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Learner Guide BSBPMG514 Manage project cost

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Company Name Learning Partnerships in Business Pty Ltd

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VERSION V1.1 Latest Update 24.09.2019

Copyright ã 2017 Learning Partnerships in Business PTY LTD. All rights reserved. No part of this publication or accompanying image files may be stored in a retrieval system, transmitted, or reproduced in any way, including but not limited to photocopy, photograph, magnetic, or other record, without the prior agreement and express written permission of the publisher. Copies of this training workbook may be legally obtained by writing to the address above or phoning (07) 4728 1555. The information contained within this document is confidential and may not be disclosed to any third party without prior written consent from Learning Partnerships. This document remains the property of Learning Partnerships and is subject to copyright. Disclaimer Learning Partnerships has used its best efforts in preparing this workbook. Learning Partnerships makes no representations or warranties with respect to the accuracy or completeness of the contents of this workbook and specifically disclaim any implied warranties of merchantability or fitness for a purpose. There are no warranties which extend beyond the descriptions contained in this paragraph. Learning Partnerships reserves the right to revise and update the content in this publication at any time, without obligation to notify any person or entity of such changes. No warranty may be created or extended by sales representatives or written sales materials. The accuracy and completeness of information provided herein and the opinions stated herein are not guaranteed or warranted to produce any results, and the advice and strategies contained herein may not be suitable for every individual. Learning Partnerships shall not be liable for any loss of profit or any other commercial damages, including, but not limited to special, incidental, consequential or other damages. Data used in examples and exercises is intended to be fictional even if actual data is used or accessed. Any resemblance to, or use of real persons or organisations should be treated as entirely coincidental. Developed and Printed in Australia by Learning Partnerships ® www.learningpartnerships.com.au



CONTENTS 3 1.1.1 Application Error! Bookmark not defined.

UNIT OF COMPETENCY ERROR! BOOKMARK NOT DEFINED. 1.1.2 Performance Criteria Error! Bookmark not defined. 1.1.3 Foundation Skills Error! Bookmark not defined. 1.1.4 Assessment Requirements Error! Bookmark not defined.

1. DETERMINE PROJECT COSTS 5

1.2 1.1 – Determine resource requirements for individual tasks identified in the work breakdown structure, with input from stakeholders and guidance from others 6

1.2.1 What is a work breakdown structure? 6 1.2.2 Why use a work breakdown structure? 6 1.2.3 When would you use a work breakdown structure? 7 1.2.4 Resource requirements 7 1.2.5 Human resources 8 1.2.6 Nonperson resources 9 1.2.7 Resource task matrix 10 1.2.8 Guidance from others 10 1.2.9 Identifying and managing internal and external stakeholders 11 1.2.10 Project procurement 11 1.2.11 Estimating costs 12 1.2.12 Activity 1A Error! Bookmark not defined.

1.3 1.2 – Estimate project costs to enable project budget to be prepared within agreed tolerances 13 1.3.1 Estimating project costs 13 1.3.2 Estimation techniques 14 1.3.3 Activity 1B Error! Bookmark not defined.

1.4 1.3 – Develop a project budget 16 1.4.1 What is a project budget? 16 1.4.2 Developing a project budget 17 1.4.3 Top-down approach 18 1.4.4 Bottom-up approach 18 1.4.5 Using project management software 19 1.4.6 Contingencies 19 1.4.7 Activity 1C Error! Bookmark not defined.

1.5 1.4 – Develop a cost-management plan, within delegated authority, to ensure clarity of understanding and ongoing management of project finances 20

1.5.1 What is a cost management plan? 20 1.5.2 Developing a cost management plan 21 1.5.3 Estimates 22 1.5.4 Management of project finances 22 1.5.5 Activity 1D Error! Bookmark not defined.

Contents



2. MONITOR AND CONTROL PROJECT COSTS 24

1.6 2.1 – Implement agreed financial-management processes and procedures to monitor actual expenditure against budget 25

1.6.1 Monitoring actual expenditure 25 1.6.2 Critical path schedule 26 1.6.3 Key performance indicators (KPIs) 27 1.6.4 Activity 2A Error! Bookmark not defined.

1.7 2.2 - Select and use cost-analysis methods and tools to identify cost variations and evaluate alternative actions 28 1.7.1 Cost-analysis methods and tools 28 1.7.2 Evaluating alternative actions 29 1.7.3 Further analysis 30 Activity 2B Error! Bookmark not defined.

1.8 2.3 – Implement and monitor agreed actions to maintain financial objectives 30 1.8.1 Implementing and monitoring agreed actions 30 1.8.2 Activity 2C Error! Bookmark not defined.

1.9 2.4 – Provide accurate and timely financial reports 31 1.9.1 Financial reports 31 1.9.2 Activity 2D Error! Bookmark not defined.

3. COMPLETE COST-MANAGEMENT PROCESSES 35

1.10 3.1 – Conduct appropriate activities to signify financial completion 36 1.10.1 Financial completion 36 Activity 3A Error! Bookmark not defined.

1.11 3.2 – Review project outcomes using available records to determine effectiveness of project cost management 37 1.11.1 Reviewing project outcomes 37 1.11.2 Project completion 40 1.11.3 Activity 3B Error! Bookmark not defined.

1.12 3.3 – Review cost-management issues and document improvements 41 1.12.1 Reviewing cost management issues 41 1.12.2 Documenting improvements 42 1.12.3 Activity 3C Error! Bookmark not defined.

