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20thSeptember
Cost management explained

Cost management is concerned with the process of finding the right project and carrying out the project the right way. It includes activities such as planning, estimating, budgeting, financing, funding, managing, controlling, and benchmarking costs so that the project can be completed within time and the approved budget and the project performance could be improved in time.

Cost management covers the full life cycle of a project from the initial planning phase towards measuring the actual cost performance and project completion. This article will explain the different steps and processes in Project Cost Management, in line with methods such as the Total Cost Management Framework of AACE International [1].

Step 1: Resource planning

Resource planning is the process of ascertaining future resource requirements for an organization or a scope of work. This involves the evaluation and planning of the use of the physical, human, financial, and informational resources required to complete work activities and their tasks. Most activities involve using people to perform work. Some activities involve materials and consumables. Other tasks involve creating an asset using mainly information inputs (e.g., engineering or software design). Usually, people use tools such as equipment to help them. In some cases, automated tools may perform the work with little or no human effort.

Resource planning begins in the scope and execution plan development process during which the work breakdown structure, organizational breakdown structure (OBS), work packages, and execution strategy are developed. The OBS establishes categories of labor resources or responsibilities; this categorization facilitates resource planning because all resources are someone’s responsibility as reflected in the OBS.

Resource estimating (usually a part of cost estimating) determines the activity’s resource quantities needed (hours, tools, materials, etc.) while schedule planning and development determines the work activities be performed. Resource planning then takes the estimated resource quantities, evaluates resource availability and limitations considering project circumstances, and then optimizes how the available resources (which are often limited) will be used in the activities over time. The optimization is performed in an iterative manner using the duration estimating and resource allocation steps of the schedule planning and development process.

 Breakdown Structure                                                                                                                                                                          

Step 2: Cost estimating

Cost estimating is the predictive process used to quantify, cost, and price the resources required by the scope of an investment option, activity, or project. It involves the application of techniques that convert quantified technical and programmatic information about an asset or project into finance and resource information. The outputs of estimating are used primarily as inputs for business planning, cost analysis, and decisions or for project cost and schedule control processes.

The cost estimating process is generally applied during each phase of the asset or project life cycle as the asset or project scope is defined, modified, and refined. As the level of scope definition increases, the estimating methods used become more definitive and produce estimates with increasingly narrow probabilistic cost distributions.

Cost estimating could be performed by dedicated software systems like Cleopatra Enterprise cost estimating and project cost databases like CESK that are created and maintained to support the various types of estimates that need to be prepared during the life cycle of the asset or project.

The estimation of the time duration of activities must be considered concurrently with costs because costs are often dependent on time duration and resource requirements identified in cost estimating may affect the schedule. Iterative approaches are used because outcomes of a cost estimate often lead to changes in scope or plans. In fact, the estimating process can be viewed as part of the scope definition process because iterative trading off between cost and scope intertwine the processes.

With Cleopatra Cost Estimating, you can achieve

  • Creation of all kinds of cost estimates, from factor to detailed estimate.
  • Successful tendering as it allows you to estimate costs, request bids, analyze those bids and to keep track of its costs.
  • Connected cost estimating and cost control. With the Cost Control Module, you can track project costs during the execution phase. By linking your project controls document directly to your estimate, Cleopatra Enterprise will minimize data handling, increase efficiency and reduce the number of errors.
  • Traditionally, management would ask to deliver an estimate based on the time remaining to the TA execution. More organizations now require estimators to follow a staged approach to estimating, delivering three different types of estimates during the preparation phase.

 

Step 3: Cost budgeting

Budgeting is a sub-process within estimating used for allocating the estimated cost of resources into cost accounts against which cost performance will be measured and assessed. This forms the baseline for cost control. Cost accounts used from the chart of accounts must also support the cost accounting process. Budgets are often time-phased in accordance with the schedule or to address budget and cash flow constraints.

Step 4: Cost control

Cost control is concerned with measuring variances from the cost baseline and taking effective corrective action to achieve minimum costs. Procedures are applied to monitor expenditures and performance against the progress of a project. All changes to the cost baseline need to be recorded and the expected final total costs are continuously forecasted. When actual cost information becomes available an important part of cost control is to explain what is causing the variance from the cost baseline. Based on this analysis corrective action might be required to avoid cost overruns.

Below figure is a process map for project performance measurement [1]. This process should be run in a continuous improvement cycle until project completion:

 

Process map for project performance measurement                                                                                                                 

The process for performance assessment starts with planning and having the right tools in place. Dedicated cost control software tools can be valuable to define cost control procedures, track and approve changes and apply analysis. Furthermore, reporting can be enhanced and simplified which makes it easier to inform all stakeholders involved in the project.  

Cleopatra Cost Control helps you achieve

  • Project cost control and always tracing back cost components to its original budget.
  • Scope change management. Estimate costs and add it to your project controls document.
  • Project completed? The feedback process will be in place. Send the actuals to your cost models to increase their accuracy and quality for future estimating. Where most tools are limited to either being cost estimating software or a cost control tool, Cleopatra Enterprise is both.

Bonus Step: Benchmarking

As a bonus step, it is wise to add Benchmarking to the project cost management process.

Benchmarking helps close the loop between project A and project B. The knowledge from project A (referring to the running and executed projects) are analyzed and the feedback is reflected in project B (the next projects). That’s how an improvement cycle is created to increase project performance. Benchmarking is widely used by technical industries to improve the performance of the projects. Software systems such as Cleopatra project benchmarking aid estimators and project controllers in answering the complex question: How to use project big data to execute projects within time and budget?

The goal of project benchmarking is to store data from executed and running projects to extract valuable project metrics and to benchmark current estimates. Performing statistical analysis on historical data can result in valuable information on relationships between variables, which can be used to set up a reliable cost knowledgebase or calibrate existing ones.

Project Benchmarking as a bonus stage

 It is important to note that project benchmarking does not only include the comparison between projects, as it is also interesting to compare revisions within a project.

 What you can achieve with Cleopatra Benchmarking

  • Collect historical project data that can provide valuable analysis and project comparison to make critical business decisions.
  • Benchmark your estimates against your previous projects and improve your cost estimate significantly.
  • Extract metrics across projects to enhance future cost estimating accuracy.
  • Develop meaningful and interactive reports.
  • Export & Import data easily from Excel.

About Cleopatra Enterprise

Cleopatra Enterprise is the innovative and industry-leading Project Cost Management Software for the oil & gas, chemical, mining, pharmaceutical, infrastructure, and construction industries. With a mission to help companies complete projects within time and budget, Cleopatra integrates cost estimating, scheduling, cost control, and project benchmarking.

For more than 20 years, Cleopatra Enterprise has been used by more than 500 industry-leading companies in 75 countries to control technical projects and improve project performance. If you'd like to talk to an expert about our software Cleopatra Enterprise, please request a demo now.

Located in North America?

To learn more about the integrated approach of Cleopatra, schedule a meeting with us in North America from 21 October to 2 November or meet us at the AACE Houston Gulf Coast Symposium on 1 & 2 November. Learn more.

Source: [1] Total Cost Management Framework 2nd edition, 2015, © by AACE International