What is project cost planning and control?
Cost planning and control is the estimation of costs, the setting of an agreed budget, and management of actual and forecast costs against that budget.
Cost planning is an essential part of the project management process. Project managers need to understand where costs fall in their schedule to manage demand for resources.
Typically, all resources that consume costs will be included in a resource optimised schedule. This type of schedule is essential to cost planning, to help build up picture of planned costs over time.
Planned costs can be fixed or variable. A fixed cost happens once in the life of a project, for example, a machine setup. A variable cost happens more than once over the life of a project, for example, component machining.
Cost control is the process of collecting actual costs and collating them in a format to allow comparison with project budgets. Cost control is necessary to keep a record of monetary expenditure for purposes such as:
- minimising cost where possible;
- revealing areas of cost overspend.
Cost control information is fundamental to the lessons learned process, as it can provide a database of actual costs against activities and work packages that be used to inform future projects.
APM’s Planning, Scheduling, Monitoring and Control (2015)
Cost breakdown structure
Cost budgets usually start with a procurement strategy and the cost breakdown structure (CBS). The CBS defines the level at which costs will be collected. Its purpose is to allow budgets to be set and costs to be collected, recorded and controlled.
APM’s Planning, Scheduling, Monitoring and Control (2015)
Diagram: Cost breakdown structure (CBS). Copyright APM
APM Body of Knowledge 7th edition
You can learn more about cost planning and control in chapter four of the APM Body of Knowledge 7th edition.
The APM Body of Knowledge 7th edition is a foundational resource providing the concepts, functions and activities that make up professional project management. It reflects the developing profession, recognising project-based working at all levels, and across all sectors for influencers, decision makers, project professionals and their teams.
The seventh edition continues in the spirit of previous editions, collaborating with the project community to create a foundation for the successful delivery of projects, programmes and portfolios.
Blog - Measuring time and budgets – what the project management community can learn from the construction Industry
I recently saw one of those lists that people publish to capture our attention or to make a point. This one covered 14 surprising project management statistics - “capturing time/costs against projects” was the one that caught my eye.
I hail from the construction industry which has a poor public image. Whilst it may have a poor reputation it has established techniques and processes that provide highly effective controls which other sectors could benefit from.
When discussing my background in monitoring and controlling costs I explain how contracting is a low risk low margin undertaking. It is unusual for margins on any construction project put out to tender to exceed 5%. Whilst a margin of 5% may not sound much it is a margin on the value of a project, a contractor does not need significant capital as contracting projects are all about cash-flow. Whilst a 5% margin on value may not seem too alluring it can generate a healthy return on capital employed. As a crude example a £1M project with a 5% margin would deliver profits of £50,000. To undertake a £1M project does not require £1M, typically the funding required for a project of that scale may be less than 10% of its value, so the 5% margin can mean more than a 50% return on capital employed. The focus is to ensure that at least a 5% margin is achieved otherwise a slender profit can become a loss very quickly.
Quantity Surveying is a specialised discipline which those on the outside may be oblivious to, here is the Wikipedia definition:
A quantity surveyor (QS) is a professional working within the construction industry concerned with construction costs and contracts. Services provided by a quantity surveyor may include: Cost planning and commercial management throughout the entire life cycle of the project from inception to post-completion.
The notion of cost planning is instructive; it is employed to determine whether what is proposed is achievable with the budget allocated. The QS can provide costings for a project on a per square metre based using historic data compiled for various types and grades of building. For example, if an investment company is proposing a shopping centre in Greater Manchester the QS can provide a realistic guide cost at the outset. During the design process the QS can identify costly items and suggest changes to achieve the same quality at a lower price, keeping the project within budget from the outset. Making changes at this time is relatively easy.
Cost planning is again possible due to the fund of historical data available to Quantity Surveyors. It is a function of capturing time and costs against projects, a discipline that has been well established in construction but interestingly is one that is regarded as a big Project Management challenge for organisations according to the article I saw.
A Bill of Quantities provides a breakdown of what is required to deliver the architects design. It is used to obtain tenders from contractors. Tenders received are based upon this document and have a common base for comparison, in turn this information can be scrutinised to ensure that the prices quoted are realistic.
Analysing the price quoted can identify anomalies and “front-loading” where the cost of activities scheduled early in the project are higher than expected in order to accelerate the contractors break-even point. Identifying such items protects the customer from over-paying for the work done.
The tender figure will be an amalgam of several cost elements which can each have a budget ascribed to them. Labour, materials, plant & equipment, overheads and sub-contract packages are typical cost elements of a construction project.
Quantifying what is required to deliver a project also provides a valuable measure that can be used to ensure that the quantity of materials ordered does not exceed what is expected, thereby reducing the potential for waste.
This discipline in turn has driven an adherence to processes to monitor and control costs in construction projects. Tracking the time spent by both direct and subcontract labour is a well-established discipline. For subcontractors it can be used to determine if they are dedicating enough resource to the project. If the number of operatives in attendance does not match what was planned and agreed, it can very quickly store up problems that cannot be resolved by flooding the project with labour at a later stage.
Measuring what has been produced on a daily basis generates more information to understand status and to validate the estimates used when the tender was originally compiled.
Monitoring materials delivered and consumed is another established construction project management discipline. Each delivery to a project will have been ordered from suppliers who will in turn invoice. Have they delivered the correct materials in the right quantities? Does their invoice price match the order value and perhaps more importantly how does it compare to the price used when compiling the original tender? Any anomalies can have a detrimental effect on project profitability.
Controlling waste through good management and storage on site will also impact the profitability of a project. Wastage will have been factored in to the tender price by the estimators, good management, materials handling and storage can limit waste and even a small improvement on the allowance made by the estimator can have a big impact on project profitability.
The focus upon identifying costs, monitoring progress and consumption of materials and labour provides the team on any construction project with powerful insights and significant elements of control that ensure effective project delivery.
Disciplines that are well established in construction could be employed by other industries and sectors to address the challenge of capturing time and costs against projects. It’s not easy doing all this but the benefits of adhering to such processes does pay dividends. Little and often are the guiding principles for this approach, the big question is can organisations endure the pain to realise the gain?
Posted by Dominic Moss on 12th Jan 2017
APM Planning, Monitoring and Control (SIG)
The generic area of operation is project control, focusing on the techniques and processes listed as well as interfaces to other subject areas, e.g. risk, governance, programme and portfolio management.
The Planning, Monitoring and Control SIG was formed in 2012.