Digital Transformation for The Enterprise Project Management Office (EPMO) – Project Cost Management – Part 1

Digital Transformation for The Enterprise Project Management Office (EPMO) – Project Cost Management – Part 1

Digital Transformation for The Enterprise Project Management Office (EPMO) – Project Cost Management – Part 1
 Digital Transformation for The Enterprise Project Management Office (EPMO) – Project Cost Management – Part 1
 

 
The next topic to be covered in the digital transformation for the enterprise project management office (EPMO) will be project cost management. For an organization, each project represents an investment that when completed it will produce the products and services for which the anticipated revenue or income will be generated when those products and services are consumed. The revenue is usually determined by the market supply and demand for which the organization would have no control on. Therefore, delivering on budget and without cost overrun is a must for the organization otherwise their anticipated ROI could be drastically affected should they fail to do so.  
The Project Management Institute (PMI) Project Management Body of Knowledge (PMBoK) provides a comprehensive approach for managing the project cost. In addition, for many projects, it is important to integrate the cost management with procurement (contract) management as actual cost would usually be captured in those contracts which the organization have opted to have to transfer the project risks to other organizations. Accordingly, the cost management knowledge area will be presented in two parts. The first part will cover cost planning, estimating, budgeting, financing and funding. While the second part which will cover managing, and controlling costs so that the project can be completed within the approved budget will be covered after present the project procurement knowledge area. This is needed as most of the actual cost will be incurred within this knowledge area.  

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Cost Breakdown Structure (CBS)  

Organizations might use the work breakdown structure (WBS) for detailing the levels for building the project cost or use a breakdown structure that is aligned with the cost control structure used by the organization. In both scenarios, the organization needs to define the cost breakdown structure (CBS) that will be used to aggregate and control their projects’ cost.
PMWeb Project Management Information System will be used to create the cost breakdown structure (CBS) to the desired level. All CBS levels will be defined and all possible values will be added. It is a very common practice that organizations unify their cost breakdown structure across projects, and if not at least unify the first three levels.
Another important requirement for cost management is to unify the financial periods for their projects. Those financial periods need to be aligned with other financial system used by the organization and for which they might need to import or export cost data to those projects. Organizations usually select the last Thursday or any specific date of each month to represent the end of a financial period. This will also allow adjusting the date for holidays or other off periods. Again, PMWeb PMIS will add those financial periods for each project to be managed by the EPMO.

Cost Estimate

The first step in determining the project cost is to estimate the cost of performing the scope of work known to the project team. As was mentioned in the last article, the work breakdown structure (WBS) and available project documents and drawings is where the project team will start with.  The accuracy of the cost estimate depends on how detailed the project scope is. It is therefore very common to have different versions of the cost estimate depending on the project life cycle stage the project is at.
PMWeb PMIS will be used to capture all those cost estimate versions along with the different type of project documents that were made available when that cost estimate was developed. Similar to other modules in PMWeb, the workflow module is used to map the process for submitting, reviewing and approving the cost estimate.
Similar to other cost estimating systems, the organization can build their own cost database for the different type of resources to be used in the project as well as the cost of materials and other products that were procured on previous projects. This will help the cost estimator in providing a substantiated cost estimate based on the knowledge captured from delivering similar projects. As explained in the demand management article, those resources and material can become part of what is known as Cost Assembly to expedite the process of coming up with a project cost estimate specially at the early project life cycle stages. The screenshot below shows an example of the price of a product that was procured on another project but for which the cost becomes available for other projects.
Although one would expect that most organizations by today use some kind of a cost estimating application, nevertheless, we have to admit that the majority of cost estimators continue to use MS Excel as their trusted application for coming with the project cost estimate. They have built macros and formulas that address the different needs of coming up with a cost estimate. Therefore, the ability of a PMIS like PMWeb to import cost estimate data from MS Excel is a must and not an option.
When the project estimate is approved by the project manager, the project budget will be generated from the cost estimate. In addition to the estimated cost, the project budget should consider allowances, mark-ups and contingencies added to the estimate to produce the approved project performance budget which is also known as the Budget at Completion (BAC).

