ongoing costs to run the business, i.e., wages, licencing/subscriptions, etc.)
- Cost profile / Cashflow
- Profile of the project costs over time and tracked by day, week, or month. Mapping the Budget over the project’s life and tracking against this is critical to understanding if your costs are getting out of control.
- The difference between the Budgeted cost against Actual and Forecasted costs remaining to complete the project.
- Other tracking items they may mention:
- EV(Earned Value), EaC(Estimate at Completion), EtC(Estimate to Completion), PV(Planned Value), CPI(Cost Performance Index), and many more
Q. What types of costs can there be in a Project?
Costs can fall into five fundamental types:
- Costs directly linked to project work (hiring specialised contractors, buying equipment, licenses etc.).
- Costs are not part of the project but of doing business overall (office rent, lighting, heating, etc.).
- A fixed cost could be Vendor supplying a product/service at a fixed price.
- Costs like skill hire resources or rental of equipment, so depending on the time of the project, then the costs are variable.
- Costs (any) already incurred are to be accounted for within the project. Also, decisions to ‘stop/continue’ projects are often based (wrongly) on sunk costs. If you have spent $800k, spending another $200k to deliver something that the company or sponsor doesn’t want is just wasting another $200k.
Q.When building/estimating a project’s Budget for a business case, what are some of the items, categories, and considerations you need to consider?
- Resources (internal/external)
- Vendor costs for services such as;
- Equipment costs such as machinery, computers and tools etc.
- Other costs; office space rental specifically for the project
- Operational costs; software Licensing, ongoing rental of items or buildings
- Also, sometimes forgotten; CPI/yearly increases to items such as; resources, equipment, services etc.
- Finally, apply contingency across items or on the project as a whole.
- The amount of contingency you need to add will depend on the project’s uncertainty and Risk profile. Generally, most organisations add 5%-10% to the base project cost. However, if the project is more risky/uncertain, then 15-20% would be more acceptable.
- As mentioned, the common methods for calculating contingency are deterministic (rough % of project range) or probability (based on risk/uncertainty aspected, against specific cost components/time of the project).
There are many other aspects to project cost management; our team at Intuity would be happy to chat further on any project cost analysis and management needs.
Contact Intuity to discuss your needs.
By Mark Dunham, Intuity Consulting
0414 700 464