SUMMATIVE ASSESSMENTS 44

REFERENCES 45



1.1 Determine resource requirements for individual tasks identified in the work breakdown structure, with input from stakeholders and guidance from others

1.2 Estimate project costs to enable project budget to be prepared within agreed tolerances

1.3 Develop a project budget

1.4 Develop a cost-management plan, within delegated authority, to ensure clarity of understanding and ongoing management of project finances

1. Determine project costs



1.1 – Determine resource requirements for individual tasks identified in the work breakdown structure, with input from stakeholders and guidance from others

By the end of this chapter, you should be able to demonstrate:

• The ability to identify resource requirements for individual tasks identified in the work breakdown structure

• The ability to identify stakeholders and others who may provide guidance on resource requirements • Knowledge of how to manage stakeholder relationships • Knowledge of how to obtain resources from outside the organisation

What is a work breakdown structure? A Work Breakdown Structure (WBS) is a tool used within project management that aims to capture the project tasks in a visual, organised manner. It is a decomposition of the project into smaller components and it organises the project into smaller, more manageable sections. It provides the project manager with an opportunity to predict outcomes based on a scenario. This ensures that the decision-making process is effective. A WBS can also be used to help identify potential risks within your project. Why use a work breakdown structure? Detailed steps:

The WBS encourages project managers, team members, and customers to generate a dialogue at the beginning of the project to identify each step, resource, cost and potential risk.

Schedule and budget:

A well-structured WBS enables an effective schedule and reliable budget plans.

Accountability:

The detailed structure of the WBS allows project managers to allocate tasks to individual team members setting out their task, time limit and expected result ensuring each team member contributes to the completion of the project equally.

Commitment:

The task of outlining each element of a project will involve all team members’ participation and expertise. Teams work best when they have had an input into determining their own goals and objectives.



When would you use a work breakdown structure? The development of the WBS normally occurs at the start of a project and a completed WBS will resemble a flowchart. For example:

If a project ever falls behind, the WBS is usually referred to as it thought of as the map of the whole project. Resource requirements Within your WBS, you will have divided your project tasks into smaller, more manageable tasks. Once you have identified the tasks, determined the sequence of these tasks and established a schedule for your project, you are ready to determine the resource requirements for each of these tasks. The resources that you require may vary depending on the nature of your project or organisation. Creating a resource requirement plan

The resource plan will allow you to extend the information you have recorded in your work breakdown structure and elaborate on what resources would be needed, how much and for how long. You would firstly list all major resources needed to complete the project and then list the individual components of each group. Major resource requirements may include:

• Human resources • Equipment • Facilities • Fees and charges • Materials • Services • Statutory costs



Example equipment resource requirement sheet:

Item

Amount

Purpose

Specification

Start Date

End date

Cost

Your WBS may reveal that some of the resources that you require will cost your project more than other resources. Some of your resources may be more difficult to obtain; you must carefully plan your project to ensure that the resources that you require are available when you need them. You may need to prioritise your requirements in order to determine which requirements will be included in the project and which requirements will be excluded completely. Human resources One of the most important resources when carrying out a project is the people that need to be involved. So, when considering the human resources that you need for your project, you should take each of the tasks that have been outlined within your WBS and define the skills that are required to complete these tasks. Then, once you have done this, you can match the people to those defined skills. One method of doing this includes developing a skills sheet; this will match the skills to your tasks. Also included in a skills sheet are the names of the relevant people, their start dates, and their costs.

Example skills sheets:

Task

Skills needed

Person

Skills level

Deliverable

Effort days

Start date

End date

Cost

Ta

Skil

Hour

When

Sour

Cont



sk

ls needed

s needed

needed

ce

act details

Activity

Skills needed

Hours needed

Cost per hour

Total cost

Date required

Source

The skills sheet that you develop for your project will depend on the nature of your project and organisation. Like most things, there is no one way of doing it; your way should suit you. Nonperson resources

You may also need to consider the nonperson resources that you require for your project, for example:

• Materials • Equipment • Facilities • Costs

You can plan for these resources using a similar sheet to the skills sheet discussed above.



Example nonperson availability sheet:

Task

Resource need

ed

Time in hours

Date (s) needed

Resource task matrix A resource task matrix can help to organise your project tasks in terms of people or departments. It can also show which nonperson resources will be needed for each project task. Basically, a resource task matrix is a combination of the example tables we have already discussed. Your resource task matrix will show a list of resources (departments, people or nonperson resources) and each task that is involved in your project. If a resource plays a part in one of the project tasks, that cell is marked by the kind of participation the resource will apply.

Example resource task matrix:

Resource/person

Task A

Task B

Task C

Task D

Task E

Task F

Guidance from others When determining the resource requirements for your individual project tasks, you may need the input from the stakeholders and/or the guidance from others. The advantage of involving others in your project and not simply to comply with organisational requirements enables a wider range of expertise, knowledge, and experience to be considered when planning the project.

Others may include:

• Program manager • Project specialists • Relevant project authority



• Subject matter experts • Team members

Identifying and managing internal and external stakeholders The stakeholder is the individual who has something to gain or lose through the outcomes of a planning process or project. Stakeholders can be internal or external for example, an internal stakeholder may be a Director/Manager and an external stakeholder may be a Local Authority, funders and customers. It is important to understand the stakeholder’s interest as this will influence and affect the decisions you make in a project when outlining the budget/ resources required. Stakeholder management is essentially stakeholder relationship management.

There are seven key principles which can be used to monitor and manage stakeholder relationships:

• Acknowledge and monitor concerns of stakeholders • Listen and communicate with stakeholders about concerns and contributions • Adopt behaviour to each stakeholder’s constituency • Fair distribution of the benefits and burdens of corporate activity – considering their risks and

vulnerabilities • Cooperate with other entities • Avoid activities which may give rise to risks • Acknowledge potential conflicts for the interests of stakeholders and address conflicts through

communication, reporting, and third-party review

Further information relating to how to monitor and manage relationships can be found in Friedman, L., and Miles, S. (2006) Stakeholders Theory and Practice textbook. Your organisation will have a procedure in place to communicate with stakeholders. You should establish what method of communication should be used, who should communicate with the stakeholders, and determine when and where the stakeholder would need to provide the project with authorisations and permissions. You should familiarise yourself with the relevant protocols and conventions in place relating to your organisation. Project procurement Project procurement is a process in which the products or services that you need from outside your project team in order to complete your work are purchased or acquired. Project procurement is crucial to the success of your project and are dependent on the goals and objectives of your project.

