Project Cost Control: the Way it Works
In a recent consulting assignment we realized that there was some lack of understanding of the whole system of project cost control, how it is setup and applied. So we decided to write up a description of how it works. Project cost control is not that difficult to follow in theory.
First you establish a set of reference baselines. Then, as work progresses, you monitor the work, analyze the findings, forecast the end results and compare those with the reference baselines. If the end results are not satisfactory then you make adjustments as necessary to the work in progress, and repeat the cycle at suitable intervals. If the end results get really out of line with the baseline plan, you may have to change the plan. More likely, there will be (or have been) scope changes that change the reference baselines which means that every time that happens you have to change the baseline plan anyway.
But project cost control is a lot more difficult to do in practice, as is evidenced by the number of projects that fail to contain costs. It also involves a significant amount of work, as we shall see, and we might as well start at the beginning. So let us follow the thread of project cost control through the entire project life span.
And, while we are at it, we will take the opportunity to point out the proper places for several significant documents. These include the Business Case, the Request for (a capital) Appropriation (for execution), Work Packages and the Work Breakdown Structure, the Project Charter (or Brief), the Project Budget or Cost Plan, Earned Value and the Cost Baseline. All of these contribute to the organization's ability to effectively control project costs.
The Business Case and Application for (execution) Funding
It is important to note that project cost control is most effective when the executive management responsible has a good understanding of how projects should unfold through the project life span. This means that they exercise their responsibilities at the key decision points between the major phases. They must also recognize the importance of project risk management for identifying and planning to head off at least the most obvious potential risk events.
In the project's Concept Phase
• Every project starts with someone identifying an opportunity or need. That is usually someone of importance or influence, if the project is to proceed, and that person often becomes the project's sponsor.
• To determine the suitability of the potential project, most organizations call for the preparation of a "Business Case" and its "Order of Magnitude" cost to justify the value of the project so that it
Can be compared with all the other competing projects. This effort is conducted in the Concept Phase of the project and is done as a part of the organization's management of the entire project portfolio.
• The cost of the work of preparing the Business Case is usually covered by corporate management overhead, but it may be carried forward as an accounting cost to the eventual project. No doubt because this will provide a tax benefit to the organization. The problem is, how do you then account for all the projects that are not so carried forward?
• If the Business case has sufficient merit, approval will be given to proceed to a Development and Definition phase.
In the project's Development or Definition Phase
• The objective of the Development Phase is to establish a good understanding of the work involved to produce the required product, estimate the cost and seek capital funding for the actual execution of the project.
• In a formalized setting, especially where big projects are involved, this application for funding is often referred to as a Request for (a capital) Appropriation (RFA) or Capital Appropriation Request (CAR).
• This requires the collection of more detailed requirements and data to establish what work needs
To be done to produce the required product or "deliverable". From this information, a plan is prepared in sufficient detail to give adequate confidence in a dollar figure to be included in the request.
• In a less formalized setting, everyone just tries to muddle through.
Work Packages and the WBS
The Project Management Plan, Project Brief or Project Charter
• If the deliverable consists of a number of different elements, these are identified and assembled into Work Packages (WPs) and presented in the form of a Work Breakdown Structure (WBS).
• Each WP involves a set of activities, the "work" that is planned and scheduled as a part of the Project Management Plan. Note, however, that the planning will still be at a relatively high level,
And more detailed planning will be necessary during execution if the project is given the go ahead.
• This Project Management Plan, by the way, should become the "bible" for the execution phase of the project and is sometimes referred to as the "Project Brief" or the "Project Charter".
• The cost of doing the various activities is then estimated and these estimated costs are aggregated to determine the estimated cost of the WP. This approach is known as "detailed estimating" or "bottom up estimating". There are other approaches to estimating that we'll come to in a minute. Either way, the result is an estimated cost of the total work of the project.
Note: that project risk management planning is an important part of this exercise. This should examine the project's assumptions and environmental conditions to identify any weaknesses in the plan thus far, and identify those potential risk events that warrant attention for mitigation. This might take the form of specific contingency planning, and/or the setting aside of prudent funding reserves.
Request for capital
Converting the estimate
• However, an estimate of
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