Back To Basics - Project Management: Project Cost Planning (Part-V)

In previous posts, we looked at project planning in terms of resource management aspects. In this post, we are going to briefly look at another vital aspect of project planning - i.e. project cost planning- budgeting and cost estimation.

Though some expert may want to distinguish project cost estimation from project cost planning, in this article we intend to cover both.

Project Cost Planning

Project cost planning exercise helps project managers to baseline the overall project budget and estimated in terms of money so that project sponsors & project steering committee can agree on project delivery schedule, the payment schedule and importantly to justify project cost-benefit analysis. It tries to identify cost elements to be consumed during the project lifecycle such as

Monetary resources requirement (people, machinery, material, equipment, space, etc.)
Provisions for risk management (people, machinery, material, equipment, space, etc.)

Quite commonly, project cost planning is observed to be an iterative process wherein project planner update the cost of project based on information available to him/her. As you would have seen, in initial phase, the rough order of magnitude (ROM) estimates are within a broad range of ą50% of the proposed estimate and as project progresses, the estimate may get updated to the tune of ą20% or less tolerance.

In conventional project management approach, project cost planning follows project scheduling/planning. Once a project planner knows the duration, resources, equipments and potential risks for a given project, it forms a ground work for project cost planning. Typically work breakdown structure (WBS) along with key milestones serves as a reference to perform project cost planning by computing planned/estimated cost at all phases of project.

What can we expect from Project Cost plan?

Cost estimates per activity

Since activity/task form the basis for estimation of effort, duration required; project cost is generally is summed up based on cost estimates of the activities involved. Just like effort/duration estimate of an activity/task, cost estimate of an activity provides quantifiable assessment expressed in terms of currency like Euro, USD, SD, etc.

It is expected to capture cost implication of

People, equipment, facilities, etc. required to complete given activity
Inflation, exchange rates applicable for context of the activity

Factors considered for estimates

This section will document how cost is determined/ what elements formed the basis of cost estimation such as

What all assumptions are made? <current vendor will supply at 10% discounted rate>
What all constraints are applied? <max number of seats, min electricity requirement>
What all parameters formed as a basis of estimate <number of lines of code, per square feet of wood, number of seats, etc.>
What is the confidence level of estimate? And Why? <80%?>

What do you think of this post? Let me know your feedback & comments.

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