There are six steps involved in the process of project procurement, including:

• Planning purchases and acquisitions • Contract planning • Requesting seller • Selecting seller • Administering contract • Closing contract



In order to complete a thorough cost analysis, as well as the costs, you should also indicate:

• The dates that the completed project is required by • Any relevant supplier contact details • Any information that the project’s management will require • Resource acquisition and lead time

Procedure

Consulting advice

Lead time

Date required

Responsibility

OTHER

Estimating costs If you cannot assign a cost to the tasks outlined in your WBS, you may need to break the tasks down even further. You should be able to confidently assign the cost and amount of effort needed for each task. Remember; the more accurate your project cost estimations are, the better you will be able to handle your project budget.

Estimating project costs are important as:

• It provides you with a guideline to help ensure that you have the necessary funds to complete your project

• It enables you to see whether the funds that you need to support your project are available • It allows you to weigh the benefits against the costs to see whether your project makes sense

Tips to keep in mind when estimating project costs include:

• Cost each task within your WBS – not your project as a whole • Provide your customer with regular budget statements – then they are always aware of the position

of the project • Get an expert view if necessary • Make use of your own experiences as well as others



1.2 – Estimate project costs to enable project budget to be prepared within agreed tolerances


• Knowledge of what to consider when estimating project costs • Knowledge of the different estimation techniques • An understanding of what a budget tolerance is

Estimating project costs Although you can never know the true cost of your project until it is completed, you will need to try your best to estimate the costs involved in your project and outline an approximate cost of your project. Your estimates may start out broad and as your project deliverables come into focus, you can provide more accurately defined estimates. A real estimate will evolve as more and more details of your project become available. A good estimate will clearly define:

• What your project will accomplish • The assumptions that you have made • How long your estimate is valid for • How much the project will cost based on current information

Once you have an estimate of the cost of your project, you can then establish a budget.

Project costs are estimated considering:

• Contingencies to allow for identified risks and uncertainty • Degree of accuracy required (tolerance levels) • Information available at the time • Organisational requirements, for example, overhead and profit margin • Work breakdown structure

Before starting your estimates, ensure that you have:

• Addressed the project scope details • Reviewed your WBS • Defined your project tasks • Reviewed your resources • Researched stakeholder input • Estimated your budget tolerance



Estimation techniques

There are many estimate techniques, including:

• Ballpark estimation • Budget estimation • Definitive estimation • Three-point estimation • Historical project estimation • Resource cost rates estimation software

Ballpark estimation

A ballpark estimation is also known as a rough order of magnitude (ROM) and is based on the high-level objectives of your project. It provides you with an overview of the project deliverables. This type of estimation allows for wiggle room.

Budget estimation

Budget estimation is more accurate than a ballpark estimation and is also called top-down estimation. Within this technique, you will start at the top and work your way down. For example, you will start with the overall cost of your project. These costs will then be separated down to meet to various components of your WBS. This is often down early in the planning phase of your project and although it quick, it is not as precise as you may require.

Definitive estimation

A definitive estimation is a technique that is used the most; it is the most accurate estimation technique. Also known as bottom-up estimation, definitive estimation takes the most time to complete. It requires using your WBS to start from the bottom and account for each little thing that your project will purchase, create and/or deliver. As this technique involves creating estimates from a task level, you will need to make sure that your tasks are accurate.

Three-point estimation

Within three-point estimation, the end value is a weighted average of three different estimates. Using this estimation technique, you can gain a greater degree of control over how the end value is calculated.

For a particular task, you will need to think of the best case, most likely and worst-case estimates:

• Best case (1/6) (B) • Most likely (4/6) (M) • Worst case (1/6) (W)

Within this estimation, add your best case estimate to four times your most likely estimate then add the worst-case estimate and divide by six. This will give you a balanced view. Formula: (B+4M+W)/6.



Historical project estimation

Within historical project estimation, you can use any lessons learned from previous projects that are similar to your current project. If you have been involved in a project in the past that had similar scope details and resources; you can use similar estimates for your current project. Remember that it is highly unlikely that two projects will be exactly the same; be careful when using similar estimation techniques.

Resource cost rates estimation software

This estimation method uses software programs to assist you in your project cost estimations. This technique involves using your WBS to estimate your project costs. Therefore, the more detailed your WBS is, the more detailed your cost estimates can be. You may need to factor your project schedule and cost variance into your estimation. Cost variance is the measurement of the budget requirement for your project and is calculated by subtracting your actual costs from the earned value. You can determine the cost of your project resources by applying resource cost rates to estimate task resources.

Consider the following general cost estimating rules:

• Make sure the process is understood • Ensure that the project environment is included within the planning stage • Have the appropriate staff available for each task • Consider the parts of the project that your estimate applies to • Have a contingency amount to allow for uncertain costs

Budget tolerance

Once you have established your estimated budget, you will need to agree on a budget tolerance. A budget tolerance is a range, usually 10% of the total budget which you can use if your project does not complete within your initial estimated costs. The size of the tolerance will depend on the size of the project and organisation. The cost estimates that have been discussed in this chapter can be used to help you to establish a budget for your project. The next chapter will look at what a project budget and how you can develop one.



1.3 – Develop a project budget


• Knowledge of what a project budget is • The ability to identify indirect and direct costs • Knowledge of how to conduct a top-down and bottom-up approach • The ability to identify potential risks

What is a project budget? A project budget is a key element of your project proposal and is an essential tool that will be used by many different groups of people that are involved with your project.

