Project Cost Management: Planning & Estimation

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  • 0:00 Project Cost…
  • 1:04 Project Cost Estimating
  • 3:16 Project Cost Planning
  • 5:37 Lesson Summary
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Lesson Transcript
Instructor: Laury Hales

Laury has taught in professional adult education settings for over 10 years and is currently working on a PhD in Organizational Psychology.

Project cost management includes activities to estimate, monitor, and control project costs. In this lesson, we'll look at the two elements of project cost management: estimating and planning.

Project Cost Management Defined

Your 20-year-old daycare business is in need of a new playground for the kids. The old playground equipment does not meet new safety standards and is beginning to show significant wear that a can of paint won't fix. Knowing you need to replace it soon, you decide to begin by determining how much the new playground will cost. To do this, you use project cost management planning and estimating.

Project cost management refers to activities used to estimate, monitor, and control costs of a project. Estimating is done to determine, as accurately as necessary, the cost of a project. It's generally in the estimating process that an organization determines whether a project is fiscally feasible. In short, estimating costs will drive the decision to spend the money on a project.

Project cost estimating is twofold. First, an estimation is done to determine costs, then cost planning is done to create a budget and determine cost guidance. Let's take a closer look at the differences between cost estimating and cost planning.

Project Cost Estimating

As we've already stated, cost estimating involves activities to determine the cost of an initiative or project. The accuracy of the estimate can vary, depending on the need and the type of estimate done. Generally, at the preliminary stages of a project, rough estimates are provided. Many times, a rough estimate is referred to as a ballpark figure and just provides a starting point to determine project costs.

As the project is more defined and the requirements are better known, the accuracy of the cost estimate increases. Better project information allows the estimator to take previously unknown factors into consideration when determining project cost. Many times, before a budget is approved, a detailed work breakdown with associated costs is done to provide a very accurate cost estimate.

Cost estimate accuracy is shown by the variance in the estimate. Variance is how much the cost estimate could change, depending on future requirements, constraints, and limitations of the project. For example, ballpark figures often have a variance of -25% to +75%. This means an estimate of $1,000 could actually cost from $750 to $1,750.

There's no requirement to step through project cost estimating from rough to final estimates. Some projects will only require a rough estimate before being approved, while other projects will require much more accurate and detailed estimates. Depending on the final need, an estimator may not do any rough estimates and may skip right to a detailed estimate.

For the daycare, you must replace the playground equipment, so you begin with a detailed project cost estimate. In gathering the cost information, you begin by gathering the cost of playground equipment and any required permits. Next, working with a contractor, you break down the tasks that'll need to be done to complete the project. With each task, you provide an estimate of labor hours needed, which provides a cost estimate for each task.

Adding up the materials, permits, and labor to complete the new playground, you determine the project should cost $12,345 to complete. You add a variance of -5% to +10% and determine that your final estimate will be between $11,272 and $13,579.

Project Cost Planning

After a cost estimate is completed, a cost plan is needed to provide guidelines for the project. Cost planning determines how costs are controlled, where money is allocated, from which funds costs are paid, cost reporting, and cost thresholds for the project. In short, the cost management plan helps the project manager ensure the project is completed within the estimated budget.

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