Cost planning

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 . 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 .

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 .

Cost planning in portfolio management evaluates the financial performance of a company's portfolio of projects and programs. By 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 .

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..

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. planning, estimation and control..

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. .

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. 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.

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 Accomplishment 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. .

Also included in the ES theory is 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.

Application of cost management planning

A Cost Management Plan describes the process of deciding how costs will be budgeted, estimated, managed, monitored and controlled. The main advantage of this process is that it provides a clear roadmap on how to handle project costs throughout its lifecycle. A Cost Management Plan is typically executed at the start of the project or at predetermined milestones. Figure 1 illustrates the inputs, tools, and outputs, while Figure 2 presents the data flow diagram of the process.

Figure 1: Control Costs: Inputs, Tools & Techniques, and Outputs (source:)

Figure 1: Control Costs: Data Flow Diagram (source:)

It is important that the cost management plan happens early in the project planning phase, this ensures that performance of the processes stay within the scope of the cost planning.

Planning Inputs

To develop a comprehensive cost management plan, four main inputs are required, namely the project charter, project management plan, environmental factors, and organisational process factors.

The project charter should include the approved financial resources that will be allocated to the project. This is crucial in developing the project's cost estimates. Additionally, the charter should outline the project approval requirements that can have a significant impact on the project's cost.

Next is the project management plan, it should contain two plans that are crucial for effective cost estimation and management. The schedule management plan, outlines the activities and criteria for developing, monitoring, and controlling the schedule. This plan also establishes processes and controls that affect cost estimation and management.

The risk management plan, defines the approach for identifying, analyzing, and monitoring risks throughout the project. This plan also outlines processes and controls that impact cost estimation and management. By implementing these two plans, the project can better manage costs and mitigate risks that may affect the project's overall success.

The main enterprise environmental factors are the following:

• The culture and structure of an organization can have a significant impact on how costs are managed throughout a project.
• Market conditions, dictate the availability of products, services, and outcomes both locally and globally.
• Consider currency exchange rates from various countries as these rates can fluctuate over time.
• Commercial databases that track skills and human resource costs, as well as published seller price lists, are valuable sources of information for resource cost rate information and standard costs for materials and equipment.
• The project management information system offers alternative options for managing cost.
• Productivity variations across different regions of the world can significantly impact project costs.

Organisational process assets that mainly affect the cost management planning are the following :

• Financial control procedures, such as time reporting, expenditure and disbursement reviews, and standard contract provisions.
• Historical information and lessons learned repository.
• Financial databases, which can track costs and provide data for analysis.
• Existing formal and informal policies, procedures, and guidelines related to cost estimating and budgeting.

Tools and techniques

Some good tools and techniques to use when working on a cost management planning project.

Firstly reaching out for Expertise on the topic at hand from experts or groups in the field on the following topics.

• Analysis of previous similar projects
• Gathering information relevant to the industry, discipline, and application area
• Utilising cost estimating and budgeting techniques
• Implementing earned value management methodologies.

Secondly, performing data analysis, gathering and analysing information such as how to best finance the project and what is the most optimal way of getting the resources required.

Thirdly is holding meetings for relevant stakeholders to help develop and shape the cost plan. Stakeholder that should be included should be the project manager, project sponsor, team project members, personnel with cost responsibilities and whomever might be relevant to the project.

Outputs

The main output is the cost management plan, it should outline how project costs will be planned, structured, and controlled. The plan documents cost management processes and associated tools and techniques.

• Units of measure: used for each resource should be noted, this should ensure consistency and avoid confusion later.
• Level of precision: specifying the degree of rounding for cost estimates based on project scope and magnitude.
• Level of accuracy: setting an acceptable range (e.g. ±10%) for determining realistic cost estimates, which may include contingencies.
• Procedure links: using the work breakdown structure (WBS) as the framework for the cost management plan, with each control account assigned a unique code or account number that links directly to the accounting system.
• Control thresholds: establishing variance thresholds to monitor cost performance and indicate when action needs to be taken, typically expressed as percentage deviations from the baseline plan.
• Rules of performance measurements: setting rules for earned value management (EVM), such as defining the points in the WBS for measuring control accounts, specifying EVM techniques to be used, and providing tracking methodologies and computation equations for EAC forecasts.
• Reporting formats: defining the formats and frequency for various cost reports.
• Additional details: including strategic funding choices, procedures for accounting for fluctuations in currency exchange rates, and procedures for project cost recording.

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.

Attributes of good cost planning

• Accuracy: The plan should include all direct and indirect costs as well as making contingencies for unexpected, this should give an accurate and realistic estimate of how much it will cost to complete the project.
• Comprehensive: All aspects of the project must be investigated, this would include labor, equipment, capital cost and many more.
• Realistic: The projects plan should be based on the most realistic and relevant assumptions available considering any limitations or hurdles that could impact the overall cost.
• Transparent: The cost plan should be clear and easy to understand, this allows stakeholders to be better informed and be more involved in the project.
• Contingency planning: Contingency plans should be involved to accommodate risks and unexpected expenses that might arise.
• Flexibility: The plan should be made flexible enough so that changes can be made along the projects life cycle. The flexibility of the plan should reflect the flexibility of the surroundings of the project.
• Consistency: The plan should stay consistent with the objectives of the project, helping guide it in the right direction.

In conclusion a good cost plan should include all stakeholder inputs and should be updated regularly.

Annotated bibliography

A Guide to the Project Management Institute. (2017). A guide to the project management body of knowledge (PMBOK guide) (6th ed.). Project Management Institute.
"A Guide to the Project Management Body of Knowledge (PMBOK Guide), 6th edition" is a comprehensive book for project management professionals. It covers a wide range of project management areas, processes, and best practices. The book includes many useful tools and techniques to be used for project management, as well as providing guidance on agile and adaptive project management approaches. The PMBOK Guide is widely recognized as a standard in the field of project management and is used by professionals around the world.

Bourne, L., Walker, D., & Paulos, A. (2018). Handbook of project portfolio management (2nd ed.). Routledge.
"Handbook of Project Portfolio Management" by Bourne, Walker, and Paulos, published in 2018, is a guide to managing project portfolios. It covers the key concepts and practices of portfolio management, with practical examples and case studies to illustrate the material. The book is intended as a guide to help managing portfolios, projects, and to gain understanding and manageging the concepts relating to it.

Mehmet Nihat Hanioglu. (2022). A cost based approach to project management. Planning and Controlling Construction Project Costs
The book presents a comprehensive overview of cost-based project management, covering topics such as budgeting, cost estimating, cost control, and project cost analysis. It provides practical guidance and examples for professionals involved in construction project management or are interested in cost-based approaches to project management.

References