For example:

• A project manager will use the project budget to determine whether the project is on track • In order to monitor project milestones, the project personnel will use the project budget as a

guideline • The client will use your project budget to assess the overall success of the effort

Ultimately, your project budget should be a detailed estimate of all the costs that are required in order to complete your project tasks. It should be an amount that you can spend without having to report back and ask for more money. Your project budget can help to manage expectation and can give the relevant information needed to develop a cost/benefit analysis for your project. You can also use your project budget throughout the life cycle of your project to check that it is on track financially. Your budget will need to specify all the costs of your project. There are two types of costs involved with your project budget: indirect and direct. Although costs will vary depending on the nature of your project, they are necessary to complete your project budget. One of the major components of your project budget will be the necessary human resources and their salaries, wages or commissions. This only involves the people that are directly engaged with your project.

Examples of direct costs include:

• Labour/human resources • Raw materials • Equipment • Travel costs • Training costs • Software licences • Consultant fees



Examples of indirect costs include:

• Office expenses, such as:

o Equipment

o Rent

o Telephone

o Internet

o Insurance

Developing a project budget Your project budget should be linked to the key outcomes of your project. You should establish a set of reference baselines. As your project progresses, you should monitor the project work then analyse your findings. The end result should be forecasted and compares with your reference baselines. If the end result is not satisfactory, you may need to make adjustments to the project and repeat this cycle at suitable intervals. How much detail should your project budget have? This will depend on the nature of the project itself and the organisational policies that may be in place. However, it is recommended that you provide the details of each individual supply item and its cost within your project budget. Remember that your project budget is different from your project costs. You should start developing your project budget by identifying your project costs. This process was discussed in Chapter 1.2. Once these project costs have been identified, you will need to identify any risks that may occur and assign a percentage to each risk reflecting how they may affect the overall project. Basically, your project budget it the total of your project costs plus the total risk percentage of those costs.

Identifying project costs

When identifying your project costs, you need to be realistic. It is sometimes helpful to look at past projects that you have been involved with to give you an idea of how to identify the project costs. As discussed in Chapter 1.2, there are many techniques that can be used to identify your project costs.

For example:

� Ballpark estimation � Budget estimation � Definitive estimation � Three-point estimation � Historical project estimation � Resource cost rates estimation software

Assessing risks

The assessment of potential risks is very important for your budget to be successful.



Risk items include unknowns, such as:

• Team experience • Obscurity of technology • Location of development teams • Planning time shortages.

Example risk assessment template:

Risk Level Strategy/cost/budget

There are two main approaches that are used when developing a project budget:

• The top-down approach • The bottom-up approach

Top-down approach The top-down approach to project budgeting often starts with senior management deciding on how much an overall project should cost. Then, this amount needs to be divided between each task involved with the project. This process should be more than just guessing; you need to give details on how you will complete each task within the allocated budget. This approach allows you to use any previous experience to judge whether the project budget looks realistic. An advantage of this approach is that it focuses on completing your project within the allocated budget. This can reduce the chance of any wasteful practices, leading to a more efficient way of working. However, a disadvantage is that it relies on previous experience to judge the budget; assuming that the person that is developing the budget has the required knowledge to make reasonable estimates. Bottom-up approach The bottom-up approach looks at the cost of the lowest-level project tasks. From this, you will have to work upwards to estimate the total cost of your project. You should start by identifying the tasks that are involved in your project and then calculate the direct and indirect costs for each task. From this, you will be able to estimate the total cost of your project. An advantage of this approach is that it is an accurate method of developing a project budget. Also, this approach can be good for team morale as it usually involves everyone. A disadvantage of this approach is the difficulty of creating the list of tasks involved in your project. If any task is forgotten about and missed out; this will throw your budget out.



Example project budget:

Expenditure

Cost Running total

Notes

Example nonperson resource table:

Cost per item No. of units Total cost

Example human resource table:

Cost per hour No. of hours Total cost

Using project management software It is important to choose the right project management software to use. Although it will not eliminate any cost overruns, it can help you to manage them. The correct project management software can show you where your project stands at any point in its life cycle and can highlight exactly how much money has been spent. Contingencies

There are many common strategies for developing your project budget, for example:

• You should plan for the worst • Points within your project where changes are likely to occur need to be identified • Once identified, these areas should be closely watched • Develop a contingency budget – just in case things go a bit wild

The expenses that are involved within your project may seem straightforward. However, there are many unknowns that can affect your project, how and when it is carried out and how it is completed. A contingency reserve should be added to your project to cover any possible risks. This fund can then be used for the occurrence of any unexpected events during your project life cycle. You should adjust your contingency level to match the risk level that you have identified for your overall project.

Contingencies that may relate to your project budget can include:

• Project’s unknowns or risks contingency • Cost estimating contingency • Design contingency • Bid contingency



• Construction contingency • Cost escalation contingencies

Although your budget should be based on the best knowledge that is available, you should remember that it is only an estimate. Who should approve your project budget? You should know the answer to this before you start developing your budget. It could be the project manager, the head of finance or the project manager’s supervisor.

1.4 – Develop a cost-management plan, within delegated authority, to ensure clarity of understanding and ongoing management of project finances


• Knowledge of what a cost management plan is

• The ability to define and understand when to use:

o cost estimating tools

o budgeting tools

o cost control tools

• Knowledge of how to develop a cost management plan

• An understanding of how to work within delegated authority

What is a cost management plan? A cost management plan is a document that details how you will manage the costs of your project. As well as defining how your project costs will be managed, your cost management plan will also identify who is responsible for managing them and it describes how the project costs will be measured. It will outline who has the authority to approve any changes to the project budget and who you need to report any findings to. Your cost management plan can allow you to predict the expenditure of your project and reduce the chance of going over budget. During your project, all the expenses should be recorded and monitored. By doing this, you can make sure that they stay in line with your cost management plan. Once your project is complete, you can compare your predicted costs against your actual costs. An analysis of this can help any future cost management. In most cases, the project manager is responsible for managing and reporting the project cost process. They may also be responsible for sorting any cost management issues that may occur. For example, they may be required to make financial decisions and get the project back on budget. Your cost management plan will involve cost estimating, cost budgeting and cost control.



