Project cost management: actions of the manager and team. Basic principles of project cost management Project cost management consists of the following processes

One of the first questions that an investor will ask the project initiator will be: “How much does it cost?” The answer is necessary to make an adequate decision about launching the project. And it is very important to find this answer. To be completely honest, you only get an accurate answer after the project is completed. The rest of the time, only assumptions about the cost of the future project are known.

Assumptions about the cost of the project and the necessary funds for its implementation should be presented in the form of a clear, structured document that answers the questions: how much, when and what funds will be spent on during the project.

In the future, the project manager will have to make a lot of efforts to ensure that his assumptions come true and the project is completed within the approved budget. The listed actions of the project manager and team constitute the content of project cost management.

Project Cost Management Concept

Cost management is ensured through the implementation of the following processes during the project:

• cost estimates;
• developing the project budget;
• project cost control.

Project cost management processes ensure:

• understanding by the customer and project investor of the projected cost of individual works, work packages and the entire project (cost estimation process);
• a clear understanding by the project manager of when, how much and on what funds will be spent in the project (budget development process);
• absence of unforeseen expenses in the project, reduction in the number of changes and deviations of the actual budget from the approved base budget (cost control process).

Moreover, these processes, like any processes during the implementation of a project, can be iterative and carried out on the principles of sequential development.

The main tasks of a project manager in cost management:

• determination of general rules and principles for project cost management;
• development of a project cost management system;
• involvement of relevant functional specialists in cost estimation work;
• assessment of the amount of resources required to implement the project;
• organizing the development of estimates and budget for the project;
• ensuring project financing according to the financial plan;
• accounting of actual costs during the project;
• control of project cost parameters, identification of deviations and timely implementation of corrective actions;
• archiving of factual information about the cost parameters of the project.

Project Cost Management combines the processes performed during planning, budget development and cost control to ensure the completion of the project within the approved budget ()

Project Cost and Finance Management - a section of project management that includes the processes necessary to form and monitor the implementation of the approved project budget (STC)

An important feature of project cost management processes is their very close connection with other planning processes. In particular, it is difficult to assume that it will be possible to develop a correct budget without information about the necessary resources and without a calendar plan. Information about project risks can also significantly influence both the size and design of the project.

One of the first steps a project manager takes in managing project cost is developing a cost management concept. This concept should contain general rules for organizing project cost management, principles of accounting and documentation, recommended methods and technologies.

Development of a concept for project cost and financing management

• developing a strategy for managing the cost and finances of the project (defining goals and objectives, criteria for success and failure, limitations and assumptions);
• conducting economic analysis and justification of the project (marketing, assessment of cost and sources of financing, forecast of implementation);
• general economic assessment of the project;
• development of an enlarged financing schedule;
• determination of requirements for the cost and financing management system in the project;
  approval of the concept.

All costs in the project can be divided into three types:

1. obligations;
2. budget costs;
3. actual costs.

Liabilities- these are planned, future costs that arise when concluding agreements, contracts, or ordering any goods or services. This usually happens in advance according to the project plan. Invoices issued by suppliers are subject to mandatory payment. However, payment can be made according to different rules at different points in time:

• at the moment of readiness of materials and components;
• after delivery of goods and services;
• on the terms of full or partial prepayment;
• in accordance with the policies of the organization purchasing or providing goods and services.

Depending on how accounting is organized in the organization, it is possible to document a budget reduction by the amount of obligations sooner or later. Some organizations do not consider these costs until the invoice is received or paid. In this case, the current state of the project budget is available to the manager in a distorted form and does not provide a complete picture for decision-making.

Budget costs represent the estimated cost of work distributed over time. This is the project cost schedule. This is sometimes called a cost plan. It contains information about the amount and timing of the project's planned expenses during the execution of work.

Actual costs show the real cash outflow in the project. The actual cost report provides information about the actual costs of the project. In this case they can happen:

• during the execution of the project;
• at the time of payment of funds;
• at the time of debiting funds from the account.

Features of accounting for obligations, budgetary and actual costs can significantly change the picture by which the financial condition of the project is determined.

Examples

During a project to build an associated gas dehydration plant in an oil field, thick-walled boilers were ordered from the manufacturer. The project budget was reduced by RUB 4,500,000. due to the fact that after concluding the contract and ordering the boilers, obligations arose for this amount. The boiler production period is seven months, but these costs have already been taken into account in the project budget.

The contract for the supply of equipment for the project of laying a fiber-optic line in the interests of the company - a cellular operator, provided for payment for the supplied router within 30 days after signing the acceptance certificates. According to the accounting rules of the customer company, these costs will be taken into account in the budget only upon actual payment.

Thus, a situation has arisen where the work has already been completed, the equipment is in the customer’s warehouse, and the costs for them have not yet been taken into account in the actual budget.

To increase the efficiency of the project cost management system in the concept of managing the cost and financing of the project, it is desirable to clearly define:

• payment policy for work (prepayment, payment upon delivery, etc.);
• policy for paying bills (on the day of receipt, within a certain period, etc.);
• principles for writing off costs for labor, materials and components;
• principles of cost accounting in a project;
• principles of payment for work when involving subcontractors;
• the relationship between the work schedule and the write-off of labor costs and payment for machinery.

Project Management Practice

In practice, the main conceptual issues of project cost management are usually determined by the parent organization implementing the project. In the case of creating a specialized company or consortium to implement a project, the rules and principles defined for the project most often become the internal rules of this organization and vice versa.

Estimation of the cost of work

Cost estimate- the process of determining all costs necessary for the successful and complete implementation of the project. Cost estimation is an iterative process of obtaining approximate data on the cost of work and resources. Estimates may be updated as the project progresses. The permissible error of estimates depends on the purpose of the data obtained and on the phase of the project.

Thus, any cost estimate in a project is approximate. But still approximately - this comes from the word “close”. As the project progresses, estimates should be refined and become more realistic.

Example

The message from the head of the IT department about the cost of implementing the SAP R3 system in the company at the stage of analyzing the feasibility of such a project may well look like “3-4 million rubles.” In the future, this assessment should become much more accurate.

Types of Cost Estimates

In project management, four types of assessments can be distinguished:

1. rough order of magnitude - cost expectations of a project in the concept or idea phase;
2. order of magnitude - project cost assumptions calculated in a business plan or similar document;
3. budget estimate - an estimate of the cost of the project, obtained on the basis of data provided by suppliers and performers of work;
4. exact - cost estimate included in the budget when determining the final planned cost of the project before moving to the implementation phase.

Estimation error ranges

It is curious that even an accurate estimate, which, in fact, is used in pricing and final budget adjustments, has an error (Figure 1).

Figure 1. Accuracy Ranges for Cost Estimates

As input for estimating costs, the project manager needs information about the scope of the project. At the initial stages, this will be the Charter or WBS of the project, and at subsequent stages it will require its detailed schedule. It all depends on the iteration number of the cost estimate. To get a rough estimate of the cost of a project, sometimes just the idea and design of the project is enough. More accurate estimates require more accurate information.

Components of Cost Estimation

When estimating the cost of work, all cost items for performing the work must be taken into account:

• materials and components;
• purchased equipment, transport;
• rental payments (space, equipment, transport);
• leasing costs (purchase, rental, leasing);
• production capacity;
• cost of personnel labor;
• costs of consumables;
• costs of training and internships;
• costs of holding events (conferences, seminars);
• travel expenses;
• logistics costs;
• entertainment expenses.

The methods that will be used in the cost assessment depend on the specific project, the qualifications of the experts and other factors. For example, to obtain a high-quality result of cost estimation using the “bottom-up” method, it is necessary to have a fairly detailed hierarchical structure of work. A well-developed WBS will not be superfluous when using other assessment methods. If you don't have a detailed work breakdown structure, you may have to start with a top-down approach.

The following methods of cost estimation are distinguished.

• Parametric estimation- a method in which a statistical relationship between the cost of an operation and other variables (parameters), obtained from an analysis of historical data (for example, the size of the structure area in construction, the number of lines in the program code, the number of working hours) is used for cost estimation. The cost of one unit of work is calculated empirically. For example, the cost of construction of 1 sq. m of housing, 1 hour of expert work, etc. When calculating the cost, various formulas are used, and to calculate the cost of the full scope of work, they proceed from the cost of an individual unit of scope of work.
• Valuation by analogues- a method of estimating costs by analogy with similar work performed in this or other projects. The analogue assessment method can apply to the entire package of work or be used in conjunction with a parametric assessment when there is information about the performance of similar work, but of a different scope or under different conditions. The advantage of the method is the ability to obtain a more accurate estimate. The reason for this is the availability of information not only about the planned cost of the analyzed work, but also about its actual cost. The difference between the planned estimate and the actual cost can give the project manager additional food for thought.
• Bottom-up evaluation- technology for assessing large volumes of work by summing up estimates obtained for smaller components of this work. The more detailed and accurate the project WBS is developed, the more accurate and correct cost estimates for the project can be obtained. The bottom-up method is rightfully considered one of the most accurate.
• Top-down evaluation method considered significantly less accurate than the bottom-up method. It is used in the absence of detailed WBS and lack of information about the resources and materials necessary for the implementation of the work. The assessment technology involves exactly the opposite steps in relation to the bottom-up method. First, a comprehensive assessment of the entire package of work is given, and then it is detailed and decomposed into individual elements (by work, performer, etc.). The method is useful in the early stages of a project, when its viability is being assessed and it is unclear whether resources should be spent on more detailed planning and assessment.
• - a very simple method, provided that there are performers and contractors willing to perform this amount of work. Terms of reference, tender or other documentation are sent to applicants with a request to provide their estimates of the cost (and often the duration) of performing these works.

Project Management Practice

When using the method of analyzing performers' proposals, you should adhere to simple rules:

• do not accept the first offer;
• do not accept the cheapest offer;
• do not accept an offer that is too expensive;
• Don't use offer price as the only criterion when making a decision.

One of the authors of this book conducted a small experiment. Starting the renovation of his own apartment, he tried to get an estimate of the cost of this project, analyzing the proposals of the performers and the “top-down” method. As you know, the top-down method is considered not very accurate. Without developing the ISR, without determining the composition and structure of the work, he prepared a technical specification for the renovation of a two-room apartment with an area of ​​55 square meters. m, sent it to six companies offering apartment renovation services on the market, and requested an estimate for the project. For the purity of the experiment, companies from the same market segment were selected, offering “average” level repairs. Companies offering luxury renovations did not take part in the experiment.

