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PROJECT COST MANAGEMENT
Transcript of PROJECT COST MANAGEMENT
PROJECT COST MANAGEMENT
what is a project? It’s a temporary group activity designed to produce a unique product, service or result.
A project is
in that it has a defined beginning and end in time, and therefore defined scope and resources.
And a project is
in that it is not a
operation, but a
specific set of operations
designed to accomplish a singular goal.
The development of software for an improved business process, the construction of a building or bridge, the relief effort after a natural disaster, the expansion of sales into a new geographic market — all are projects.
Project management, then, is the application of knowledge, skills and techniques to execute projects effectively and efficiently. It’s a strategic competency for organizations, enabling them to tie project results to business goals — and thus, better compete in their markets.
It has always been practiced informally, but began to emerge as a distinct profession in the mid-20th century. PMI’s A Guide to the Project Management Body of Knowledge (PMBOK® Guide) identifies its recurring elements:
Project Cost Management includes the processes involved in
Planning and estimating,
Controlling costs so that the project can be completed within the approved budget.
Cost Estimating – developing an approximation of the costs of the resources needed to complete project activities.
Cost Budgeting – aggregating the estimated costs of individual activities or work packages to establish a cost baseline.
Cost Control – influencing the factors that create cost variances and controlling changes to the project budget.
Many people confuse profits and costs.
Q Suppose you sell 10 cement bags per day on average, and the average cost per cement bags is $10.
If you sold 11 cement bags one day, what would the affect on profits be?
A There is not enough information to answer this question. You are given costs and asked to estimate profits. You do not know what the average profit is per widget. You might actually lose money by selling more widgets.
Investment decisions for projects are usually based on projected life cycle costs and benefits. Project managers should have input into the budgeting process.
An important part of a project manager's job is controlling project costs.
The image below shows how the price we pay is made up for a chocolate bar. This chocolate bar is priced at Â£1.30. The segments show an estimate of how this price might be arrived at.
Dairy milk split up according to cost part
The raw materials will include the cocoa, sugar, milk, honey, hazelnuts, flavouring and colour that are used to make the chocolate bar.
The capital will include all the buildings and factories that make up the Cadbury's business, the machinery, equipment used in the manufacture of the bar as well as all the vehicles and so on involved in the distribution of the finished product and the offices and administration buildings that support the business.
Labour includes not only those who are involved directly in the making of the bars but all the sales staff, administration staff, management, marketing teams and so on that are employed by Cadbury.
The profit is the reward for enterprise. It is the amount left over when all the costs have been paid.
These represent the costs of production.
Cost management is the process of planning and controlling the budget of a business. Cost management is a form of management accounting that allows a business to predict impending expenditures to help reduce the chance of going over budget.
Many businesses employ cost management plans for specific projects, as well as for the over-all business model. When applying it to a project, expected costs are calculated while the project is still in the planning period and are approved beforehand. During the project, all expenses are recorded and monitored to make sure they stay in line with the cost management plan. After the project is finished, the predicted costs and actual costs can be compared and analyzed, helping future cost management predictions and budgets.
Implementing a cost management structure for projects can help a business keep their over-all budget under control. Several business intelligence (BI) programs, such as Oracle Hyperion, offer cost management software to help businesses monitor costs and increase profitability. While the software may help, it is not imperative that software is used when executing a cost management plan.
Cost denotes the amount of money that a company spents on the creation or production of goods or services. It does not include the mark-up for profit.
From a seller’s point of view, cost is the amount of money that is spent to produce a good or a product. If a seller sold his products at the production price, he would break even, meaning that he would not lose money on his sales. However, he would not make a profit either.
From a buyer’s point of view the cost of a product can be called the price. This is the amount that the seller charges for a product, and it includes both the production cost and the mark-up cost, which is added by the seller in order for him to make a profit.
In business, cost is usually a monetary valuation of (1) effort, (2) material, (3) resources, (4) time and utilities consumed, (5) risks incurred, and (6) opportunity forgone in production and delivery of a good or service
Importance of Project Cost Management
We all read the papers, and listen to the news, and we know that the challenge of cash and cost management is doing more damage to companies than lack of sales. Do you want help to avoid this? As your outsourced procurement department we can help you with your cash and cost issues on a no savings, no fee basis.
