Project Cost Management and Cost Trend Analysis


Elaboration, 2015
9 Pages, Grade: 1,3
Anonymous

Excerpt

Table of Contents

Table of Figures

List of Abbreviations

1 Introduction

2 Term “Project Cost Management”

3 Phases of Project Cost Management
3.1 Cost Estimating
3.2 Cost Budgeting
3.3 Cost Control

4 Cost Trend Analysis
4.1 Structure
4.2 Review

5 Conclusion

List of references

Table of Figures

Figure 1: Principles of Cost Budgeting

Figure 2: Cost Trend Analysis – Example

List of Abbreviations

Abbildung in dieser Leseprobe nicht enthalten

1 Introduction

It is no rarity, that the costs of a project exceed pre-estimated budgets. The origin of this exceeding often lays in the complexity of estimating, budgeting and controlling costs. Therefore cost management is an inevitable part of project management.

The following thesis deals with several aspects of project cost management. First it shall give the reader a short explanation of the term “cost management” and the necessity of this process. In addition to that, the text describes the three steps of cost management in projects. Those are cost estimating, cost budgeting and cost control. Furthermore there is a focus on the cost control tool “Cost Trend Analysis”. Therefore this tool is described and reviewed in more detail so that the reader gets the ability to create a critical view individually. Finally the thesis summarizes the findings in a conclusion.

2 Term “Project Cost Management”

The term „Cost Management“ in the context of projects can be divided into the two sub-terms “Cost” and “Management”. The first part deals with the several costs occurring in a project. In general the different cost elements are mostly categorized in expenses for internal staff, external staff and materials.1 To go deeper into those categories, the PMBOK, published by the Project Management Institute of Newtown Square in Pennsylvania, defines the costs in a more detailed way. They name charges for labor (“internal staff”) and services (“external staff”) as well, but define expanses for materials, equipment and facilities (“materials”) more precisely. Additionally they consider inflation costs and a cost buffer for risks.2

The second term, “Management” stands for the strategy, how the costs of a project are managed. The general management cycle consists of four steps: planning, realization, monitoring and control.3 Those steps can be adapted to the project cost management easily. The majority of successful projects have been planned intensely before they were realized. After the realization the project activities and their costs should always be monitored continuously so that for example budget exceedings can be identified during project controls.

If the two terms are fused into “Cost Management” it can be seen, that it handles the financial aspect of projects. Costs for resources must be managed during all project phases to structure the project in the most efficient way. As projects can be seen as predefined results, it is inevitable to calculate the costs in advance, what underlines the necessity of project cost management.

3 Phases of Project Cost Management

Project Cost Management can be divided into three main phases: cost estimating, cost budgeting and cost control. The following chapter explains and distinguishes these three steps.

3.1 Cost Estimating

The phase of cost estimating takes place in advance of the operational work in the project. To evaluate how many costs will occur during the project, the sum of expenses has to be estimated. Estimations are mostly measured in units of currency, staff hours or staff days.4

At the very beginning of a project the estimation is difficult, because there is only little information on which estimations can be based on. At this time the accuracy of ratings reach from -50 to +100% related to the overall costs at the end of a project, the PMBOK says. At a later point of time in the project, when more information and experiences are available, the accuracy lays between -10 and +15%. It shows that cost estimating is not only a process at the beginning of the project, but rather an on-going-process.5

The contrariness of cost estimations is that on one hand the costs should not be estimated too high so that the project is as efficient as possible. On the other hand ratings being too low are not good as well because cost buffers are not included then. Those are important if delays should occur during the project.6

3.2 Cost Budgeting

As soon as “cost estimates are approved” by the management, “they become project budgets”7. The goal of cost budgeting is to set precise cost borders for defined work packages. Those budgets can be created top-down- and bottom-up-wise.8

The top-down principle means that a total budget, also called summary budget, is given for the whole project at the beginning. Then this budget is spread to the several work packages which have to be executed during the project.9

Following the bottom-up principle causes that the budget direction is turned. Here, the work packages get budgets and those are accumulated to the total project budget.10 The following figure shall illustrate the two principles to bring a better comprehension. The letters stand for work packages (e.g. A or B) and work sub-packages (B.1. or E.2).

Figure 1: Principles of Cost Budgeting

Reference: Figure based on data from Dr. Brauner GmbH (2008), S. 626.

3.3 Cost Control

The cost control is an important process for every project. Without considering this aspect it would not be possible to identify cost variances. The first part of controlling the costs is to monitor the development of the costs so that cost variances can be detected. Then, if occurring, the variances have to be understood.11 There is no benefit if project costs are monitored and nobody questions them. For that purpose it can be helpful to ask responsible project members about explanations or to compare the current project with similar projects of the past. When cost variances then have been understood, they must be managed and the project plan must be edited concerning the new findings. Managing cost variances means that actions are taken to minimize additional costs and to bring the project back on track.12

4 Cost Trend Analysis

As a continuation to the previous chapter, the cost trend analysis, a possible tool to control project costs, is described and reviewed in the following.

4.1 Structure

The cost trend analysis is used to anticipate the total costs of a project at several points of time during the project. The tool is based on the milestone plan analysis which focuses on the time needed to terminate a project. The CTA on the other hand concentrates on costs.13

It tries to estimate the sum of costs, which will be expanded at the end of a project. For that purpose various data is needed and usually fixed in a table. At first the total budget is taken being estimated at the very beginning of the project. As a second step, the actual costs are summed up. At this point the main difficulty of the cost trend analysis occurs. The current project value needs to be estimated. This number stands for the value which was created in the project until now and must be estimated of course. To set a value being as precisely as possible, the project leader should communicate with several responsible project members and let them evaluate their work up to the present. When the current project value has been fixed, the cost development index can be calculated by dividing the current project value by the actual costs. This value is then multiplied with the total budget to come to the output of the CTA: the estimated total costs.14

For a better comprehension, an example of a CTA can be seen in the following. The first column “Time” stands for the succeeded project progress meetings which are arranged to communicate the project state. Due to the continuous time, the actual costs and the current project value increase. The total budget is of course fixed, because this estimation was placed one time at the project beginning. The two pictured signs signalize the difficulty of estimating the current project value and mark the output of the CTA at the end.

[...]


1 Cf. Niklas, Cornelia (2014), Online im Internet.

2 Cf. Project Management Institute Inc. (2004), S. 161.

3 Cf. Krems, Burkhardt (2012), Online im Internet.

4 Cf. Project Management Institute Inc. (2004), S. 161.

5 Ibid.

6 Cf. Bohinc, Tomas (2010), S. 93.

7 Venkataraman, Ray, Pinto, Jeffrey (2008), S. 83.

8 Cf. Wilson, Randal (2014), S. 205 ff.

9 Cf. Woolley, Darren (2014), Online im Internet.

10 Cf. Keyes, Jessica (2006), S. 217.

11 Cf. Kerzner, Harold (2003), S. 503 ff.

12 Ibid.

13 Cf. Angermeier, Georg (o. J.), Online im Internet.

14 Cf. Tutt, Peter (o. J.), S. 15 f.

Excerpt out of 9 pages

Details

Title
Project Cost Management and Cost Trend Analysis
College
University of Applied Sciences Bergisch Gladbach
Grade
1,3
Year
2015
Pages
9
Catalog Number
V309401
ISBN (eBook)
9783668081246
ISBN (Book)
9783668081253
File size
636 KB
Language
English
Tags
project, cost, management, trend, analysis
Quote paper
Anonymous, 2015, Project Cost Management and Cost Trend Analysis, Munich, GRIN Verlag, https://www.grin.com/document/309401

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