Project Cost Management includes processes involved in planning, estimating, budgeting, financing, funding, managing and controlling costs so that Project can be completed within the approved budget.
1. Plan Cost Management – The Process that establishes the policies, procedures and documentation for planning, managing, expending and controlling project costs. It provides organization direction on how project cost will be managed throughout the project .
2. Estimate Costs – The process of developing an approximation of the monetary resources needed to complete project activities.
3. Determine Budget is the process of aggregating the estimated costs of individual activities or work packages to establish an authorized cost baseline
4. Control Costs is the process of monitoring the status of the project to update the project budget and managing changes to the cost baselineProject cost management is primarily concerned with two factors (1) the cost of the resources needs to complete project activities. (2) It should also consider the effect of project decisions on subsequent recurring cost of using, maintaining and supporting the product, service or result of the project.
For example, limiting the number of design reviews can reduce the cost of the project but could increase the resulting product’s operating cost. Similarly procurement low quality cement may reduce the cost of constructing a housing complex, but it exponentially increases the maintaining cost. Similarly, the decision to go for shallow depth foundation may reduce the cost of present building, but it certainly limits house owners wish of constructing multiple floors on the housing complex.
Life Cycle Costing = Cost of completing the project + Cost incurred during the usage of the project’s product.
In many organizations, predicting and analysing the Financial performance of Project’s product is performed outside of the project. In such case, below financial control measures will not be part of Project Cost Management. However, if prediction and analysis of financial performance of project’s product forms part of Project’s Scope, then below financial control measures will be needed to carry out Project cost management.
A. Payback Period refers to the period of time required for the return on an investment to "repay" the sum of the original investment. For example, a $1000 investment which returned $500 per year would have a two year payback period. Shorter payback periods are preferable to longer payback periods.
B. Return on investment (%) = (Net profit / Investment) × 100. A high ROI means the investment gains compare favorably to investment cost. As a performance measure, ROI is used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments
C. The internal rate of return (IRR) is a rate of return to measure and compare the profitability of investments. In the context of savings and loans the IRR is also called the effective interest rate. The term internal refers to the fact that its calculation does not incorporate environmental factors (e.g., the interest rate or inflation). The higher the IRR, the better it is.
D. Discounted cash flow (DCF) analysis is a method of valuing a project, company, or asset using the concepts of the time value of money. All future cash flows are estimated and discounted to give their present values (PVs)
E. Net Present Value (NPV) of cash flows, both incoming and outgoing, is defined as the sum of the present values (PVs) of the individual cash flows of the same entity (both incoming and outgoing)
NPV can be described as the “difference amount” between the sums of discounted: cash inflows and cash outflows. It compares the present value of money today to the present value of money in the future, taking inflation and returns into account
NPV= Present Value of all incoming Funds – Present Value of all outgoing funds