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:

Anonymous said...


Tag: PM206A53. Let me share all of you about #5 Tips for Project Management Success,, I hope you enjoy it

1. Plan your day using time management techniques

As a project manager, time management skills are essential because you are dealing with a wide range of tasks that demand a quick turnaround time. Planning your day will go a long way in keeping you organized and increasing your productivity. Assist your task planning by using project management software which helps you track the work of you and your team.

If you are not very tech savvy, a simple to-do list can also be a great organizational tool. Prioritize your most important tasks by putting them at the top of the list and less important ones at the bottom. Having a visual plan of your daily tasks helps to keep you on track and aware of time.

Related post: Free ebook 104 secrets to become a great project manager

2. Include stakeholders in important project conversations

While you will have plenty of responsibilities regarding the project, don’t neglect your clients.

Good communication is essential is keeping both parties informed of project progression, curtailing scope creep, and apprised of changing requirements. Some clients may have different expectations when it comes to communication, so make sure to establish the frequency and type of communication (like emails, phone calls, and face-to-face conversations) at the beginning of your project.

Establishing communication expectations early helps alleviate stakeholder uncertainty about communication frequency and delivery.

3. Regularly communicate with your team

Daily team communication helps keep misunderstandings and unclear requirements under control. Keeping your team informed in every step of the project is essential to project management success.

For example, a study published by Procedia Technology found that good communication skills were the cornerstone of project management. The study examined over 300 “construction project managers, architects, construction managers, engineers and quantity surveyors” and their successes and failures on various construction projects.

4. Anticipate project setbacks

Even the best-laid plans often go awry.

Remember that even with a high amount of planning and attention to detail, your project may still encounter some challenges. Pay attention to complaints from stakeholders or colleagues, and other warning signs, like a missed deadline or cost overrun, that there may be a problem.

Preventing a crisis will keep your project running smoothly, save you a lot of time, and keep you, your team, and your stakeholders confident in progressing with the project.

Unfortunately not every complication can be avoided. Crisis management skills are essential for dealing with the unexpected. Project managers need to be flexible and pragmatic. Improvise and make sharp decisions when needed.

Related post: 92 free project management templates

5. Stay focused on the details

A common problem project managers encounter is having the project aims not aligned with the organization’s objectives. A great project manager will strategize a plan for the project to lead back to the overall success of the business.

Know your project’s scope by heart and avoid wandering outside of the project’s requirements. It’s too easy to get lost in minor details and forget what your focus is, so a well-planned project scope is essential for success.

And final, you should use KPI to measure effectiveness of the project, here are full list: 76 project management KPIs