BSBPMG403A Apply Cost Management Techniques Apply Cost Management Techniques Introduction to Project Cost C ertificate IV in Project Management Qualification Code BSB41507 Unit Code BSBPMG403A

BSBPMG403A Apply Cost Management Techniques Basic Principles of Cost Management Project cost management is traditionally a weak area in many projects Project Managers must work to improve their ability to deliver projects within approved budgets This requires the ability to prepare detailed budgets with clearly documented assumptions Project Managers need to couple an overall understanding of cost management with a detailed understanding of organisational cost management polices and procedures

BSBPMG403A Apply Cost Management Techniques 3 Basic Principles of Cost Management Most Project Sponsors and senior project stakeholders have a better understanding of financial terms than project terms A primary focus will be the financial benefits of project outcomes and the overall business case for a project Project managers need to develop a sophisticated understanding of cost management in order to – Prepare, track and monitor all cost elements associated with a project, and to Manage the expectations of the Project Sponsor and stakeholders

BSBPMG403A Apply Cost Management Techniques Organisational Process Assets It is critical that Project Managers understand the cost management policies and procedures within the organisation where they are executing the project These can differ vastly between organisations Inform yourself of the policies and procedures, follow them and document any assumptions Adapated from PMBOK 4 th Edition Budgeting Policies & Procedures Cost Policies & Procedures Research & Development Policies Planning & Budgeting Cycle Accounting Policies & Procedures Capitalisation Policies Budgeting Tools & Reporting

BSBPMG403A Apply Cost Management Techniques Profit – revenue (income) minus expenses (costs) Life Cycle Costing – considers the total cost of ownership for an asset and is commonly applied to projects. Total of execution and development costs plus ongoing support costs. Cash Flow Analysis – determines the estimated annual costs and benefits for a project and the resulting annual cash flow. Return on Investment – is the expected overall positive benefit of a project over a defined time period. Included in a business case. Cost Management Terms for Projects

BSBPMG403A Apply Cost Management Techniques 6 Cost Management Terms for Projects Sunk Cost – Costs that have already been incurred, the money has been spent in the past and cannot be recovered. Useful when deciding which projects to finish and which to cancel. Contingency – Allowances for future situations that may be partially planned for and are included in the project cost baseline. Often related to overall project risk Business Case – Process of analysing and documenting overall costs and benefits, both quantifiable and unquantifiable. Supports project selection and prioritisation

BSBPMG403A Apply Cost Management Techniques Different Types of Costs There are many different costs that need to be planned and tracked in order to fully manage the costs of a project. It is critical that a Project Manager understands ALL the types of costs that may be applied to their project budgets Operational Costs Variable Costs Fixed Costs Capital Costs Intangible Costs Tangible Costs Indirect Costs Direct Costs Running Costs Sunk Costs

BSBPMG403A Apply Cost Management Techniques Direct Costs or Tangible Costs – Obvious costs that can easily be measured in dollars e.g. human resources, tools and equipment, interest charges Indirect Costs or Intangible Costs - Less obvious costs that are harder to quantify, these are often recharged or levied on the project by a central accounting area or relate to unquantifiable factors e.g. %age allocation for It support per head, loss of customer goodwill due to reduced service Different Types of Cost Many inexperienced Project Managers get caught out by Indirect Costs, these can be a major factor in cost overruns.

BSBPMG403A Apply Cost Management Techniques Capital Costs – Costs related to the purchase or creation of an asset that is used to create goods or provide services, these costs can be depreciated in the future. Often applied to the tangible end products of a project. Operational Cost – On-going support and maintenance (running) costs for a capital asset e.g. it might cost $100,000 to develop a new IT system and then $10,000 per annum of operational costs to maintain the IT system. Different Types of Cost Capital Costs need to be planned and tracked explicitly in order to depreciate assets and to claim tax, and research and development, concessions.

BSBPMG403A Apply Cost Management Techniques Fixed Cost – Costs that remain the same regardless of the size or duration of the project. They are independent of the project or business activity. E.g. rent, unlimited software licence Variable Cost – Costs that increase as the size or duration of the project increases. They are dependent on project or business activity. E.g. project staff salary costs will increase if the project is extended Different Types of Cost The impact on project Variable Costs should be included in the impact analysis and approval of Change Requests

BSBPMG403A Apply Cost Management Techniques Total Cost of a Project The total cost of a project equals the fixed costs plus the variable costs Fixed and variable costs can be made up of both direct and indirect costs Example fixed costs Capital purchases One off purchases Example variable costs Salary costs Overheads based on time Fixed Costs Variable Costs Time Total Cost

BSBPMG403A Apply Cost Management Techniques Example Project Budget – High Level

BSBPMG403A Apply Cost Management Techniques Example Project Budget - Detailed

BSBPMG403A Apply Cost Management Techniques Staying on Budget To stay on budget, Project Managers must – Be knowledgeable about internal cost management policies Understand all the cost elements of the project Prepare a detailed budget and carefully document assumptions Diligently control Project Scope Re-baseline the Project Budget after any Change Requests are approved Ensure accurate capture of actual costs Closely monitor the Critical Path activities Urgently resolve or escalate risks and issues on the Critical Path Renegotiate the baseline Project Budget whenever it changes due to external factors Manage stakeholder expectations closely Evaluate performance against the agreed and re-baselined Project Budget

BSBPMG403A Apply Cost Management Techniques Next Steps Please proceed to Cost Processes in the Learning Program. Best of Luck!