Cost planning

Revision as of 17:29, 9 May 2023

Abstract

Cost planning is essential to the management of projects, programs, and portfolios. It enables businesses to achieve their strategic goals while efficiently allocating resources and minimizing costs. Identifying cost drivers, creating cost estimates, and establishing cost baselines are all parts of the cost planning process ^[1]. Effective cost planning guarantees that projects, programs, and portfolios are finished on time and within budget, which ultimately improves performance and helps the firm achieve its objectives.

Cost planning in project management establishes the necessary funding and resources to complete the project. Project managers can recognize potential risks and adapt resources by using accurate cost estimates. Resource allocation is improved, cost control is improved, and the success of the project as a whole is ensured by effective cost planning ^[1].

Cost planning in program management is creating and overseeing budgets for various initiatives within a program. Program managers must strike a balance between the financial requirements of individual projects and the program's overall budget to ensure effective resource allocation to achieve goals. Developing a thorough grasp of project costs and benefits, keeping track of and controlling program expenditures, and revising program budgets are all essential components of effective cost planning ^[2].

Cost planning in portfolio management evaluates the financial performance of a company's portfolio of projects and programs. It entails weighing the costs and advantages of each project or program, setting priorities based on their financial value, and ensuring that they are in line with strategic goals. Making data-driven decisions for resource allocation and investment optimization, as well as monitoring and controlling costs, are all essential components of effective cost planning (Bourne et al., 2018; PMI, 2017).

Effective cost planning is crucial for project, program, and portfolio management because it enables businesses to maximize resources, cut costs, and accomplish strategic goals.

Introduction

Definition of cost planning

Cost planning is the practice that ensures that a all costs that arise during a project, program or portfolio can be covered by its budget, this is ensured by planning, estimation and control. https://www.projectfacts.com/glossary/cost-planning.html

Importance of cost planning

Cost planning is a critical point in project, program and portfolio management. A practical example of a cost planning project is to take a mid-rise building, the first aspect of a project like this is how much capital can be gathered or is meant to be spent on the project, that is the budget for the project. After a budget is decided it is possible to break it down and show more detailed where the money is to be spent. In this process many important decisions must be decided like if the building will be luxurious or budget, to get a famous designer or have a pre-made design, building material quality and location all must be chosen and fit in the decided budget. If it were not for the budget, it would be hard to make informed decisions about how or what it is to be made, with a well-defined budget it should be easier to see if costs are getting out of hand and some changes may have to be made. This is especially important for large corporations where multiple projects happen at the same time, unexpected costs arise, and assumptions don't follow through. Using cost planning these challenges can be mitigated by allowing project managers to implement practices that set clear expectations for stakeholders. They include limiting scope crepe, keeping track of progress and responding to corrections quickly. With good cost management profit margins are held the same, ROI can be increased and losses due to increased cost are prevented. Good cost planning also provides good data and indication of costs in future projects and price trends. Cost planning is a very important part of project, program and portfolio management due to it ensuring successful project completion on budget while also meeting the projects requirements.

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Cost planning in Project, Program and Portfolio management

What is cost planning in project, program and portfolio management

In the context of project, program, and portfolio management, a project is a temporary endeavor with a specific goal or objective, such as building a new product or launching a marketing campaign. A program, on the other hand, is a group of related projects that are managed together to achieve a common goal or objective. A portfolio is a collection of programs and projects that are managed together to achieve strategic objectives. https://graduate.northeastern.edu/resources/project-management-vs-portfolio-management-vs-program-management/#:~:text=A%20program%20is%20a%20group,or%20unrelated%20to%20one%20another The cost of a project, program or a portfolio come in many different forms, for a project the cost appears as material, labor, machinery, equipment, technology, cash, loans and knowledge and more. (A cost based approach P 3) While for the program the costs over multiple projects are summed up to make the cost plan. This then happens again where a portfolio is a collection of programs and the portfolio cost plan consists of the combination of the program costs. From this it is easy to see that the quality of the program cost plan depend on the quality of each of the project cost plans and this applies the same way from portfolio to programs.

