Thursday, June 12, 2008

Revising Project Cost Estimates and Budgets

Projects need to have parameters. It only makes sense that there should be a set duration of time in which to produce what the customer has asked for, and a limited amount of money to spend doing it. But what if early measurements of cost efficiency reveal that you are going to have trouble remaining within the cost and budget boundaries?

Revising cost estimates and making updates to the overall budget through the course of the project as more information becomes available is a part of the project cost control process. Preliminary estimates that were set during the planning stages of the project may need to be revised for the following reasons.
  • Real costs for certain resources have changed.
  • The original estimates contained errors.
  • There has been a change in the project or product scope.
  • Vague estimates can now be refined.
Cost revisions are justified when it becomes apparent that cost variances to date are not due to isolated causes. A poor rating of cost performance to date may show that your total costs at completion are going to be outside the permitted range. The sooner you can bring variances into line, the better. Revising cost estimates can result in the following benefits.
  • Revised cost estimates ought to be much more accurate.
  • You will have more confidence in the estimated costs at completion.
  • You will know better if the project will come in on budget.
Cost revisions that lead to a change to the budget must be approved as outlined in the project's cost change control system. The person making the change should indicate in the change request the reason for the proposed revisions and await final approval before making any changes.

To revise cost estimates, you simply go back to your original estimates, isolate the specific items that are causing the variance, and then update the estimates based on the more accurate information.

Not all revisions to cost estimates will necessarily lead to updates to the budget. Offsetting revisions to cost categories may not affect the overall budget for a certain time frame or task. Budget updates involve a change to the approved cost baseline and should only be done under certain circumstances.

A change to the budget is considered to be one of the "last resorts" of project cost control. Cost variances should be assessed to see if there is any other way to correct them before re-baselining the entire project.

When you have determined that revised estimates will lead to a budget update, you must follow the approval process laid out in your cost change control system. Any changes to the product or project scope must be analyzed to see how they will affect overall costs. You will want to consult the project's scope management plan and integrated change control system as well. Additional details are provided below.
  • Cost management plan (CMP). If your CMP states that the project budget will have a 25 percent contingency on top of the original estimate, a 5 percent variance might be easy to accept. If there is no contingency, or the variance is more significant, you would update the budget.
  • Product scope. Changes to the features and functions of the product or service you are delivering, whether imposed or optional, will likely affect costs. You need to determine if the changes in cost are great enough to warrant altering the budget.
  • Project scope. Changes to the work that must be done in order to deliver the specified product or service, whether imposed or optional, may also affect costs. You need to determine if the budget should be altered to compensate for these prospective variances.
Remember, cost estimates and budgets need to be updated so that at any point in time the project plan continues to be a valid tool for predicting the future of the project. By keeping in mind the information discussed above, you'll know when and how to revise cost estimates and update budgets.

1 comment:

phatik said...

I actually enjoyed reading through this posting.Many thanks.

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