Cost estimating tools may include:

• Estimating skills • Quality and quantity estimating • Sound project judgement • Quotations and tenders • Project management software

Cost budgeting tools may include:

• Judgement skills • Knowledge of previous projects • Analysis • Project management software

Cost control tools may include:

• Forecasting skills • Performance reviews • Analysis • Earned value management • Project management software

Developing a cost management plan Your cost management plan can be formal or informal.

The differences between formal and informal may include:

• The level of detail within the plan • The units of measurements used within the plan • Whether contingencies are included, minimised or excluded • Whether the figures are rounded up or not

The steps involved in developing your cost management plan may depend on the size and scope of the project but may include:

• Identifying tasks that produce costs • Listing the materials needed for your project • Creating a timeline for your project • Stating the metrics used to measure costs

You may want to include a timeline within your cost management plan as it can help you to avoid cost overruns. It can also ensure that your project stays profitable. A variance analysis can also be included within your cost management plan.



Consider how you will report your cost management:

• How frequent? • How complex should it be? • What is the process for doing so? • Consider stakeholder reference • Consider the effect on project decisions

When developing your cost management plan, in order to ensure clarity of understanding, you should do so within delegated authority.

Delegated authority means that activities will:

• Be conducted routinely or as changing circumstances dictate • Be done independently within broad guidance • Involve consultation with other project members, teams, and internal stakeholders • Involve taking a lead role in a team where required • Involve the selection, use, and supervision of appropriate cost management methods, tools and

techniques • Consider internal organisational change and external environmental change

By ensuring that your cost management plan is developed within delegated authority, you can make sure that it can be clearly understood.

Once a variance change is approved, your cost management plan should be altered to reflect this. Estimates

When making your estimates, remember:

• It can help you to think of costing alternatives • To consider any possible risks • Use consistent units (e.g. hours, days or currency) • To include inflation risk and contingency costs • To consider any possible alternatives (e.g. renting instead of buying) • To consider sharing project resources

Management of project finances Your cost management plan will assist in the ongoing management of your project finances. These finances should be managed throughout the life cycle of your project. Your project will consume many resources; it is necessary to manage your investment on a regular basis. When managing your project finances, consider the wide range of cost management methods and tools that are available and decide which ones are appropriate for your project and organisation. Whether you are managing your finances routinely or as a result of a circumstantial change, you may need the involvement of the



other project team members or the stakeholders. The management of your project finances can also be conducted independently; by someone that is completely independent of the project and organisation. Further analysis of financial documents is often the job of an independent review team.

The project manager has many roles within a project, including:

• Defining the project • Splitting project tasks between team members • Building teamwork • Obtaining vital resources • Setting project objectives • Handling project changes • Being aware of any external factors or influences • Keeping stakeholders informed on progress



2.1 Implement agreed financial-management processes and procedures to monitor actual expenditure against budget

2.2 Select and use cost-analysis methods and tools to identify cost variations and evaluate alternative actions

2.3 Implement and monitor agreed actions to maintain financial objectives

2.4 Provide accurate and timely financial reports

2. Monitor and Control project costs



2.1 – Implement agreed financial-management processes and procedures to monitor actual expenditure against budget


• An understanding of what monitoring the actual expenditure against the budget allows • The ability to identify financial management processes and procedures • An understanding of what should be outlined in the monitoring process • An understanding of how and when to use a critical path schedule • The ability to identify Key performance indicators

Monitoring actual expenditure The actual expenditure of your project will need to be monitored against your budget. This will allow you to verify that your expenditures are in accordance with your project plan and to address any deviations. This can be done by implementing the agreed financial management processes and procedures.

Before the monitoring process, there are many things that should already be agreed, including:

• Your cost management plan and its purpose (to compare actual expenses to planned expenses) • Any assumptions or constraints • Your WBS • Your change control management processes • Your cost/budget

What are financial management processes and procedures?

Financial management processes and procedures help to guide a project and outline how money is used and managed.

Financial management processes and procedures may include:

� Approval processes � Communication and reporting processes � Financial authorisations and delegations � Invoice procedures

� Organisational chart of accounts links

These financial management processes and procedures should be agreed upon by everyone working on a project. In order to monitor the actual expenditure against your project budget, you may need to create a checklist to assist you. You can use an existing template and/or a program to highlight the likely overruns.



Before starting the monitoring process, determine:

• What item(s) need to be monitored? • Who is responsible for this? • How will the monitoring be done? • What should you look for? • What date will the monitoring start? • What is the proposed end date?

Critical path schedule For the on-going monitoring of your finances, you could use a critical path schedule; a ‘living’ document that can be used to check your actual expenditure against your budget. There are many templates that are available for you to create your critical path schedule; choose one that fits your project and organisation. Use your critical path schedule as the deadlines approach to assess how your project is doing – in terms of finances. It can be altered when necessary; the previous issue should be destroyed if changes are ever made.

Example critical path schedule:

WBS component

Period of

performance

Current

date

Total

Ref

Title

Budget

Actual

Difference

Budget

Actual

Difference

Budget

Remaining



Typical accounting example:

Category

Month

Actual

Month

Budget

Month

Variance

To date

Actual

To date

Budget

To date

Variance

Project

Budget

Further breakdown:

Breakdown categori

es

Actual Budget Variance

1

2

Key performance indicators (KPIs) You may wish to use KPIs in the assessment of your project expenditures. These KPIs will tell you whether your project is being successful and, if so, to what degree. They will enable you to assess the performance of your project in terms of the achievement of the desired objectives. There are no right or wrong KPIs; they will depend on your project.

