Dr. Jana Jagodick Polytechnic of Namibia, 2012 Project Management Chapter 10 Project Cost Management

Dr. Jana Jagodick Polytechnic of Namibia, 2012 Cost management Resource management Methods for cost management Other important cost management terms

Dr. Jana Jagodick Polytechnic of Namibia, 2012 Cost management Costs are one of the critical elements of project management, and project cost management entails resource planning, cost estimating, cost budgeting, and cost auditing and control. Cost management involves predicting the way in which money is spent on the project and to have the cash available at the right time You need to know the resources you need to work out a cost estimate

Dr. Jana Jagodick Polytechnic of Namibia, 2012 Resource management Resource management entails the way in which resources are optimally and cost-effectively utilised in order to obtain the required project outcome Good resource management not only saves time and costs, but it frees up resources to utilise on critical issues as the need arises

Dr. Jana Jagodick Polytechnic of Namibia, 2012 Project resources You need 7 resources in a project….. What are they? People Money Equipment Facilities Materials & Supplies Information Technology “all means/efforts that go into producing the outcome of a project”

Dr. Jana Jagodick Polytechnic of Namibia, 2012 Resource management: resource planning resource definition resource allocation resource aggregation resource aggravation resource levelling resource smoothing

Dr. Jana Jagodick Polytechnic of Namibia, 2012 Resource planning Certain aspects/elements should be considered in the resource planning process: WBS as the primary input Historical records of similar projects and expert judgement The project aim (justification & objectives) Availability of the specified resources The policies of the performing organisation regarding staffing, procurement etc.

Dr. Jana Jagodick Polytechnic of Namibia, 2012 Resource definition After the initial planning phase one has to decide which resources to use. It is impossible to look at all the different resources and therefore only the essential resources, those that can be tracked, should be chosen. Often a resource definition includes an estimate of resource availability

Dr. Jana Jagodick Polytechnic of Namibia, 2012 Resource allocation Resources are allocated to some of the activities in the WBS Each task is taken in isolation and resources are allocated, giving preference to critical (path) activities. A resource demand profile can be drawn up covering the whole duration of the project

Dr. Jana Jagodick Polytechnic of Namibia, 2012 Resource aggregation Through the use of resource aggregation, the estimated requirement for resources can be compared with availability What do you need? What have you got?

Dr. Jana Jagodick Polytechnic of Namibia, 2012 Resource aggravation In a situation where the demand for resources is higher then availability, the PM must, with the help of a resource histogram, resolve this problem by reallocating resources or lengthening the time frame.

Dr. Jana Jagodick Polytechnic of Namibia, 2012 Resource levelling It is a process by which you should ensure that the project never demands more resources than you have available Using a resource histogram levelling can be done in two ways: a task can be delayed or repositioned e.g. Move from August to September when the resources will become available Sequencing the tasks in order of priority…….

Dr. Jana Jagodick Polytechnic of Namibia, 2012 Resource hierarcihies In projects, where the use of one resource is dependent/linked to the use of another resource, resource hierarchies have to be established, to ensure that the necessary resources are available.

Dr. Jana Jagodick Polytechnic of Namibia, 2012 Resource smoothing The project manager should try and use resources optimally and smooth the demand for major resources by: –using subcontractors – peaks & troughs –do critical tasks first –shift resources from task to task –check through the logic of the project

Dr. Jana Jagodick Polytechnic of Namibia, 2012 Resource levelling v smoothing Levelling – changing the tasks in time or changing the priority of the tasks – so that peaks and troughs in demand are smoothed out Smoothing – managing the resources so that peaks and troughs in resource availability are smoothed out

Dr. Jana Jagodick Polytechnic of Namibia, 2012 Resource calendars For the management of human resources it is useful to draw up a resource calendar to see when these resources are available.

Dr. Jana Jagodick Polytechnic of Namibia, 2012 Cost Estimates Cost estimates - quantitative assessment of the likely costs of the resources required to complete project activities and are normally expressed in units of currency (N$) or units manpower (hours/days)

Dr. Jana Jagodick Polytechnic of Namibia, 2012 Developing Cost Estimates A number of methods/techniques can be used for cost estimation, by using information from these WBS, resource rates, activity duration estimates, historical information and a chart of accounts

Dr. Jana Jagodick Polytechnic of Namibia, 2012 Developing Cost Estimates ActivityDurationResourceCost per unit/ resource Total costs Compile business plan 10 daysGerson$100 per day$1000 Do risk analysis15 daysRudolph/ Esther £100 per day per resource $3000 Buy 2000 bricks2 weeksSusan (temp)$1.00 per brick $2000 Pay weekly wages for temps 1 daySylvia$300 per week (1 temp) $300

Dr. Jana Jagodick Polytechnic of Namibia, 2012 Methods for Cost Estimating top-down estimating (analogous) parametric modelling activity-based costing bottom-up estimating Earned Value

Dr. Jana Jagodick Polytechnic of Namibia, 2012 Top down estimating Uses rules of thumb or cost estimating relationships Can use the actual cost of a similar project as the basis for estimating the cost of a current project Good where there is limited information on a current project But many projects are different

Dr. Jana Jagodick Polytechnic of Namibia, 2012 Parametric Modelling Uses project characteristics in a mathematical model Models may be simple (e.g. building a house can be estimated by cost per m2 of space) or can be complex Can be expensive to run (uses costly software) and can be highly inaccurate because the factors may not be scaleable

Dr. Jana Jagodick Polytechnic of Namibia, 2012 Activity based costing (ABC) Cost based on how much it costs to do certain activities Can be fairly accurate compared with other costing models Manufacture garments 12 hours$100 per hour$1200 Pack garments 3 hours$50 per hour$150 Ship garments 24 hours$150 per hour$3600

Dr. Jana Jagodick Polytechnic of Namibia, 2012 Bottom up estimating Uses a detailed WBS and needs pricing of each activity that make up the project Time consuming and can be costly – especially if there are many small work items to be costed Usually good accuracy

Dr. Jana Jagodick Polytechnic of Namibia, 2012 Earned Value Earned value – estimating task cost Growing in popularity as one of the best ways to estimate cost Start using a cost method of the type shown previously – ABC, parametric etc Next, when tasks are completed, compare estimate to actual costs Work out cost variance Build in to future cost estimates

Dr. Jana Jagodick Polytechnic of Namibia, 2012 Cost estimate considerations Most cost estimates turn out to be too low! A contingency factor should be built into any cost estimate to allow for a change of scope and/or planning, technical considerations and changing assumptions With the help of a spread sheet (available in most PM software), changes can be accommodated and implemented and various sensitivities can be run

Dr. Jana Jagodick Polytechnic of Namibia, 2012 Project Budgets - Steps determine and set clear objectives accurate costs must be attached to each objective the expected income must be estimated income v expenditure (feasibility) produce the final budget

Dr. Jana Jagodick Polytechnic of Namibia, 2012 Cost Management Plan The cost management plan describes how cost variances will be managed, can be formal or informal, and is part of the overall project or business plan

Dr. Jana Jagodick Polytechnic of Namibia, 2012 Cost estimating Cost estimating - an estimate of the costs of the resources by adding individual project elements into a project total This estimate is known as the benchmark or baseline

Dr. Jana Jagodick Polytechnic of Namibia, 2012 Project Selection Important cost or money factors which will finally influence the selection of a project are: –cash flow –risk –resources

Dr. Jana Jagodick Polytechnic of Namibia, 2012 Business Plan A business plan is a crucial element in project management in order to secure support or funds for a project. An important part of the business plan are cost estimates which are essential to secure funding