Project Costing: Fundamental Components of Project Cost
The project cost is a cost required to procure all the needed products, services and resources to deliver the project successfully.
Example: In an example of a construction project, the cost estimation starts from land acquisition cost, construction cost, materials cost, administration cost, labor cost and other direct and indirect costs.
Cost management is concerned with the process of finding the right project and carrying out the project the right way. It includes activities such as planning, estimating, budgeting, financing, funding, managing, controlling, and benchmarking costs so that the project can be completed within time and the approved budget and the project performance could be improved in time.
Step 1: Resource planning
Resource planning is the process of ascertaining future resource requirements for an organization or a scope of work. This involves the evaluation and planning of the use of the physical, human, financial, and informational resources required to complete work activities and their tasks. Most activities involve using people to perform work. Some activities involve materials and consumables. Other tasks involve creating an asset using mainly information inputs (e.g., engineering or software design). Usually, people use tools such as equipment to help them. In some cases, automated tools may perform the work with little or no human effort.
Resource planning begins in the scope and execution plan development process during which the work breakdown structure, organizational breakdown structure (OBS), work packages, and execution strategy are developed. The OBS establishes categories of labor resources or responsibilities; this categorization facilitates resource planning because all resources are someone’s responsibility as reflected in the OBS.
Resource estimating (usually a part of cost estimating) determines the activity’s resource quantities needed (hours, tools, materials, etc.) while schedule planning and development determines the work activities be performed. Resource planning then takes the estimated resource quantities, evaluates resource availability and limitations considering project circumstances, and then optimizes how the available resources (which are often limited) will be used in the activities over time. The optimization is performed in an iterative manner using the duration estimating and resource allocation steps of the schedule planning and development process.
Step 2: Cost estimating
Cost estimating is the predictive process used to quantify, cost, and price the resources required by the scope of an investment option, activity, or project. It involves the application of techniques that convert quantified technical and programmatic information about an asset or project into finance and resource information. The outputs of estimating are used primarily as inputs for business planning, cost analysis, and decisions or for project cost and schedule control processes.
The cost estimating process is generally applied during each phase of the asset or project life cycle as the asset or project scope is defined, modified, and refined. As the level of scope definition increases, the estimating methods used become more definitive and produce estimates with increasingly narrow probabilistic cost distributions.
Cost estimating could be performed by dedicated software systems like Cleopatra Enterprise cost estimating and project cost databases like CESK that are created and maintained to support the various types of estimates that need to be prepared during the life cycle of the asset or project.
Step 3: Cost budgeting
Budgeting is a sub-process within estimating used for allocating the estimated cost of resources into cost accounts against which cost performance will be measured and assessed. This forms the baseline for cost control. Cost accounts used from the chart of accounts must also support the cost accounting process. Budgets are often time-phased in accordance with the schedule or to address budget and cash flow constraints.
Step 4: Cost control
Cost control is concerned with measuring variances from the cost baseline and taking effective corrective action to achieve minimum costs. Procedures are applied to monitor expenditures and performance against the progress of a project. All changes to the cost baseline need to be recorded and the expected final total costs are continuously forecasted. When actual cost information becomes available an important part of cost control is to explain what is causing the variance from the cost baseline. Based on this analysis corrective action might be required to avoid cost overruns.
Below figure is a process map for project performance measurement. This process should be run in a continuous improvement cycle until project completion:
The process for performance assessment starts with planning and having the right tools in place. Dedicated cost control software tools can be valuable to define cost control procedures, track and approve changes and apply analysis. Furthermore, reporting can be enhanced and simplified which makes it easier to inform all stakeholders involved in the project.
Cleopatra Cost Control helps you achieve
- Project cost control and always tracing back cost components to its original budget.
- Scope change management. Estimate costs and add it to your project controls document.
- Project completed? The feedback process will be in place. Send the actuals to your cost models to increase their accuracy and quality for future estimating. Where most tools are limited to either being cost estimating software or a cost control tool, Cleopatra Enterprise is both.
Bonus Step: Benchmarking
As a bonus step, it is wise to add Benchmarking to the project cost management process.
Benchmarking helps close the loop between project A and project B. The knowledge from project A (referring to the running and executed projects) are analyzed and the feedback is reflected in project B (the next projects). That’s how an improvement cycle is created to increase project performance. Benchmarking is widely used by technical industries to improve the performance of the projects. Software systems such as Cleopatra project benchmarking aid estimators and project controllers in answering the complex question: How to use project big data to execute projects within time and budget?
The goal of project benchmarking is to store data from executed and running projects to extract valuable project metrics and to benchmark current estimates. Performing statistical analysis on historical data can result in valuable information on relationships between variables, which can be used to set up a reliable cost knowledgebase or calibrate existing ones.
It is important to note that project benchmarking does not only include the comparison between projects, as it is also interesting to compare revisions within a project.
What you can achieve with Cleopatra Benchmarking
- Collect historical project data that can provide valuable analysis and project comparison to make critical business decisions.
- Benchmark your estimates against your previous projects and improve your cost estimate significantly.
- Extract metrics across projects to enhance future cost estimating accuracy.
- Develop meaningful and interactive reports.
- Export & Import data easily from Excel.