Estimating and Tracking Project Costs
The management of project costs can be the most complicated, political, (and tedious) element of the project management process. But, costs have to be controlled, for the sake of IT credibility, and the overall fate of current and future projects. There are three primary steps to project cost estimating:
#1 - To identify project cost factors.
#2 - To estimate cost values and create a budget.
#3 - To track costs and monitor variances.
Since project cost estimates are just that - estimates, and
it is unlikely that related project budget, resulting from these
estimates, can be etched in stone. Projects have a pulse,
and the circumstances and conditions under which projects occur
can, and do change, impacting costs and expenses. To deal with
this uncertainty, project managers often apply a "contingency
factor" when preparing a project budget. This contingency
factor normally consists of a 5 - 10% boost of anticipated project
expenses in order to uncover inexperience, as well as the "unknown"
or the "unexpected".
Depending on the degree of internal experience with a given type of project, contingency reserves may or may not be necessary. In addition, there is a philosophy that says that contingency reserves are dangerous, leading to unwarranted project spending.
Contingency Pros:
The extra funds are in hand when needed, without seeking further
approval.
Considering that project circumstances can change so frequently,
contingencies readily acknowledge this fact, facilitating project
completion.
Contingency Cons:
Contingency reserves make it easier to gloss over project costs,
making budgets less precise.
Contingency reserves encourage cost overruns, by granting easy
access to additional funding without a thorough consideration
of available alternatives.
Steps: estimating workable project projects
Step #1 Identifying Cost Factors: While cost factors will vary based on project characteristics and business circumstances, in general, project costs can be viewed from four basic perspectives – labor, capital investments, overhead (to maintain the project environment) and project specific (costs to plan, manage and execute the project):
Step #2 Cost Estimates and Budgets:
Project budgets quantify the expected costs associated with
a project, and these budgets must be based on a reasonable,
realistic estimate of likely project costs and expenses. The
estimation of project costs is part science, and part logic,
common sense and experience.
In fact, past projects can be the most valuable indicator of current project expenses. As project costs are estimated, the following factors should be considered:
#1 The specific cost factors involved depending on the needs
of the project.
#2 The costs of similar projects in the past.
#3 The opinions and feedback of project participants.
When estimating costs, it is important to get a broad spectrum
of information, experience and opinion.
Step #3 Tracking Costs and Cost Variances:
Once the project budget is created and approved, and the project
is underway, costs and expenses must be tracked to ensure that
budget utilization is as planned and expected (are you spending
what you expected to spend based on how the project is proceeding?).
If variances exist you should consider whether the variance positive or negative, and what it all means:
A positive variance: indicates that you are under budget, but appearances to the contrary notwithstanding, this is not necessarily a good thing. When project expenses are less than expected, this may be a sign that the project is not proceeding according to plan, and may be behind schedule. In addition, a positive variance may be a sign of ineffective estimating. On the other hand, this under budget condition may be the result of legitimate changes, discounts, or cost saving measures.
A negative variance: indicates that the project is over budget. Depending upon whether the negative variance is at a monthly or overall project level, this variance may be the result of serious project problems, such as excessive changes, schedule delays or ineffective budgeting. If the negative variance is on a monthly level, but the overall project is on track, there may not be an immediate cause for concern.
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