Determine project costs

Every project involves stakeholders. These stakeholders include business owners, business analysts, customers and project team members. Project management plans need stakeholder input to ensure that project details and resource requirements are accurate. Resource requirement management defines the quantifiable aspects of the project's deliverables, which include the specific items, measurable outcomes and results needed to complete the project.`

Internal stakeholders include management, project team members and other workers within your organisation who have a vested interest in the project’s success. They are the ones who are most likely to be aware of the resources and costs associated with the project. Soliciting feedback from internal project stakeholders about required resources is an essential step in ensuring that a project is completed on time and within budget. 

As a project manager, it is important to consider feedback from external stakeholders to identify resource requirements. External stakeholders are people outside your organisation, including the government, customers, contractors and suppliers. Customers and suppliers can provide valuable insights into the potential costs of a project, and their feedback should be considered when making cost-related decisions. Consulting with government agencies can provide useful information about legislative requirements, approval processes and timeframes. 

Customer feedback can be particularly helpful in identifying potential cost savings. For example, customers may know cheaper alternatives of specific products or services that can be used in the project. They may also suggest ways to streamline the project to reduce costs.

Suppliers can also provide valuable information about potential cost savings. For example, they may be aware of discounts that could be applied for purchasing materials or services. They may also have insight into reducing waste and improving efficiency, which can lead to lower costs.

Stakeholders can provide feedback about the resource requirements for individual tasks for the project and tasks identified in the work breakdown structure, such as: 

• staff and contractors
• equipment
• sales and marketing
• training
• travel
• licences

Consultation with the stakeholders is a critical aspect of the scope planning process as it establishes a foundation of understanding and agreement on the resources required for a project.  It ensures that the resources needed for a project have been carefully considered and costed.  Otherwise, an unrealistic budget could be established, and the project is at risk of scope creep, which can seriously affect the project's resources, cost and time allocation.

Communication skills

When communicating with stakeholders: 

• speak clearly and concisely
• listen without interrupting
• use non-verbal communication to assist with understanding, such as:
  • nod in agreement
  • use encouraging words, including “yes” 
  • use open body language
• ask open and closed questions to gather information, confirm requirements and seek guidance
• use appropriate vocabulary and tone

Stakeholder requirements inform the project scope planning process, and this information helps the project management team plan and maintain the focus of the project's objectives throughout the project life cycle. Complete project scope planning details every aspect of the project and is an essential process for successful completion. 

Project managers must understand the project scope and requirements to estimate project costs accurately. 

Successful projects are guided by policies that provide consistent and cohesive procedures for business operations. A project policy details the guidelines, standards and procedures to ensure consistency.

A general project management policy outlines the scope of an organisation's projects. Different departments or projects may have specific policies. You may need to follow both internal and external project policies and procedures. If you are working for a client organisation, review the policies and procedures relevant to the project.   

It is essential to obtain the appropriate project management policy and implement its procedures to ensure the project is completed on time and within budget. 

An effective project management policy contains details about:

• project resources (time and budget), quality, scope and risk
• governance, authorisation and control
• management plans for communication, quality and risk
• stakeholder consultation procedures
• post-implementation review process.

The organisation might have other specific financial management processes and procedures relating to:

• approval processes
• communication
• reporting
• invoice procedures
• financial authorities and delegations
• organisational chart of accounts 

Policies and procedures document the delegated authority who can make decisions about the project.  The cost management plan scope of responsibilities may include the following:

• Who can act with independence or within broad guidance?
• Who needs to be consulted to develop the cost management plan, such as other project members, teams and internal stakeholders?
• Who can take the lead and make decisions where required?

Project costs are estimated considering:

• contingencies allowed for identified risks and uncertainty
• degree of accuracy required (tolerance levels)
• information available at the time
• organisational requirements, including overhead and profit margin expectations
• work breakdown structure

Types of costs

Cost can include:

Human resources	Considerations include: Internal recruitment - Identifying potential people from within the organisation and checking if they are available and skilled to fulfil the roles versus External recruitment – recruiting people from outside of the organisation through: Advertising through online job forums, advertisements, newspapers Employment agencies – ask an employment agency to find a suitable person on your behalf, saving you time recruiting staff Labour contractor – an agency provides contractors who are appointed for a particular period of time.
Material resources	Materials may include: Software Computer hardware Equipment Machinery Property/building/lease – The organisation may already have access to a site.  It is important to ensure that Project Managers know the sites the company already has access to or if an additional budget is required.
Capital resources	The Project Manager must communicate with the Project Sponsor to understand the project deliverables and expectations of the money that is planned to be spent.  All projects must be adequately funded, and the Project Manager must use software to track income and expenditure.

Cost-benefit analysis

A cost-benefit analysis is used to weigh project costs versus benefits, and it is a useful tool for comparing the benefits and costs of different options.  

For example, it can be used to:

• Decide the best method of human resource recruitment
• Evaluate different material resources 
• Determine the feasibility of a capital purchase

To conduct a cost-benefit analysis, follow these steps:

1. Brainstorm all of the costs and benefits of taking a course of action in the project
2. Assign a monetary value to the costs.  This helps to compare the costs, for example, the cost of employing someone using an internal process vs the cost of employing people using an external recruitment process. 
3. Assign a monetary value to the benefits.  
4. Compare the costs and benefits.  Consider the payback time to reach the break-even point – the point in time at which the benefits have repaid the costs. A method of calculating is Total cost / total revenue (or benefits) = length of time (payback period)

Steps in the budgeting process

The main steps in the budgeting process are:

1. Break down the project into tasks and milestones using a work breakdown structure. You will learn about WBS in the next section. If you don’t have a work breakdown structure, create the project's scope and list all tasks that need to be completed. 
2. Estimate the cost of each item in the list – estimate the costs for each item considering the costs of resources and materials. 
3. Total the estimates together.  
4. Add contingency costs – it is recommended this is allocated as 10% of the total project. 
5. Get approval – the project sponsor or manager must approve the budget and project costs.  
6. Review the budget, identify variances and take action. 

