The Project Cost Management Plan

The cost management plan is an important element of project cost control. It is developed during the cost estimating process and forms one of the main inputs used during the cost control process.

The cost management plan describes how cost variances will be managed, should they occur. Project managers must review the cost management plan regularly to ensure that the guidelines it contains continue to be appropriate throughout the duration of the project.

The cost management plan can be either formal or informal, depending on the nature of the organization. The level of detail required by the project stakeholders will determine whether the plan needs to be detailed or broad.

During the planning stages, companies decide the range by which cost variances will be permitted to deviate. The permitted range may be dependent on such factors as:

• the particular phase of the project you are in
• the length of the phase
• the length of the entire project
• the nature of the task or materials being estimated
• the perceived accuracy of the estimate.

Variance management may be different from project to project. For many projects, variances are permitted to change over the project duration. For projects that involve research and development, for example, larger deviations may be allowed during the earlier phases of the project. On the other hand, for manufacturing projects, allowed variances may be fixed over the duration of the project. Since the risk for any project decreases as time goes on, so should the allowed variance.

When a variance occurs, you can deal with it in one of four ways. You can choose to ignore the variance, make functional modifications, replan the project, or redesign the product. The first issue to consider when choosing the appropriate management technique is the size of the cost variance.

• If the variance is inside the permitted range of deviation, the two best choices are to ignore it or to make functional modifications.
• If the variance is outside of the permitted range of deviation, you need to take a more drastic approach, such as replanning or redesigning the product.

The choices available to manage a cost variance vary in terms of how drastic they are, how much work they require, and how much they change the project. Ignoring the variance or making functional modifications are mild solutions. These choices require little or no work, and make minimal changes to the project, if any.

Replanning or making changes to the product scope are more drastic solutions. They require a great deal of work and make substantial changes to the project. More details about these four choices are provided below.

• Disregard. The cost variance can be ignored if it falls within the permitted range of deviation and does not appear to be a sign of future cost problems.
• Modify. If the variance is within the permitted variance range, but could potentially grow or become a problem in the future, functional modifications can be made. These are small changes to the project that can save time and money.
• Replan. Replanning occurs if the variance is outside of the permitted range. Management attempts to replan the project without changing the product scope. This means finding less expensive ways of doing things, such as using less expensive resources or contracting out.
• Redesign. This is the most drastic measure. It involves changing the product or service you will deliver. You have to find ways to make the product less expensive to produce and deliver. Redesign only if replanning is not sufficient.

Project replanning and product redesign involve major changes to the project. Both approaches require an assessment of the impact on the overall product quality and its ultimate usability by the customer. Taking either of these approaches too far could render the product sub-standard and unmarketable.

Remember, there is comfort in having a good plan for managing costs and knowing how to implement it. The cost management plan can help you effectively manage project cost variances when they occur.