Tuesday, May 20, 2008

The Project Cost Management Plan

Besides the cost estimates themselves, the most important output from estimating project costs is the cost management plan. This is the document that outlines how project costs will be kept on track.

As excellent as your cost estimates may be, you must have an adequate plan for managing cost variances and dealing with problems. A good cost management plan (CMP) clearly outlines how to implement corrective action in order to reduce or eliminate cost variances.

The main purpose of a cost management plan is to provide direction to project management teams. It must contain guidelines to follow, outlining what to do when positive or negative cost variances occur. Cost problems are usually handled according to their severity. Variances that pose no real threat to overall cost performance may require no action at all.

Cost management plans can be structured differently depending on the performing organization and the needs of the project stakeholders. The points below describe a broadly-based plan and a detailed plan.
  • In a broadly-based plan, costs are estimated, monitored, and reported at the high-level work breakdown structure (WBS) elements. Tasks are not complex.
  • A detailed plan will deal with costs at the lowest level of the WBS, making it easier to obtain timely and accurate information.
You also must decide whether your cost management plan will have a formal or informal structure. Bureaucratic structures are much more formal than project-based companies. Design a CMP that is consistent with the organizational culture of your company and with the authority that project managers hold. More details are provided below.
  • Bureaucratic. Does your company have a bureaucratic and inflexible structure? If so, you likely will require formal forms, processes, approvals, and reviews for every step of the cost management process.
  • Mixed. Your project team may work within a formally structured organization that answers to upper management but has the authority to manage project costs at its own discretion and without all the red tape.
  • Project-based. The cost management plans of small, entrepreneurial companies typically reflect the increase in decision-making authority held by project managers. Processes are flexible, depending on particular projects and situations.
With the four options available—broad-based and detailed, bureaucratic (or formal) and project-based (or informal)—for structuring cost management plans, a type of matrix is formed from the combinations.
  • Formal-detailed. This type of plan would be appropriate for a large institution with rigid accounting procedures.
  • Formal-broad. The processes are vigorous but costing categories are general.
  • Informal-detailed. The cost of every team activity is outlined but loosely monitored.
  • Informal-broad. Costs aren't closely monitored or very detailed.
The two extreme situations are easy to identify. For the others, you need to look at organizational structure, level of detail, degree of decision-making authority, and the important of auditability.

How will you know if your project's cost management plan is a good one? Assess whether or not it meets the needs of the project stakeholders. Stakeholders are the people involved in producing the project or who are affected by the project's end result. They include the project team, investors, and the customer. Stakeholder needs may vary from one project to another.

Remember, as you develop cost estimates for your project, keep in mind that your project also needs a cost management plan to help you manage project costs after the budget is developed and project activities are under way.

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