#PM Cost Management–Cost Management Plan


1. Introduction—

Let’s start the topic off with a quiz. Under which cost management process is the cost management plan developed:

  1. Estimate Costs
  2. Determine Budget
  3. Control Costs
  4. None of the above

The surprising answer is: D, none of the above. The cost management plan is actually developed as part of the overall project management plan in the integration knowledge area process 4.2 Develop Project Management Plan. So the very first cost management process, 7.1 Estimate Costs, already assumes that the cost management plan has been completed.

2. Purpose

If you give the simple answer to “what is the purpose of the cost management plan” as being “to manage the costs”, you would be right. However, if you were asked to explain your answer, you’d need a little more detail. “Manage costs” really has to do with being able to monitor and control them, where the word “monitor” means “measure.” Here are the components of the cost management plan divided into those elements which are more for monitoring or measuring the costs (those in shades of red), and those which are more for controlling the costs (those in shades of blue).

Here are the descriptions of the elements:

Plan Element

Monitoring or Controlling

Description

1. Units of measure, level of precision Monitoring Are the costs computed in staff hours or days?  What is the level of rounding of the data?
2. WBS & Control Accounts Monitoring WBS has control accounts, where the costs of the WBS elements below it are summed up.
3. Reporting Formats Monitoring Who will get the cost performance reports, and how often?
4. Performance measurement rules Controlling The earned value measurement techniques are specified (i.e., using what formulas, or what percent complete).
5. Control thresholds Controlling Cost control thresholds are the percentage that the costs are allowed to vary from the cost baseline. Actions to be taken are specified in case the cost variance exceeds the cost control threshold.
6 Change control procedures Controlling If the cost baseline itself needs to be changed, the change control procedure is specified.

Here are a few additional remarks about these elements. First let’s discuss those that have to do with monitoring or measuring the costs. These three elements are fairly independent of each other.

1.  Units of measure, level of accuracy

The units of measure may refer to the unit costs (cost per staff hour, for example), or possibly the unit of currency in an international project. The level of accuracy refers to the level of precision in stating each cost. There is a concept having to do with the level of accuracy of the cost estimates, but this has more to do with the process 7.1 Estimate Costs.

2. WBS & Control Accounts

The control accounts are different from other elements below in the WBS in that they do not specify deliverables. They are there for accounting purposes to alert the project manager that, when the activities in the WBS elements below it are completed, the costs for those activities needed to be summed up and reported. Each control account is assigned a unique code or account number for accounting purposes.’

3. Reporting Formats

Once the costs are calculated and the performance measurement calculations are done, who gets the report and how often? This element is pretty straightforward.

Now let’s move on to the elements that have to do with controlling costs. As opposed to the elements involved in monitoring costs, these three elements are actually closely related and should be understood in the following sequence.

4. Performance measurement rules

Okay, this is the heart of controlling the costs; comparing the measured or monitored actual costs and comparing them to the budgeted or estimated costs. How much do they vary?

5. Control thresholds

Similar to control thresholds in quality, but with cost being the operative measurement here, there are specifications for how far the actual costs are to vary from the budgeted costs, usually in terms of a percentage. Then various thresholds are established so that if the variance goes over, say, 5%, the project manager must assemble the team and look for a root cause. If it is more than 10%, management may need to be informed. (These are just examples.)

6. Change control procedures

If the control thresholds are triggered, there will have to be some investigation and possibly a recommendation for a change. It could be in the form of a corrective action, in which there is a change control procedure specified for that scenario. But if the investigation reveals that the estimated costs were based on unrealistic assumptions, the cost performance baseline (i.e., the budget) may need to be changed. This will definitely involve the sponsors and/or customers, and this scenario needs to be covered by the change control procedures as well.

Note that the cost management plan doesn’t tell you how to move towards getting the budget. It only tells you how to monitor and control the costs AFTER you have estimated them. And that is the subject of the next post, the process 7.1 Estimate Costs.

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