Chapter 9. Budget and Procurement
9.5 Managing Project Costs
A key aspect of ongoing cost management is monitoring cost estimates. Projects seldom go according to plan in every detail. Baseline budgets often change after they have been approved. Successful project leaders understand that estimates are just that, estimates. As new information and real experience occur, it may be necessary to revise an estimate. In some cases, the revision is minor and does not impact the achievement of the project’s total budget. In other instances, the necessary revisions are significant, and a new baseline needs to be created. Project managers need to discuss the ongoing management of the schedule with key stakeholders to understand their expectations of when/how they are informed of changes that need to be made. Stakeholders’ expectations for ongoing cost management can be documented in the Cost Management Plan.
The project manager must be able to identify when costs are varying from the budget and, thus, manage these variations. A project manager must regularly compare the amount of money spent with the budgeted amount and report this information to managers and stakeholders. It is necessary to establish an understanding of how this progress will be measured and reported. Earned Value Management (EVM) is an effective tool used by project managers to monitor and control these variations. We will elaborate on EVM in Chapter 11.
If the total amount spent on a project is equal to or less than the amount budgeted, the project can still be in trouble if the funding for the project is not available when it is needed. There is a natural tension between the financial people in an organization, who do not want to pay for the use of money that is just sitting in a checking account, and the project manager, who wants to be sure that there is enough money available to pay for project expenses. The financial people prefer to keep the company’s money working on other investments until the last moment before transferring it to the project account. The contractors and vendors have similar concerns, and they want to get paid as soon as possible so they can put the money to work in their own organizations. The project manager would like to have as much cash available as possible to use if activities exceed budget expectations.
As explained in section 9.4, project managers keep contingency and management reserves in case risks occur and activities need more money. In practice, most projects face uncertainties that increase costs above the original estimates. Estimating the likelihood of such uncertainties is part of risk analysis, which is discussed in more detail in Chapter 10.