For any project plan to come into action a firm need to have a proper project budget. So no matter what the size of your project is whether big or small, and irrespective of the number of resources utilized and activities involved, the process remains the same.
Therefore, it is important to come up with detailed estimates for all the project costs. Once the project cost is properly compiled, the cost estimates are added up into a budget plan. So even when the project is functional it is possible to track the project according to that budget.
Generally when a project starts, there is an expectation of the cost involved and the time frame within which it gets completed. Any estimate made early in the project without having a fair idea about it, is known as rough order-of-magnitude estimate or a ballpark estimate. This rough estimate becomes more refined as time passes on and as you learn more about the project.
Tools and Techniques for estimating cost
- Determining resource cost: Every resource whether any material or individual working on the project has a specific cost attached to it. So determining the resource costs means settling the rate at which the labor and materials will be available for the project.
- Conducting vendor bid analysis: At times it is required to work with an external contractor for project completion. There can be more than one contractor bid on the task. Primarily this tool is used for evaluating the available bids and thereby choosing the one that best matches the requirement.
- Conducting reserve analysis: For any project one needs to set apart some money in situation of cost overruns. It is always suggested to keep some reserve amount in case the project has a risk of something expensive occurring in the near future. Reserve analysis primarily means putting aside some cash away in case of overruns.
- Determine the cost of quality: It is always required to estimate the cost of all your quality-related activities into the overall budget. Since it is cheaper to find bugs earlier in the project than later, therefore it is suggested to add the quality costs associated with everything your project produces. Cost of quality is only a way of tracking the cost of those activities. Cost of quality is primarily the amount of money involved to do the project right.
Often the Projects runs according to plan with every specified detail. It is therefore necessary for the project manager to be able to identify when costs are varying from the budget and thereby manage those variations.
Managing Cash Flow
A project can be in trouble in case the total amount spent on the project is both over or under the budget. In case the total amount spent on a project is equal to or less than the budgeted amount then the project can still be in trouble in case the funding for the project is not available when needed. It is therefore very important to manage the cash flow properly so that funding is made available as and when required. Natural tension occurs between the financial people and the project managers in an organization, as the financial accountants do not want to pay for the use of money sitting in a checking account, and the project manager, who wants to be sure that there is enough money available to pay for project expenses. The main objective of the financial people is to keep the company’s money flowing in other investments until the last moment before transferring it to the project account. Where on the other hand the contractors and vendors have want to get paid as soon as possible so that they can put the money rolling to work in their own organizations. At any point of time the project manager would like to have enough cash resource available to use if activities exceed budget expectations.
Contingency Reserves
Very often the projects faces something unexpected which increases the overall costs above the original estimates. In case the estimates are rarely exceeded, then the estimating method should be reviewed carefully as the estimates appear to be too high. Initially, it is impossible to predict the activities that will cost more than expected, but it is reasonable to assume that some of the activities will surely exceed the estimates. Here, estimating the likelihood of such events is part of risk analysis.
So rather than overestimating cost of each event, some money should be budgeted to deal with unplanned yet statistically predictable cost increases. The funds assigned to meet such situations are referred as contingency reserves. It is almost that these money reserves will be spent, as it is part of the total budget for the project. Therefore, if these fund are adequate to meet the unplanned expenses, then the project is to complete within the assigned budget.
Management Reserves
In case something occurs during the functioning of the project that needs an immediate change in the project scope, then some cash reserves would surely be needed to deal with the situation before a change in scope can be handled with the project sponsor or client. This change could be an opportunity as well as a challenge. For instance, a new technology was developed that could help enhance the project completion, with some additional cost and a change to the scope, then it would be worth adapting the change.
Cash reserves can be made available at the discretion of the manager to meet the needs that would change the scope of the project. These cash reserves used to change the project scope are referred as management reserves. In contrast to contingency reserves, management reserves are not likely to be spent as they are not considered as a part of the project’s budget baseline, but they are still included in the total project budget.
Therefore, a project manager must regularly compare the amount of money utilized with the budgeted amount and then report this information to managers and stakeholders. It is crucial to regularly update the progress of the project by establishing a clear understanding of how the progress will be measured and reported in the project.
Budgeted cost of work scheduled (BCWS)
It comprises of detailed cost estimates for each activity in the project.
Planned Value (PV)
It is the amount of work that should have been done by a specified date.
Often these terms are used interchangeably by sources, but the planned value term is used in formulas to refer to the sum of the budgeted cost of work up to a particular point in the project.
Establishing a Budget
After breaking the project into smaller tasks, calculate the overall cost of the project by estimating and totaling the individual costs associated with each activity. This process of subtotaling costs by category or activity is referred as cost aggregation.
Budget Timeline
Since costs are associated with individual activities, where each activity has a start date and a duration period, therefore it is possible to estimate the total money to be spent by any particular date during the project.
Any requirement for cash reserves to pay for a project is usually transferred to the project account shortly before it is needed. Note that such transfers must be timed accordingly so that enough cash reserve is there to compensate for each activity without causing a delay in the start of the activity. In case the reserves are transferred too far in advance, the organization might just lose the opportunity to utilize the money somewhere else, or unnecessary interest charges would be paid in case the money is borrowed from outside. Therefore, a schedule of money transfers must be created to match the need to pay for the activities.
The process of matching the schedule of transfers with the schedule of activity payments is known as reconciliation.