The lowest and highest repair cost estimates received from all suppliers differed by a factor of eight (8). In the estimate with the lowest price, it was supposed to use 24 bags of mixture for leveling the walls (25 kg each) during the repair, with the most expensive - 420 bags.

Exactly the same thing happens on any project. Let's add image and marketing components here. An estimate from a market leader contracting company will be much more expensive than from another market participant. The same thing will happen if the estimate is developed for a customer company that is a market leader.

This should not confuse the project manager. It is necessary to discard the extreme values ​​- the highest and the lowest - and continue to analyze the remaining sentences.

In the event of a tender for the selection of suppliers, all components of the proposal are analyzed as a whole. The proposed deadlines, quality criteria and other indicators, not just the price, are analyzed, and this problem becomes less acute.

Comparative characteristics of various cost estimation methods are given in Table 1. The result of cost estimation is an estimate of the costs of performing each work separately and as a whole for the project. This can be done in tabular form (Table 2).

In order to obtain high-quality cost estimates, the project manager must involve subject matter experts and functional specialists with sufficient experience to participate in such work.

Table 1

Table 2. Estimation of the cost of the project “Organization of the competition “Best Taxpayer of St. Petersburg””

To improve the quality of the cost estimation process, the project manager is recommended to adhere to the following principles.

• The principle of optimal responsibility- the one who understands it best will best estimate the cost of a task. Often such a person is the direct performer of the task. His assessments are the most accurate, based on his experience and expert knowledge. In addition, by involving performers in the planning process, the project manager thereby increases their motivation and responsibility for the result when completing the task.
• The principle of independence- the assessment of the cost of operations and work must be carried out independently of the assessment of the work associated with them. Each job is considered independent of other jobs. The relationship between activities, associated risks and associated deviations will be taken into account when aggregating the information received at a higher planning level.
• Principle of adequacy of conditions- when assessing and calculating work, the expert must be guided by the assumption that he has adequate conditions for implementation, a sufficient amount of resources, and effective methods for performing work are available to him. Of course, life is more complex than assumptions about it, so calculations obtained in this way are prone to excessive optimism. To obtain more accurate estimates, the expert must adequately take into account the project limitations in his assumptions. Most likely, this will lead to an increase in grades, but it will be reasonable and adequate.
• Risk recognition principle- estimates entered into planning documents must take into account unforeseen circumstances and risks that may affect the cost and timing of work. It is absolutely normal to include risk reserves in the valuation. However, their value must be the result of adequate, meaningful analysis and calculation. Introducing a “just in case” reserve into the cost of work is most often ineffective. It turns into elementary “reinsurance”, “just in case” planning, which is not justified either by objective circumstances or by the real situation in the project.
• The principle of the right to make mistakes- any estimate is an assumption. Any assumption contains an error. The expert’s task is to make this error minimal. The introduction of penalties for errors, sanctions for any deviation of real data from forecast ones will lead to “remortgages” and “reinsurances”. Performers and experts will make unreasonable reserves to avoid punishment. All estimates will contain exclusively pessimistic values. At the same time, there is practically no hope that under such conditions actual and planned costs will coincide or savings will appear. The famous Murphy's Law states: “Any budget will be spent in full.” Trusting an expert will greatly improve the accuracy of your estimates.

Development of estimates

Development of estimates- the process of structuring and systematizing cost estimates obtained at the cost assessment stage. Structuring and systematization of data on the cost of work is carried out in accordance with the cost items adopted in the accounting system of the parent organization of the project.

Estimate - a document containing a list of project costs derived from the project scope of work, required resources and prices, structured by items.

If in a project (parent organization) it is customary to structure project estimates by work, then the process of developing estimates is greatly simplified. Estimates structured by work are transferred to the estimate and compiled into a single document.

If the company’s requirement is to structure costs in the estimate by cost item, the process becomes somewhat more complicated. Usually distinguished:

• direct costs (expenses);
• overhead (indirect) costs;
• general and administrative overhead.

Direct costs- expenses directly related to the production of products and project work; production costs included in the cost of production, in direct production costs.

Direct costs are directly related to the work package. These include:

• labor costs;
• costs of materials and equipment;
• other expenses associated with the performance of work.

It is direct costs that can be directly influenced by the project manager and his team. The project team's influence on other costs is limited.

Overhead costs (indirect costs)- expenses that accompany the main production, but are not directly related to it, and are not included in the cost of labor and materials. Overhead costs cannot be tied to any specific work or specific result. They apply to the entire project as a whole. These are the costs for:

• maintenance and operation of fixed assets;
• management, organization, maintenance of production;
• business trips;
• employee training.

General and administrative overhead (fixed costs)- costs not associated with any specific project. They relate to the company's expenses, but at the same time they also relate to the project. General and administrative expenses usually include the costs of maintaining the management staff and supporting departments (accounting, secretariat, security, etc.).

Project Management Practice

Some companies have a fixed amount of general and administrative overhead (for example, as a percentage). This amount is calculated by the project manager and added to the calculated direct costs. This practice has a right to life, although its use can sometimes cause a significant increase in the cost of the project.

Classification of estimates

• local;
• object;
• estimates for certain types of costs;
• consolidated (consolidated estimate calculation).

Local estimates- a primary document containing calculations and estimates of the cost of structural elements and types of work for the project in current or forecast prices.

The local resource list includes:

• employee labor costs (man-hours);
• time of use of equipment (machine hours);
• consumption of materials, products, structures, etc. (in accepted physical units of measurement).

The local resource estimate may include:

• labor costs;
• equipment operating costs;
• Cost of materials;
• overheads;
• estimated profit;
• estimated cost.

The approximate structure of the local estimate is given in Table 3.

Table 3

Object estimate- a document containing calculations and cost estimates for the object (objects) as a whole at basic or current prices.

• Basic price- the price of a product of standard quality, on the basis of which the price of a product of higher and lower quality is established, for example in the case when the properties of the actually delivered product differ from those specified in the contract.
• Current price- price or tariff in force in a given period of time (can be wholesale, purchasing, retail, prices and rates in construction, tariffs and prices for services provided to enterprises, organizations, the population).

Based on the results of developing the project’s object estimate, the project management team and the customer can obtain indicators of the unit cost of the object:

• cost of 1 sq. m of area (for example, residential or office);
• cost of 1 cubic m volume (for example, a structure being built);
• cost of 1 m of length (for example, utilities);
• standard labor intensity;
• estimated salary.

Estimates for individual types of costs- documents containing calculations and cost estimates based on costs that are not taken into account by the estimate standards.

Some types of costs include:

• bonuses for early completion of the project;
• payment for consulting and audit services;
• payment of benefits and compensation;
• payment for unforeseen business trips;
• payment for transport for employees (delivery to the place of work);
• advertising expenses;
• insurance premiums for voluntary insurance;
• payment for services of mobile operators, Internet providers;
• other.

Summary estimate- the main document defining the cost of the project, summarizing the data of local and site estimates and estimates for individual types of costs, in basic and current prices or in basic and forecast prices.

In the summary estimate calculation, the data of local and site estimates is summed up and brought together to the level of the entire project. The final estimate includes data from estimates for individual types of costs. The summary estimate (summary estimate) is usually accompanied by an explanatory note, which contains related information necessary to understand the document and facilitate work with it.

The structure and composition of the consolidated estimate is shown in Figure 2.

Figure 2. Structure of the project summary estimate

Based on their purpose, estimates are divided into the following (see Table 4):

• preliminary - intended to determine the order of magnitude of the expected costs of a starting project;
• primary - designed to compare planned project costs with existing financial restrictions;
• factorial - the same as primary;
• close ones - intended to make the final investment decision on launching or abandoning the project;
• summary - designed to finalize the cost of the project.

Table 4

Thus, an estimate is a document that contains structured information about how much money will be spent on what in the project.

Project budget development

The main planning document that determines the planned cost indicators of the project is the project budget. In addition to the questions of how much money will be spent on the project and on what, the project manager is very interested in the question of when it should and can be spent. The answer to this question is provided by developing a project budget.

Project budget- another document, the development of which perfectly illustrates the principle of sequential development.

It is almost impossible to develop an accurate, complete and realistic budget on the first try. The budget is clarified and adjusted as the project progresses. Depending on the project stage and purpose, several types of budgets are distinguished (see Table 5). They may have varying degrees of accuracy. However, as the budget is refined over the course of the project, the error should decrease.

Budgeting- the process of structuring project expenses according to the chart of accounts for cost accounting of a specific project. Budget structuring can be done:

• by type of work;
• cost items;
• reporting periods;
• risks;
• different structure.

Budgeting - cost planning. Its result is a budget or cost plan, i.e., the answer to the questions: when, how much and what money will be spent on. The algorithm for developing a project budget is shown in Table 6. It is almost impossible to develop a project budget without a calendar plan. Typically, the development of a schedule and budget proceed in parallel.

Table 5

Table 6

Calculation and optimization of the project budget

The fundamental differences between a budget and an estimate are the presence of a revenue part in the budget and the distribution of costs over time. A budget is a schedule of future expenses and income. In the case where the project does not provide for a post-investment phase, i.e., a profit-making phase, the revenue side of the budget is not developed.

If a revenue part is provided, it is developed on the basis of data from marketers about the planned sales volumes of the project product and forecast prices.

If a cost budget is being developed, then if correct estimates are available, the process of converting the estimate into a budget becomes a technical function. An estimate is a document that answers the questions of how much and for what to pay in the project. The budget adds to these questions the answer to the question of when this will happen.

The estimate is superimposed on the time axis, and all payments are distributed over time. When using budgeting information systems and assigning costs to a specific job, the system does the rest automatically.

The budget can be presented in various forms. The most common form of presenting a budget is in the form of a table. Sometimes histograms or pie charts are used for clarity.

Fixing the basic (initial) budget

Like a schedule, a cost plan or budget will be tracked and controlled by the manager as the project progresses. After receiving data on the actual costs of performing work, the manager will need to compare them with the planned ones. The role of the reference budget will be played by a timely fixed basic (initial) budget.

Project Management Practice

In some investment, construction and development companies, the basic budget has 2-3 versions.

The first version of the basic budget is fixed after the approval of the feasibility study, the end of the pre-investment phase and the decision to launch the investment phase of the project, i.e., the transition to construction.

The second version of the basic budget is fixed after receiving the design and estimate documentation and making the necessary adjustments to the basic budget of the first version.

