ISO 21502:2020 Clause 7.7 Cost management

Project Management 8 Minutes

7.7.1 Overview

The purpose of cost management is to establish the financial controls to be used throughout the project life cycle to facilitate delivery of the project within the approved budget. The budget should be an integrated part of the project’s plan.
Cost management should involve estimating costs for each element of work, developing a budget, acquiring funds and controlling the project’s costs. Techniques such as earned value management can be used to monitor costs and predict future performance

Cost management in project management refers to the process of planning, estimating, budgeting, financing, funding, managing, and controlling project costs to ensure that the project is completed within the approved budget. It involves identifying, analyzing, and managing costs throughout the project lifecycle to optimize resource utilization, minimize expenses, and maximize value delivery. Cost management encompasses various activities and techniques aimed at achieving cost-effective project outcomes while meeting project objectives and stakeholder expectations. Key components of cost management in project management include:

  1. Cost Estimation: Cost estimation involves predicting the expenses associated with project activities, resources, materials, equipment, and other project-related costs. Estimating costs accurately is essential for developing realistic budgets, identifying cost drivers, and assessing project feasibility.
  2. Budgeting: Budgeting involves allocating financial resources to project activities, tasks, and deliverables based on cost estimates and project requirements. Developing a comprehensive project budget helps ensure that adequate funds are available to support project execution and meet project objectives within defined constraints.
  3. Cost Control: Cost control focuses on monitoring, tracking, and managing project costs throughout the project lifecycle to prevent cost overruns, deviations from the budget, and unauthorized expenses. It involves implementing cost management strategies, establishing cost baselines, and taking corrective actions to address variances and ensure cost compliance.
  4. Cost Reporting: Cost reporting involves documenting, analyzing, and communicating project costs, expenditures, and financial performance to stakeholders, project sponsors, and other relevant parties. Cost reports provide insights into project financial health, progress against budget, and variances from planned costs, enabling informed decision-making and accountability.
  5. Cost Optimization: Cost optimization aims to identify opportunities to reduce project costs, improve cost efficiency, and enhance value delivery without compromising project quality or scope. It involves analyzing cost drivers, exploring cost-saving measures, and implementing cost-effective solutions to achieve optimal project outcomes.
  6. Risk Management: Risk management in cost management involves identifying, assessing, and mitigating risks that may impact project costs, budgets, or financial performance. By proactively addressing potential risks, project managers can minimize the likelihood of cost overruns, delays, or financial losses and protect project investments.
  7. Vendor and Contract Management: Vendor and contract management involves negotiating, executing, and managing contracts with external vendors, suppliers, and contractors to obtain goods, services, or resources for the project. Effective vendor and contract management help ensure cost competitiveness, adherence to budgetary constraints, and compliance with contractual obligations.

Overall, cost management plays a critical role in project success by ensuring that projects are completed within budgetary constraints while delivering value to stakeholders. By implementing cost-effective strategies, controlling project expenses, and optimizing resource utilization, project managers can achieve cost-efficient project outcomes and enhance organizational performance.

The purpose of cost management is to establish the financial controls to be used throughout the project life cycle to facilitate delivery of the project within the approved budget.

The purpose of cost management in project management is to establish and maintain financial controls that ensure the project is delivered within the approved budget. These controls are applied throughout the project lifecycle to monitor, track, and manage costs effectively. By implementing robust cost management processes, project managers can optimize resource utilization, minimize expenses, and mitigate financial risks, thereby ensuring that the project remains financially viable and meets stakeholder expectations. Cost management provides transparency, accountability, and governance over project finances, enabling informed decision-making and ensuring the project’s financial objectives are achieved.

The budget should be an integrated part of the project’s plan.

