Project Management

Module 6

Project Costs & Quality Planning

Project Costs
The total funds required to complete the project in all aspects are
called as Project Costs. These are the expenditures made or
estimated to be made, or monetary obligations incurred or
estimated to be incurred as mentioned in the project baseline

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 Types of Project Costs

Project
Costs

Direct Indirect Fixed Variable Sunk Capital Maintenan

Costs Costs Costs Costs Costs Costs ce Costs

Overhead Admin

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1. Direct Costs
• Directly accountable to a project
• Easily traceable
• It includes cost of raw material, equipment and machines, wages,
payment to suppliers and sub-contractors, etc
• They are uniform per unit of production and may or may not vary
with rate of output
e.g. Direct material and Labour, Project team salaries and wages,
team travel cost, etc

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 2. Indirect Costs
• Not directly accountable for specific activity but still needed for
completion of the project
• Belong to main supporting business but cannot be directly
allocated to the project
• It includes administration, personnel and security costs
• The fringe benefits or taxes are indirect costs
• E.g. The project team member salary will be direct cost but the
Project Manager will be running multiple projects and his salary
will be indirect to that particular project
• Indirect costs are of two types – a) Overhead Costs and b)
Administration Costs

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a) Overhead costs
• Indirect cost incurred over project deliverables
• Cannot be traced conveniently or identified with any particular
cost unit
e.g. Fringe benefits, cost of supplies.

b) Administration costs
• An ongoing expense of operating a business
• These are must for keeping the organisation operational
e.g. Taxes, Accounting and legal expense, general indirect and
administrative cost.

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3. Fixed Costs
• Remain fixed throughout project life cycle
• Does not depend on the amount and rate of work
performed
• These costs are incurred even if there is no production
e.g. Rent, setup cost, depreciation, salaries

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4. Variable Costs
• These costs change with level of production
• If there is no production, then there is no variable cost
• Amount may or may not be proportional to production level

e.g. Cost of Raw material, equipment, hourly labour, performance

bonus, cost of supply

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Cost Curve

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5. Sunk Costs
• Cost that has already been incurred and cannot be recovered
• Also called as retrospective cost
• It is the sum paid in the past that is no longer relevant to
decision about the future
e.g. Lease expense is a sunk cost. It has already been paid. It
will be incurred no matter how you utilise the facility

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6. Capital Costs
• One time fixed cost
• Also called as non-recurring costs
• It is the total cost needed to bring a project to commercially
operable status
e.g. Purchase of land, construction of facility, Permit and legal
cost

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7. Maintenance cost
• Cost incurred on maintaining and servicing of machines and
equipment
• Also called as recurring costs
• It is necessary to keep the asset in optimum operating condition
• If not maintained, the machine may fail which will have a major
impact on cost, hence, this is necessary
e.g. Fixing a broken module to repair Solar System, Preventive
maintenance cost, fixing a shot fuse in electrical circuit

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Project Cost Management
• Project Costing is key factor in making project decisions
• Project cost management is the process of planning, administering
and controlling all cost related to project
• It allows business to predict coming expenses in order to reduce
the chances of it going overbudget
• It sets up control measures for expense in each and every aspect
of the project
• Project costs are calculated during the planning phase of project
and must be approved before work begins
• Performed throughout the project life cycle
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 Cost Management Process

Resource Cost Cost Cost

Planning Estimation Budgeting Control

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 1. Resource Planning
• Estimate the resources required to complete the project
• Take help of Work Breakdown Structure (WBS), scope
statement and other similar past projects to define resources
• Define the various types and number of resources required
• Assign the cost to these resources
• Final estimated cost for all the resources is obtained

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2. Cost Estimation
• It is predictive process to quantify cost and to price the
resources accordingly
• Uses statistical cost estimation method to get idea of cost
associated with required resources
• It is application of technique that converts quantified technical
information into finance and resource information
• Platforms like Cleopatra Enterprise Cost Estimating and
database like CESK are used for the same

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3. Cost Budgeting
• Cost estimate assigned to individual work items to develop
project budget
• It forms baseline for cost control
• It allocates the estimated costs over the project schedule to
indicate whether these costs will be incurred
• Often time phased in accordance with schedule to address cash
flow constraints

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4. Cost Control
• Determine variance from cost baseline
• Take corrective action to achieve minimum cost
• Expenditure is monitored throughout the progress of the project
and changes from the baseline are identified
• Due to this, the total cost keeps on changing which needs to be
updated on timely basis
• By proper cost control techniques, Cost overruns can be
avoided.

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Project Budget
• It lists total cost that a project is likely to incur before it is completed
• It provides financial roadmap of the project
• It is an essential activity to manage a project
• At initial stage, high-level budget is developed
• It is subsequently refined and added with details as the project
progresses
• The development of good budget depends on how accurately the
project costs are estimated

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Process to create Project Budget

Identify work Set up the cost Combine project

Estimate cost of
elements for management schedule and
work elements
costing process cost estimate

Make provisions
Generate the Review the
for
project budget budget
contingencies

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Process to create Project Budget
1. Identify work elements for costing
• Scope elements, individual work tasks or work packages are identified
• Cost elements of these work packages need to be included in the budget

2. Set up the cost management process

• Set the procedures and processes to follow while planning and managing
project costs
• Specify documentation requirements

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Process to create Project Budget
3. Estimate cost of work elements
Cost of each work element or work package identified in step 1 is
estimated

4. Combine project schedule and cost estimate

Once the cost of each work element is calculated, it is linked to project
schedule to develop schedule for cost requirements

5. Generate the project budget

Present project budget in pre-defined template
It should be presented clearly and in simple language

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Process to create Project Budget
6. Make provisions for contingencies
Provision for project contingencies, dependencies and constraints within
the project

7. Review the budget

The prepared budget is reviewed thoroughly to verify whether cost of all
work elements is estimated and constraints are considered

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Earned Value Analysis (EVA)
• It is an industry standard method of
measuring project’s progress at any
given point of time
• Also used to forecast project
completion date and final cost along
with analysing variances
• It compares planned amount of work
to actual completed work to
determine the progress

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 EVA has following key terms:-
• Planned Value: The value of project work that should be earned
on the basis of the project schedule
• Earned Value: The value of project work actually completed to
date
• Actual Cost: The cost spent on project to date
• Cost Variance: The difference between cost incurred and
planned cost. It gives idea about changes occurred in costs till
date for the project
Cost Variance (CV) = Earned Value (EV) – Actual Cost (AC)

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 Budgeting Techniques

Top-down Bottom-up Activity-based

Budgeting Budgeting Budgeting

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Top-down Budgeting
• Top level management decides project cost
• Also issues budgeting guidelines
• This is then assigned to activities
• Usually followed at initial stage of project
• If the budget is unable to cover all activities,
some may be removed or merged
• The top manager may not have idea about
actual ground work, so, if allowance is less
then the project cost may go over the budget

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Bottom-up Budgeting
• Project cost is determined by adding
cost of all individual work elements,
packages and activities
• Usually followed where detailed break-
up of project work is available
• Employees are directly involved in
budgeting
• Even though the departments determine
their budgets, if management does not
find it appropriate, they may send it for
revision

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Activity-based Budgeting
• Budgets created using activity-based costing
• Assign cost to each activity in a project on basis of its volume
• Thorough analysis of these activities is done before determining
the budget
• It drives efficiency in project activities
• Since the budget is determined after justifying cost drivers, this
technique enhances productivity in the organisation

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