Examples of KPIs that may be used in the assessment of project expenditures may include:

• Deviations from the planned budget • Deviations from the planned project schedule • Variations to the planned hours of work • Actual cost of work performed • Cost of any approved requirements that are not yet implemented • Deviations from the cost of managing your nominated process • Cost of the scope items without prioritised requirements • Percentage of re-working costs that are attributable to the project scope



There are many things that may affect your project budget, including:

• Extras • ‘Mystery’ hidden expenses • Poor supplier management

In order to handle these, you should ensure that you obtain any required approval before starting and have a good knowledge of costs and processes. If your actual expenditure is more than your outlined budget, you may need to seek approval to proceed. If throughout the life cycle of your project, you find that your actual expenditure is starting to resemble a pattern, there may be changes that you can make to get your project back on track. Just remember, any changes that are made should be done so in accordance with any organisational policies or procedures that are in place.

2.2 - Select and use cost-analysis methods and tools to identify cost variations and evaluate alternative actions


• An understanding of why cost analysis methods are used • The ability to identify cost analysis methods • The ability to identify possible alternative actions

Cost-analysis methods and tools It is the project manager’s responsibility to select the appropriate cost-analysis methods and tools for the project and use these to identify any cost variations. From this, they will need to evaluate any alternative actions. The tools that are available for project managers to use are very useful. They can help to record the financial activity throughout a project’s life cycle and can give the project manager an insight into any potential cost problems. It is often difficult to interpret the costs involved with a project until it is completed; even then, it can still be confusing. This chapter aims to look at how you can use the methods and tools that are available to interpret the information that you do have to your best ability. For any cost-analysis method or tool that is used within your project, the original detailed cost estimate baseline is your project budget. The specific items within your cost-analysis are the cost elements. For example, the expenses that are incurred throughout the life cycle of your project can be recorded in specific accounts and then compared to your original cost estimates. These accounts can then be broken down into work activities – the scheduled activities for your project. These relate to the actual costs incurred by your project; actual cost of work performed. These methods and tools can also identify the labour and resources that were consumed, saved and overrun. Any items that indicate a significant deviation from your budget should be the ones that you focus on. When you are choosing cost-analysis methods and tools for your project, you will need to have outlined the estimated total cost and the budgeted cost of your project. Also, you should have highlighted the approved cost, the cost exposure and the cost to date. Finally, whether you are over or under budget should be recorded.



Cost control procedures

These cost control procedures can be used within a project and are intended to identify any cost variations from the project plan; not to suggest areas in which savings can be made. These cost saving suggestions should be considered during the planning and design stages of your project. During your project’s life cycle, it is inevitable that change will occur. Any changes or alternative actions are likely to affect the cost of your project.

Schedule variance

Schedule variance = earned value – planned value. Earned value is the estimated value of the work completed by your project as of today. Planned value is the estimated values of the work to be completed by your project within a specific time period. Schedule variance is the measurement of the schedule performance of a project.

Schedule performance index

Schedule performance index = earned value/planned value. Earned value is the estimated value of the work completed by your project as of today. Planned value is the estimated values of the work to be completed by your project within a specific time period. A schedule performance index measures the progress achieved against the progress that was planned.

Cost variance

Cost variance = earned value – actual cost. Earned value is the estimated value of the work completed by your project as of today. Actual costs are the costs incurred by your project as of a certain point in time (actual cost of work performed). Cost variance is the measurement of the budget performance of a project.

Cost performance index

Cost performance index = earned value/actual cost. Earned value is the estimated value of the work completed by your project as of today. Actual costs are the costs incurred by your project as of a certain point in time (actual cost of work performed). A cost performance index measures the value of the work completed compared to the actual cost of the work completed. Evaluating alternative actions The alternative actions that you may consider will depend on the nature of your project and its objectives. You may need to look closely at the contracted labour rates and seek any changes in purchasing – this will be reflected in the estimation of future expenditures. In order to gain a more informed status as to what your alternatives may be, you should place your evaluations incrementally along your critical path schedule. When using cost-analysis methods or tools along your project’s critical path schedule, you may need to engage qualified experts or supervisors.



Further analysis In order to investigate any deviations in more detail, further analysis is required. Within this analysis, the components that contribute to the variation can be identified.

For example:

• Low productivity can be caused by lack of specific resources (specialist equipment) or insufficient training

• High costs of resources may not necessarily be down to the costs of the resources, but the lower than expected project productivity

• An increase in labour may:

o indicate overtime rates

o indicate higher than expected payments

o be caused by unscheduled work to correct any problems with quality

2.3 – Implement and monitor agreed actions to maintain financial objectives


• The ability to identify agreed actions • An understanding of how to implement an agreed action • An understanding of how to monitor agreed actions

Implementing and monitoring agreed actions As discussed in the previous chapter, once you have identified any cost variations within your project you will need to look at alternative actions. These actions should be agreed upon by the relevant person/people. Think about a project you have been involved with; in order to maintain the financial objectives for the project, did you have to implement any alternative actions? How did you do this? How were these actions monitored? Agreed actions may include reference to new laws, regulations or standards. They may also include actual or potential problems. For example, you may need to revise the forecast for the costs and schedule – totally or partially. You may be required to make changes to the existing time frames in order for the project tasks to be completed by a specific time.

