Cost Management

6.1 Introduction

The preceding chapter elaborated the significance and discusses the best practices for planning the management of resources avail­able to complete a project. The second key block of information

on which the project manager must have a firm handle is project costs. The main goal for the project manager is to manage these costs. The discussion which follows, concerning the costs of a project as a whole from a decision-making point of view, will bring out the many other subjects touched by cost management decisions.

A cost estimate is the main target data to obtain at the outset of any project. It enables management team to define a project budget. During the project’s execution, cost control management methods are applied to control and follow up progress of the project.

Usually, cost estimates are calculated and verified in more than one phase of the project. In the initial studies phase, which is called the appraisal phase, costs are calculated according to relatively simplified principles, with the regions and boundaries of "right" and "wrong" widely set. The accuracy of cost estimate calculations increases as the project progresses. Possibilities of increasing, the actual cost more than the estimated cost of the project decreases with time, until the end of the project has been reached and 100% of costs have been issued.

To ensure the best chance of devising an accurate valuation of a project’s costs, the feasibility studies phase requires personnel possessing extensive experience in cost-estimating similar projects, hopefully individuals with specialized expertise in the particular type of project at hand. Residential building projects are different than factories and petroleum projects, all of which have distinctive characteristics and needs of their own.

To illustrate the steps in estimating the cost, we will use a tradi­tional example of going to a friend to purchase land for a new villa. Your friend requires a rough budget cost estimate, but this will be very complicated to obtain, as you have no drawings, calculation, or concrete data to calculate cost.

Hence, at the outset, your estimated cost figure will contain high uncertainty. Someone with experience from an engineering office can provide a budget, but he or she at least needs to know the num­ber of floors and the location of the land. Then he will have a cost as per (USD/т2) for this specific location, the number of floors, and so on.

This is a very preliminary stage, commensurate with small proj­ects such as building a home. In the case of large projects, how­ever, a meaningful budget for this same stage entails conducting surveys and taking soil boreholes and then calculating the cost of the project. The entire project must then be re-examined to compute the likely profit now that there is some realistic data from which to make these and other determinations.

In major projects, such as large-scale and high-cost industrial projects, especially where the equipment and machinery for pro­duction are unique, the estimated cost in the initial phase of studies could be within ±50% accuracy.

The difference between the expected and real cost seems initially very large. However, when there is data from a similar project avail­able as a benchmark, then the smaller will be the difference between the actual and estimated costs. This comes about because, with industrial facilities, a large proportion of the project construction cost depends on the equipment and machinery used in manufacturing.

On the other hand, there are some projects such as the replace­ment and renovation of residential or industrial facilities that have a very low percentage of accuracy and will also operate with an initial error margin of about ±50%. After finishing the front-end engineering design (FEED), the accuracy of the estimated cost will be ±30%. After finishing the detailed construction drawing for the whole project, the estimated cost will be calculated based on the quantity and will provide an approximate cost for each item. At that point, the estimated cost for the project emerges with a pre­dictably small deviation closer to the actual and accepted accuracy, which is about ±15%. Presented this way, such a margin seems like a big improvement. However, proceeding with such a proj­ect under these conditions remains a gamble against considerable uncertainty. In a case of this kind, a project manager has to recog­nize that, even after determining the cost of the project, setting its budget and beginning its implementation for a certain period, a 15% cost overrun may appear and have become irreducible, forcing a full or partial stoppage. If, on the other hand, costs come If, on the other hand, costs come in at less than 15% of the budgeted, it will be a waste of investment to the company as a whole.

As the owner or contractor company could "book" this amount of money, possibly even placing the owner in a position to invest such "savings" in another project.

Based on the above discussion the accuracy of the cost estimate is very critical and vital to project success and becomes more critical over time.