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Describe The Stages In Involved In Project Cost Management

Paul Naybour Paul Naybour

Published: 25th January 2013

This seems like an easy question but it needs to cover budgeting, commitment, accruals, forecasting and corrective actions. Write five paragraphs on each of these topics.

  1. Paul says:

    Steve you will be pleased to know that this is the right answer to the right question. Again it’s very clear and well set out, well done, and best of luck with the exam.

  2. Student says:

    Great, think ive answered the question wrong now?

  3. Student says:

    Paul, I noticed this question so had a go, I’ve made it quite prompt as I’m still having time issues with the 15 minute cap. Please let me know if this is ok. Thanks.

    -Project budgeting is the last stage found within the planning process and must instigate cost management awareness. The budget will have been comprised from the sum of works identified within the precedence diagram, resource and planned overheads calculated accordingly to the project. The some of this work is quantified and measured to create a baseline figure for which the PM can use throughout the project. Techniques used in cost management to control and manage finances include…………

    -Forecasting- this is used to help calculate the amount of money spent on a project (actual costs) to understand what expenditure remains on the project (remaining cost). Having a live profiled document supports a pro-active approach to managing costs within the project, a function which aids transparency to costs on a project and prompts any corrective actions required. This can be used as a tool to present costs to senior management/ sponsor showing planned, actual and remaining costs on the project.

    -Accruals, these are used within a project for credits and debits to the budget. Using this method helps the project set aside monies for certain endeavours within a certain time period or funding period without it affecting the budget. For example work may have been done on the ground by a contractor and they may not as of yet invoiced the PM for works done to date accruing this amount stabilizes the budget moving forward so money is not being spent elsewhere to help ‘’balance the books’’.

    -Commitments are used to commit a sum of money to the projects budget which is accounted for and ring fenced. For example the PM may commit £50,000 to a construction contract and pay by instalments. Ultimately the outlay of money is committed to that contract and will be paid over time. This can’t otherwise be spent on anything else within the project as a commitment has been made.

    -Cash flowing is to understand where the funding of monies comes from and how this interacts with cash income and cash expenditure on the project. For example making a payment to a contractor, if you paid them up front you would be in negative deficit which is not favourable to the projects cash flow which needs consideration and attention. However creating payment terms and contracts to support this function would be to have them either paid when paid or paid for works complete depending cash flow mechanics. All relative to a more sustainable flow of money within the project environment.

  4. Student says:

    Thanks Paul, I could obviously precis this down but I find once I start typing it is difficult to stop, on the other hand, at least it is legible which I’m afraid my handwriting is not!
    Cheers, PU

  5. Paul says:

    Paul U. A really good answer, very clear what is going on at each step and really good examples of what a PM and the team would be doing at each stage. May be a bit more than you need for the marks, but its only an issue if it takes beyond the 15 minutes.

  6. Student says:

    Paul
    yes the examiner will only mark the first five points that you make. They have 5 sets of 10 points to award. They wont’ select the best five to give you the marks, sorry.

  7. Student says:

    The stages involved in project cost management are as follows:
    1, Prepare the Project Budget: This can only be prepared once the Work Bank, Resources, Materials List and Programme have been assembled.
    The Work Bank Schedule (WBS) identifies what activities are required to deliver the project, down to the lowest level, it needs to be linked to the Programme by activity number so that it can cross reference for ease of costing each activity and for identifying changes.
    The Resources and the Project Materials List are also tied into the programme to enable costing. Shortening of any activities on the programme will probably result in an increase in the resource level required to achieve that item which will therefore effect the cost and would need to be identified as a change. Similarly changes to specifications for materials etc would need to be assessed for change/cost.
    The Programme is one of the PM/’s most important documents and needs regular review and maintenance. During the preparation of the original estimate the propgramme will have gone through several iterations so at the earliest opportunity the project team will need to verify the programme and identify any changes and their impact on the project cost.
    Preperation of the Budget will also include preparation of the Materials Forecasts, Cash Flow forecasts and Cost Spend Profile. These documents will allow the PM and his team to review progress for the project and see how it is performing against the initial Tender Forecast.

    2. Confirming the Commitments. All projects will invariably have commited costs. Committed costs are those costs that need agreement at the start fof the project, the money may not be spent at that stage but a legal undertaking has been given to spend it at a future date.
    A perfect example of this would be rental of project offices for the duration of the project. The rental may be for £100 per month for an office, the project duration may be 1 year, therefore at the start of the project the Committed cost would be £1200 against the projects Budget, though the actual cost at the start would be £0 as notrhing has been paid yet, as the project progresses the Commited cost would decrease as the liability is realised and the accumulated cost would increase. So in month two the Committed cost is now £1100 and the accumulated cost is £100 (rental paid for month 1)
    Committed costs would ideally be kept to a minimum as these could end up being paid for something that is no longer required. Withdrawing from an agreement can often prove almost as costly as allowing the commitment to run to its natural end.

