Controlling costs surely is a very important process in project management and one of the first responses when asking people’s opinion about a project manager’s role. While cost control certainly indeed is very important, it is only a part of cost management. Without other management areas not equally taken care of, cost management will never succeed. This article is about how to manage project cost the right way and covers the following processes:
- Planning cost management,
- Estimating project cost,
- Determine project budget, and
- Controlling project cost.
Knowledge Areas in Project Management
The image shows the knowledge areas covered by Project Managers. The percentages are a result of a small assessment among website visitors. It presents their opinion about the daily activities carried out by project managers. It is difficult to classify whether cost management is the most important part of project management. This entirely depends to individual projects and their objectives. Further are the different processes across all knowledge areas linked too close to make such a differentiation.
Project managers are often prisoners in a triangle of scope, time and cost. This symbolization makes it clear that all management areas are fundamentally related and cannot function individually. Neither side of the triangle can be changed without affecting the others. Therefore, this symbolization also illustrates the importance of treating all management areas equally important.
According to own observations and exchange of experiences among colleagues, the actual cause of cost overruns are often:
- Insufficient scope elaboration, which may include quality and other requirements,
- Creating schedules not detailed enough and not according to best practices, and
- Incorrect resource estimates.
Please share your experience and leave a comment below.
Problems in Cost Management
One problem in the construction industry results from the fact that many companies are getting the project manager on board too late. I assert this based on the observation that construction companies often have very little involvement in the initiation phase. Instead, they offer for a job and usually do not take any further action, including the engagement of a project manager, until contract award. The almost immediate start of construction activities is expected often directly after contract award. Consequently the planning phase comes up short. Especially since the project manager and his team are often still not on board at this time. Also read my article about common problems in construction projects. Construction companies that quote for certain projects are very much focused on making offers and securing a contract. Such offers are often based on
- Mountains of assumptions,
- Historical and/or unverified data from previous projects, and
- Missing project detail knowledge.
In this way, an offer can never come about, which in relation to the cost estimate even comes close to the later actual costs.
1. Planning Project Cost Management
Many project managers create a schedule and look at it as "the planning". That is of course wrong and insufficient. A project manager covers 10+ management areas, depending on the industry. Each area requires a thorough planning, this of course also applies to cost management.
Planning cost management is therefore mainly concerned with
- Setting the framework for each of the cost management processes so that performance of the processes will be efficient and coordinated, and
- Describing the cost management processes in the project cost management plan, which becomes a component of the overall project management plan.
Management plans and other documents are reusable with some adaptation for several projects. Therefore I cannot accept a common project manager’s answer, that there would be more important things to do, and that there is no time for plan preparation. So, use your plan from your last project, or wasn’t there enough time? In that case check out this link, I share my templates with you for free.
2. Estimating Project Cost
Many construction companies are focused on pricing a particular project. Although other processes are a basis for this, they are often not worked on or postponed until afterwards. These processes include:
- Collecting and understanding stakeholder requirements,
- Decomposing scope into manageable packages,
- Estimating resources,
- Estimating durations, and
- Evaluating risks.
How can you get the cost estimate right, if you miss out these important processes? If you get this wrong, there is little to control later. Maybe only frustration…
Something that you may hear over and over again on construction projects are statements like "The crazy HSE officers hinder us from doing our work and cost us too much time and money with their overblown requirements." Well, probably most of these requirements were even documented before bid submission and should have been considered in calculations.
Another common mistake is the inadequate consideration of time and resources. Jobs are often priced according to following sample formula:
Finish concrete wall = x m3 reinforced concrete + y m2 plaster + y m2 wall paint.
This initially looks relatively logical even so I did not include formworks. However, it must be remembered that between concreting and plastering, as well as between plastering and painting up to 28 days have to pass to allow for curing. Curing by the way is an activity and requires resources. But if you price a bill of quantities (BoQ) you will usually not find this item. In other words, without decomposing the scope into manageable packages, estimating resources for each and every activity and task, and estimating their duration, there is great possibility of forgetting it.
I hope that sounds logic, right? I can tell you, the reality is often different.
Please share your point of view below.
3. Determine the Project Budget
The reality in many construction companies is as follows:
- "Direct cost + x% overhead + y% risk contingency + z% profit = offer price",
- "Cost estimate = budget" or "cost estimate - a% = budget",
- Offer submission and re-negotiation,
- Contract award,
- PM hired.
Budget preparation is a project manager's task. In order to perform this task he or she must be involved early enough in the process. If the PM gets engaged after the contractor signed a contract and consequently committed himself to a price and duration, it is very difficult to get this project back on track.
That means in summary the PM's starting position is as follows:
- Weeks time delay at the time of engagement,
- Scope and requirements possibly not evaluated thoroughly,
- Time and resources possibly estimated wrongly or incomplete,
- A so-called budget is grabbed out of thin air and is a “done deal”.
What could be the likelihood that this project will finally become a success? I'm looking forward to your comments.
The more correct and far more promising way would be:
- Estimate thoroughly the cost per each activity bottom-up including resource and duration estimates as described above,
- Aggregate the activity costs to figure out the cost per work package and consequently for each deliverable,
- Add the risk contingency.
4. Control Project Cost
As long as above processes are not performed correctly, not much is left to control.
Otherwise controlling cost is about:
- Ensuring that no money is expensed without the budget owner's approval,
- Preventing that expenditure exceed the individual budget per activity, work-package, and deliverable without authorization,
- Monitoring cost and work performance and analyzing variances,
- Managing overruns and ensure that overall project budget is maintained,
- Influencing factors (such as scope changes etc.) that may result in a change to approved baselines,
- Updating the budget to accommodate approved changes and keep budget changes within acceptable limits.
Please feel free to share your opinion with me. I would be very happy if you prove me wrong.