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Managing project cost
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Managing project cost
The challenges of public-sector cost management
- Structurally, the project face law and administrative constraints. These cost constraints can include salaries, the type of items that can be purchased, or requirements for competitive bidding etc.
- Even if the project costs are well tracked, project managers often argue that many costs are not controllable by the project team; for example, relatively high rates of overhead costs may be charged to project, eating up the project budget.
- In public sector projects resources may be assigned without concurrence of the project manager; if so, they can eat the budget without producing any results.
- Even if the data are available, it is hard to identify which data should be measured; for example should one measure the quality of education programs by the percentages of graduating students or the number who hold a steady job.
A procedure for prioritizing and selecting the new project ideas
Project selection and prioritization
- On-going projects must be prioritized, particularly when the first time the prioritization process is implemented.
- The selection process has to be fair and transparent, based on criteria against which the new proposal is assessed.
Selecting projects
Selection
- Find a project that fits accurately for your team’s skill set, level of competence, and has the best chance of success
- While the selection of projects can be a time-consuming process, it’s a necessary activity considering the number of large and complex projects that are undertaken only to be abandoned in later stages
Possible methods
- criteria matrix/prioritization matrix (determines which projects will deliver successful improvements
- value weightening (not all the criteria are equally important so they need to be weighted)
Prioritizing projects
Prioritization
It is one of the most important capacity
for every organization that sets up projects
Project prioritization is where you:
- align your projects with your strategy
- quantify which projects add value and which don’t
- balance the volume of projects you take on
- focus your whole project delivery team on business benefits
Possible methods
- allocating budgets to departments (it allows each department to set its own priorities)
- choosing projects that deliver the highest financial benefit
1. Estimating the costs of the project
2. Acquiring the financial resources
for the project
3. Managing project costs and
reporting on expenditures
You can find the explanation of these functions in the following slides
Vital functions for managing public-sector project cost
Estimating the costs of the project
Estimating the costs of the project
Cost estimating is the practice of forecasting the cost of completing a project with a defined scope.
Since cost estimation is about prediction of costs rather than counting the actual cost, the more project is completed, the greater chance of more accurate estimation.
Tools & Methods
Tools & Methods
There are some tools and techniques to develop more accurate cost estimates:
Rough order of magnitude estimate is used to provide a very general idea of the project costs for the purposes of selection, prioritization, and resource assignment. It takes place very early in a project’s life cycle and it is very inaccurate.
Rough order of magnitude
estimate
Analogous estimating
Analogous estimating uses the actual data from a previous, similar project as the basis for estimating the current project. It is the most common tool for initial estimating.
Parametric estimating
Parametric estimating uses the relationship between variables to calculate the duration or cost.
Essentially, a parametric estimate is determined by identifying the unit cost or duration and the number of units required for the project.
Compared to the analogous estimation, parametric estimation stands to be more accurate, because it uses mathematical formulas.
Bottom-up estimating
Bottom-up estimating is regarded as the most accurate estimating technique. Bottom-up estimates rely on aggregating all the individual costs of a project to create the total project budget.
Top-down estimating is a project estimating technique whereby the overall project is estimated first, and individual tasks are derived from it. This type of project budgeting usually occurs when there is a fixed budget and the scope of the project must fit within a predetermined funding level.
Top-down estimating
Acquiring resources for public-sector projects requires a combination of
the ability to create a solid business case for the project and
the ability to engage in formal or informal organizational politics.
Acquiring the financial resources
In public sector project budget has to be integrated into the agency’s budget request.
That will require that the project team engage in a variety of activities
Discussing budget processes with agency fiscal staff
Discussing budget processes with agency
fiscal staff
Completing budget request forms
Completing budget request forms
Defending the budget proposal to those who must provide approval
Reporting on project costs
Working with budget officials to identify and secure ongoing funding
needs
Working with budget officials to identify and secure ongoing funding needs including requesting additional funds,
budget processes, requesting changes in budget authorizations
Public-sector projects are rarely concerned with cash flows.(the total amount of money being transferred into and out of a business, especially as affecting liquidity.)
Public budgets are created
on strict and limited time cycles, and projects cannot assume that a budget
started in one budget period will extend into another
Cost management is a way of managing project cost,
which includes estimating project costs.
Managing project costs and reporting on expenditures
At least four factors complicate public-sector project cost management:
COMPLICATING FACTORS
1) Less control over composition of the project team and theirs compensation;
2) For ex. sick leave of an employe can cause large costs in the project budget;
3) Some public-sector projects are charged overhead rates that charge the costs of general government to projects and chargeable activities;
4) If items are purchased for the project, it is
likely that the agency’s purchasing unit will be assigned to bid and purchase the items. Those processes are often slow and may not allow for the most cost-effective purchases to be made.
Input-Output Model for Project Resources
INPUT-OUTPUT MODEL FOR PROJECT RESOURCES
First, at the top, this model identifies the flow of resources into the project
that allows it to do its work. These assets are the inputs to work processes.
There are two major types of assets/inputs available to the project. They are
expendable, assigned assets and facilities and capital assets, as detailed in
the following sections.
Expendable assets
EXPENDABLE
ASSETS
- expendable assets create direct costs
- those assets include staff and supplies
- costs of these resources are the most controllable type of costs
- most direct costs = costs of resources assigned to the project
Direct costs can also be variable costs.
CAPITAL ASSETS
CAPITAL ASSETS
- facilities and capital assets = equipment and other physical assets
- these assets do not represent variable costs (their use cannot be varied dependent on the level of services)
- In order to make the best use of facilities and capital assets the project needs to optimize their use (capitalization, depreciation, inventories)
DELIVERABLES
Some of those assets can be expended on
creating the deliverables of the project.
DELIVERABLES
WASTE
WASTE
- waste represents the difference between actual resource use and optimal use
- examples: unnecessary overtime, unused or poorly used supplies, downtime, overstaffing, and waiting time
Earned-value management begins with the creation of three new terms:
Earned-value management
- Earned value (EV)
- Planned value (PV)
- Actual cost (AC)
EV, PV and AC
EV,
PV,
AC
- Earned value (EV) is the budgeted cost of the work that has been
performed to date.
- Planned value (PV) is the budgeted cost of the work that has been
planned to be performed to date.
- Actual cost (AC) is the actual cost of the work accomplished.
Four very simple formulas allow us to determine how we are doing:
Assessment of the progress
- EV ÷ AC, which calculates the cost-performance index (CPI)
- EV ÷ AC, which calculates the cost variance (CV)
- EV ÷ PV, which calculates the schedule-performance index (SPI)
- EV ÷ PV, which calculates the schedule variance (SV)
We can also use the CPI to estimate the total cost of the project given the
performance to date. That new estimate is called the estimate at completion
(EAC).
EAC
BAC = budget at completion (total original budget)
by taking the costs to date and adding
the budgeted costs of the work that is left
- (EAC = BAC ÷ CPI)
- (EAC = AC + (BAC - EV)
- (ETC) (EAC = AC + ETC)
by adding the actual costs incurred so far to a new estimate of the costs required for completion
- Estimate project costs: lowest level
- Project budgets could change
- Assignment of resource costs: timekeeping systems
- Use earned-value performance manager
- Work with budget officers and staff: needs in project
- Put in the project: Aware of, factor overhead rates and multipliers
- Build compelling business case
- Put in the project: factor benefit payouts
- Build cooperative relationships with purchasing agencies
- Be prepared for the funding of project
- Optimize resources: inputs
- Reduce asset: inventory levels