Chapter Review: chapter 7

Chapter 7
Project Cost Management
Cost is one of the triple constraints, so the project cost management is the processes required to ensure that a project team completes a project within an approved budget. There are three project cost management processes:
1- Cost estimating: estimate the cost of the resource needed to complete a project. The main outputs of the cost estimating process are activity cost estimates and supporting details, request changes, and updates to the cost management plan.
2- Cost budgeting: allocating the overall cost estimate to individual work items to establish a baseline for measuring performance. The main outputs of the cost budgeting process are cost baseline, project funding requirement, request changes, and updates to the cost management plan.
3- Cost control: control changes to the project budget. The main outputs of the cost control process are performance measurements, forecast completion information, request changes, recommended corrective actions, and updates to the project management plan, cost estimate. Cost baseline, and organizational process assets.
Basic principles of cost management:
- Profit: revenues minus expenditures. To increase profits, a company can increase revenue, decrease expenses, or try to do both.
- Profit margin: the ratio of revenues to profits.
- Life cycle costing: allow us to see a big picture view of the cost of project throughout its life cycle. This help to develop an accurate projection of a project’s financial cost and benefits. It considers the total cost of ownership, or development plus support cost, for a project.
- Cash flow analysis: a method for determining the estimated annual costs and benefits for a project and the resulting annual cash flow. Project managers must conduct cash flow analysis to determine net present value.
- Tangible cost or benefit: cost or benefit that an organization can easily measure in dollars.
- Intangible cost or benefit: cost or benefit that an organization that difficult to measure in dollars.
- Direct costs: are cost that can be directly related to producing the products and services of the project. We can attribute direct costs directly to certain project.
- Indirect costs: costs that are not directly related to producing the products and services of the project, but are indirectly related to performing the project.
- Sunk cost: money that has been spent in the past. Consider it gone, like a sunken ship that can never be returned.
- Learning curve theory: when many items are produced repetitively, the unit cost of those items decrease in regular pattern as more units are produced.
- Reserves: dollars included in a cost estimate to mitigate cost risk by allowing for future situations that are difficult to predict. Contingency reserve for future situations may be partially planned. Management reserves for future situation that is unpredictable.

Cost management plan is a document that describes how the organization will mange cost variance on the project.
One of the main outputs of project cost management is a cost estimate.
There are three basic types of estimates:
1- Rough Order of Magnitude (ROM) estimate: provide an estimate of what project will cost.
2- Budgetary estimate: used to allocate money into an organization’s budget.
3- Definitive estimate: provide an accurate estimate of project costs.
Cost budgeting: involve allocating the project cost estimate to individual work items over time. Cost budgeting requires WBS. An important goal is to produce a cost baseline.
Cost Control includes: monitoring cost performance, ensuring that only appropriate project changes are included in a revised cost baseline.
Earned Value Management (EVM) is a project performance measurement technique that integrates scope, time, and cost data.

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