The third version is fixed in case of significant deviations from the basic budget during implementation. This version of the basic budget is not always the case. Changes to the second version of the budget baseline are considered a major change to the project.

Project cost control

Developing a project budget is half the battle. Completing the project work and not exceeding the budget is the second half of the task.

The project manager must build an effective system for controlling project costs and ensure timely implementation of corrective actions to minimize deviations from the budget. There are two main tasks of cost control:

1. accounting of actual costs;
2. forecast of future costs.

The use of traditional cost control methods often allows solving only the first control problem - accounting.

Traditional Cost Control

The project manager's commitment to the budget development process provides the project team with a detailed and realistic financial plan. The budget execution control system provides the project manager with actual data on budget implementation. This information should allow the project manager to make the right decision about the current state of the project.

Based on the available data, it becomes possible to conduct a “plan-to-fact” analysis of the project cost.

Usually two values ​​are compared:

• planned cost of work performed or earned value (EV - Earned Value);
• actual cost of work performed (AC - Actual Cost).

The difference between these indicators is called cost variance (CV - Cost Variance) (see Fig. 3).

From Figure 3 it can be seen that the actual cost of work performed (AC) is 4,000 rubles more than the planned cost of work (EV). There is a cost overrun of RUB 4,000 in the project. (CV). It would seem that things are bad. But it is premature to make such a decision.

Figure 3. Traditional project cost control

The cost variance in a project is calculated using the formula

CV = EV - AC.

In the traditional control method, only cost indicators of work completion are monitored. It lacks the ability to control volumetric indicators of the project. The available information is not enough to predict the progress of work.

To make the right decisions, the project manager must have a lot of information:

• how much work has been completed relative to the plan;
• whether the project is behind schedule or ahead of schedule;
• whether what should be done by the reporting date has been done;
• are there any deviations from the work plan in terms of volume indicators;
• Are deviations from the schedule random or is it a reasonable trend?

All this information is required by the project manager to understand the further progress of the project and calculate the projected cost of the entire project in changed conditions. The ability to solve the listed problems is provided by the use of the earned value method (Earned Value Analysis), which is often used in project control.

Earned Value Method

The earned value method is a set of tools that allow you to measure, analyze and predict the values ​​of the main project indicators for the cost, duration and content of the project. The main indicators of the method are:

• EV- planned cost of work performed. This is the cost of work that was completed at the time of analysis according to plan according to the approved budget. This figure is included in the basic budget as the planned cost of a given (actually completed) amount of work;
• A.C.- actual cost of work performed. This is the cost of work that was completed at the time of analysis in fact, the money actually spent on work that has actually been completed at the moment;
• PV(planned volume, Planned Value) - the planned cost of the planned work. This is the cost of work that must be completed at the time of analysis according to the approved budget. This value is included in the base budget as the cost of the amount of work that must be completed by this moment.

The first and second indicators are already familiar to us, and it is clear why they are needed. By comparing the mastered volume and the actual cost, i.e., the cost according to the budget and the actual cost of those works that have already been completed, it is possible to determine whether there are cost overruns in the project.

CV (cost variance) is the difference between earned volume and actual cost:

CV = EV - AC.

• If CV< 0, в проекте имеет место перерасход средств.
• If CV > 0, the project has budget savings.

The physical meaning of calculating the CV indicator is a comparison of actually completed work in planned (budget) and actual money. From Figure 3 it is clear that there is a budget overrun of RUB 4,000, but it is not at all clear how the project schedule is being implemented. Maybe the cost overrun is due to the speed of execution? Has all the work planned to date been completed? Or is there unfinished work? Or maybe more work was completed than planned?

An indicator will help answer this question PV- planned volume. By comparing it with the mastered volume, you can answer the questions posed.

Figure 4. Earned value method indicators

SV (schedule variance, Schedule Variance) is the difference between the mastered volume and the planned volume:

SV = EV - PV

• If S.V.< 0, в проекте имеет место отставание от графика выполнения работ.
• If SV > 0, the project is ahead of schedule.

The physical meaning of calculating the SV indicator is a comparison in planned (budget) money of the volume of work that is actually completed (EV) and the volume of work that must be completed according to the work schedule. In Figure 4, the situation shown in Figure 12.3 has been developed and can be characterized somewhat differently.

Analyzing the cost deviation CV = -4000 rubles, we can say that there is an overspend, and this is bad. However, considering the value of the schedule deviation SV = 5000 rubles, we can draw a different conclusion. Indeed, there is a cost overrun of RUB 4,000. But at the same time, the deviation according to the schedule is +5000 rubles, i.e. more work was completed than planned. Perhaps the cost overrun is due to the high speed of work. As you know, time is money. More work has been completed than planned, and you have to pay for it.

Project Cost Forecasting

So, the accounting control function is completed. The situation that has developed on the project has been adequately analyzed and the current state of the project has been clarified. The second and most important component of control is the forecast of the further progress of the project.

What will the actual cost of the project be at completion? How much money will actually be spent on the project? These questions are important for the project manager. The earned value method can also provide an answer to them. Absolute CV and SV indicators make it possible to draw conclusions about the current, instantaneous state of the project. Understanding trends and forecasts requires relative metrics.

The earned value method provides not only absolute, but also relative indicators of project completion.

CPI (Cost Performance Index) - cost performance index:

• a relative indicator characterizing the efficiency of spending money in a project;
• the ratio of earned value and actual cost.

CPI = EV/AC.

SPI (Schedule Performance Index) - schedule performance index:

• a relative indicator characterizing the degree of achievement of project indicators in terms of scope of work and fulfillment of the project schedule;
• the ratio of the values ​​of the mastered volume and the planned volume.

SPI = EV/PV.

The project cost performance index characterizes the cost parameters of the project:

• if CPI< 1, в проекте имеет место перерасход средств;
• if CPI > 1, the project has budget savings.

The schedule execution index characterizes the parameters of schedule implementation and the volume of work performed:

• if SPI< 1, в проекте имеет место отставание по срокам;
• If SPI > 1, the project is ahead of schedule.

Indexes will help the project manager in calculating forecasts for the further progress of the project. To predict future project costs, in particular calculating estimates at the end of the project, the project manager will need:

• understanding how much money has already been spent;
• forecast of how much money remains to be spent.

It is the forecast of the remaining cost of the project that is the main task of the cost management team. The earned value method makes it possible to calculate it taking into account the actual situation in the project.

To understand the capabilities of the earned value method for predicting future cost indicators of a project, we will introduce a few more concepts.

BAC (Budget At Complete)- planned cost you! completion of all project work, recorded in the basic project budget. The completion budget is calculated during the planning and development of estimates and budget for the project.

EAC (Estimate At Complete)- the estimated (forecast) cost of performing the project work, calculated on the basis of available factual information about the progress of the project and its cost indicators at the current moment. The completion estimate can be calculated at any point in the project. In order to calculate its correct value, the value of the actual costs in the project is required. At the beginning of the project, when there are no actual costs yet, the estimate at completion is the value of the budget at completion:

EAC = BAC (at the time the base budget is fixed).

ETC (Estimate To Complete)- the forecast value of the cost of completing the remaining work of the project from the moment of analysis to the end of the project. Calculating the estimate before completion is the main task of the project manager when predicting its cost indicators. Having the pre-completion estimate value makes calculating the completion estimate a technical task:

The main forecast and basic estimates of the cost of the project are presented more clearly in Figure 5. The earned value method allows you to calculate the estimate before completion, taking into account the current situation in the project. To do this, existing factual information is analyzed and a method for calculating forecast indicators is selected. Options and formulas for calculating forecast project cost indicators using the earned value method are given in Table 7.

Figure 5. Cost forecasting using the earned value method

As can be seen from the above formulas, the cost performance index CPI is entered into the calculation formula to take into account the trend of cost performance in the project.

• If the project has cost overruns, enter the CPI value into the formula< 1 в знаменатель увеличивает значение оценки до завершения. Это логично. Раз есть перерасход сейчас, то сохранение тенденции приведет к общему перерасходу по итогам проекта.
• If the project is currently experiencing cost savings, then introducing a CPI value > 1 into the denominator in the formula increases the value of the estimate to completion. Since there are savings now, maintaining the trend will lead to savings across the entire budget.

Analysis of trends and tendencies

Estimates and forecasts should not be blindly trusted. The principles of cost accounting in projects may vary. The value of actual project costs (AC) may not correspond to reality (see section “Project Cost Management Concept”).

• Option 1. We have only acquired obligations by placing an order for equipment at the manufacturing plant, and the value of the actual cost of work performed (AC) has increased. The project cost completion index should demonstrate budget overruns: work has not yet been completed, but money has been spent.
• Option 2. In the case of payment for work upon completion, the opposite situation arises: the work has been completed, but the actual costs have not yet been written off. The calculated values ​​of indices and forecasts will show serious savings in the project budget.

Table 7

To increase the accuracy of forecasts, it is necessary to organize regular collection of factual information on cost indicators and recalculation of forecast estimates. Based on the assessments obtained, graphs should be drawn up and existing trends and tendencies should be analyzed.

If three or four reporting periods the estimated indicators of the main estimates have the same meaning, for example, “budget overrun,” the confidence in such an estimate increases significantly. If three or four reporting periods of assessment show different values ​​(either “overspending” or “savings”), this may be due to the peculiarities of cost accounting in the project or other reasons.

The cost of the project is determined by the total cost of the project resources, costs and time of completion of the project work.

For construction projects, the construction cost is determined, which is the portion of the project cost that includes the funds needed for capital construction. Estimating all project costs is equivalent to estimating the total cost of the project.

Project cost management includes the processes necessary to ensure and ensure that the project is completed within the approved budget.

In the context of this chapter, value management and cost management are practically identical concepts. The goals of a cost (cost) management system are to develop policies, procedures and methods that allow planning and timely control of costs.

Project cost (cost) management includes the following processes:

project cost assessment;

project budgeting, i.e. setting cost targets for project implementation;

control of the cost (expenses) of the project, constant assessment of actual costs, comparison with those previously planned in the budget and development of corrective and preventive measures.

The main document by which project cost is managed is the budget. A budget is a directive document that is a register of planned expenses and income distributed by item for the corresponding period of time. The budget is a document that defines the resource limitations of the project, therefore, when managing cost, its cost component comes to the fore, which is usually called the project estimate.

Project estimate is a document containing the justification and calculation of the cost of a project (contract), usually based on the scope of the project, the required resources and prices.