Key concepts of cost planning

Considering Long-Term Costs in Project Decision-Making

Effective cost planning involves not only considering the immediate costs of a project, but also the long-term effects of project decisions on the product, service or result being delivered. Project managers need to carefully evaluate the consequences of their decisions, not only in terms of reducing immediate project costs but also in terms of their impact on usage, maintenance, support or product quality in the future. For example, if a project manager decides to reduce the number of design reviews in a high-rise building project in order to save costs, it may seem like a good short-term cost-saving strategy. However, if the design is flawed and this is not identified until later in the project, it may end up costing much more to fix the issues, leading to higher long-term costs. Therefore, it is important for project managers to take a holistic view of cost management and carefully weigh the trade-offs between immediate and long-term costs when making project decisions. This requires a deep understanding of the project requirements, as well as an ability to accurately forecast the potential impact of different cost management strategies.(PMI)

Differences in cost measurements

An important consideration in cost planning is to understand the perspective of each stakeholder and how they measure the cost of the project. Often, stakeholders measure costs at different times and using different methods. For instance, the cost of acquiring a material may be recorded when the decision to purchase it is made, when it is delivered, when it is paid for, or at another point in time. These variations in measurement can have significant effects on the accuracy of cost planning and management. In many cases, organizations perform predictive and analytical work to determine the prospective financial performance of the project’s product outside of the project scope. However, some projects, such as capital facilities projects, may include this type of work within Project Cost Management. When such analyses are included, Project Cost Management may encompass additional processes and numerous financial management techniques, such as return on investment, discounted cash flow, and investment payback analysis. These techniques can help to provide a more accurate measure of the project's success and ensure that the project remains on track to meet its financial objectives.

Useful practices=

Earned value management (EVM) including earned schedule (ES)

Earned Value Management (EVM) is a popular project management technique used to measure the progress of projects. EVM achieves this by subtracting the planned value from the earned value. If the EVM value is below zero, it means that the project has earned less value than planned and is behind schedule. However, integrating the Earned Schedule (ES) technique provides an overview of how much the project is behind schedule time-wise. ES shows how much of the project has been completed percentage wise. ES is calculated by dividing Planned Value (PV) by Planned Acomplishment Rate (PAR). If the ES is larger than zero, the project is ahead of schedule, this means the project has earned more value than planned.The Schedule Performance Index (SPI) also using earned schedule metrics and is calculated ES divided by AT. This index can be used to measure the efficiency work that is being accomplished. https://www.pmi.org/learning/library/evm-cpm-evaluate-project-performance-6355#:~:text=To%20calculate%20the%20EV%20for,are%20expressed%20in%20cost%20units. Also included in the ES theory is are formulas that forecast final completion date using ES, AT and estimated duration. This helps project managers to predict the future course of the project and make necessary adjustments to ensure the project is completed within the given timeframe. In summary, EVM and ES are both useful project management techniques that help project managers to measure project progress, forecast project completion date, and make informed decisions. While EVM measures the project's financial progress, ES provides a schedule-based perspective to project management. By using both techniques, project managers can gain a comprehensive understanding of project performance and ensure the successful completion of the project.

Cost planning in agile and adaptive environments

When making a cost plan in a highly adaptive and agile environment the best way may not to create the most detailed plan. Since the surroundings and situation is constantly changing the plan would have to be altered very regularly while not giving good insights into the costs that are to come. A more appropriate approach would be to create a less detailed plan that covers all the aspects of the project on a rough basis. Those kinds of plans are fast and easy to change while the more detailed plans can cover the short horizon where changes are less frequent. In a very agile world where a project has a strict budget schedule the scope and project schedule might have to be altered to keep within the set budget limit.(PMI)

Attributes of good cost planning

- main tips and tricks for effective cost planning

- common mistakes to avoid

- good strategies

- some examples of good cost planning

- some examples of bad cost planning

Conclusion

References

1. ↑ ^{1.0 1.1} Project Management Institute. (2017). A guide to the project management body of knowledge (PMBOK guide) (6th ed.). Project Management Institute.
2. ↑ Bourne, L., Walker, D., & Paulos, A. (2018). Handbook of project portfolio management (2nd ed.). Routledge.