Estimate costs process.
This particular process group contains the earned value technique which consists of 13 key formulas that will need to be learnt for the PMP exam. Just like time management, costs must be planned in the first place, then quantified and ultimately measured. However, the tools and techniques that the company cost management are very different from those used within the time management group.
Many organizations set budgets, estimate costs, and put funds by ready for particular projects and hence place constraints on the planning and delivery of such projects. But best practice shows that costs tie back directly to the scope of the work and the resulting activities.
From the processes within time management, you will already have developed the work breakdown structure along with an activity list which includes resource and duration estimates for each of them. Even the schedule will now be known.
The purpose of estimate costs and the determine budget process within the cost management process group, is to produce the cost baseline – even though this will need to be reconciled with any high-level budgets are set by your organisation.
The estimate costs process is where each activity is evaluated to determine the cost estimates from their resource estimates. Like so many of the planning processes, ‘estimate costs’ may be carried out time and again.
There are six inputs that are used to estimate costs:
This uses the project scope statement with important references relating back to the underlying needs that led to its creation. Also important here is that the scope statement contains assumptions and constraints that relates to the scope, and each of these will affect the cost estimates.
Projects consume large amounts of cost and knowing when such costs are needed, is important particularly when considering cash-flow. For this reason, and cost performance baseline will be created as part of the next process, ‘determine budget’.
For now however, since estimate costs estimates are based for the most part on an activities duration and the resources applied within it, then considering when the resources are needed may affect the cost. As an example there may be times of the year when labour or material costs is more expensive, and so the project schedule provides information about when such resources are needed. If the schedule shows that overtime is to worked, then this normally involves premium labor rates.
Human resource plan.
This document shows what types of resources the project will need and includes how all they will be procured. Both of these aspects will have a direct affect on cost estimates generated in the estimate costs process.
All risks contain impact. Here, the risk register will help identify the risks that will have an impact on estimate costs, and these will need to be factored in when estimating project costs. The register will also contain opportunities, and any that may reduce costs are important to consider here.
Enterprise environmental factors.
The environment within which the project is to be run will have a large effect on the estimate costs and hence the budget that will be required. The marketplace, policies, procedures and processes, laws and regulations are just some examples of factors that will have a direct affect on costs.
Organisational process assets.
Usually cost information can be gleaned from previous similar projects, lessons learned, or any guidelines that must be followed. In addition there may be software tools or databases that contain important cost data.
There are three outputs from the estimate costs process:
Activity cost estimates.
As you might imagine, this is the main output from this process as it lists the cost of each schedule activity within the project.
Basis of estimates.
When performing estimating, it is important to capture any assumptions or approaches that were used in gathering such data. The basis of estimates is supporting information describing how each activity cost estimate was derived. This is helpful in challenging such assumptions, but it is also useful for future projects or re-estimating within the current project.
Project document updates.
When carrying out the develop project management plan within the integration knowledge area, the cost management plan was created. This plan laid out how the project costs plus change requests related to costs will be managed.
As a consequence of determining activity costs, it is highly likely that this plan would need to be updated.
Earned Value Management.
Finally, I just want to briefly mention earned value management. It will be explained in detail elsewhere, but in the context of discussing the cost baseline derived from the estimate costs process and controlling such costs, it is worthy of a brief description here:
Imagine for a moment that the only cost information contained within a project plan was the planned cost shown that over a period of time. Suppose also, that you are now halfway through such a project. By referring to the above spend plan, you could determine how much was planned to be spent by this point in time.
You have also been faithfully gathering how much has actually been spent on the above project and now you are able to compare the planned cost against the actual cost.
Suppose that the planned cost was greater than the actual cost. Does that mean you are under spending, and hence the project will finish under budget?
Or does it mean that you have not carried out as much work (and hence activities plus the use of their resources) as you had originally planned, and you are therefore spending correctly for the (smaller) amount of work actually done, and as a consequence your project will finish late?
This ambiguity would require significant investigation to determine which of the above two statements are actually true, and hence, what corrective action would be required by the project manager.
This is where earned value comes to the rescue by providing a third variable called unsurprisingly, ‘earned value’.
It is based on the percentage complete that has been ‘earned’ on each activity up to this point in time. If an activity was planned to cost $1000, and it is now 50% complete, then the earned value is $500.
If the earned value dollar amount is less than the planned amount, then the project will deliver late (and vice-versa).
If the earned value dollar amount is less than the actual cost, then the project will come in under budget (and vice-versa).
In this way accurate and precise cost information on the project progress and hence cost forecast of the project can be obtained – giving the project manager far better control by providing firm evidence to apply any corrective action if needed.
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David spent 25 years as a senior project manager for US multinationals and now develops a wide range of project-related downloadable video training products under the Primer brand. In addition, David runs training seminars across the world, and is a prolific writer on the many topics of project management. He currently lives in Spain with his wife Jude.