Companies and organisations of all sizes can struggle with managing costs which do not seem to be that important. Recent research has found that 80% of all businesses fail to manage and review their contracts; inevitably this leads to unnecessary and avoidable costs. This means their hard-won margins are eroded by paying over the odds for their essential business overheads, such as telecoms, utilities, waste.
Also, we find that many organisations for very good reasons commit to services or products that they subsequently don’t need, but don’t cancel or adjust. Part of our service is to review your expenditure with you
You’re not alone in your concerns, 85% of CEOs and FDs surveyed stated that they believed cost reduction is their highest priority challenge in the coming years.
Don’t forget that lowering costs is the easiest way to increase profits; at a gross profit margin of 25% it is easier to find £1,000 savings than it is to make £4,000 in sales.
1. Estimating Capabilities
One of the main objectives of a project cost management solution is to simplify and reduce the costs of your projects. In order to do this, the solution you choose must have the ability to calculate productivity from a variety of resources, including man-hours, currencies, rates, and labor types.
2.Budgeting and Forecasting Features
The software you choose should allow you to create accurate budgets and forecast outcomes based on applicable trends. In order to do this, the software should offer flexible features that enable you to quickly track project costs at all levels, compare your project’s target budget to actuals, and view reports on planned and earned value.
3. Project Performance Measurements
As a project manager, it is up to you to ensure your projects stay on schedule and within budget. That said, having the ability to view and track overall project status in real time is an important component. Easy access to performance measurements against your budget, forecasts, actual costs, and other key indicators are also vital. Performance measurement features allow you to spot problems with your budget or schedule so you can take remedial action and get your project back on track immediately.
4. A Variety of Easy Reporting Options
Your cost management tool should offer a variety of reporting options. It should have intuitive report-building features that enable you to customize reports quickly and easily. If building a report requires a manual or the help of an outside consultant, you should consider an alternative. Secure sharing in the Cloud for total visibility is also a must when it comes to reporting.
5. Simple and Easy to Use
Because one of the primary objectives of project cost management software is to increase productivity, the solution you choose should be simple to understand and use. Your solution should allow you to quickly configure data and seamlessly move information across each of the project cost management components. If there are multiple steps involved in manipulating information, continue your search.
Type of Costs
Fixed Costs (FC)
. The costs which don’t vary with changing output. Fixed costs might include the cost of building a factory, insurance and legal bills. Even if your output changes or you don’t produce anything, your fixed costs stays the same. In the above example, fixed costs are always £1,000.
Variable Costs (VC)
. Costs which depend on the output produced. For example, if you produce more cars, you have to use more raw materials such as metal. This is a variable cost.
Total Costs (TC) – Fixed + Variable Costs
– Marginal cost is the cost of producing an extra unit. If the total cost of 3 units is 1550, and the total cost of 4 units is 1900. The marginal cost of the 4th unit is 350.
– Opportunity cost is the next best alternative foregone. If you invest £1million in developing a cure for pancreatic cancer, the opportunity cost is that you can’t use that money to invest in developing a cure for skin cancer.
Economic cost includes both the actual direct costs (accounting costs) plus the opportunity cost. For example, if you take time off work to a training scheme. You may lose a weeks pay £350, plus also have to pay the direct cost of £200. Thus the total economic cost = £550.
– this is the monetary outlay for producing a certain good. Accounting costs will include your variable and fixed costs you have to pay.
. Costs that can be avoided. If you stop producing cars, you don’t have to pay for extra raw materials and electricity. Sometimes known as an escapable cost.
or benefits are those costs or benefits that an organization can easily measure in dollars.
or benefits are costs or benefits that are difficult to measure in monetary terms.
are costs that can be directly related to producing the products and services of the project.
are costs that are not directly related to the products or services of the project, but are indirectly related to performing the project.
is money that has been spent in the past; when deciding what projects to invest in or continue, you should not include sunk costs.
