Project Cost Management Techniques

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  • 0:03 Project Cost Management
  • 0:37 Estimating Costs Techniques
  • 3:19 Monitoring Costs Techniques
  • 4:40 Controlling Costs Techniques
  • 5:38 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 techniques are designed to ensure a project stays on budget. In this lesson, we'll look at the different techniques used in estimating, monitoring, and controlling project costs.

Project Cost Management

Your son has been accepted onto a prestigious swimming team requiring hours of daily practice, providing just the excuse to install the Olympic pool you've been wanting for years. As with many projects, your biggest concern is cost. How much should you expect and will the project actually finish within the cost estimate? In this, project cost management can help.

Project cost management is defined as activities used to estimate, monitor, and control costs of a project. Each phase of project cost management will have specialized techniques to help the project manager accomplish the goals.

Estimating Costs Techniques

Estimating cost is the first step in project cost management. It provides a basis to judge the merits of the project and results in a budget for the project. Most cost estimates start with some type of rough estimate and get more accurate as the project details are known.

There are several cost estimating techniques used by project managers, including:

1. Expert Judgment

This method uses estimator expertise to provide a guess of the project costs. Estimates using expert judgment happen early in project phases and can be inaccurate due to project differences and estimator expertise. Expert judgment is used by the pool contractor to give you an idea of the costs to install an Olympic-sized pool.

2. Analogous Estimating

This method is also known as the top-down method. Costs are estimated by comparing the current project to a similar one previously completed. It isn't very accurate and is also used in the early project phases. When the pool contractor shows you similar pools that he's done for the price he stated, he is using analogous estimating.

3. Parametric Estimating

Somewhat more accurate, parametric estimating combines costs from similar projects previously done with known cost changes. For example, the contractor would look at previous projects for Olympic-sized pools, taking into consideration recent increased costs in concrete and pool pumps, to give you an estimate.

4. Three-Point Estimating

This method is used to reduce bias and uncertainties by averaging three different estimates. Generally, the costs of a best case scenario, a most likely scenario, and a worst case scenario are averaged. These three scenarios provide high, middle, and low costs. To use this technique, the pool contractor would look at three different projects similar to yours: one that went better than expected and cost less, one that went as expected, and one that went worse than expected and cost more. He would average the costs of those three projects to give you an estimate.

5. Bottom-Up Estimating

This is the most accurate cost estimate because it's derived from a detailed work plan. The project work is broken down into individual packages. Costs of each package are estimated and rolled up into a total cost estimate. In the pool project, the contractor identifies work packages, such as clearing the land and digging the hole. He would estimate the costs of labor and materials for each work package, and add all work packages into a total. He would then add costs of any permits and inspections to provide you a total project cost estimate.

6. Vendor Bid Analysis

This provides a good estimate by comparing the bids of several vendors. This is a common method when you are contracting out all or part of a project, such as a pool installation.

Monitoring Costs Techniques

Once the project starts, the costs need to be monitored to ensure we don't exceed the approved budget. There are specific techniques to monitor project costs and catch any surprises early in the project.

These cost monitoring techniques include:

1. Routine Project and Budget Reviews

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