The budget is a critical component of the project plan and should be seamlessly integrated into all aspects of project planning and execution. Here’s why the budget should be an integrated part of the project’s plan:

  1. Alignment with Project Objectives: The budget reflects the financial resources allocated to achieve the project’s objectives. By integrating the budget into the project plan, project managers ensure that financial constraints and objectives are aligned with project goals, scope, and deliverables.
  2. Resource Allocation: The budget determines the financial resources available for project activities, tasks, and milestones. Integrating the budget into the project plan allows project managers to allocate resources effectively, prioritize expenditures, and optimize resource utilization to maximize project value and minimize waste.
  3. Scope Management: The budget serves as a constraint for defining project scope and requirements. By integrating the budget into the project plan, project managers can ensure that project scope is defined within budgetary constraints, manage scope changes effectively, and prevent scope creep that may lead to cost overruns.
  4. Schedule Management: The budget influences project timelines and schedules by determining resource availability and funding constraints. Integrating the budget into the project plan enables project managers to develop realistic schedules, prioritize activities, and allocate resources efficiently to meet project deadlines and milestones within budgetary limits.
  5. Risk Management: The budget plays a crucial role in identifying and managing project risks related to financial constraints, cost overruns, and funding shortages. Integrating the budget into the project plan allows project managers to assess the impact of financial risks, implement risk mitigation strategies, and allocate contingency reserves to address unforeseen expenses or budget deviations.
  6. Stakeholder Communication: Integrating the budget into the project plan facilitates transparent communication with stakeholders, including project sponsors, clients, and team members, about project finances and resource allocation. By providing stakeholders with visibility into budgetary constraints, project managers can manage expectations, build trust, and foster collaboration throughout the project lifecycle.
  7. Performance Monitoring: The budget serves as a baseline for monitoring and controlling project costs, expenditures, and financial performance. Integrating the budget into the project plan enables project managers to track actual costs against planned expenditures, identify variances, and take corrective actions to ensure that the project remains within budgetary limits.

In summary, integrating the budget into the project plan is essential for aligning financial resources with project objectives, optimizing resource allocation, managing scope and schedules, mitigating risks, communicating with stakeholders, and monitoring project performance. By treating the budget as an integral part of the project plan, project managers can ensure effective cost management, financial control, and successful project delivery within defined constraints and objectives.

Cost management should involve estimating costs for each element of work, developing a budget, acquiring funds and controlling the project’s costs.

By involving estimating costs for each element of work, developing a budget, acquiring funds, and controlling the project’s costs, project managers can effectively manage project finances, optimize resource utilization, minimize expenses, and ensure that the project is completed within the approved budget. This holistic approach to cost management helps organizations achieve their project objectives while maximizing value delivery and minimizing financial risks.

  1. Estimating Costs for Each Element of Work: Cost estimation involves predicting the expenses associated with individual project activities, tasks, deliverables, resources, materials, equipment, and other elements of work. Estimating costs accurately is crucial for developing realistic budgets, identifying cost drivers, and assessing project feasibility. Various techniques such as bottom-up estimation, parametric estimation, and analogous estimation can be used to estimate costs for each element of work based on historical data, expert judgment, and other relevant factors.
  2. Developing a Budget: Once costs have been estimated for each element of work, the next step is to aggregate these costs to develop a comprehensive project budget. The project budget allocates financial resources to project activities, tasks, milestones, and deliverables based on cost estimates, project requirements, and funding constraints. Developing a well-defined and realistic budget is essential for ensuring that adequate funds are available to support project execution and meet project objectives within defined constraints.
  3. Acquiring Funds: Acquiring funds involves securing the financial resources needed to execute the project according to the approved budget. This may involve obtaining funding from internal or external sources, securing project financing or loans, securing investment from stakeholders or sponsors, or allocating existing organizational resources to the project. Project managers work closely with project sponsors, finance teams, and other relevant stakeholders to ensure that sufficient funds are available to support project activities and deliverables.
  4. Controlling the Project’s Costs: Cost control focuses on monitoring, tracking, and managing project costs throughout the project lifecycle to prevent cost overruns, deviations from the budget, and unauthorized expenses. It involves implementing cost management strategies, establishing cost baselines, and taking corrective actions to address variances and ensure cost compliance. Cost control measures may include regular monitoring of project expenditures, comparing actual costs to planned expenditures, identifying cost-saving opportunities, and implementing changes to keep project costs within budgetary limits.