Project Performance Budget  

Managing the project performance budget is one of the most important processes in managing any project. Each budget line item represents that amount that cannot be exceeded when the project is executed. Organizations might opt to have the budget line item in different currency than the overall budget if there is no contingency allowed for accounting for currency fluctuation or devaluation. In this case, the currency exchange rate will depend on values set by the organization that can be manually adjusted or linked to a currency exchange portal to update the exchange rates on pre-specified periods. It should be noted that and similar to the cost estimate, a project could have more than one budget version but only can be labelled as Project Approved Budget. Again, PMWeb PMIS will be used to capture all those budget versions whether they have a single currency or multi-currency.
 
Another important aspect of every performance budget and that is to determine the anticipated spending plan of the approved budget. This is very critical for any organization to ensure that the needed funds for the project is available. Similarly, this will help in reducing the risk of booking project budget for periods where those funds are not needed. Failing to do so, would deprive other projects who could be in earnest needs to use those funds on their project. For each budget line item, PMWeb will enable project the budget allocated for that line item over its performance period. The funds could be projected in a front end, back end, bell shaped, linear or any other desired distribution curve. In addition, each budget line item could be linked to its assigned project schedule activity if needed. The anticipated budget projection is also known as the Planned Value (PV) or Budget Cost of Work Scheduled (BCWS).
This will enable the project team to produce a report that details the amount of budget anticipated to be spent for each financial period. The same report can provide this anticipated budget data for a single project, a program, a portfolio of projects or for the whole organization projects.

Budget Adjustments

When a budget is approved, any changes, adjustments or transfers to the approved budget, must be done through a formal process known as “Budget Request”. The Budget Request document template will detail the reason of this change, adjustment or transfer, who is requesting this change and when as well as the budget line items that could be affected by a change. For example, in addition to the cases where the budget needs to be increased due to new scope or decreased to reduced scope, budget requests are used to control the project contingency drawdown where funds will be transferred from the contingency line item to the appropriate budget line item. In addition, budget transfers could be done from one to another if this authorized by the organization.
The budget request document template in PMWeb PMIS will be used to capture the details of all budget changes, adjustments or transfers whether within the same project of from and to other projects. In addition, for new scope of work, the budget request value can be generated from the cost estimating document template similar to the project budget. All supportive documents can be attached to the budget request and related PMWeb records and emails can be also linked to the budget request. In addition, a workflow is usually assigned to the budget request document template to ensure that all required reviews and approvals are secured before approving the budget change.
 
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As discussed earlier, the remaining processes of the project cost management knowledge area will be addressed after the completion of the procurement knowledge area. This will be the next article to be presented to maintain the cost management continuity.

                                                                           Bassam Samman PMP EVP PSP GPM
About:
Enabling Anytime, Anywhere Using Any Device Trust-Worthy, Real-Time, Single Version of the Truth Monitoring, Evaluation and Reporting for Your Capital Projects Delivery 

Bassam Samman, PMP, PSP, EVP, GPM is a Senior Project Management Consultant with 40-year service record providing the best practices of digital transformation and lean construction management to enforce transparency, accountability, governance and single version of the truth reporting to over than 200 programs and projects with a total value in excess of US $100 Billion. Those programs and projects included Commercial, Residential, Education and Healthcare Buildings and Infrastructure, Entertainment, Hospitality and Shopping Malls, Oil and Gas Plants and Refineries, Telecommunication and Information Technology projects. He is thoroughly experienced in complete project management including project management control systems, computerized project control software, claims analysis/prevention, risk analysis/management (contingency planning), design, supervision, training and business development. Bassam is a frequent speaker in topics relating to Project Management, Strategic Project Management and Project Management Personal Skills. Over the past 40 years he has lectured at more than 350 events and courses at different locations in the Middle East, North Africa, Europe and South America. 
He has written more than 300 articles on project management and project management information systems that were featured in international and regional magazines and newspapers. He is a co-founder of the Project Management Institute- Arabian Gulf Chapter (PMI-AGC) and has served on its board of directors for more than 6 years. He is a certified Project Management Professional (PMP) from the Project Management Institute (PMI), a certified Planning and Scheduling Professional (PSP) and Earned Value Professional (EVP) from the American Association of Cost Engineers (AACE) and Green Project Management (GPM).  Bassam holds a Masters in Engineering Administration (Construction Management) with Faculty Commendation, George Washington University, Washington, D.C., USA, Bachelor in Civil Engineering – Kuwait University, Kuwait and has attended many executive management programs at Harvard Business School, Boston, USA and London Business School, London, UK

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