Birhan College
Department of Management
MSc in Project Management
Course Title: Project Cost Management/PCM
Course Code: MAPM 608
Credit Hour: 2
ECTS: 5
Chapter One
An Overview of
PCM
Chapter Outline
What is Cost?
What is PCM?
Importance of PCM
PCM Processes
Basic Principles of PCM
Keys to Effective PCM
What is Cost?
Cost is defined as the monetary valuation of
effort, resources, time consumed, risk and
opportunity forgone in production or delivery of
a good or service.
It is simply put as a resource sacrificed or
forgone to achieve a specific objective or
something given up in exchange.
Costs are usually measured in monetary units
like dollars, euros, birr …
What is PCM?
PCM is defined as the process of planning and
controlling the budget of projects.
It helps in predicting the expenses of the
project, so that one can avoid going over budget.
It is primarily concerned with the cost of the
resources needed to complete the project.
It includes the process that requires to ensure
that project is completed within an approved
budget.
Cont’d
Project managers must make sure their
projects are well defined, have accurate time
and cost estimates and have a realistic budget
that they were involved in approving.
All the above process will enable the project
manager to avoid any kind of cost over-runs.
Cont’d
Reasons for Cost Over-runs?
Not emphasizing the importance of realistic project
cost estimates from the outset of the project.
o Many of the original cost estimates of IT projects are
low to begin with and based on very unclear project
requirements.
Many IT professionals think preparing cost estimates is a
job for accountants when in fact is very demanding and
important skill that project managers need to acquire.
Many IT projects involve new technology or business process
which involve untested products and inherent risks.
Importance PCM
It helps in controlling the project specific cost, in turn
also the over all project cost.
One can predict the future expenses, and costs and
accordingly work towards the expected revenues.
It helps in taking those actions that are necessary to
assure, that the resources and project operations aim
at attaining the chalked objectives and goals.
It helps in analyzing the long term trends of the
project.
Cont’d
The actual cost incurred can be compared to the
budgeted to see if any component of the project is
spending more than expected.
PCM is indeed one of the essential requisites for the
success of any project.
When one knows the scope for the cost, that the
project can bear, it becomes much easier to see the
goals and accordingly work towards it.
PCM Processes
There are three PCM processes:
1) Cost estimating: developing an approximation or
estimate of the costs of the resources needed to
complete a project.
2) Cost budgeting: allocating the overall cost
estimate to individual work items to establish a
baseline for measuring performance.
3) Cost control: controlling changes to the project
budget.
Basic principles of PCM
Most members of an executive board better
understand and are more interested in financial
terms than IT terms, so IT project managers
must speak their language.
Profits are revenues minus expenditures
Profit margin is the ratio of revenues to
profits
• Birr 2 per Birr 100 revenue → 2% profit margin
Cont’d
Life cycle costing considers the TC of ownership, or
development plus support costs, for a project.
• A project could take 2 years to build and be in place
for 10 years; costs and benefits must be estimated
for the entire life of the project.
Cash flow analysis determines the estimated annual
costs and benefits for a project and the resulting
annual cash flow.
• Too many projects with high cash flow needs in the
same year may not be able to be supported which will
impact profitability.
Cont’d
Tangible costs or benefits are costs or benefits that
an organization can easily measure in monetary units.
• A task that was allocated Birr 150,000 but actually
costs Birr 100,000 would have a tangible benefit of
Birr 50,000 if the assets allocated are used for other
projects.
Intangible costs or benefits are costs or benefits that
are difficult to measure in monetary terms.
• Costs- resources used to research related areas of a
project but not billed to the project.
• Benefits- goodwill, prestige, general statements of
improved productivity not easily translated in birr.
Cont’d
Direct costs are costs that can be directly related
to producing the products or services of a project.
• Salaries, cost of hardware and software purchased
specifically for the project.
Indirect costs are costs that are not directly
related to the products or services of the project,
but are indirectly related to performing the
project.
• Costs of electricity, paper towels…
Cont’d
Sunk cost is money that has been spent in the past;
when deciding what project to invest in or continue, you
should not include sunk costs.
• To continue funding a failed project because a great
deal of money has already been spent is not a valid way
to decide on which projects to fund.
• Sunk costs should be forgotten.
Learning curve theory states that when many items
are produced (or tasks are performed) repetitively, the
UC of those items decreases in a regular pattern as
more units are produced (or more tasks are performed)
Cont’d
Reserves are birr included in a cost estimate to
mitigate cost risk by allowing for future situations that
are difficult to predict.
• Contingency reserves allow for future situations that
may be partially planned for (sometimes called known
unknowns) and are included in project cost baseline.
Recruiting & training costs for expected personnel
turnover during a project.
• Management reserves allow for future situations that
are unpredictable (sometimes called unknown unknowns)
Extended absence of a manager; supplier goes out of
business
Keys to Effective PCM
Effective PCM is an extremely complex process that
begins very early during a project life cycle, and long
before its actual start.
Among the factors that influence success is a
reasonable and accurate system for estimating costs.
Table 1.1, drawn from Rodney Turner’s work
highlights some of the most important considerations
when creating a cost estimation system.
Cont’d
Cont’d
Cont’d
Cont’d
Cont’d
Cont’d
While the above list is not all-inclusive, its elements do have
a significant influence over the effectiveness of cost
management for projects large and small.
Of more immediate interest is the sheer complexity and
breadth of an effective cost estimation system, suggesting
that organizations intent on controlling their costs need to
recognize that there is no such thing as a simple, quick fix.
Rather, downstream PCM rests heavily on the care and
accuracy of detailed estimation occurring early in the
project.
As the old saying suggests, ‘‘We can’t fix what we can’t see.’’
Taken one step further, we can’t control what we did not
plan for!
The End of Chapter 1
Thank You!!!