One way to manage project costs is to use a structure of cost accounts (charts of accounts). To perform work, resources are required, which can be expressed both in the labor of workers, materials, equipment, and in the form of cash cost items, when there is no need or opportunity to know what specific resources constitute them. At the stage of budgeting for work, all resources involved in its implementation are written off to various cost items.

Since the structure of cost accounts is developed according to the principles of decomposition, by aggregating information from the accounts of the lower levels of the structure, it is possible to obtain cost data at the required level of detail, up to the upper level, characterizing the project budget.

When performing project work, actual cost information is also recorded in the appropriate cost accounts, which allows for a comparison of planned (budgeted) costs with actual costs at appropriate levels of detail.

Cost management is carried out throughout the entire project life cycle, and, of course, management processes are implemented differently at different stages of the project cycle.

The concept presented will be described as we look at the processes that make up cost management, especially the process of estimating project costs, as this process is fundamental to both budgeting and control and the cost management function as a whole.

The distribution of the project cost during its life cycle is uneven. But it should be noted that the main decisions that determine the project cost indicators are made at the pre-investment phase of the project. Thus, the ability to manage project costs is also unevenly distributed throughout its life cycle.

The cost of the project is determined by the total cost of the project resources, costs and time of completion of the project work. For construction projects, the construction cost is determined, which is the portion of the project cost that includes the funds needed for capital construction. Estimating all project costs is equivalent to estimating the total cost of the project.

Project cost management includes the processes necessary to ensure and ensure that the project is completed within the approved budget. In the context of this chapter, value management and cost management are practically identical concepts. The goals of a cost (cost) management system are to develop policies, procedures and methods that allow planning and timely control of costs.

Project cost (cost) management includes the following processes:

Project cost assessment;

Project budgeting, i.e. setting cost targets for project implementation;

Control of the cost (expenses) of the project, constant assessment of actual costs, comparison with those previously planned in the budget and development of corrective and preventive measures.

The main document by which project cost is managed is the budget. A budget is a directive document that is a register of planned expenses and income distributed by item for the corresponding period of time. The budget is a document that defines the resource limitations of the project, therefore, when managing cost, its cost component comes to the fore, which is usually called the project estimate.

Project estimate - a document containing the justification and calculation of the cost of a project (contract), usually based on the scope of the project, the required resources and prices.

One way to manage project costs is to use a structure of cost accounts (charts of accounts). To perform work, resources are required, which can be expressed both in the labor of workers, materials, equipment, and in the form of cash cost items, when there is no need or opportunity to know what specific resources constitute them. At the stage of budgeting for work, all resources involved in its implementation are written off to various cost items.

Since the structure of cost accounts is developed according to the principles of decomposition, by aggregating information from the accounts of the lower levels of the structure, it is possible to obtain cost data at the required level of detail, up to the upper level, characterizing the project budget.

When performing project work, actual cost information is also recorded in the appropriate cost accounts, which allows for a comparison of planned (budgeted) costs with actual costs at appropriate levels of detail.

Cost management is carried out throughout the entire project life cycle, and, of course, management processes are implemented differently at different stages of the project cycle. This is reflected in the modern concept of project cost management - cost management throughout the project (life-cycle costing - LCC)

The distribution of project costs over its life cycle is uneven and usually has the structure shown in Fig. 1. As you can see, the bulk of the cost arises during the project implementation phase. But it should be noted that the main decisions that determine the cost of the project are made at the pre-investment phase of the project. Thus, the ability to manage project costs is also unevenly distributed throughout its life cycle.

PROJECT COST ASSESSMENT

Depending on the stage of the project life cycle and the purpose of the assessment, various types and methods of estimating the cost of the project are used. Based on the purposes of the assessments, the accuracy of such assessments also varies.

In table 1 presents various types of project cost estimates, indicating the purpose of the estimates and their accuracy. To estimate the cost of a project, you need to know the cost of the resources that make up the project, the time it takes to complete the work, and the cost of this work. Thus, cost estimation begins with determining the resource and work structure of the project. These tasks are solved as part of project planning (Chapter 13), and the cost estimation module should receive the results of this process.

The cost of the project is determined by the resources required to complete the work, including:

*equipment (purchase, rental, leasing);

*devices, devices and production facilities;

*labor (full-time employees hired under contract);

*consumables (stationery, etc.);

*materials;

*training, seminars, conferences;

*subcontracts;

*transportation, etc.

Rice. 1. Distribution of project cost over its life cycle

All costs can be classified as:

* direct and overhead costs;

* recurring and one-time. For example, monthly payments for the use of production facilities are recurring costs, the purchase of a set of equipment is a one-time cost;

* constants and variables depending on the volume of work;

* payment for overtime working hours.

The cost structure of a project by cost item is usually based on the structure of the project's chart of accounts, which is a decomposition of costs from the highest level of cost of the entire project to the lowest level of cost of one unit of resources. For a specific project, you select your own chart of accounts or family of them. Russian accounting charts of accounts, international accounting charts of accounts, and management accounting charts of accounts can be used as basic options.

Table 1 Types of project cost estimates

The project cost estimation technique consists of 13 steps. These may vary depending on the project and generally include the following:

1. Determining the work's resource requirements.

2. Development of a network model.

3. Development of a work breakdown structure.

4. Estimation of costs in terms of the work breakdown structure,

5. Discussion of the WBS (work breakdown structure) with each of the functional managers.

6. Development of the main direction of action.

7. Estimation of costs for each element of the WBS.

8. Coordination of basic costs with the highest level of management

9. Discussion with functional managers of personnel needs.

10. Development of a line responsibility scheme.

11. Development of detailed schedules.

12. Formation of a summary report on costs.

13. Inclusion of cost estimation results in project documents.

A project cost estimate is essentially an estimate of all the costs required for the successful and complete implementation of the project. These costs can have different ideas, colored by different economic meanings. Moreover, the differences between such ideas are sometimes very subtle.

There are three types of costs:

*obligations;

* budget costs (estimated cost of work distributed over time);

* actual costs (cash outflow). Obligations arise, for example, when ordering any goods or services in advance of their use in the project. As a result, invoices are issued, payment for which can be made either at the time the goods are ready for delivery, or at the time of receipt, or in accordance with the payment policy adopted by the organization. In any case, when ordering, the budget is reduced by the amount of this order. In some cases, it is not taken into account until the invoice is received, which does not correctly reflect the current state of the budget. In this regard, there is a need for a system for planning and accounting for project obligations. In addition to performing its main functions, this system will make it possible to predict future payments.

Budget costs characterize the costs planned for the production of work.

Actual costs reflect expenses incurred during the implementation of the project work or at the time of payment of funds.

The actual ratio of these types of costs depends on several factors, including:

* the ratio between the volumes of labor resources, materials and subcontracts in the project;

* bill payment policy in the organization;

* delivery period of main equipment;

* schedule of work under subcontracts;

* the influence of the work schedule on when and how workers' costs will be written off when delivering equipment.

Understanding the differences between the cost “expressions” described will allow you to effectively manage your overall project costs.

Based on the structure of the project life cycle, its cost includes the following components:

Cost of research and development: conducting pre-investment studies, cost-benefit analysis, system analysis, detailed design and development of prototypes of products, preliminary assessment of project products, development of design and other documentation for products;

Production costs: production, assembly and testing of project products, maintaining production capacity, logistics, personnel training, etc.;

Construction costs: production and administrative premises (construction of new ones or reconstruction of old ones);

Current costs: wages, materials and semi-finished products, transportation, information management, quality control, etc.;

Removal of products from production: costs for re-equipment of production facilities, disposal of residues.

PROJECT BUDGETING

Budgeting refers to the determination of the cost values ​​of the work performed within the project and the project as a whole, the process of forming a project budget that contains an established (approved) distribution of costs by type of work, cost items, by time of work, by cost centers or by another structure. The structure of the budget is determined by the chart of accounts for the cost accounting of a specific project. The budget can be formed both within the framework of a traditional accounting chart of accounts, and using a specially developed chart of accounts for management accounting. Practice shows that in most cases the accounting chart of accounts is not enough. For each specific the project requires taking into account certain specifics from the point of view of cost management, therefore each project must have its own unique chart of accounts, but which is based on established indicators of management accounting.

Different types of budgets are developed at different phases and stages of a project. The accuracy and purpose of these types of budgets are given in table. 2. Budgeting is cost planning, i.e. determining the cost plan: when, how much and for what money will be paid.

The budget can be drawn up as:

1) cost schedules,

2) cost distribution matrices,

3) cost bar charts,

4) bar charts of cumulative (cumulative) costs,

5) linear diagrams of cumulative costs distributed over time

6) pie charts of cost structure, etc.

table 2

Types of budgets

The form in which budgets are presented depends on:

Document consumer;

The purpose of creating the document;

Established standards;

Information of interest.

Depending on the stage of the project life cycle, budgets can be:

Preliminary (evaluative);

Approved (official);

Current (correctable);

Actual.

After conducting feasibility studies (Chapter 4), preliminary budgets are drawn up, which are more evaluative than prescriptive in nature. Such budgets are negotiated with all stakeholders and ultimately approved by the project manager or other decision maker. Once the budget has acquired official status, it becomes the standard against which actual results are compared. During the implementation of the project, deviations from previously planned indicators arise, which should be reflected in a timely manner in current budgets. And upon completion of all work, an actual budget is created as a final document, which reflects real numbers.

Estimates that represent expenditure budgets deserve special attention. Estimate documentation is an important component of budget documentation in large investment projects

One of the first questions that an investor will ask the project initiator will be: “How much does it cost?” The answer is necessary to make an adequate decision about launching the project. And it is very important to find this answer. To be completely honest, you only get an accurate answer after the project is completed. The rest of the time, only assumptions about the cost of the future project are known.

Assumptions about the cost of the project and the necessary funds for its implementation should be presented in the form of a clear, structured document that answers the questions: how much, when and what funds will be spent on during the project.

In the future, the project manager will have to make a lot of efforts to ensure that his assumptions come true and the project is completed within the approved budget.

The listed actions of the project manager and team constitute the content of project cost management.

Learning goals

After studying this chapter, the reader will receive answers to the following questions.

• How to determine the cost of a project?
• What is an estimate and what information does it provide to the project manager?
• What is the project budget and why is it often exceeded?
• How to develop a realistic project budget?
• How to organize effective cost control in a project?
• What is the earned value method and why is it needed?

Project Cost Management Concept

This chapter discusses the means, methods and instruments that provide cost management for a project at different stages of its implementation.