Your agreed actions may include monitoring the existing accounting management areas such as:

• Managing financial risks • Generating project financial reports • Account analysis versus budget • Project plan • Budget and budget adjustments based on agreed actions



• Forecasting

Any agreed actions should be described clearly and need to include all the relevant limitations (e.g. timescales and deliverables). It should also be outlined which team member is responsible for these actions and monitoring their effects. If these actions are not explained fully, agreed with the team members or monitored properly, then the implementation process will likely fail. In order to maintain the financial objectives within a project, these agreed actions will need to be documented correctly and communicated to all team members. Agreed financial actions may differ from operational actions. The process of applying these actions involves implementing them efficiently, monitoring them closely and evaluating them to see if they were effective. The implementation stage relies on the actions being challenging, yet achievable. They should be specific and outline clearly what is required. They should also include the time that is available to plan, monitor, report and evaluate the implementation of the agreed actions. Any agreed action should be measurable; how will the team know if the agreed actions have been successful? In order to deal with deviations, a process that deals with corrections and adjustments should be included. What does the monitoring process involve? How will the project team manage the progress and resource usage? These answers should be detailed within any agreed action – using a financial perspective. Whilst monitoring the action, it may be necessary to report on the impact of it. Give details on anything relevant. For example, were any changes made to the process of obtaining resources or requesting materials?

2.4 – Provide accurate and timely financial reports


• An understanding of why a financial report is produced • The ability to identify different sections within a financial report • Knowledge of what records can be drawn upon when producing a report

Financial reports A financial report is a vital part of project management as it communicates the essential information. It provides details of the budget, time frame and the performance of the project. Although there are many types of reports, the general function is to give an account of the project at a specific time or after completion. As well as giving a result or a status of the project, a financial report is an analytical document. These reports can be communicated to a wide audience and are likely to be distributed electronically. They can be referenced easily and there are many templates available if necessary. There should be software available within your organisation to assist you in the development of these reports (e.g. Project Manager or more specific accounting software). The format and style of your reports will depend on your organisation and the policies regarding the reporting process.



Regardless of the format, every report should be:

• Clear and concise • Logical • Well organised • Appropriate • Accurate

Your report may be formal or informal. Formal reports are long and include complex information, whereas informal reports can be presented as emails or notes and are shorter with lighter content. A financial report should be designed in a way that allows the reader to scan through it quickly. Because of this, short and concise paragraphs are essential. Along with this, bullet point lists, headings, and sub-headings are also useful.

The sections that may be in a financial report include:

• Terms of reference • Summary of project systems • Investigation reports • Presentation of alternatives • Suggested remedy • Cost/benefit analysis • Conclusions • Results • Recommendations • Attachments

A financial report will draw upon a wide range of existing records, including:

• Banking information • Cash flow • Profit and loss • Budgets • Reports on variances

Usually, a financial report will include a written summary. This summary provides the stakeholders with information regarding the financial goals of the project and the financial progress. The summary can be used within discussions about project problems and overruns that are affecting, or may affect, the financial performance of the project. Your financial report will give details on how much revenue was gained or lost during a particular period within a project. It can also be used to make financial decisions (e.g. the on-going financial support of the project). In order to demonstrate your professionalism, these reports will need to be provided in a timely manner.



Example financial report:

Project budget Actual expendi

ture

Variation

Direct project costs

Materials

Salaries

Consultanc



ies

Transport

Insurance

Other

Subtotal

Certified name:

Signature:



3.1 Conduct appropriate activities to signify financial completion

3.2 Review project outcomes using available records to determine effectiveness of project cost management

3.3 Review cost-management issues and document improvements

3. Complete cost-management processes



3.1 – Conduct appropriate activities to signify financial completion


• Knowledge of activities that can be used to signify financial completion.

Financial completion As you reach the final stages of your project, you will need to ensure that you have allowed for the occurrence of unexpected delays; not all aspects of your project will finish at the same time or even on time at all. The project team may be waiting for certain project tasks to be completed; you will need to allow the project team the time to refer to these areas that may still need to be completed (including financial matters). Due to the uncertainty of the start and finish dates of some of the project tasks, it may be necessary to adjust the project’s reporting stage and finalisation schedule.

Financial completion may include:

• Allocations and distributions • Final payments • Financial reports • Organisational project accounting procedures • Project accounts finalisation

• Variations statement

Within the financial completion of any project, the future should be the focus – not necessarily what is happening or has happened. Many reports that signify financial completion often focus on variances – the differences between the planned results of the project and the actual results. In order to signify the financial completion of your project, you will need to conduct the appropriate activities. By acquiring the necessary signature at various stages within the project lifecycle, you are indicating the approval – or the go ahead. It is viewed as a project management milestone as it allows the project to progress forward. By gaining the appropriate formal approval, you are acknowledging that a project deliverable has been completed, reviewed and accepted.

An example of a completed financial record:

Project area

Planned

outcome

Actual outcome

Variance

Reason for

variance



The different project areas that may be included in the table above include:

• Internal labour

• External labour

• Materials

• Facilities

• Training

3.2 – Review project outcomes using available records to determine effectiveness of project cost management


• The ability to identify key measurements • The ability to identify what would be evaluated with a review of project outcomes • Knowledge of what records can be used to assist in a review of project outcomes • The ability to identify who would authorise the completion of a project task

Reviewing project outcomes The success of a project will need to be measured, regardless of the size, nature or complexity of it. In terms of cost management, the project outcomes would be to what extent the budget was effective and adhered to overall. You can determine to what extent the outcomes were reached by assessing key measurements throughout the project and after completion.

These measurements should be well-defined and may include:

• Whether the key milestones have been met • How well the project was managed • Whether the project outputs were achieved and delivered

The review may include evaluations of:

• Agreed major milestones, for example, phases and subcontracts • Change of key personnel • Contingencies • Delivery of major deliverables • Finalisation of project and other agreed milestones • Variations



You can use lists of estimated and actual costs associated with the project to determine whether the project costs were managed effectively:

• Were the estimated costs roughly accurate?

• What was the total cost overall?

o was this in line with budgetary expectations and allowances?

• Did the individual elements of the project meet cost expectations?

o what elements of the project were under- or overspent?

o what were the lessons learned?

• Did any contingencies occur?

For example, the budget for a store refurbishment project was set at $30,000.