Benefit Cost Ratio (BCR)
This is the amount of money a project is going to make versus how much it will cost to build it.Generally, if the benefit is higher than the cost, the project is a good investment
Net Present Value (NPV)
This is the actual value at a given time it takes to build
Internal Rate of Return
This is the amount of money the project will return to the company that is funding it.It's how much money a project is making the company.It's usually expressed as a percentage of the funding that has been allocated to it.
This is the rate at which your project loses value over time. So, if you are building a project that will only be marketable at a high price for a short period of time, the product loses value as time goes on.
Before you get started on a project, it's really useful to figure out how much you exoect it to cost-not just to develop, but to support the product once it's in place and being used by the customer.
Allocation of capital
Based on risk & Uncertainty
Cut off Rate (expected rate of return)
Mobilization of funds
How much plow back by capitalization
Current Assets Management/Liquidity Decision
To have liquidity
Routine Financial Matters (Custody of cash, bank acc., payments, loan collection)
Special Financial Functions ( Financial planning, budgeting, investment decision etc)
Provides conceptual & analytical frame work for decision making.
View financial mgmt as an integral part of overall mgmt
Four major decisions as functions of finance
Dividend policy decision
Funds requirement decision
Raising and administering of funds
Keep accurate financial records & prepare records
Has the following limitations
Ignored routine problems
ignored working capital financing
No allocation of funds.
Functions of FM
Dividend Policy decision
Managerial activity concerned with planning and controlling of firms financial resources.
Acquisition of capital funds in meeting financial needs of the business.
3 A’s of Financial management
Anticipating Financial needs
Acquiring Financial resources
Allocating funds in business
ELEMENTS OF COST MANAGEMENT
Basic Principles of Cost Management
are revenues minus expenses.
Life cycle costing
considers the total cost of ownership, or development plus support costs, for a project.
Cash flow analysis
determines the estimated annual costs and benefits for a project and the resulting annual cash flow.
Learning curve theory
states that when many items are produced repetitively, the unit cost of those items decreases in a regular pattern as more units are produced.
are dollars included in a cost estimate to mitigate cost risk by allowing for future situations that are difficult to predict.
allow for future situations that may be partially planned for (sometimes called known unknowns) and are included in the project cost baseline.
allow for future situations that are unpredictable (sometimes called unknown unknowns).
the total amount of money being transferred into and out of a business, especially as affecting liquidity.
Cash flow is the movement of money into or out of a business, project, or financial product. It is usually measured during a specified, limited period of time.
cash flow is the difference in amount of cash available at the beginning of a period (opening balance) and the amount at the end of that period (closing balance). It is called positive if the closing balance is higher than the opening balance, otherwise called negative. Cash flow is increased by (1) selling more goods or services, (2) selling an asset, (3) reducing costs, (4) increasing the selling price, (5) collecting faster, (6) paying slower, (7) bringing in more equity, or (8) taking a loan
Understand the importance of project cost management.
Explain basic project cost management principles, concepts, and terms.
Discuss different types of cost estimates and methods for preparing them.
Understand the processes involved in cost budgeting and preparing a cost estimate and budget for an information technology project.
Understand the benefits of earned value management and project portfolio management to assist in cost control.
Describe how project management software can assist in
project cost management.
In includes purchase price, installation cost, operating costs, maintenance and upgrade costs, and remaining (residual or salvage) value at the end of ownership or its useful life.
Capital budgeting, or investment appraisal, is the planning process used to determine whether an organization's long term investments such as new machinery, replacement machinery, new plants, new products, and research development projects are worth the funding of cash through the firm's capitalization
The decision made for the management of current asset that affects a firm's liquidity.
The ability to convert an asset to cash quickly. Also known as "marketability
Liquid assets include items such as accounts receivable, demand and time deposits, gilt edged securities. In some countries, precious metals (usually gold and silver) are also considered liquid assets. Also called quick asset.
The policy a company uses to decide how much it will pay out to shareholders in dividends.
Baselines are important input to number of project processes and outputs of many processes raise change request to these baselines.
Benchmark, Standard, Guideline and Baseline are different words that are used interchangeably in Management.