Cost management is ensured through the implementation of the following processes during the project:

• cost estimates;
• developing the project budget;
• project cost control.

Project cost management processes ensure:

• understanding by the project manager, customer and project investor of the projected cost of individual works, work packages and the entire project (cost estimation process);
• a clear understanding by the project manager of when, how much and on what funds will be spent in the project (budget development process);
• absence of unforeseen expenses in the project, reduction in the number of changes and deviations of the actual budget from the approved base budget (cost control process).

Moreover, these processes, like any processes during the implementation of a project, can be iterative and carried out on the principles of sequential development.

The main tasks of a project manager in cost management:

• determination of general rules and principles for project cost management;
• development of a project cost management system;
• involvement of relevant functional specialists in cost estimation work;
• assessment of the amount of resources required to implement the project;
• organizing the development of estimates and budget for the project;
• ensuring project financing according to the financial plan;
• accounting of actual costs during the project;
• control of project cost parameters, identification of deviations and timely implementation of corrective actions;
• archiving of factual information about the cost parameters of the project.

Project Cost Management integrates the processes performed during planning, budgeting, and cost control to ensure that a project is completed within the approved budget.
PMBOK

Project Cost and Finance Management- project management section, which includes the processes necessary for the formation and control of the implementation of the approved project budget.
NTK

An important feature of project cost management processes is their very close connection with other planning processes. In particular, it is difficult to assume that it will be possible to develop a correct budget without information about the necessary resources and without a calendar plan.

Information about project risks can also significantly influence both the size and design of the project.

One of the first steps a project manager takes in managing project cost is developing a cost management concept. This concept should contain general rules for organizing project cost management, principles of accounting and documentation, recommended methods and technologies.

Development of a concept for project cost and financing management:

• developing a strategy for managing the cost and finances of the project (defining goals and objectives, criteria for success and failure, limitations and assumptions);
• conducting economic analysis and justification of the project (marketing, assessment of cost and sources of financing, forecast of implementation);
• general economic assessment of the project;
• development of an enlarged financing schedule;
• determination of requirements for the cost and financing management system in the project;
• approval of the concept.

All costs in the project can be divided into three types:

1. obligations;
2. budget costs;
3. actual costs.

Liabilities- these are planned, future costs that arise when concluding agreements, contracts, or ordering any goods or services. This usually happens in advance according to the project plan. Invoices issued by suppliers are subject to mandatory payment. However, payment can be made according to different rules at different points in time:

• at the moment of readiness of materials and components;
• after delivery of goods and services;
• on the terms of full or partial prepayment;
• in accordance with the policies of the organization purchasing or providing goods and services.

Depending on how accounting is organized in the organization, it is possible to document a budget reduction by the amount of obligations sooner or later. Some organizations do not consider these costs until the invoice is received or paid. In this case, the current state of the project budget is available to the manager in a distorted form and does not provide a complete picture for decision-making.

Budget costs represent the estimated cost of work distributed over time. This is the project cost schedule. This is sometimes called a cost plan. It contains information about the amount and timing of the project's planned expenses during the execution of work.

Actual costs show the real cash outflow in the project. The actual cost report provides information about the actual costs of the project. In this case they can happen:

• during the execution of the project;
• at the time of payment of funds;
• at the time of debiting funds from the account.

Features of accounting for obligations, budgetary and actual costs can significantly change the picture by which the financial condition of the project is determined.

Examples

During a project to build an associated gas dehydration plant in an oil field, thick-walled boilers were ordered from the manufacturer. The project budget was reduced by RUB 4,500,000. due to the fact that after concluding the contract and ordering the boilers, obligations arose for this amount. The boiler production period is seven months, but these costs have already been taken into account in the project budget.

Another example. The contract for the supply of equipment for the project of laying a fiber-optic line in the interests of the company - a cellular operator, provided for payment for the supplied router within 30 days after signing the acceptance certificates. According to the accounting rules of the customer company, these costs will be taken into account in the budget only upon actual payment.

Thus, a situation has arisen where the work has already been completed, the equipment is in the customer’s warehouse, and the costs for them have not yet been taken into account in the actual budget.

To increase the efficiency of the project cost management system in the concept of managing the cost and financing of the project, it is desirable to clearly define:

• payment policy for work (prepayment, payment upon delivery, etc.);
• policy for paying bills (on the day of receipt, within a certain period, etc.);
• principles for writing off costs for labor, materials and components;
• principles of cost accounting in a project;
• principles of payment for work when involving subcontractors;
• the relationship between the work schedule and the write-off of labor costs and payment for machinery.

Project Management Practice

In practice, the main conceptual issues of project cost management are usually determined by the parent organization implementing the project.

In the case of creating a specialized company or consortium to implement a project, the rules and principles defined for the project most often become the internal rules of this organization and vice versa.

Estimation of the cost of work

Cost estimation is the process of determining all costs necessary for the successful and complete implementation of a project.

Cost estimation is an iterative process of obtaining approximate data on the cost of work and resources. Estimates may be updated as the project progresses. The permissible error of estimates depends on the purpose of the data obtained and on the phase of the project.

Thus, any cost estimate in a project is approximate. But still approximately - this comes from the word “close”. As the project progresses, estimates should be refined and become more realistic.

Example

The message from the head of the IT department about the cost of implementing the SAP R3 system in the company at the stage of analyzing the feasibility of such a project may well look like “3-4 million rubles.”

In the future, this assessment should become much more accurate.

Types of Cost Estimates

In project management, four types of assessments can be distinguished:

1. rough order of magnitude - cost expectations of a project in the concept or idea phase;
2. order of magnitude - project cost assumptions calculated in a business plan or similar document;
3. budget estimate - an estimate of the cost of the project, obtained on the basis of data provided by suppliers and performers of work;
4. exact - cost estimate included in the budget when determining the final planned cost of the project before moving to the implementation phase.

Estimation error ranges

It is curious that even an accurate estimate, which, in fact, is used in pricing and final budget adjustments, has an error (see Fig. 1).

Figure 1. Accuracy Ranges for Cost Estimates

As input for estimating costs, the project manager needs information about the scope of the project. At the initial stages, this will be the Charter or WBS of the project, and at subsequent stages it will require its detailed schedule. It all depends on the iteration number of the cost estimate. To get a rough estimate of the cost of a project, sometimes just the idea and design of the project is enough. More accurate estimates require more accurate information.

Components of Cost Estimation

When estimating the cost of work, all cost items for performing the work must be taken into account:

• materials and components;
• purchased equipment, transport;
• rental payments (space, equipment, transport);
• leasing costs (purchase, rental, leasing);
• production capacity;
• cost of personnel labor;
• costs of consumables;
• costs of training and internships;
• costs of holding events (conferences, seminars);
• travel expenses;
• logistics costs;
• entertainment expenses.

The methods that will be used in the cost assessment depend on the specific project, the qualifications of the experts and other factors. For example, to obtain a high-quality result of cost estimation using the “bottom-up” method, it is necessary to have a fairly detailed hierarchical structure of work. A well-developed WBS will not be superfluous when using other assessment methods. If you don't have a detailed work breakdown structure, you may have to start with a top-down approach.

The following methods of cost estimation are distinguished.

• Parametric estimation- a method in which a statistical relationship between the cost of an operation and other variables (parameters), obtained from an analysis of historical data (for example, the size of the structure area in construction, the number of lines in the program code, the number of working hours) is used for cost estimation. The cost of one unit of work is calculated empirically. For example, the cost of construction of 1 sq. m of housing, 1 hour of expert work, etc. When calculating the cost, various formulas are used, and to calculate the cost of the full scope of work, they proceed from the cost of an individual unit of scope of work.
• Valuation by analogues- a method of estimating costs by analogy with similar work performed in this or other projects. The analogue assessment method can apply to the entire package of work or be used in conjunction with a parametric assessment when there is information about the performance of similar work, but of a different scope or under different conditions. The advantage of the method is the ability to obtain a more accurate estimate. The reason for this is the availability of information not only about the planned cost of the analyzed work, but also about its actual cost. The difference between the planned estimate and the actual cost can give the project manager additional food for thought.
• Bottom-up evaluation- technology for assessing large volumes of work by summing up estimates obtained for smaller components of this work. The more detailed and accurate the project WBS is developed, the more accurate and correct cost estimates for the project can be obtained. The bottom-up method is rightfully considered one of the most accurate.

Example

Before handing over the new server to the customer, it must be tested. The cost of server testing can be determined in a bottom-up manner. This will be the sum of the costs:

• routine testing;
• stress tests;
• load testing in a thermal chamber.

• Top-down evaluation method considered significantly less accurate than the bottom-up method. It is used in the absence of detailed WBS and lack of information about the resources and materials necessary for the implementation of the work. The assessment technology involves exactly the opposite steps in relation to the bottom-up method. First, a comprehensive assessment of the entire package of work is given, and then it is detailed and decomposed into individual elements (by work, performer, etc.). The method is useful in the early stages of a project, when its viability is being assessed and it is unclear whether resources should be spent on more detailed planning and assessment.
• - a very simple method, provided that there are performers and contractors willing to perform this amount of work. Terms of reference, tender or other documentation are sent to applicants with a request to provide their estimates of the cost (and often the duration) of performing these works.

Project Management Practice

When using the method of analyzing performers' proposals, you should adhere to simple rules:

• do not accept the first offer;
• do not accept the cheapest offer;
• do not accept an offer that is too expensive;
• Don't use offer price as the only criterion when making a decision.

One of the authors of this book conducted a small experiment. Starting the renovation of his own apartment, he tried to get an estimate of the cost of this project, analyzing the proposals of the performers and the “top-down” method. As you know, the top-down method is considered not very accurate. Without developing the ISR, without determining the composition and structure of the work, he prepared a technical specification for the renovation of a two-room apartment with an area of ​​55 square meters. m, sent it to six companies offering apartment renovation services on the market, and requested an estimate for the project. For the purity of the experiment, companies from the same market segment were selected, offering “average” level repairs. Companies offering luxury renovations did not take part in the experiment.

The lowest and highest repair cost estimates received from all suppliers differed by a factor of eight (8). In the estimate with the lowest price, it was supposed to use 24 bags of mixture for leveling the walls (25 kg each) during the repair, with the most expensive - 420 bags.

Exactly the same thing happens on any project. Let's add image and marketing components here. An estimate from a market leader contracting company will be much more expensive than from another market participant. The same thing will happen if the estimate is developed for a customer company that is a market leader.