Techniques such as earned value management can be used to monitor costs and predict future performance

Earned Value Management (EVM) is a powerful technique used in project management to monitor project costs and predict future performance. Here’s how EVM works and why it’s valuable:

  1. Measurement of Performance: EVM integrates three key project dimensions: scope, schedule, and cost. It measures project performance by comparing the planned value (PV), earned value (EV), and actual costs (AC) of work performed. PV represents the budgeted cost of work scheduled, EV represents the budgeted cost of work performed, and AC represents the actual cost incurred for work performed.
  2. Variances Analysis: EVM enables project managers to identify variances between planned and actual performance in terms of cost, schedule, and scope. Variances such as Cost Variance (CV) and Schedule Variance (SV) indicate whether the project is under or over budget and ahead of or behind schedule, respectively. These variances provide insights into project performance and help project managers assess deviations from the baseline plan.
  3. Performance Indices: EVM calculates performance indices such as Cost Performance Index (CPI) and Schedule Performance Index (SPI) to assess project efficiency and progress. CPI indicates the value of work achieved per unit of cost spent, while SPI indicates the value of work achieved per unit of time spent. These indices help project managers gauge project performance relative to cost and schedule objectives and forecast future performance trends.
  4. Forecasts and Predictions: By analyzing EVM data, project managers can generate forecasts and predictions about future project performance. EVM techniques, such as Estimate at Completion (EAC) and Variance at Completion (VAC), allow project managers to estimate the final project cost and schedule based on current performance trends. These forecasts help project managers identify potential risks, assess the impact of variances, and make informed decisions to mitigate risks and optimize project outcomes.
  5. Early Warning System: EVM serves as an early warning system for potential project risks and issues. By monitoring variances and performance indices regularly, project managers can identify trends, patterns, or deviations from the baseline plan that may indicate emerging risks or challenges. This early detection allows project managers to take proactive measures, implement corrective actions, and mitigate risks before they escalate into larger issues.
  6. Communication and Reporting: EVM provides a standardized framework for communicating project performance to stakeholders, project sponsors, and other relevant parties. EVM metrics and reports offer clear and concise insights into project progress, costs, and performance, enabling effective communication, transparency, and accountability throughout the project lifecycle.

Overall, Earned Value Management is a valuable technique for monitoring costs, assessing project performance, and predicting future outcomes in project management. By leveraging EVM techniques, project managers can enhance cost control, optimize resource utilization, and ensure project success within defined budgetary constraints and objectives.

Published by Pretesh Biswas

Pretesh Biswas has wealth of qualifications and experience in providing results-oriented solutions for your system development, training or auditing needs. He has helped dozens of organizations in implementing effective management systems to a number of standards. He provide a unique blend of specialized knowledge, experience, tools and interactive skills to help you develop systems that not only get certified, but also contribute to the bottom line. He has taught literally hundreds of students over the past 5 years. He has experience in training at hundreds of organizations in several industry sectors. His training is unique in that which can be customized as to your management system and activities and deliver them at your facility. This greatly accelerates the learning curve and application of the knowledge acquired. He is now ex-Certification body lead auditor now working as consultancy auditor. He has performed hundreds of audits in several industry sectors. As consultancy auditor, he not just report findings, but provide value-added service in recommending appropriate solutions. Experience Consultancy: He has helped over 100 clients in a wide variety of industries achieve ISO 9001,14001,27001,20000, OHSAS 18001 and TS 16949 certification. Industries include automotive, metal stamping and screw machine, fabrication, machining, assembly, Forging electrostatic and chrome plating, heat-treating, coatings, glass, plastic and rubber products, electrical and electronic equipment, assemblies & components, batteries, computer hardware and software, printing, placement and Security help, warehousing and distribution, repair facilities, consumer credit counseling agencies, banks, call centers, etc. Training: He has delivered public and on-site quality management training to over 1000 students. Courses include ISO/TS -RAB approved Lead Auditor, Internal Auditing, Implementation, Documentation, as well as customized ISO/TS courses, PPAP, FMEA, APQP and Control Plans. Auditing: He has conducted over 100 third party registration and surveillance audits and dozens of gap, internal and pre-assessment audits to ISO/QS/TS Standards, in the manufacturing and service sectors. Other services: He has provided business planning, restructuring, asset management, systems and process streamlining services to a variety of manufacturing and service clients such as printing, plastics, automotive, transportation and custom brokerage, warehousing and distribution, electrical and electronics, trading, equipment leasing, etc. Education & professional certification: Pretesh Biswas has held IRCA certified Lead Auditor for ISO 9001,14001 and 27001. He holds a Bachelor of Engineering degree in Mechanical Engineering and is a MBA in Systems and Marketing. Prior to becoming a business consultant 6 years ago, he has worked in several portfolios such as Marketing, operations, production, Quality and customer care. He is also certified in Six Sigma Black belt .

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