Project Cost Estimation and Budgeting in Project Management

Project Cost Management

Project Cost Management is defined as the process of planning and controlling the project cost and budget effectively and efficiently. It defines what costs are required for each deliverable of the project. It includes various functions of project management like estimation, job controls, field data collection, scheduling, accounting, design, and more.

The cost of the project can be estimated from various process sources (examples below):

• Creating Work Breakdown Structure (WBS)
• Develop Schedule
• Plan human resources
• Identifying risks

The inputs of cost management include:

• Project management plan
• Project charter
• Enterprise environmental factors
• Organizational process assets

While the output of this is:

• Cost Management Plan

Creating estimation and costing for a project is an extremely crucial part of any project management. Various things are taken into consideration while calculating the budget for a project, like labor costs, necessary equipment acquisition, material costs, and more.

What is Project Cost Estimation?

Project Cost Estimation is defined as the process of approximating the total expenditure of the project. The accuracy of the cost estimation and budgeting in project management depends on the accuracy and details of the project scope, which is the scope baseline. The scope will also define any constraints like date, resources, or budget. The risk register will help to calculate estimate types of costs, the expenses made behind contingent action, and the expenses made to cope with risks.

To estimate the cost of a project, you have to categorize various cost types into categories like:

• Labor cost
• Equipment cost
• Cost of supplies
• Travel cost
• Training cost
• Overhead cost, etc.

Techniques used to estimate project cost

There are some techniques used to estimate a project cost, like Expert Judgement, Three-Point Estimation, Reserve Analysis, and Cost of Quality.

However, to estimate project cost, formally there are a few main methods (techniques) used, as follows:

Analogous Estimating

This estimating technique is based on expert judgment and information from similar previous projects, where a previously done similar project’s cost is considered with a plus or minus of 20% for the existing project.

Parametric estimating

Past data or records are used to estimate the cost for the current project.

Bottom-up estimating

Once you have defined the scope of the project, this is the most reliable form of technique. In this technique, based on the WBS, you estimate the cost for each resource or deliverable.

Likewise, there are other methods (techniques) that could be useful for estimating cost, like PERT estimating, vendor bid analysis, and more.

Project Budget Planning

The main purpose of this activity is to allocate and authorize the monetary resources required to complete the project. The main output for determining the budget includes the cost performance baseline. It not only specifies what cost will be incurred but also when costs will be incurred. The inputs for determining the budget include the following project management budgeting methods:

• Activity cost estimates
• Basis for estimates
• Scope baseline
• Project Schedule
• Resource calendars
• Contracts
• Organizational process assets

The output of this process is:

• Cost performance baseline
• Project funding requirements
• Project document updates

The project budgeting is performed in parallel with the project scheduling process. It is highly dependent on three components:

• Cost estimation
• Task durations
• Allocated resources

During project budgeting and costing, the project manager communicates with different people responsible for managing the work efforts as well as estimating project costs.

He or she will use various project prospects like the work breakdown structure of the project, the cost estimates, historical data and records, resource information, and policies.

Without risk assessment, the budgeting process is not completed. The risk assessment process considers factors like time shortage, availability of resources, development team experience, the technology used, and more. The risk assessment can be an amount between 25 and 30 percent of the overall project cost.

Project Quality Management Plan

The quality management process group consists of three processes.

Plan Quality

The Plan Quality process involves identifying which quality standards are relevant to the project and how to fulfill them. It also includes identifying quality metrics and standard measures for project processes, regulatory compliance requirements, product functionality, documentation, and more.

The inputs of the plan quality management include:

• Project management plan
• Stakeholder register
• Risk register
• Requirements documentation
• Enterprise environmental factors
• Organizational process assets

The output for the quality management is:

• Quality management plan
• Process improvement plan
• Quality metrics
• Quality checklists
• Project documents updates

Quality Assurance

This stage includes mainly two activities: first, analyzing project quality, and second, improving project quality. It is a process of auditing the quality requirements and the results from quality control measurement to ensure that the quality standard is maintained throughout the process. The input for this will be the same as the output of plan quality management.

The output of this process will be:

• Change request
• Project management plan
• Project documents updates
• Organization process assets updates

Quality Control

This will be conducted to control quality throughout the project life cycle. It defines how the quality standard can comply with the defined quality standards. The output of Quality Assurance will be the input for Quality Control.

While the output will be:

• Quality control measurements
• Validate changes
• Verified deliverables
• Work performance information
• Change request
• Project management plan
• Project documents updates
• Organizational process assets updates

Project Human Resource Management

HR management includes the process of organizing, managing, and leading the project team. It is comprised of the people with allocated roles and responsibilities for completing the project. HR management will deal with four processes.

Develop human resource plan

This stage defines the project roles and responsibilities, project organization charts, and the staff management plan.

The input for this will be:

• Project management plan
• Activity resource requirements
• Enterprise environmental factors
• Organizational process assets

The output for this will be:

• Human resource management plan

Acquire project team

This stage confirms the availability of the human resource and obtaining the team necessary to complete project activities. The input for this stage would be the output from the previous step. The output of this stage would be:

• Project staff assignments
• Resource calendars
• Project management plan updates

Develop project team

In this stage, the focus is improving team efficiency, team member interaction, and enhancing overall team and project performance. The input for this stage would be the output from the previous step. The output for this stage would be:

• Team performance assessments
• Enterprise environmental factors updates

Manage project team

This process includes tracking team member performance, resolving issues, providing feedback, and managing a team to optimize project performance. The input for this stage would be the output from the previous step. The output for this stage would be:

• Change request
• Project management plan updates
• Project document updates
• Enterprise environmental factors updates
• Organizational process assets updates

Project Communication Management

Here, Project Communication does not mean interacting verbally with each other, but transmitting project-related information effectively with the project team, stakeholders, project managers, and others. It should address risk actions and assessments, project plans, meeting management and actions, reviews and walk-throughs, and more.

This segment covers the following key areas:

Communicating with Stakeholders

It is the process of developing an approach to communicate with stakeholders efficiently and understanding their requirements. The input for this would be:

• Project management plan
• Stakeholder register
• Enterprise environmental factors
• Organizational process assets

While the output for this will be:

• Communication management plan
• Project documents updates

Manage Communications

It is the process of storing, distributing, collecting, and retrieving project information in accordance with a communication plan. The input of this stage would be:

• Enterprise environmental factors
• Organizational process assets
• Work performance reports
• Communication management plan

While the output would be:

• Project communications
• Project management plan updates
• Project documents updates
• Organizational process assets updates

Control Communications

It is the process of controlling and monitoring communication throughout the entire project lifecycle. The input for this stage would be:

• Project management plan
• Project communications
• Issue log
• Work performance data
• Organizational process assets

While the output of this stage would be:

• Work performance information
• Change requests
• Project management plan updates
• Project document updates
• Organizational process updates

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