This should not confuse the project manager. It is necessary to discard the extreme values ​​- the highest and the lowest - and continue to analyze the remaining sentences.

In the event of a tender for the selection of suppliers, all components of the proposal are analyzed as a whole. The proposed deadlines, quality criteria and other indicators, not just the price, are analyzed, and this problem becomes less acute.

Comparative characteristics of various cost estimation methods are given in Table 1.

The result of cost estimation is an estimate of the costs of performing each work separately and as a whole for the project. This can be done in tabular form (see Table 2).

In order to obtain high-quality cost estimates, the project manager must involve subject matter experts and functional specialists with sufficient experience to participate in such work.

Table 1

Table 2. Estimation of the cost of the project “Organization of the competition “Best Taxpayer of St. Petersburg””

To improve the quality of the cost estimation process, the project manager is recommended to adhere to the following principles.

• The principle of optimal responsibility- the one who understands it best will best estimate the cost of a task. Often such a person is the direct performer of the task. His assessments are the most accurate, based on his experience and expert knowledge. In addition, by involving performers in the planning process, the project manager thereby increases their motivation and responsibility for the result when completing the task.
• The principle of independence- the assessment of the cost of operations and work must be carried out independently of the assessment of the work associated with them. Each job is considered independent of other jobs. The relationship between activities, associated risks and associated deviations will be taken into account when aggregating the information received at a higher planning level.
• Principle of adequacy of conditions- when assessing and calculating work, the expert must be guided by the assumption that he has adequate conditions for implementation, a sufficient amount of resources, and effective methods for performing work are available to him. Of course, life is more complex than assumptions about it, so calculations obtained in this way are prone to excessive optimism. To obtain more accurate estimates, the expert must adequately take into account the project limitations in his assumptions. Most likely, this will lead to an increase in grades, but it will be reasonable and adequate.
• Risk recognition principle- estimates entered into planning documents must take into account unforeseen circumstances and risks that may affect the cost and timing of work. It is absolutely normal to include risk reserves in the valuation. However, their value must be the result of adequate, meaningful analysis and calculation. Introducing a “just in case” reserve into the cost of work is most often ineffective. It turns into elementary “reinsurance”, “just in case” planning, which is not justified either by objective circumstances or by the real situation in the project.
• The principle of the right to make mistakes- any estimate is an assumption. Any assumption contains an error. The expert’s task is to make this error minimal. The introduction of penalties for errors, sanctions for any deviation of real data from forecast ones will lead to “remortgages” and “reinsurances”. Performers and experts will make unreasonable reserves to avoid punishment. All estimates will contain exclusively pessimistic values. At the same time, there is practically no hope that under such conditions actual and planned costs will coincide or savings will appear. The famous Murphy's Law states: “Any budget will be spent in full.” Trusting an expert will greatly improve the accuracy of your estimates.

Development of estimates

Development of estimates is the process of structuring and systematizing cost estimates obtained at the cost assessment stage. Structuring and systematization of data on the cost of work is carried out in accordance with the cost items adopted in the accounting system of the parent organization of the project.

Estimate- a document containing a list of project costs derived from the project scope of work, required resources and prices, structured by items.
Wikipedia

If in a project (parent organization) it is customary to structure project estimates by work, then the process of developing estimates is greatly simplified. Estimates structured by work are transferred to the estimate and compiled into a single document.

If the company’s requirement is to structure costs in the estimate by cost item, the process becomes somewhat more complicated. Usually distinguished:

• direct costs (expenses);
• overhead (indirect) costs;
• general and administrative overhead.

Direct costs- expenses directly related to the production of products and project work; production costs included in the cost of production, in direct production costs.

Direct costs are directly related to the work package. These include:

• labor costs;
• costs of materials and equipment;
• other expenses associated with the performance of work.

It is direct costs that can be directly influenced by the project manager and his team. The project team's influence on other costs is limited.

Overhead costs (indirect costs)- expenses that accompany the main production, but are not directly related to it, and are not included in the cost of labor and materials. Overhead costs cannot be tied to any specific work or specific result. They apply to the entire project as a whole. These are the costs for:

• maintenance and operation of fixed assets;
• management, organization, maintenance of production;
• business trips;
• employee training.

General and administrative overhead (fixed costs)- costs not associated with any specific project. They relate to the company's expenses, but at the same time they also relate to the project. General and administrative expenses usually include the costs of maintaining the management staff and supporting departments (accounting, secretariat, security, etc.).

Project Management Practice

Some companies have a fixed amount of general and administrative overhead (for example, as a percentage). This amount is calculated by the project manager and added to the calculated direct costs. This practice has a right to life, although its use can sometimes cause a significant increase in the cost of the project.

Classification of estimates

• local;
• object;

Local estimates- a primary document containing calculations and estimates of the cost of structural elements and types of work for the project in current or forecast prices.

The local resource list includes:

• employee labor costs (man-hours);
• time of use of equipment (machine hours);
• consumption of materials, products, structures, etc. (in accepted physical units of measurement).

The local resource estimate may include:

• labor costs;
• equipment operating costs;
• Cost of materials;
• overheads;
• estimated profit;
• estimated cost.

The approximate structure of the local estimate is given in Table 3.

Table 3

Object estimate- a document containing calculations and cost estimates for the object (objects) as a whole at basic or current prices.

• Basic price - the price of a product of standard quality, on the basis of which the price of a product of higher and lower quality is established, for example, in the case when the properties of the actually delivered product differ from those specified in the contract.
• Current price - the price or tariff in force in a given period of time (can be wholesale, purchasing, retail, prices and prices in construction, tariffs and prices for services provided to enterprises, organizations, and the population).

Based on the results of developing the project’s object estimate, the project management team and the customer can obtain indicators of the unit cost of the object:

• cost of 1 sq. m of area (for example, residential or office);
• cost of 1 cubic m volume (for example, a structure being built);
• cost of 1 m of length (for example, utilities);
• standard labor intensity;
• estimated salary.

Estimates for individual types of costs- documents containing calculations and cost estimates based on costs that are not taken into account by the estimate standards.

Some types of costs include:

• bonuses for early completion of the project;
• payment for consulting and audit services;
• payment of benefits and compensation;
• payment for unforeseen business trips;
• payment for transport for employees (delivery to the place of work);
• advertising expenses;
• insurance premiums for voluntary insurance;
• payment for services of mobile operators, Internet providers;
• other.

Summary estimate- the main document defining the cost of the project, summarizing the data of local and site estimates and estimates for individual types of costs, in basic and current prices or in basic and forecast prices.

In the summary estimate calculation, the data of local and site estimates is summed up and brought together to the level of the entire project. The final estimate includes data from estimates for individual types of costs.

The summary estimate (summary estimate) is usually accompanied by an explanatory note, which contains related information necessary to understand the document and facilitate work with it.

The structure and composition of the consolidated estimate is shown in Figure 2.

Figure 2. Structure of the project summary estimate

Based on their purpose, estimates are divided into the following (see Table 4):

• preliminary - intended to determine the order of magnitude of the expected costs of a starting project;
• primary - designed to compare planned project costs with existing financial restrictions;
• factorial - the same as primary;
• close ones - intended to make the final investment decision on launching or abandoning the project;
• summary - designed to finalize the cost of the project.

Table 4

Thus, an estimate is a document that contains structured information about how much money will be spent on what in the project.

Project budget development

The main planning document that determines the planned cost indicators of the project is the project budget. In addition to the questions of how much money will be spent on the project and on what, the project manager is very interested in the question of when it should and can be spent. The answer to this question is provided by developing a project budget.

Project budget- another document, the development of which perfectly illustrates the principle of sequential development.

It is almost impossible to develop an accurate, complete and realistic budget on the first try. The budget is clarified and adjusted as the project progresses. Depending on the project stage and purpose, several types of budgets are distinguished (see Table 5). They may have varying degrees of accuracy. However, as the budget is refined over the course of the project, the error should decrease.

Budgeting- the process of structuring project expenses according to the chart of accounts for cost accounting of a specific project. Budget structuring can be done:

• by type of work;
• cost items;
• reporting periods;
• risks;
• different structure.

Budgeting - cost planning. Its result is a budget or cost plan, i.e., the answer to the questions: when, how much and what money will be spent on.

The algorithm for developing a project budget is shown in Table 6. It is almost impossible to develop a project budget without a calendar plan. Typically, the development of a schedule and budget proceed in parallel.

Table 5

Table 6

Calculation and optimization of the project budget

The fundamental differences between a budget and an estimate are the presence of a revenue part in the budget and the distribution of costs over time. A budget is a schedule of future expenses and income.

In the case where the project does not provide for a post-investment phase, i.e., a profit-making phase, the revenue side of the budget is not developed.

If a revenue part is provided, it is developed on the basis of data from marketers about the planned sales volumes of the project product and forecast prices.

If a cost budget is being developed, then if correct estimates are available, the process of converting the estimate into a budget becomes a technical function. An estimate is a document that answers the questions of how much and for what to pay in the project. The budget adds to these questions the answer to the question of when this will happen.

The estimate is superimposed on the time axis, and all payments are distributed over time. When using budgeting information systems and assigning costs to a specific job, the system does the rest automatically.

The budget can be presented in various forms. The most common form of presenting a budget is in the form of a table. Sometimes histograms or pie charts are used for clarity.

Fixing the basic (initial) budget

Like a schedule, a cost plan or budget will be tracked and controlled by the manager as the project progresses. After receiving data on the actual costs of performing work, the manager will need to compare them with the planned ones.

The role of the reference budget will be played by a timely fixed basic (initial) budget.

Project Management Practice

In some investment, construction and development companies, the basic budget has 2-3 versions.

The first version of the basic budget is fixed after the approval of the feasibility study, the end of the pre-investment phase and the decision to launch the investment phase of the project, i.e., the transition to construction.

The second version of the basic budget is fixed after receiving the design and estimate documentation and making the necessary adjustments to the basic budget of the first version.

The third version is fixed in case of significant deviations from the basic budget during implementation. This version of the basic budget is not always the case. Changes to the second version of the budget baseline are considered a major change to the project.

Project cost control

Developing a project budget is half the battle. Completing the project work and not exceeding the budget is the second half of the task.

The project manager must build an effective system for controlling project costs and ensure timely implementation of corrective actions to minimize deviations from the budget. There are two main tasks of cost control:

1. accounting of actual costs;
2. forecast of future costs.

