2. The Importance of Project Cost
Management
• Projects have a poor track record for meeting cost goals
• Average cost overrun from 1995 CHAOS study was 189% of the
original estimates; improved to 145% in the 2001 study
• The 2003 CHAOS studies showed the average cost overrun (the
additional percentage or dollar amount by which actual costs exceed
estimates) was 43 percent.
• In 1995, cancelled projects cost i.e IT in the U.S. over $81 billion
• U.S. lost $55 billion in projects i.e IT in 2002 from cancelled projects
and overruns compared to $140 billion in 1994.*
*The Standish Group, “Latest Standish Group CHAOS Report Shows
Project Success Rates Have Improved by 50%,” A Standish Group
Research Note (3/25/03).

3. What is Cost and Project Cost
Management?

4. Project Cost Management Processes
1. Resource planning: determining what resources and
quantities of them should be used
2. Cost estimating: developing an estimate of the costs and
resources needed to complete a project
3. Cost budgeting: allocating the overall cost estimate to
individual work items to establish a baseline for
measuring performance
4. Cost control: controlling changes to the project budget

5. Basic Principles of Cost Management
• Most CEOs and boards know a lot more about finance than
technical/engineering, so technical project managers must
speak their language
– Profits are revenues minus expenses
– Life cycle costing is estimating the cost of a project plus the
maintenance costs of the products it produces
– Cash flow analysis is determining the estimated annual costs and
benefits for a project
– Benefits and costs can be tangible or intangible, direct or indirect
– Sunk cost should not be a criteria in project selection

6. Example : Cost of Defects
When Defect is Detected
User Requirements
Coding/Unit Testing
System Testing
Acceptance Testing
After Implementation
Typical Cost of Correction
$100-$1,000
$1,000 or more
$7,000 - $8,000
$1,000 - $100,000
Up to millions of dollars
It is important to spend money up-front on projects to
avoid spending a lot more later.

7. Basic Principles of Cost Management
1. Tangible costs – can easily measured.
2. Intangible costs – difficult to measure.
3. Direct costs - directly related to producing
products and services.
4. Indirect costs - not directly related to the
products or services of the project
5. Sunk cost - money that has been spent in
the past

8. Unit Cost
Basic Principles of Cost Management
Quantity Produced
When many items are produced repetitively, the unit
cost of those items decreases in a regular pattern as
more units are produced

9. Reserves are dollars included in a cost estimate to mitigate
cost risk by allowing for future situations that are difficult to
predict.
Contingency reserves allow for future situations that
may be partially planned for (sometimes called known
unknowns) and are included in the project cost baseline.
Management reserves allow for future situations that
are unpredictable (sometimes called unknown
unknowns).
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10. Resource Planning
The nature of the project and the organization will affect
resource planning
Some questions to consider:
How difficult will it be to do specific tasks on the project?
Is there anything unique in this project’s scope statement that will
affect resources?
What is the organization’s history in doing similar tasks?
Does the organization have or can they acquire the people,
equipment, and materials that are capable and available for
performing the work?

11. Cost Management Plan
• A cost management plan is a document that
describes how the organization will manage cost
variances on the project.
• A large percentage of total project costs are often
labor costs, so project managers must develop
and track estimates for labor.

12. Figure 7-1. Surveyor Pro Project Cost Estimate

13. Figure 7-2. Surveyor Pro Software Development Estimate

14. Common Sources of Project Cost
 Labor
 Materials
 Subcontractors
 Equipment & facilities
 Travelling, Mileage, Allowances, Refreshments
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15. Eg: Labour Costs
Name
Hours
Needed
Overhead
Charge
Personal
Time Rate
Hourly
Rate
Total Direct
Labor Cost
John
40
1.80
1.12
$21/hr.
$1,693.44
Bill
40
1.80
1.12
$40/hr.
3,225.60
J.P.
60
1.35
1.05
$10/hr.
850.50
Sonny
25
1.80
1.12
$32/hr.
1,612.80
Total Direct Labor Cost =
$7,382.34
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16. Building Lease
Expedite
X
X
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X
X
X
X
8-16
Expedited
X
Normal
X
Variable
X
X
Material
Non-recurring
Fixed
X
Indirect
Direct
Direct Labor
X
X X
Costs
Recurring
Cost Classifications
X
X

17. Cost Estimating
• An important output of project cost management is
a cost estimate
• Several types of cost estimates and tools and
techniques to help create them
• It is also important to develop a cost management
plan that describes how cost variances will be
managed on the project
VO = Variances Order

18. Cost Estimation
Ballpark Yellow Pad Guesstimate 30%
Comparative 15%
Feasibility 10%
Definitive 5%
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19. Types of Cost Estimates
Type of Estimate
Rough Order of
Magnitude (ROM)
Budgetary
Definitive
When Done
Why Done
How Accurate
Very early in the
project life cycle,
often 3–5 years
before project
completion
Early, 1–2 years out
Provides rough
ballpark of cost for
selection decisions
–25%, +75%
Puts dollars in the
budget plans
–10%, +25%
Later in the project, <
1 year out
Provides details for
purchases, estimate
actual costs
–5%, +10%

20. Cost Estimation Tools and Techniques
• 3 basic tools and techniques for cost
estimates:
–analogous or top-down: use the actual cost
of a previous, similar project as the basis for
the new estimate
–bottom-up: estimate individual work items
and sum them to get a total estimate
–parametric: use project characteristics in a
mathematical model to estimate costs

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22. Problems with Cost Estimation
Low initial estimates
Unexpected technical difficulties
Lack of definition
Specification changes
External factors
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24. Creating a Project Budget
WBS
Project
Plan
Scheduling
Budgeting
• Top-down
• Bottom-up
• Activity-based costing (ABC)
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The budget is a plan
that identifies the
resources, goals and
schedule that allows a
firm to achieve those
goals

25. Activity-Based Costing
Projects use activities & activities use resources
1. Assign costs to activities that use resources
2. Identify cost drivers associated with this activity
3. Compute a cost rate per cost driver unit or
transaction
4. Multiply the cost driver rate times the volume of
cost driver units used by the project
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27. Months
Activity
January
Survey
February
March
April
May
4,000
4,000
Design
5,000
Clear Site
4,000
Foundation
Framing
Plumb &
Wire
Monthly
Planned
Cumulative
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Total by
Activity
3,000
8,000
4,000
7,500
7,500
8,000
2,000
10,000
1,000
4,000
5,000
4,000
9,000
10,500
9,000
6,000
4,000
13,000
23,500
32,500
38,500
8-27
38,500

28. Budget Contingencies
The allocation of extra funds to cover
uncertainties and improve the chance of finishing
on time.
•
•
•
•
Contingencies are needed because
Project scope may change
Murphy’s Law is present
Cost estimation must anticipate interaction costs
Normal conditions are rarely encountered
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29. ABC VIDEO
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31. • Project Management Institute – home of the Project
Management Body of Knowledge (PMBOK)
http://www.pmi.org/Pages/default.aspx
• NYS Project Management Guidebook Release 2
http://www.oft.state.ny.us/pmmp/guidebook2/index.htm
• FNS Handbook 901, Chapter 5
http://www.fns.usda.gov/apd/Handbook_901/V_1-2/Chapter_5.pdf
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