Effective Planning, Monitoring and Control of Cost.

Cost estimates are not "blind" luck. They are well thought-out calculations and decisions based on available information — derived either from historical data or a structured cost model. Whether a project is a small feasibility study or a large-scale design, procurement, and construction programme, the estimate type and information required may differ radically.

1. Cost Planning

The Three Types of Cost Estimates

Cost estimates can be broadly categorised into three types, each suited to the stage of information available:

Many companies standardise their estimating procedures through an Estimating Manual, which can price out a project by as much as 90%. Estimating manuals typically deliver better estimates than industry standards because they account for downtime, festivals, and breaks.

Estimates Across the Project Life Cycle

The type of estimate changes as a project matures. Cost reductions are far more achievable in the early stages — and become progressively more expensive the further along the project life cycle you are.

Estimating Pitfalls

Several pitfalls can impede the pricing function. Unfortunately, many do not become evident until detected by the cost control system, well into the project.

• Misinterpretation of work
• Omissions or improperly defined scope
• Poorly defined or overly optimistic schedule
• Inaccurate Work Breakdown Structure (WBS)
• Applying improper skill levels to tasks
• Failure to account for risks
• Failure to understand or account for cost escalation and inflation
• Failure to use the correct estimating technique
• Failure to predict rates for overhead, general, administrative and indirect costs

Project Risks

Project plans are living documents subject to change. Risk refers to factors that, if they occur, increase the probability that project goals of time, cost, and performance will not be met. Risk management must be an integral part of project management throughout the entire project life cycle. Common risks include:

• Poorly defined requirements
• Lack of qualified resources
• Lack of management support
• Poor estimating
• Inexperienced project manager

Overhead Costs

All costs must carry associated overhead rates. The development of overhead rates is a function of three separate elements:

2. Cost Monitoring and Control

"Cost control is not only monitoring costs and recording data, but also analysing the data in order to take corrective action before it is too late."

Cost control implies good cost management, which must include: cost estimating, cost accounting, project cash flow, company cash flow, direct labour costing, overhead costing, and other expenses such as incentives, penalties, and profit sharing. Cost control is imperative regardless of the size of the project or company.

A robust cost planning, monitoring and control system gives management a clear picture of project status toward its objective completion. It also establishes policies, procedures, and techniques for day-to-day management.

The System Should Provide Information That:

• Gives a true picture of work progress status
• Relates to cost and schedule performance
• Identifies potential problems with respect to their sources
• Provides information to Project Managers at a practical level
• Demonstrates that milestones are valid, timely and auditable

3. Understanding Control

Effective management during the operating cycle requires a well-organised cost and control system — designed, developed, and implemented — so that immediate feedback can be obtained and up-to-date resource usage can be compared against the target objectives established during planning.

Requirements for an Effective Control System

1. Thorough planning of the work to be performed to complete the project
2. Good estimating of time, labour and costs
3. Clear communication of the scope of required tasks
4. A disciplined budget and authorisation of expenditures
5. Timely accounting of physical progress and cost expenditures
6. Periodic estimation of time and cost to complete remaining work
7. Frequent, periodic comparison of actual progress against schedules and budgets

Management must compare time, cost, and performance to budgeted values — not independently, but in an integrated manner. Being within budget at the proper time serves no purpose if performance is only 75%. All three resource parameters must be analysed as a group, or we might "win the battle but lose the war."

The Two Purposes of Control

First Purpose — Verification

Comparing actual performance to date with predetermined plans and standards, verifying that:

• Objectives have been successfully translated into performance standards
• Performance standards reliably represent programme activities and events
• Meaningful budgets have been established so actual vs. planned comparisons can be made

Second Purpose — Decision Making

Three key reports are required for effective and timely decisions:

These reports provide three results: feedback to management and planners; identification of major deviations from plan; and the opportunity to initiate contingency planning early enough to take corrective action without loss of resources.

The Role of the Work Breakdown Structure (WBS)

The WBS is the total project broken down into successively lower levels until the desired control levels are established. It serves as the tool from which performance can be subdivided into objectives and sub-objectives. As work progresses, the WBS provides the framework on which costs, time, and schedule performance can be compared against the budget for each level.

Downstream changes can easily exceed the original cost of the project. Cost reductions are more available in early project phases and reduce dramatically as the project life cycle advances.