Project outcome(s)

The project outcome is to complete a store refurbishment for a cost of around $30,000.

Cost estimations

This consisted of the following estimations:

• $15,000 for the builders

• $10,000 for the decorators

• $5,000 for other miscellaneous activities, such as shop-fitting

The estimation for project cost is $30,000.

Project cost

This consisted of the following actual expenditure:

• $25,000 for the builders

• $6,000 for the decorators

• $6,000 for the other miscellaneous activities

The actual cost of the budget ended up at $36,000, $6,000 over the estimation.



Project cost records

The cost records you can use in this instance to determine whether the project met its outcomes could be:

• Cost verification and validation documentation

• Invoice and payment records

• Lists of costs

• Project and/or organisation files and records

This is because you need to understand what was spent and how this compares to the estimations and budget.

Project cost management

You would need to look at the records of total and individual costs to see:

• How much was spent overall

o the whole project cost $36,000

• Whether individual elements of the budget were met

o builders were overspent

o decorators were underspent

o miscellaneous were overspent

• Where over-expenditure occurred and why

o builders: the building budget was overspent to a structural issue that needed resolution. This was not part of a contingency plan, but the work needed to be done, so the extra spend was approved

o miscellaneous: some shelves were found to be damaged and unusable, so money was spent on new shelving

• Where under-expenditure occurred and why

o the decorators cost less than expected because less time and material was required; this means that the estimation was overestimated

• Contingencies

o problems with fixtures and fitting were expected, so additional funds were allowed for this. This means that the additional spend on new shelves was approved and justified and the budget was adjusted accordingly



Review of project outcomes

Although both a contingency and an unforeseen problem occurred, the project cost management was adapted to handle these situations. Upon the completion of the project, it can be deemed that the project did achieve its outcome of refurbishing the store on a budget of around $30,000. If the project cost-management had failed to accommodate the additional expenditure, then it would have been less effective. In order to review the outcomes of your project, you could also use the records that are available.

These records may include:

• Budgets, commitment, and expenditure

• Cash flows

• Cost-management lessons learned

• Cost-management plans

• Invoice and payment summaries

• Lists of potential costs

• Project and/or organisational files and records

• Quotations

• Recommended and approved courses of action

• Reports to relevant stakeholders

By reviewing these records, you will be able to determine how effective your cost management was. Project completion

Example of a project completion report:

Project phase Completed? Signed off by?

The different project phases may include:

• Project overview • Agreed changes • Deliverables • Final costs



• Risk assessment • Recommended improvements • Scheduled completion date • Final date

This project completion report may need signing off.

The person that may be required to sign the report off could be:

• The funding body

• The project sponsor

• The management

• The client or customer

3.3 – Review cost-management issues and document improvements


• An understanding of the purpose of cost management • The ability to identify cost management issues • The ability to document improvements

Reviewing cost management issues

What is cost management?

We know that cost management involves planning and controlling a project budget and all the associated procedures. It is a challenging and dynamic process that should not be confused with accounting. It can help to predict any future expenditure whilst reducing the chances of going over budget. However, the process doesn’t necessarily follow logical steps. What did the organisation get for the amount of money that was spent whilst completing the project? Essentially, the answer to this question can be achieved by reviewing the cost management issues. The reviewing of cost management issues is an essential part of project management. Remember that the level of detail that is required will depend on the project itself or the organisation. Any issues that have occurred within the cost management of a project, along with their outcomes and solutions, need to be communicated.



Any cost management issues may include changes to:

• Scope

• Schedule

• Quality

• Budget

• Functionality

Throughout your project, you may have used a financial software or system in order to help control the project expenditure. When reviewing cost management issues, you may want to refer back to the software of systems that you used.

Look at:

• The process of data application • The process of tracking and reporting project expenditure • The actual and estimated cost management techniques that were used • The input and functionality

Could a different software or system be more appropriate? You may also need to look at the management of your project; were their methods appropriate? Did the management have the necessary experience and/or knowledge?

When reviewing cost management issues, remember:

• Be accurate • Don’t bring personalities into the reviewing process • Keep details objective • Focus on outcomes or changes • Look at positives as well as negatives • Don’t be vague – give examples wherever necessary • Look closely at-risk identification • Learn from any mistakes – suggest future improvements

Documenting improvements Any improvements that are highlighted when reviewing any cost management issues should be documented appropriately. The focus of any review is the future; procedures should be adapted in order to strive for success. Specific cost management recommendations should be made for future projects that may be similar.



You may base your future improvements on:

• Suggestions from the project team and management • Reports of costs to budget and time frames • Stakeholder satisfaction surveys • Reports on quality, efficiency, and performance

The way that you document future improvements may depend on the organisational procedures that are in place. Details of the suggested improvements may need to be included within the project finalisation documentation. The documentation of suggested improvements can be used for future projects.



At the end of your Learner Workbook, you will find the Summative Assessments. This includes:

• Skills Activity • Knowledge Activity • Performance Activity

This holistically assesses your understanding and application of the skills, knowledge and performance requirements for this unit. Once this is completed, you will have finished this unit and be ready to move onto the next one – well done!

Summative Assessments



These suggested references are for further reading and do not necessarily represent the contents of this unit.

Websites

Budget planning: https://opentextbc.ca/projectmanagement/chapter/chapter-12-budget-planning-project-management/ Project costs and crashing: http://www.cbpa.drake.edu/bmeyer/webm120/PPT_Crashing.pdf Project costs blog: http://projectmanager.com.au/?s=project+cost Project cost management: http://www.projectsmart.co.uk/project-cost-management.html

Publications

Friedman, L., and Miles, S. (2006) Stakeholders Theory and Practice. Oxford University Press. Rad, P.F. (2002). Project Estimating and Cost Management. Kogan Page.

All references accessed on and correct as of 18th September 2018, unless otherwise stated.

References

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