    3. Accruals for Liaibilities. The PM needs to know accurately what his liabilities are at any time so the
    Project Commercial team would need to include accruals for anticipated applications/invoices as part of their accounting processes.
    Take for example the situation where a sub-contractor had carried out some work on the project, at the monthly Commercial review it would be identified that the work had been done so the QS would know that the sub-contractor will very soon want paying for that work. The sub-contractor has not yet submitted an application/invoice but the QS knows that the value of the work carried out was, say, £2500. Therefore an accrual for £2500 would be shown on the liabilities sheet to show that the value was waiting to impact the projects costs.
    Some suppliers/contractors are not particularly efficient at submitting their costs/invoices and this can lead to unpleasant surprises for the project team if they are late/have accumulated so it is imperative that the QS accrues for these anticipated costs to prevent the PM’s Forecasting being totally awry.
    Once an accrued costs is invoiced/applied for, certified and paid the QS would need to ensure that the accrual is removed to prevent a false impression on the accounts, otherwise the costs would appear bigger than they truly were.

    4. Forecasting is an important skill of the Project Manager because it enables him to demonstrate that he has a firm grasp on what is happening in the project, and what he intends to do to ensure that it stays on track to deliver on time/cost/quality.
    Regular reviews are needed to check the progress of the project. This is where the project team compares the progress against the programme and compares costs against the budget/latest forecast. If progress is slipping, but the costs are above those anticipated in the budget, then the team need to identify the problem, come up with the best solution and identify the impact of these changes.
    Once this exercise has been carried out the PM and his QS will look at the forecast and see what impact any changes have had on the timing, costs or quality.
    It is not sufficient to just say that things will cost more/take longer than anticipated, senior managers/ programme managers need to know how much more/how much longer and most importantly why. They will have their own forecasts to submit and these may well be severely impacted by the changes in the the PM’s project.

    5. Corrective Actions are those actions taken by a PM when he has identified that there is a variance between his Budgetted costs and his Actual costs (or baseline programme against latest programme) This could be down to inaccuracies in the tendering process or an assumption that wasn’t realised. The PM can do little about what has caused the variance, but he should take steps to stop a recurrence of the instance.
    The corrective action is called Re-Forecasting, this can cover commercial or programme but most likely both. By re-forecasting the PM can demonstrate that he has an undersatanding of what has caused the project problems and what he intends to do about it.
    The re-forecasting could focus on the Commercial or the Programme issues but invariably they are interlinked, it could mean extra resources (perhaps to increase productivity?) or different specification materials (quicker setting concrete?) but it will have a link to costs and/or programme.
    However repetetive re-forecasting would indicate that the project is possibly suffering several problems in different areas and may need assistance from senior management to rectify fundamental problems.

    I would appreciate your feedback on the above please?

    Cheers, Paul U

  8. Student says:

    Hi Paul
    Many thanks for the feedback.

    In terms of corrective actions and managing the variances, would you suggest mentioning things such as working overtime, extra resources etc?

    Also, my original answer had 7 points after splitting out the costs, accruals & forecasts into different points; in the exam, if i have 7 points and the question asked for 5, would the examiner ignore the last 2 points
    or would they give some consideration to the contents of the last 2 points?

    Many thanks again
    Best Wishes
    Paul

  9. Student says:

    A very good answer, my corrective action hint was pointing towards the management of variances between the budget and forecast. He project manger woulda ant to understand and put in place actions to manage the variances.

    I would also have spilt committed costs, accruals and forecasts into different points.

  10. Student says:

    Hi Paul,
    First attempt on here after enrolling on the distance learning course for the APMP exam in May. I found the question ok to answer from memory, but wasn’t sure where your hint for “Corrective Actions” fits in, so here goes and hopefully not too rambling…

    1. Cost Management is defined as the management of actual and forecast costs against a defined budget. Cost management starts after the schedule for the project has been established. Budgeting is the first part of the process and is used to estimate the costs involved and resolves to the defined budget for the project, otherwise described as the total cost of the plan.

    2. The cost plan will show when amounts will be spent and when costs will be incurred. A cash flow forecast will be created which will show when cash will be received and when payments will be made and received. The cash flow forecast will be baselined and used to track expenditure throughout the project. The expenditure can be classified and goes through several stages, namely Planned Costs, Committed Costs, Accrual Costs and Actual Costs.

    3. Planned costs are estimates of the costs involved in an activity. At the start of the project, all costs are planned costs which means they are not 100% accurate, but a bets approximation. For example, the number of man hours to complete a task would be a planned cost.

    Committed costs are those which the project is legally obliged to spend. For example, rent of offices based on a yearly rental agreement would be classed as committed costs, as the organisation would be held accountable for payment if the project was terminated early.

    Accrual costs are provision amounts based on a liability received but not yet actually paid. Planned costs and committed costs can transfer to accrual costs once an invoice has been received. For example, once an invoice for office rental was received, but not paid, the committed costs would be reduced accordingly by the invoice amount, whilst the accrual costs increased. Similarly, a planned bonus payment for early completion of work would be moved from planned to accruals on completion of the work.

    When the accrual cost is realised, the money leaves the bank account and it is classified as an actual cost. The accrual cost is reduced by the actual amount paid.

    4. At any point in the project, the forecast outturn cost is the overall cost of the project to completion and is calculated as :
    Outturn = Planned + Committed + Accruals + Actual.

    5. By recording accurate costs over the lifecycle and using accruals effectively, it is possible to enhance cash flow, maximising the opportunities to receive money before payments are made. Using the cost plan, it is possible to ensure that the schedule of money flow is being adhered to. If payment milestones are missed, corrective action may be required to prevent negative balances, and borrowing money.

    Your feedback will be much appreciated.

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