Cost Management

The function required to maintain effective financial control of a project through the processes of evaluating, estimating, budgeting, monitoring, analyzing, forecasting, and reporting the cost information.

The ability to maintain and calculate appropriate cost data relating to a product or a service.

Project estimates start out broad, and as the project deliverables come into focus we're able to more accurately define our estimates.

Each estimate should provide an acceptable range of variance, the conditions of the estimates, and any assumptions made by the estimate provider. For example, an estimate to build a new warehouse may state that the warehouse will cost $350,000, +/- 10%, is valid for 30 days, and assumes that the warehouse will be built in the month of June.

Notice the range of variance, the assumptions, and the stated work? A good estimate clearly defines what the project will accomplish, the assumptions made, how long the estimate is valid, and how much the project will cost based on current information. A good estimate presents to the stakeholder everything relevant to the proposed work, without holding back any secrets. If there's a disagreement in price, assumptions, or range variance, it's better to discuss this issue now rather than four months into the project execution.

There are three major estimate types that project managers should rely on:

• The Ballpark Estimate is also known as the rough order of magnitude (ROM). A ROM estimate is based on high-level objectives, provides a bird's-eye view of the project deliverables, and has lots of wiggle room. Most ROM estimates, depending on the industry, have a range of variance from -25% all the way to +75%. Like I said, lots of wiggle room.  The project manager shouldn't invest too much time in creating these initial estimates, just as the customer shouldn't place too much confidence in the accuracy of the ROM estimate. Unfortunately for both parties, there's a consistent breakdown in expectations when it comes to ROM estimates. Typically the project manager blindly throws out the ROM estimate like a bride tossing her bouquet, and the customer clings to the ROM bouquet like the maid of honour at the same wedding. ROM estimates, regardless of your role in the project, are simply for eyeballing the project's initial perceived costs.

• The Budget Estimate (or top-down estimate) is a bit more accurate. Formulated fairly early in the project's planning stage, the budget estimate is most often based on analogous estimating, taking budget lessons learned from a similar project and applying them to the current project. Do a little maths magic and we've got ourselves a budget estimate. Abra-cadaver!  With the budget estimate, we start at the top and work our way down into the project details. Like the ROM, this estimate should include conditions, a range of variance, and any assumptions that went into your calculations. A budget estimate is quick, but not very accurate. The range of variance on the budget estimate is from -10 percent to +25 percent.

• The Definitive Estimate (or bottom-up estimate) is the most accurate of the estimate types, but takes the most time to create. The definitive estimate requires a work breakdown structure (WBS). A WBS is not a list of activities. A WBS is a deliverables-oriented decomposition of the project scope. That's decomposition of the deliverables that your project will create for the customer, nouns, not verbs.