It's More Than Money
Projects have costs, costs realized through expended dollars resulting from the purchase of materials, resources, people, even the purchase of time. Project progress and performance are also measured through these expended costs. As a project is planned, work packages determined, work activities scheduled, and resources assigned, a project manager (PM) can predict cost expenditures along timelines or by work accomplished over the full duration of the project. These planned costs are the quantified predictions of planned values. Planned values combined with tracking actual costs expended serve as two of the essential elements on measuring project performance against the project plan.
As work activities are performed, resources are expended money is spent. If you know how much a work activity is supposed to cost before it has begun then you can better determine actual cost performance against the planned budget. By adding planned time/duration estimates against actual time/duration used to execute a work activity to this cost performance data, you now have a means of measuring project actual performance against the original plan. It allows performance predictions of whether the project is currently over budget, under budget, behind schedule or ahead of schedule. As for the project time/duration piece of this puzzle, I discuss this in article on Project Time/Duration Management, Estimates, and Performance articles. Cost estimates, capital, and control are also covered in separate articles. For now, we will focus on the overall cost management piece.
Cost management is closely tied to resource management. These resources include the purchase and expending of supplies, materials, equipment, even people.
Cost Tolerances and Funding Authority
Rarely will a PM have full authority over costs in the project. Often times, the PM is really working with costs as more of an accountant than a financial, procurement, or contract manager. Most organizations have a separate office, department, or person(s) that has responsibility for actual purchases or authorization of fund expenditures. This might be in the form of a procurement office, financial manager, program manager, financial officer, comptroller, even the project sponsor; usually the idea is to have someone outside of the project serve as the “honest broker” for the business. Although this might seem like a big pain and nuisance to the PM, it also benefits the PM by permitting the PM to transfer some major cost risk decisions on to the financial authority. In other words, if the PM is faced with a customer/user request to expand or change the product features and functions to the extent that it would cost more money, that cost authority falls to the sponsor and financial manager. If the sponsor and financial manager say “NO”, then that’s it and you (the PM) are off the hook and can get the project back on its original course. It’s not always a bad thing not to have total authority and responsibility in project management.
Stakeholder Management: Attitudes Towards Costs and Tolerances
What is the business’s sensitivity to variations in cost and procurement changes? As PM you must be aware of the level of tolerance and sensitivity to over-runs, rework costs, costs resulting from unplanned and unauthorized project or product scope changes. You will have to get the specifics directly from the cost/financial power brokers and project sponsor. Don’t assume you know; and, if possible, get them in writing. At the outset of the project, when you and the sponsor are preparing the project charter, it is a good time to establish the overall budget constraints and the approval procedures for cost overruns. The cost/financial power brokers may not want to set a cost overrun amount in writing; however, you can usually talk them into a verbal ballpark value like: “We’ve allotted a 15% buffer.” It’s fairly common for a mature organization that is experienced in managing multiple projects to have 10% to 50% buffer for potential cost overruns. Remember though, your job as PM is to avoid having to use any buffer. PM’s gain better reputations when they can bring a project in on-time and on-budget.
Where Are Your Costs Coming From
Verify what resources are being charged against the project. All direct materials, supplies, and equipment will be charged against the project; however, the personnel resources costs can be a little tricky. When team members are assigned specifically to the project, their time is usually part of the project expenses. In a project where workers are provided by functional managers with multiple projects and operations, the personnel costs may or may not be charged against the project. You will need to know how the organization handles human resources costs. In some organizations, employees have to log-in all their work hours with references to a work code or project code so that the upper managers know where they are burning money and resources.
Materials, supplies, and equipment costs may change over the course of the project; especially during long projects. When, at the start of the project planning, you forecasted costs it was based on the prices at that time; however, things change, prices can go up or down, and customers/sponsors/users may want to change something that affects costs adversely; it happens. It is difficult to estimate the possibility of future costs.
I’ll cover more on “cost” estimates, control, and resource leveling” in separate articles to be published soon; check back on my home page or search this website for more articles on project management. In these future articles we will cover the use of the Work Breakdown Structure (WBS) and Project Breakdown Structure in preparing cost estimates. I’ve written an article on Work Package Authorization (WPA) that should be beneficial to for project managers and program managers.
Penn State University
Your ability (as PM) to influence cost is greatest affected by the specifics of the scope; inclusive of both the project and the product or services produced as a result of the project. This should be pretty easy to see:
- For example. If the project calls for a widget that meets specific tolerances and includes unique features and functions, that widget will likely have to be procured from a widget-specific supplier. Because of the unique elements to the scope requirements, that widget will likely cost you more than an off-the-shelf widget; thus, you will have to absorb added cost in the project. There will be little to no control on that cost. However, if the unique widget can be installed by almost anyone (skill level), then it would be prudent to assign the least expensive employee/project team member to that installation work package (WP). In this way, you at least have a little control over the WP cost.
One final note: Cost management affects other project management functions: Remember to evaluate potential cost risk for impact and include in your risk management planning; also, ensure that you have a means in place via change control management to accommodate cost changes, both planned and unplanned. Future course material will include how Cost is used in measuring the health of the project as well as Earned Value Analysis and other topics noted in the video.
InfoBarrel is your source for the Project Management Practitioner Course.