Developing a budget involves forecasting and preparing for risks that could affect a project. A project manager or finance officer estimates the potential factors that could impact a project and develops a budget considering these risk factors. 

Dynamic Tools are online software programs that collate information to forecast risk using statistical data and spreadsheets. Consultation with a finance officer and using budgeting software enables strategic planning and modelling of the project to forecast and budget for project costs.

Resource 

Read more about comparing budgeting and forecasting software.

Work Breakdown Structure 

A critical part of the project planning process is implementing a Work Breakdown Structure (WBS). The WBS is a deliverable that defines the scope of a project and breaks the project into manageable components and tasks.  

Read 

Read about the 10 Rules to Create the Perfect Work Breakdown Structure.

Work Breakdown Structure 

Project cost estimation is a complex process that needs to forecast risks and adequately allocate finance to each task within the project life cycle. A project manager can review the work breakdown structure with stakeholders to analyse the resource requirements to complete each task.  In the work breakdown example of Interior work – electrical, the resources required to complete the interior electrical work might include an electrician, cables and fittings.  It could be a fixed agreed price with an external contractor, or the company could use their own electrician.  For example, you consult an electrician who works for your company, and they advise that the work will take 7.5 hours.  You are then able to calculate the cost as follows:

Labour cost 7.5 hours x $50 per hour = $375.00 

Electrical cables $300.00

Fittings $500.00

Total electrical interior cost $1,175.00      

The electrician might advise that if it is difficult to access a particular area, the time required might increase by 6 hours.  These variations must be considered and factored into the budget, or an agreed tolerance should be allowed.  

Project cost estimation techniques assist the process of accurate cost estimation and allow for variations during the project life cycle.

Project cost estimation tools and techniques

Project cost estimation tools and techniques include:

• Expert judgement – uses the experience and knowledge of project managers and experts to estimate the cost of a project. 
• Analogous estimating—Uses relevant historical data to identify precedents to predict future costs
• Statistical modelling—Uses statistical or parametric data to identify the key drivers and calculate the impact that changes have on the project cost
• Bottom-up estimating—Estimates the cost of individual tasks and calculates the overall cost of the project
• Three-point estimate—Presents three project scenarios (most likely, optimistic and pessimistic) that are calculated in an equation to develop an estimated cost
• Reserve analysis—Determines the degree of contingency allocated to the budget in an effort to address uncertainties in the project
• Cost of quality—Quantifies quality-related costs in the project. There are four costs of quality: prevention, appraisal, internal failure and external failure.

Project cost estimation is a complex process that requires thorough investigation to calculate realistic and achievable financial parameters over the project's life. Effective project budgeting facilitates the successful completion of the project without tying up or depleting valuable business funds.

Watch

Watch How to Estimate Project Costs: A Method for Cost Estimation.

Resource

Download the eBook Creating a Project Budget.

Watch 

Watch How to Create a Project Budget.

Budget considerations

Factors to consider in developing a project budget include:

• Cost estimation—Predict the cost of completing a project. There are three types of cost estimation: order of magnitude, budget and definitive estimates.
• Budget contingency—Money set aside for unforeseen circumstances during the project lifecycle. Calculate budget contingency by using risk analysis or historical data. Otherwise, a contingency of 10% is acceptable.
• Budget monitoring—Tracking costs over the project's lifespan. Monitoring helps keep the project within the allocated budget and identifies if any funding adjustments need to occur.

Planning a budget proposal

The diagram below shows an overview of how to plan a budget proposal. 

Source: https://www.fool.com/the-blueprint/projectbudget

Cost management plan 

An essential aspect of any project is cost and budgeting. A cost management plan provides the financial requirements for the project: 

• How much money is required?
• When is it needed?
• What is it allocated for?
• When will it be spent?

The purpose of the cost management plan is to manage and control project finances through resource planning, cost estimates and budgets.

The cost management plan:

• outlines the costs of the project
• describes factors that could increase costs
• describes cost control procedures

The development of an effective cost management plan should include accurate estimation and budget tolerance. Accurate estimate informs budget planning by forecasting and budgeting for potential risks. When risks occur, a budget tolerance—usually 10% of the overall project budget—enables the project manager to make timely cost adjustments. The budget tolerance is agreed upon at the project's onset and saves valuable time during the project lifecycle.

Every business has a cash cycle of four phases: Financing, Investing, Operating and Returning. This process is how a company acquires finance to commence, invests funds to develop and operate, and returns the money it owes to creditors and investors. 

The cost management plan needs to consider these four phases to build a strategy for the project budget. 

• Resource planning
  • Application of a Work Breakdown Structure to define the heirarchy of the project and its deliverables. Shows where the greatest expenses occur in the project life cycle.
• Cost estimation
  • An iterative process that evolves during the project life cycle. Different techniques estimate the overall project cost: concept goals, historical data, expert analysis and determinative methods.
• Budgeting
  • A detailed account of cost and allocation for a project. Released in phases to ensure the project achieves its milestones for each budgetary phase.
• Cost control
  • A benchmark that measures the dollar value performance against the total cost and timeline throughout the project life cycle.

Cost management—also known as cost transparency, cost accounting or spend management—is the primary factor for business success or failure. For successful cost management, funds must be allocated at the right time and in the right amounts.

The cost management plan guides the project management team to manage the project cost effectively. Documenting project expenses throughout the life cycle will assist in managing project costs to ensure project completion within the allocated budget and timeframe.