Project Management Chapter 10 Project Cost Management Dr

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 Dr. Jana Jagodick Polytechnic project” 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 have you got? Dr. Jana Jagodick Polytechnic of Namibia, 2012 What do you need?

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 Dr. Jana Jagodick Polytechnic of Namibia, 2012 Sequencing the tasks in order of priority…….

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 Activity Duration Resource Cost per unit/ resource Total costs Compile business plan 10 days Gerson $100 per day $1000 Do risk analysis 15 days Rudolph/ Esther £ 100 per day per resource $3000 Buy 2000 bricks 2 weeks Susan (temp) $1. 00 per brick $2000 Pay weekly wages for temps 1 day Sylvia $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 m 2 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 Ship garments 3 hours $50 per hour 24 hours $150 per hour $3600 Dr. Jana Jagodick Polytechnic of Namibia, 2012 $150

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 1. 0 1. 2 1. 3 1. 2. 1 1. 3. 1 1. 2. 2 1. 3. 2 1. 2. 3. 1 • Usually good accuracy Dr. Jana Jagodick Polytechnic of Namibia, 2012 1. 4 1. 2. 3. 2

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 Dr. Jana Jagodick Polytechnic of Namibia, 2012