Project Cost Management System: Planning, Estimation, and Control

This report provides a comprehensive overview of project cost management, focusing on the critical aspects of planning, estimation, and control within the context of IT projects. It explores the paradigm of the cost management process, detailing cost estimation, budget preparation, and cost control mechanisms. The report examines cash flow analysis, various types of costs (tangible, intangible, direct, indirect, and sunk), and different cost estimation techniques (analogous, bottom-up, and parametric). It also addresses challenges in cost estimation and emphasizes the importance of controlling costs through earned value management. The report concludes by highlighting the significance of accurate cost estimation and budget preparation for successful project outcomes and emphasizes the role of tools like Microsoft Project for effective cost management. Key concepts like cost variance and cost performance index are also discussed to provide a complete understanding of the subject.

Project Cost management System

Table of Contents
Introduction................................................................................................................................2
Paradigm of Cost management process.....................................................................................2
Cash Flow Analysis....................................................................................................................3
Types of cost...........................................................................................................................3
Types of Cost estimates.............................................................................................................3
Tools and Techniques for cost estimation plan..........................................................................4
Challenges in the cost estimation program................................................................................4
Controlling cost..........................................................................................................................5
Conclusion..................................................................................................................................5
References:.................................................................................................................................6

Introduction
Cost management plan is the integral process for the completion of the IT project without any
pitfalls. Project cost estimation plan is the amalgamation of planning process, estimation,
developing budget, and implementation of controlling parameters for reducing costs for the
approval of the final budget.
Project is dependent on three variables which are named as time, cost, and scope. Cost of the
IT project is determined against the time required to complete the activities which are
scheduled in the project scope management plan. Cost variance can be minimized by
developing the cost estimation plan because it gives the estimated values of the project so that
minimal difference of variance can occur in the planned values and the actual values of the
activities (Ogero, 2013). Implementation of controlling parameters for reducing costs helps in
the approval of final budget.
Paradigm of Cost management process
Project cost management program is designed for completing the given activities schedule
within the approved cost of the project (Huang, and Zhang, 2013). Requirement of the
stakeholders should be satisfied within the minimum budget allocated for finishing the tasks
with excellence so that overall cost of the project can be controlled. Paradigm of cost
management processes is described below:
 Cost estimation: Costs are determined according to the resources used for
accomplishing the tasks within the given deadline. Accuracy in the estimation is the
integral part of the process which helps in minimizing the cost variance. It is required
to estimate the values of the activities and resources used by examining and
monitoring their performance and market analysis (Schwalbe, 2013).
 Budget preparation: Development of the budget involves the allocation of cost to the
individual activities so that it can be completed within the baseline of time and cost.
Determining the cost of the tasks depends on measuring the performance of resources
used and time allocated for completing the given activities.
 Controlling costs: Implementation of controlling parameters for reducing costs helps
in the approval of final budget. Cost can be controlled by forecasting the resource
required for completing the activities within the minimum time. Updating of the

activities according to the availability of resources helps in systematic organization of
the assets.
In the planning process, estimation of costs and preparation of the budget take place by
creating the baseline for the cost, updating process, setting baseline, and preparing budget for
the final approval. Monitoring and controlling of the costs can be done by identifying the
performance of the resources, forecasting of budget, asset organization, and deploying change
request management.
Cash Flow Analysis
Cash flow analysis can be determined by measuring the annual cost of the project and return
on investment to evaluate the profit earned by the enterprise. Cost of the project is determined
by defining tangible cost and intangible cost. Profitability of the firm can be measured by
evaluating the benefits earned from the intangible and tangible cost of the project.
Types of cost
Types of cost Description
Tangible cost Cost of the fixed assets
Intangible cost Cost of things which are indefinite and intangible objects
Direct cost Direct cost associated with the development of product and
services (Schwartz, 2017)
Indirect cost Indirect cost are not directly related to the development of
product and services
Sunk cost Sunk cost is the amount spent in the project past history
Types of Cost estimates
Types of cost estimates are described in the table below:
Types of cost estimates Description
Rough order of magnitude estimate It gives the rough estimates of the overall
cost of the project required to be completed
within the given time and resources
Budgetary estimates Development of the budget involves the
allocation of cost to the individual activities

so that it can be completed within the
baseline of time and cost. It is developed for
the future planning of the undertaken project
Definite Estimates Association accurate value for purchasing the
required resources. It is involved throughout
the completion of project.
Tools and Techniques for cost estimation plan
Quality and accuracy in determining the cost of the project activities depends on the
acquisition of tools and techniques for the development of the project budget which are
summarized below:
 Analogous estimates: It is the top down approach which is used for estimating the
actual cost of the project. Decision capability of the project managers enhances the
reliability and accuracy of the project cost management. Estimation of the cost
depends on the historical analysis of the prepared budget for the project completed in
the past (Simanjuntak, and Agung, 2018)
 Bottom up estimates: Total cost of the project depends on the scheduling of the
project activities. It is the work packages, of resources, time, performance, and
activities (Yismalet, and Patel, 2018).
 Parametric estimates: Parametric costs are allocated by using the software tools.
Consideration of the cost estimates depends on the reserves amounts which are stored
for future completion of the project (Hanid, Siriwardena, and Koskela, 2010).
Challenges in the cost estimation program
Inaccuracy and unreliability of the costs estimations occurs due to the following reasons:
 Estimation of complex project
 Lack of experience in estimation process
 Underestimation
 Failure in achieving desired estimation

Controlling cost
Monitoring of the cost performance is the important step for setting the cost baseline.
Changes in the project planned activities directly affect the project budget. Forecasting of the
budget helps in controlling the cost during the project start up phases (Lichtig, 2010). Cost
control can be determined by following the earned value management system. It can be
controlled by forecasting the resource required for completing the activities within the
minimum time. Earned value management system is developed for amalgamating time, cost,
quality, and scope under the single units for setting the cost baseline for the project (Kahura,
2013). Cost control depends on three cost values which are:
Planned value: It is the estimated value allocated to each activity
Actual cost: It is the cost incurred during the accomplishment of the project work
Earned Value: It is the estimation of completing the undertaken activities by the stakeholder
within the given time and cost.
Cost variance: It is calculated by finding the difference between earned value and actual cost
of the project. Cost variance can be minimized by developing the cost estimation plan
because it gives the estimated values of the project so that minimal difference of variance can
occur in the planned values and the actual values of the activities.
Cost performance index: CPI is the ratio between the earned value and actual cost of the
project (Kujala, Brady, and Putila, 2014).
Conclusion
It can be concluded that estimation of the cost and preparing project budget helps in
calculating the profit earned by the enterprise by measuring the estimation of return on
investment. Decision making capability of the project manager helps in getting accuracy in
the estimation of the project cost. Controlling cost fosters on minimizing the project risks so
that project can be successfully accomplished within the project constraints. Allocation of
cost per individually activities can be accurately done by implementing the Microsoft project.
Earned value management system is developed for amalgamating time, cost, quality, and
scope under the single units for setting the cost baseline for the project. It is required to
estimate the values of the activities and resources used by examining and monitoring their
performance and market analysis.

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