MANPRO 7.1 Project Cost Management

Summary

Welcome 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.