MANPRO 7.1 Project Cost Management

ave adriana

11 Nov 202011:04

Summary

TLDRWelcome to the management class! In this video, we discuss Project Cost Management, emphasizing its importance in avoiding cost overruns and ensuring projects stay within budget. Key concepts covered include profit and profit margin, lifecycle costing, cash flow analysis, and tangible and intangible costs and benefits. The video also explains direct and indirect costs, sunk costs, and contingency reserves. Additionally, it outlines the steps of planning cost management, estimating costs, determining budgets, and controlling costs. Methods for estimating costs and managing budget deviations are detailed, providing a comprehensive guide to effective project cost management.

Takeaways

📊 Effective project cost management is crucial to avoid cost overruns and ensure projects are completed within the approved budget.
💸 Profit is the difference between cost and the benefits gained from a project.
📉 Profit margin represents the percentage of profit compared to revenue.
🔄 Life cycle costing involves determining the total cost of owning a product, including maintenance and support costs.
📈 Cash flow analysis examines the flow of cash in and out, including costs and benefits.
🧮 Tangible cost or benefit can be measured in monetary terms, while intangible costs or benefits cannot be quantified monetarily.
💡 Direct costs are expenses directly attributed to the project, like salaries and procurement, while indirect costs are not directly tied to project tasks, such as utilities.
⚖️ Sunk costs are expenses already incurred and cannot be recovered; they are not included in future project cost estimations.
🚨 Contingency reserves are funds set aside to address unforeseen changes in project costs.
🛠️ Management reserves are allocated for completely unpredictable events that might impact the project budget.
🔍 Cost management activities include planning, estimating, budgeting, and controlling project costs.
📆 Rough Order of Magnitude (ROM) estimates are made 3-5 years before project completion, while Budgetary estimates are made 1-2 years before, and Definitive estimates are made less than a year before project completion.
🎯 The accuracy of cost estimates improves as the project progresses, with ROM estimates having the widest error range and Definitive estimates being the most accurate.
💰 Budget determination involves allocating estimated costs to work items, creating a cost baseline for project execution and control.
📉 Cost control involves monitoring project expenses, updating the cost baseline for any changes, and informing stakeholders about the financial performance of the project.

Q & A

What is project cost management?
-Project cost management involves processes to ensure a project is completed within the approved budget.
Why is it important to manage project costs?
-Managing project costs is important because many projects have a history of exceeding their budgets, leading to cost overruns. Effective cost management helps avoid these issues.
What is a cost overrun?
-A cost overrun occurs when the actual project costs exceed the initial budget estimates.
What is profit margin in project cost management?
-Profit margin is the percentage of profit earned compared to the revenue generated by the project.
What does life cycle costing involve?
-Life cycle costing involves determining the total costs associated with acquiring and maintaining a product over its lifespan.
What is cash flow analysis in project management?
-Cash flow analysis examines the inflow and outflow of cash related to project costs and benefits, helping to assess the project's financial health.
What are tangible and intangible costs or benefits?
-Tangible costs or benefits are measurable in monetary terms, such as in dollars or rupiah. Intangible costs or benefits cannot be measured monetarily.
What is the difference between direct and indirect costs?
-Direct costs are directly attributable to project activities, like salaries and equipment purchases. Indirect costs are not directly linked to specific project activities, such as utilities.
What are contingency reserves?
-Contingency reserves are funds set aside to cover potential unforeseen changes in project costs, such as price increases in essential materials.
What are management reserves?
-Management reserves are funds allocated for unexpected situations that cannot be predicted and are not included in the project budget.
What are the key activities in project cost management?
-The key activities in project cost management include planning cost management, estimating costs, determining the budget, and controlling costs.
How is a cost estimate developed?
-A cost estimate is developed through various methods such as expert judgment, analytical processes, and meetings, and is crucial for staying within budget.
What are the different types of cost estimates?
-The types of cost estimates include Rough Order of Magnitude (ROM), Budgetary, and Definitive estimates, each with different accuracies and timelines.
What is a cost baseline?
-A cost baseline is a detailed budget that serves as a benchmark for measuring actual project performance against the planned budget.
What is cost control?
-Cost control involves monitoring project financial performance, updating the budget as needed, and reporting changes to stakeholders.
What tools are used for cost control?
-Tools for cost control include earned value management, which calculates planned value, earned value, and actual cost to assess project performance.

Outlines

00:00

💼 Importance of Project Cost Management

This paragraph introduces the concept of Project Cost Management, explaining its significance in preventing cost overruns. It covers key terms such as profit, profit margin, life cycle costing, cash flow analysis, and tangible and intangible costs. The discussion emphasizes the importance of managing both direct and indirect costs in project execution, and the need for contingency reserves to handle unforeseen financial changes.

05:02

📊 Cost Estimation Techniques

This section details the different types of cost estimates used in project management, including Rough Order of Magnitude (ROM), budgetary estimates, and definitive estimates. Each type is explained in terms of when it should be used and its accuracy range. The purpose of these estimates is to help in project selection, budget planning, and precise financial forecasting, highlighting the potential for variance between estimated and actual costs.

10:02

🔧 Defining the Project Budget

The paragraph discusses the process of allocating estimated costs to specific project activities, resulting in a cost baseline. It outlines how the cost baseline is used to guide project execution and monitor deviations from the budget. The explanation includes the role of cost control in adjusting the budget for any changes and communicating these adjustments to stakeholders. The emphasis is on ensuring that the project stays within financial constraints while adapting to any necessary changes.