The use of traditional cost control methods often allows solving only the first control problem - accounting.

Traditional Cost Control

The project manager's commitment to the budget development process provides the project team with a detailed and realistic financial plan. The budget execution control system provides the project manager with actual data on budget implementation. This information should allow the project manager to make the right decision about the current state of the project.

Based on the available data, it becomes possible to conduct a “plan-to-fact” analysis of the project cost.

Usually two values ​​are compared:

• planned cost of work performed or earned value (EV - Earned Value);
• actual cost of work performed (AC - Actual Cost).

The difference between these indicators is called cost variance (CV - Cost Variance) (see Fig. 3).

From Figure 3 it can be seen that the actual cost of work performed (AC) is 4,000 rubles more than the planned cost of work (EV). There is a cost overrun of RUB 4,000 in the project. (CV). It would seem that things are bad. But it is premature to make such a decision.

Figure 3. Traditional project cost control

The cost variance in a project is calculated using the formula

In the traditional control method, only cost indicators of work completion are monitored. It lacks the ability to control volumetric indicators of the project. The available information is not enough to predict the progress of work.

To make the right decisions, the project manager must have a lot of information:

• how much work has been completed relative to the plan;
• whether the project is behind schedule or ahead of schedule;
• whether what should be done by the reporting date has been done;
• are there any deviations from the work plan in terms of volume indicators;
• Are deviations from the schedule random or is it a reasonable trend?

All this information is required by the project manager to understand the further progress of the project and calculate the projected cost of the entire project in changed conditions.

The ability to solve the listed problems is provided by the use of the earned value method (Earned Value Analysis), which is often used in project control.

Earned Value Method

The earned value method is a set of tools that allow you to measure, analyze and predict the values ​​of the main project indicators for the cost, duration and content of the project. The main indicators of the method are:

• EV- planned cost of work performed. This is the cost of work that was completed at the time of analysis according to plan according to the approved budget. This figure is included in the basic budget as the planned cost of a given (actually completed) amount of work;
• A.C.- actual cost of work performed. This is the cost of work that was completed at the time of analysis in fact, the money actually spent on work that has actually been completed at the moment;
• PV(planned volume, Planned Value) - the planned cost of the planned work. This is the cost of work that must be completed at the time of analysis according to the approved budget. This value is included in the base budget as the cost of the amount of work that must be completed by this moment.

The first and second indicators are already familiar to us, and it is clear why they are needed.

By comparing the mastered volume and the actual cost, i.e., the cost according to the budget and the actual cost of those works that have already been completed, it is possible to determine whether there are cost overruns in the project.

CV(cost deviation, Cost Variance) is the difference between the earned volume and the actual cost:

• If CV
• If CV > 0, the project has budget savings.

The physical meaning of calculating the CV indicator is a comparison of actually completed work in planned (budget) and actual money.

From Figure 3 it is clear that there is a budget overrun of RUB 4,000, but it is not at all clear how the project schedule is being implemented. Maybe the cost overrun is due to the speed of execution? Has all the work planned to date been completed? Or is there unfinished work? Or maybe more work was completed than planned?

An indicator will help answer this question PV- planned volume.

By comparing it with the mastered volume, you can answer the questions posed.

Figure 4. Earned value method indicators

SV (schedule variance, Schedule Variance) is the difference between the mastered volume and the planned volume:

• If S.V.
• If SV > 0, the project is ahead of schedule.

The physical meaning of calculating the SV indicator is a comparison in planned (budget) money of the volume of work that is actually completed (EV) and the volume of work that must be completed according to the work schedule. In Figure 4, the situation shown in Figure 12.3 has been developed and can be characterized somewhat differently.

Analyzing the cost deviation CV = -4000 rubles, we can say that there is an overspend, and this is bad. However, considering the value of the schedule deviation SV = 5000 rubles, we can draw a different conclusion. Indeed, there is a cost overrun of RUB 4,000. But at the same time, the deviation according to the schedule is +5000 rubles, i.e. more work was completed than planned. Perhaps the cost overrun is due to the high speed of work. As you know, time is money. More work has been completed than planned, and you have to pay for it.

Project Cost Forecasting

So, the accounting control function is completed. The situation that has developed on the project has been adequately analyzed and the current state of the project has been clarified. The second and most important component of control is the forecast of the further progress of the project.

What will the actual cost of the project be at completion? How much money will actually be spent on the project? These questions are important for the project manager. The earned value method can also provide an answer to them.

Absolute CV and SV indicators make it possible to draw conclusions about the current, instantaneous state of the project. Understanding trends and forecasts requires relative metrics.

The earned value method provides not only absolute, but also relative indicators of project completion.

CPI(Cost Performance Index) - cost performance index:

• a relative indicator characterizing the efficiency of spending money in a project;
• the ratio of earned value and actual cost.

CPI = EV/AC.

SPI(Schedule Performance Index) - schedule performance index:

• a relative indicator characterizing the degree of achievement of project indicators in terms of scope of work and fulfillment of the project schedule;
• the ratio of the values ​​of the mastered volume and the planned volume.

SPI = EV/PV.

The project cost performance index characterizes the cost parameters of the project:

• if CPI
• if CPI > 1, the project has budget savings.

The schedule execution index characterizes the parameters of schedule implementation and the volume of work performed:

• if SPI
• If SPI > 1, the project is ahead of schedule.

Indexes will help the project manager in calculating forecasts for the further progress of the project. To predict future project costs, in particular calculating estimates at the end of the project, the project manager will need:

• understanding how much money has already been spent;
• forecast of how much money remains to be spent.

It is the forecast of the remaining cost of the project that is the main task of the cost management team. The earned value method makes it possible to calculate it taking into account the actual situation in the project.

To understand the capabilities of the earned value method for predicting future cost indicators of a project, we will introduce a few more concepts.

BAC(Budget At Complete, budget upon completion) - the planned cost you! completion of all project work, recorded in the basic project budget. The completion budget is calculated during the planning and development of estimates and budget for the project.

E.A.C.(Estimate At Complete, assessment upon completion) - the estimated (predicted) cost of performing the project work, calculated on the basis of available factual information about the progress of the project and its cost indicators at the current moment. The completion estimate can be calculated at any point in the project. In order to calculate its correct value, the value of the actual costs in the project is required. At the beginning of the project, when there are no actual costs yet, the estimate at completion is the value of the budget at completion:

EAC = BAC (at the time the base budget is fixed).

ETC(Estimate To Complete, estimate to completion) - the predicted value of the cost of completing the remaining work of the project from the moment of analysis to the end of the project. Calculating the estimate before completion is the main task of the project manager when predicting its cost indicators. Having the pre-completion estimate value makes calculating the completion estimate a technical task:

The main forecast and basic estimates of the project cost are presented more clearly in Figure 5.

The earned value method allows you to calculate the estimate to completion, taking into account the current situation in the project. To do this, existing factual information is analyzed and a method for calculating forecast indicators is selected. Options and formulas for calculating forecast project cost indicators using the earned value method are given in Table 7.

Figure 5. Cost forecasting using the earned value method

As can be seen from the above formulas, the cost performance index CPI is entered into the calculation formula to take into account the trend of cost performance in the project.

• If the project has cost overruns, enter the CPI value into the formula
• If the project is currently experiencing cost savings, then introducing a CPI value > 1 into the denominator in the formula increases the value of the estimate to completion. Since there are savings now, maintaining the trend will lead to savings across the entire budget.

Analysis of trends and tendencies

Estimates and forecasts should not be blindly trusted. The principles of cost accounting in projects may vary. The value of actual project costs (AC) may not correspond to reality (see section “Project Cost Management Concept”).

• Option 1. We have only acquired obligations by placing an order for equipment at the manufacturing plant, and the value of the actual cost of work performed (AC) has increased. The project cost completion index should demonstrate budget overruns: work has not yet been completed, but money has been spent.
• Option 2. In the case of payment for work upon completion, the opposite situation arises: the work has been completed, but the actual costs have not yet been written off. The calculated values ​​of indices and forecasts will show serious savings in the project budget.

Table 7

To increase the accuracy of forecasts, it is necessary to organize regular collection of factual information on cost indicators and recalculation of forecast estimates. Based on the assessments obtained, graphs should be drawn up and existing trends and tendencies should be analyzed.

If three or four reporting periods the estimated indicators of the main estimates have the same meaning, for example, “budget overrun,” the confidence in such an estimate increases significantly. If three or four reporting periods of assessment show different values ​​(either “overspending” or “savings”), this may be due to the peculiarities of cost accounting in the project or other reasons.

Summary

1. Project Cost Management Concept

   Cost management is one of the most important functional areas in project management. During project cost management, the project manager organizes sequential processes of cost estimation, development of estimates and project budget.

   Cost management is ensured through the implementation of the following processes during the project:

   • cost estimates;
   • developing the project budget;
   • project cost control.
2. Estimation of the cost of work

   There are various methods and tools for valuation. They differ in accuracy and application conditions.

   Cost estimation is an iterative process of obtaining approximate data on the cost of work and resources. Estimates may be updated as the project progresses. The permissible error of estimates depends on the purpose of the data obtained and on the phase of the project. There are four types of assessments:

   • rough order of magnitude;
   • order of magnitude;
   • budget;
   • accurate.

   Each subsequent estimate must be more accurate than the previous one.

3. Development of estimates

   Estimate is a document containing a list of project costs derived from the project scope of work, required resources and prices, structured by items.

   • local;
   • object;
   • estimates for certain types of costs;
   • consolidated (consolidated estimate calculation).

Based on their purpose, estimates are divided into:

• preliminary;
• primary, or factorial;
• intimates;
• summary.

The main objectives of a cost-based project cost management system are to develop overall policies as well as effective procedures and methods to enable planning and operational control of project costs. Cost-based project cost management involves processes to ensure that a project is executed efficiently and completed within the approved budget.

The main processes of cost-based project cost management are:

1. Resource Planning- determination of resources (people, equipment, materials) and their quantities necessary to complete the project work.
2. Cost Estimation- assessment of the cost of resources required to complete the project.
3. Budget development- application of cost estimates to individual project works.
4. Cost Based Cost Management- managing project budget changes.

Resource planning and cost estimating are preparatory in nature, used to assess the economic feasibility of a project, and are performed by a temporary project team during the initiation phase. Cost estimates can be made on the basis of expert estimates, estimates based on analogues or parametric estimates based on current standards.

Basic principles of project cost management.

