Chapter 6 Flashcards
Cost management
- management of costs, reflects the project’s strategic goals, mission statement and business plan
- encompasses data collection, cost accounting and cost control
Cost accounting and cost control
main mechanisms for identifying and maintaining control over project costs
Cost estimation
- process that creates reasonable budget baseline for the project
- is the first step you take when determining is a project is viable
- identifies project resources, creating a time-phased budget
Common sources of project cost: Labor
costs related to personnel to be employed in the development of the project
Common sources of project cost: materials
material costs to apply to the specific equipment, required to complete tasks
Common sources of project cost: subcontractors
cost of services to be provided to the project
Common sources of project cost: equipment and facilities
costs of hiring equipment or facilities to be used in the development of the project
common sources of project cost: travel
expenses related to business travel (car rental, airfare, hotels, meals, etc.)
Types of costs
- Direct and indirect
- Fixed and variable
- Recurring and nonrecurring
- Normal and Expedited
Direct costs and indirect costs
- direct costs are costs used to execute project activities (labour and materials)
- indirect costs are not used for the execution of the project (overhead and general administration)
Fixed and Variable costs
- fixed costs do not vary
- variable costs increase in direct proportion to usage level
Recurring and nonrecurring
- recurring typically continue to operate over the project’s life cycle (material, labour, logistics, sales costs)
- nonrecurring costs are applied once at the beginning or end of the project (personnel training, marketing analysis…)
Normal and Expedited costs
- normal costs are carried out when the project is carried out as planned (labour, materials)
- expedited costs are unplanned and extra costs (paying overtime or temporary workers)
What cost is direct labour?
direct cost, also recurring, fixed, and normal
What cost would a building lease be considered?
indirect (or overhead), recurring, fixed, normal
Cost estimation principles
- the clearer you define the project’s costs in the beginning, the lesser the chance of making mistakes
- if your initial cost is accurate, it is very likely that your project budget will match your project cost (higher chance of not going over the budget)
Disaggregated basis
breaking down project costs into smaller parts called “work packages” when estimating costs, you figure the cost of each work package and then you add them all up for the final estimated cost
Rough estimates
early estimates made when you don’t have enough time or information, gives a basic idea (30% accuracy)
Comparative estimates
historical data from past projects to estimate the cost of the current one (15% accuracy)
Feasibility estimates
based on real numbers after the project design is done, often done in construction where material costs can be calculated based on quantities (10%)
Definitive estimates
can only be made after most of the design is complete (5% accuracy)
Problems with cost estimation: low initial estimates
happens when the project costs are misunderstood either on purpose (to make it look cheaper so that it gets approved), or by mistake, and always leads to spending more than planned
Problems with cost estimation: unexpected technical difficulties
estimating costs can go wrong when people estimate that there wont be technical problems, good estimates need to consider technical issues, delays, and other risks
Problems with cost estimation: lack of definition
poorly defined features and objectives lead to poor cost estimates
Problems with cost estimation: specification changes
changes to the project’s goals or features during development often increase costs
Problems with cost estimation: external factors
things like inflation, raw material shortage, or other economic impacts can increase costs
Creating a project budget
- involves planning resources, goals, and timeline needed to complete the project
- the budget must match the project activities outlined in the WBS which helps create the project schedule, the budget then assigns the necessary resources to meet that schedule
How can cost data be collected and interpreted?
through a top-down or bottom-up budgeting procedure
Activity based costing (ABC)
method that assigns costs first to activities, and then to the projects based on each project’s use of resources
Top-down budgeting
- starts with senior manager’s estimates of costs for future projects (first total cost, and then major work packages costs)
- estimates are passed down the hierarchy to the net functional levels, where additional information is collected
- each step down the hierarchy, the project becomes more detailed until the people doing the actual work provide input on the specific cost for each task
Bottom-up budgeting
- starts by looking at individual tasks in WBS
- the costs for all activities are then added together: first for individual tasks, then for work packages, then for deliverables and finally for the overall project
Activity-based costing (ABC) steps
- assign costs to activities
- identify cost drivers (factors that cause costs for each activity)
- calculate cost rate per unit of the cost driver (cost rate/unit = $cost/hour)
- multiply the cost driver rate by the number of units used (Labour cost= ($40/hr) x (80 hours)= $3200)
Time-phased budget
allocates costs across both project activities and the anticipated time in which the budget is to be expended
Cumulative budgeted cost of the project
tracking chart that illustrated the expected budget expenditures by plotting the cumulative budgeted cost of the project against the baseline schedule