Mindmap

Keywords

💡Project Cost Management

Project Cost Management involves processes necessary to ensure that a project is completed within the approved budget. It is crucial because projects often exceed their initial cost estimates, leading to cost overruns. Effective management helps in controlling these costs and includes activities like cost estimation, budgeting, and cost control.

💡Cost Overrun

Cost Overrun refers to the additional expenses incurred beyond the initial budgeted amount for a project. This is a common issue in project management and highlights the importance of proper cost estimation and control. For instance, if the initial budget for a project was 1 million but the actual cost ends up being 1.5 million, there is a cost overrun of 0.5 million.

💡Profit

Profit is the financial gain obtained when the revenue from a project exceeds its costs. It is calculated by subtracting total costs from total revenue. For example, if a project costs 800,000 and generates 1,000,000 in revenue, the profit is 200,000. This concept is crucial for assessing the financial success of a project.

💡Profit Margin

Profit Margin is a financial metric that shows the percentage of profit made relative to the revenue. It is calculated by dividing profit by revenue and multiplying by 100. For instance, if a project generates 1,000,000 in revenue with a profit of 200,000, the profit margin is 20%. This helps in evaluating the efficiency and profitability of the project.

💡Life Cycle Costing

Life Cycle Costing is the process of determining the total cost of ownership of a product, including purchase, maintenance, and operational costs over its lifetime. This approach helps in making more informed financial decisions by considering all costs associated with a product. For example, the total cost of a server would include its purchase price, maintenance, and operational expenses.

💡Cash Flow Analysis

Cash Flow Analysis involves examining the inflows and outflows of cash in a project. It helps in understanding the liquidity and financial health of a project by tracking how money is spent and earned. For example, analyzing the cash flow can reveal if a project is generating enough cash to cover its expenses.

💡Tangible Costs and Benefits

Tangible Costs and Benefits are measurable and quantifiable in monetary terms. These include direct financial impacts like costs of materials and labor, and benefits like increased revenue. For instance, the cost of purchasing a server is a tangible cost, while the increased efficiency and revenue from using the server are tangible benefits.

💡Intangible Costs and Benefits

Intangible Costs and Benefits are not easily quantifiable in monetary terms but still impact the project. These include factors like employee satisfaction, brand reputation, and customer loyalty. For example, improved team morale from a well-managed project is an intangible benefit.

💡Direct Costs

Direct Costs are expenses that can be directly attributed to a specific project, such as salaries of project staff, costs of materials, and equipment. These costs are essential for project execution and are included in the project budget. For example, the cost of purchasing servers specifically for the project is a direct cost.

💡Indirect Costs

Indirect Costs are expenses that are not directly tied to a specific project but support its completion. These include overhead costs like utilities, office rent, and administrative expenses. For example, the cost of electricity for the office where the project team works is an indirect cost.

💡Sunk Costs

Sunk Costs are expenses that have already been incurred and cannot be recovered. These costs should not influence ongoing project decisions as they are in the past. For example, money spent on preliminary research for a project that is no longer moving forward is a sunk cost.

💡Contingency Reserve

Contingency Reserve is a budget allocated for unforeseen expenses that may arise during the project. This reserve helps in managing financial risks and uncertainties. For example, if the cost of a server increases unexpectedly, the contingency reserve can be used to cover the additional expense.

💡Management Reserve

Management Reserve is a budget set aside for unanticipated changes that are not predictable at the time of planning. It is used for unknown risks that impact the project. For example, if a new regulatory requirement arises that necessitates additional project activities, the management reserve can cover these costs.

💡Cost Baseline

Cost Baseline is the approved version of the project budget, excluding any management reserves, which can be changed only through formal change control procedures. It is used to compare actual project expenditures against planned expenditures. For instance, if the baseline for a project phase is set at 500,000, actual costs are monitored against this figure.

Highlights

The importance of Project Cost Management in ensuring projects are completed within the approved budget.

The concept of cost overrun, which refers to additional expenses exceeding initial budget estimates.

Definition of profit, which is the difference between cost and the benefits gained from a project.

Explanation of profit margin as the percentage of profit compared to revenue.

Introduction to life cycle costing, a process for determining the total cost of ownership, including maintenance costs.

Cash flow analysis, which examines the inflow and outflow of cash in terms of costs and benefits.

Tangible costs and benefits that can be measured in monetary terms, and intangible costs and benefits that cannot be easily quantified.

Direct costs, which are expenses directly attributed to project activities like salaries and procurement.

Indirect costs, such as utilities, which are not directly attributed to specific project activities.

Sunk costs, which are past expenses that cannot be recovered or included in future project budgets.

Contingency reserves, used to address unforeseen changes in project costs.

Management reserves, allocated for unpredictable future events that impact project costs.

The process of planning cost management, including methods like expert judgment, analytical processes, and meetings.

Cost estimating involves predicting project expenses to ensure the project stays within budget.

Types of cost estimates: Rough Order of Magnitude (ROM), Budgetary, and Definitive, each with varying accuracy and timing.

Purpose of different cost estimates, from selecting projects to detailed planning and procurement.

The range of error for each type of cost estimate, with ROM having the widest range and Definitive being the most accurate.

Determining the project budget by allocating estimated costs to work items in the Work Breakdown Structure (WBS).

Creating a cost baseline, which is used for measuring and controlling project cost performance.

Cost control involves monitoring cost performance, comparing it with the cost baseline, and managing changes.

The importance of updating stakeholders on changes affecting project costs.

The use of Earned Value Management (EVM) in controlling project costs, including metrics like Planned Value, Earned Value, and Actual Cost.