• Systematicity. Providing the necessary information about costs at all stages of strategic project management.
• Differentiation. The use of various methods and methods in the process of formation, control, regulation.
• Hierarchy. Providing cost information to all levels of the project management hierarchy.
• Adequacy. The mode of operation of the cost (cost) management of the project must coincide with the mode of operation of the strategic management system of the project and its components (subsystems).
• Relevance. Providing managers at all levels of management with only necessary and sufficient information about costs.
• Reliability. Cost information should reflect the actual process of the organization's work in space and time.
• Economical. The costs of operating value (cost) management should be fairly minimal.
• Efficiency. Cost (cost) management should help achieve the minimum required level of costs and make the most effective strategic management decisions.

Within project management, cost-based project cost management and project cost management are often treated as identical concepts. Cost-based project cost management includes the following processes:

• project cost assessment;
• project budgeting, i.e. setting cost targets for project implementation;
• control of project costs, constant assessment of actual costs, comparison with those previously planned in the budget and development of corrective and preventive measures.

The main document used to manage the cost of a project based on costs is the budget. A budget is a directive document that is a register of planned expenses and income distributed by item for the corresponding period of time. The budget is a document that defines the resource limitations of the project, therefore, when managing cost, the cost component comes to the fore, which is usually called the project estimate.

Project estimate is a document containing the justification and calculation of the cost of a project (contract), usually based on the scope of the project, the required resources and prices.

One way to manage project costs is to use a structure of cost accounts (charts of accounts). To perform work, resources are required, which can be expressed as the labor of workers, when there is no need or opportunity to know what specific resources constitute them. At the stage of budgeting for work, all resources involved in its implementation are written off to various cost items.

Since the structure of cost accounts is developed according to the principles of decomposition, by aggregating information from the accounts of the lower levels of the structure, it is possible to obtain cost data at the required level of detail, up to the upper level, characterizing the project budget.

When project work is carried out, actual cost information is also recorded in the appropriate cost accounts, allowing planned (budgeted) costs to be compared with actual costs at appropriate levels of detail.

Cost-based cost management is carried out throughout the entire project life cycle, and naturally, management processes are implemented differently at different stages of the project cycle. This is reflected in the modern concept of project cost management - cost management throughout the project life cycle (Life-Cycle Costing - LCC).

Rice. 1. Cost-based project cost managementLCC

The distribution of project costs over its life cycle is uneven and usually has the structure presented in Figure 2.

The bulk of the cost arises during the implementation stage of the project. The main decisions that determine the cost of the project are made during the pre-investment phase of the project. Thus, the ability to manage project cost is also unevenly distributed throughout the project life cycle.

Rice. 2. Distribution of project costs throughout its life cycle

Depending on the stage of the project life cycle and the purpose of the assessment, various types and methods of estimating the cost of the project are used. Based on the purposes of the assessments, the accuracy of such assessments also varies.

Table 1. Dependence of purpose, type and estimation error

To estimate project costs, you need to know the cost of the resources that make up the project, the time it takes to complete the work, and the cost of this work. Thus, the assessment of the cost part of the project begins with determining the structure of resources and work of the project. These tasks are solved as part of project planning, and the cost-based cost management module should receive the results of this process.

All costs can be classified as:

• direct and overhead costs;
• recurring and one-time. For example, monthly payments for the use of production facilities are recurring costs, the purchase of a set of equipment is a one-time cost;
• constants and variables depending on the volume of work;
• payment for overtime working hours.

The cost structure of a project by cost item is usually based on the structure of the project's chart of accounts, which is a decomposition of costs from the highest level of cost of the entire project to the lowest level of cost of one unit of resources. For a specific project, you select your own chart of accounts or family of them. Russian accounting charts of accounts, international accounting plans with estimates, and management accounting charts of accounts can be used as basic options.

The project cost estimation technique consists of 13 steps. These may vary depending on the project and generally include the following:

1. Determining job resource requirements.
2. Development of a network model.
3. Development of a work breakdown structure.
4. Estimation of costs in terms of work breakdown structure.
5. Discussion of the work breakdown structure with each of the functional managers.
6. Development of the main direction of action.
7. Cost estimates for each element of the work breakdown structure.
8. Coordination of basic costs with the highest level of management.
9. Discussion with functional managers about personnel needs.
10. Development of a line responsibility scheme.
11. Development of detailed schedules.
12. Generating a summary report on costs.
13. Incorporate cost estimation results into project documents.

A project cost estimate is essentially an estimate of all the costs required for the successful and complete implementation of the project. These costs can have different ideas, colored by different economic meanings. Moreover, the differences between such ideas are sometimes very subtle.

There are three types of costs;

• obligations;
• budget costs (estimated cost of work distributed over time);
• actual costs (cash outflow).

Liabilities arise, for example, when ordering any goods or services in advance of their use in the project. As a result, invoices are issued, payment for which can be made either at the time the goods are ready for delivery, or at the time of receipt, or in accordance with the payment policy adopted by the organization. In any case, when ordering, the budget is reduced by the amount of this order. In some cases, it is not taken into account until the invoice is received, which does not correctly reflect the current state of the budget. In this regard, there is a need for a planning system and accounting for project obligations. In addition to performing its main functions, this system will allow you to predict future payments.

Budget costs characterize the costs planned for the production of work. Actual costs reflect expenses incurred during the implementation of the project work or at the time of payment of funds. The actual ratio of these types of costs depends on several factors, including:

• the relationship between the volumes of labor resources, materials and subcontracts in the project;
• the organization's bill payment policy;
• delivery period of main equipment;
• work schedule under subcontracts;
• the impact of the work schedule on when and how workers' costs will be written off when equipment is delivered.

Understanding the differences between the cost “expressions” described will allow you to effectively manage your overall project costs. Based on the structure of the project life cycle, its costs include the following components:

• cost of research and development: conducting pre-investment studies, cost-benefit analysis, system analysis, detailed design and development of prototypes of products, preliminary assessment of project products, development of design and other documentation for products;
• production costs: production, assembly and testing of project products, maintaining production capacity, logistics, personnel training, etc.;
• construction costs: production and administrative premises (construction of new ones or reconstruction of old ones);
• current costs: wages, materials and semi-finished products, transportation, information management, quality control, etc.;
• removal of products from production: costs for re-equipment of production facilities, disposal of residues.

Cost estimation is an estimate of the likely cost of those resources that will be required to complete the work required by the project.

Cost estimates are calculated over the course of the entire project. In order to give a project permission to start, it is necessary to first check the conceptual (pre-project) estimates of its cost. At this stage, a preliminary estimate is used, the so-called Order of Magnitude Estimate, the difference of which from the actual cost lies in the range from -25% to + 75%. More accurate estimates are required as the project progresses. In this case, the Budget Estimates are determined with an accuracy of -10% to +25%. And finally, by the time the agreed base price for the project (Project Cost Baseline) is developed, it is necessary to carry out a final cost estimate (Definitive Estimate), the value of which should not be less than the real one by more than 5% and exceed it by more than 10%.

In the early stages of a project, the uncertainty in understanding the actual scope of the project is still too great, and there is no point in expending the effort to make more accurate cost estimates at each stage of the project than is currently necessary.

There are several generally accepted methods for calculating cost estimates. Everyone can choose a method that provides the required accuracy of assessment and corresponds to its capabilities in terms of money and labor costs for conducting the valuation itself.

Top-down evaluation method

The top down cost estimation method is used to estimate costs in the early stages of a project, when information about the project is still very limited. The meaning of such an integrated expert assessment is that it is carried out in a generalized manner and the project is assessed as a whole according to one indicator. The assessment is convenient because it does not require much effort and time. The disadvantage is that the accuracy is not as high as it could be with a more detailed assessment.

Bottom-up assessment method

The bottom-up estimating method is needed to arrive at an agreed upon base price for the project or a final estimate of project costs. The name of the method reflects the way the estimate is calculated - the method involves estimating costs at detailed levels of the project, and then summing the costs at higher levels of aggregation to obtain an estimate of the cost (budget) of the entire project. To accomplish this “roll-up” of costs, you can use the work breakdown structure (WBS or WBS) of the project. The advantage of this method is the accuracy of the results obtained, which in turn depends on the level of detail in estimating costs at lower levels of consideration. From mathematical statistics it is known that the more details are added to the consideration, the higher the accuracy of the estimate.

The disadvantage of this method is that the cost and time required to perform a detailed assessment is much higher.

“By analogy” assessment method

The “analogous” valuation method is one of the variations of the “top-down” valuation method. Its essence lies in the fact that to predict the cost of the project being evaluated, actual data on the cost of previously completed projects is used. This method is based on the idea that all projects are somewhat similar to each other.

If the similarity between the peer project and the project being evaluated is high, then the evaluation results can be very accurate, otherwise the evaluation will be incorrect.

Let, for example, you need to develop a new software product, and its modules are similar to the modules of another, already developed product, but must contain a larger number of commands. In terms of the nature of the work, the previous and upcoming projects are very similar. If the volume of work in a new project is 30% greater than in the previous one, then the “by analogy” valuation method allows us to assume that the cost of the new project will be 30% more than the cost of the previous one, provided that the cost of resources remains unchanged.

Parametric Estimation Methods

Parametric estimation methods are similar to the analogue estimation method and are also a type of top-down method. Their inherent accuracy is no better or worse than the accuracy of the “by analogy” assessment method.

The parameter estimation process consists of finding a project parameter whose change entails a proportional change in the cost of the project. Mathematically, a parametric model is built based on one or more parameters. After entering the parameter values ​​into the model, the calculations result in an estimate of the project cost.

If the parametric models of different projects are similar and the costs and values ​​of the parameters themselves are easy to calculate, then the accuracy of the parametric estimate of the upcoming project can be increased. If, for example, there are two completed projects, and the cost of one of them is greater than the cost of the project being evaluated, and the cost of the other is less, and the parametric model is valid for both completed projects, then the accuracy of the parametric estimate of the cost of the upcoming project and the reliability of using the parameter will be quite high.

Evaluation can also be done using a variety of parameters. In this case, each parameter, depending on its significance, is assigned a weighting coefficient, and the cost is assessed according to a multi-parameter model.

Examples. Building a house costs $815 per square foot, so building a 1,000-square-foot house would cost $815,000. Developing a software product costs $2 per team, so developing a program with 5,000 teams would cost $10,000. . Construction of an office building will cost $854 per square meter, plus $54 per cubic meter. meter, plus 2 thousand dollars per 100 sq.m. land, etc.

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