Each project should have an approved budget, and the project manager’s job is to ensure that the project is completed without exceeding this budget. Project cost management as defined by Schwalbe “includes the processes required to ensure that a project team completes a project within an approved budget” (Schwalbe, 2010, p.256). Project cost management is subdivided into three processes that are cost estimation, budget determination and cost control.
Cost estimation process involves estimating costs needed to complete the project, those costs include everything that would make a project successful, such as human and non-human resources, engagement of external contractors, hardware and software requirements and so on, it even include travel expenses if necessary. Budget determination on the other hand is about allocating project cost estimate defined in the previous process to work packages, it is based on activities in work breakdown structure of the project. This process has a main goal, which is constructing a project cost baseline to measure performance and understand funding requirements (Schwalbe, 2010, p.256). The third process in project cost management is cost control; this process includes monitoring cost performance (Schwalbe, 2010, p.256), this ensures that only required changes are added to the revised cost baseline, as well update all engaged stakeholders about the changes that impact cost.
Project sponsor is more interested in financial terms rather than technological terms, this is the main reason why project managers should understand financial terms and know how to present the project for approval based on financial values. Project manager should understand the difference between profit and revenue, direct and indirect costs, cash flow and suck cost, and terms like earned value, which is “the estimate of the value of the physical work actually completed” (Schwalbe, 2010, p.273). There are three basic types of cost estimates, each of them has a certain use within the project lifecycle and differs in the level of accuracy it provides, and those are:
1) ROM estimate, this is done at early stages and not accurate, however it is used to estimate a project total cost.
2) Budgetary estimate, this is more accurate than ROM and used to allocate budget for this project.
3) Definitive estimates, this is the most accurate and is used to issue actual purchasing decisions.
There are varies numbers of estimation tools and techniques that project managers can use to estimate project cost, those tools differ based on their estimation accuracy, cost, and time required to derive the cost estimates. Analogous estimate, also known as top-down estimate, this technique is known as the least accurate and less costly, this technique builds cost estimate for current project based on previous similar projects, and due to this reason previous project should be as much similar as current project, as well it requires expert judgment (Schwalbe, 2010, p.263). Another cost estimate technique is the bottom-up estimate; also known as activity-based, if the WBS is constructed, each resource will be responsible for a work package and he or she will develop the cost estimate for that work package. This technique is costly but and time consuming, but very accurate.
With the existence of previously mentioned tools and techniques to aid project managers better estimate cost for their projects, it is still inaccurate. Its not easy to relate cost estimation problem to a single cause, as lots of external and internal factor affect cost estimation results, McDonald for example identifies lack of experience, as one of the main reasons behind generating inaccurate cost estimates (McDonald, 2005), this could be either because inexperienced team would require longer time to complete their tasks and by that it will cost more, or because as McDonald mentioned inexperienced resources produce lower cost estimates. DeMarco listed four main drivers that cause in accuracies in project cost estimations, and those are:
1) Estimates done too quickly: usually estimating cost for IT projects, being software development or customization, require lots of efforts, in terms of time, money and resources. To properly estimate cost, requirements should be set, analyzed and evaluated. WBS should present to help in understanding actual project requirements, against task list. If cost is estimated without proper analysis and knowledge of task list, it will result in inaccurate results.
2) Lack of experience: resources who perform cost estimates usually lack proper cost management experience, as well organizations lack project estimation history to help in top-down cost estimation. Keeping historical data within the organization provide more solid data for project managers; as well training IT personnel on cost estimation matter would help in providing more accurate and solid estimates.
3) People are biased toward underestimation: usually people involved in project estimation are not the same who execute actual tasks, they do estimations based on personal judgments. As well estimators might forget to allocate extra cost for unknowns.
4) Management seek accuracy: although tope management requests estimates, but their actual aim would be accurate cost, or as much accurate as possible. The reason behind this is to help them prepare and allocate budgets, insure proper cash flow present in the organization.
Top management, as Schwalbe mentioned would never forget initial estimates, for that approved change to cost estimates should be documented and communicated with stakeholders along with amendments to original approved budget.
Reference:
McDonald, J., (2005), ‘The Impact of Project Planning Team Experience on Software Project Cost Estimates’, Empirical Software Engineering, Springer Netherlands, ISSN: 1382-3256, V10, Issue 2, pp. 219-234, DOI: 10.1007/s10664-004-6192-9, [Online]. Available from: http://dx.doi.org/10.1007/s10664-004-6192-9 (Accessed 17 December 2011)
Rick McCarthy, (2004) "Understanding project costs and building costs", Bottom Line: Managing Library Finances, The, Vol. 17 Iss: 1, pp.6 – 9, DOI: 10.1108/08880450410519638, [Online]. (Accessed 17 December 2011)
Schwalbe, K., (2010), Information Technology Project Management (with Microsoft Project 2007 CD-ROM), 6th ed., Course Technology, 2010, ISBN 978-0-324-78692-7
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