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What is Project Cost Management? - Definition & Importance

What is Project Cost Management? - Definition & Importance
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  • 0:03 What Is Project Management?
  • 0:47 Estimating Costs
  • 2:04 Monitoring Costs
  • 2:39 Controlling Costs
  • 3:32 Importance of Cost Management
  • 4:20 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 is all of the activities that ensure a project stays on budget. In this lesson, we'll look at the steps in project cost management and its importance in business.

What Is Project Cost Management?

Dear old mom is getting up in years and can't live alone anymore. You've decided to move her in with you, but you simply don't have the spare room. After looking at options, you decide building an addition to your home for mom is your best choice. The first question, of course, is how much is this project going to cost?

Cost is usually one of the first questions that come up in any project. The question is usually answered through project cost management. Project cost management is the activities used to estimate, allocate, and control costs of a project. It produces an approved budget, monitors costs throughout the project, and provides a basis for decisions to control unexpected or extra costs. Let's explore each of these components in more detail.

Estimating Costs

Let's start with estimating costs. Like most projects, your home addition will go through a few different types of cost estimates. Generally, cost estimates start out as a rough figure and get more refined as the project work and materials are defined.

Estimates have a variance, which is how much the costs could differ based on final project requirements. In general, the more accurate the estimate, the narrower the variance range. Because of the wide variance, approving budgets or issuing purchase orders should never be done at this stage.

In starting your home addition project, you first call a general contractor for an estimate. You and the contractor walk around the house and talk design ideas. You tell the contractor that you want a large bedroom with a separate sitting room, a bathroom, and a private entrance.

Given these objectives and his quick walk around the home, the contractor tells you it can probably be done for around $80,000. He warns you, though, that custom materials, unseen infrastructure problems, or other factors could change the price.

After some additional inspection and a floor plan approval, you receive a contract for $72,500 that outlines the work to be done, what work and materials won't be included, and an estimated timeframe for completion. Happy with that, you sign the contract, secure a loan, and schedule a project start date.

Monitoring Costs

Another important part of cost management is monitoring costs. Once a project is underway, monitoring costs is important to ensure the project is completed on budget. When monitoring costs, the project manager compares the costs already incurred with the known remaining costs and forecasts whether the project budget is adequate.

During the construction of your new home addition, the contractor closely monitors the schedule and materials purchased. Early in the project, a week of rain brings a schedule delay, and though his workers can't continue with the project until the weather clears, he is still obligated to pay them, increasing his costs.

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