Cost Management - Knowledge Area

National Project Management System
Business Projects-IT-Enabled

TITLE:

Cost Management Knowledge Area

1. EFFECTIVE DATE:

December 2010

2. AUTHORITY:

This policy-related document is issued under the authority of the Deputy Minister, Public Services and Procurement Canada (PSPC).

3. CONTEXT:

This Knowledge Area is to be implemented in conjunction with the PSPC National Project Management System (NPMS) Policy.

4. PURPOSE:

To describe the components and requirements of the NPMS as applied to the management of project costs.

5. DETAILS:

Cost Management includes the processes involved in planning, estimating, budgeting and controlling costs so that a project can be completed within the approved budget.

Cost Management procedures are used to create a budget, and to monitor performance relative to that budget. Effective monitoring requires a focus on the actual and forecast consumption of elements such as people's time, materials, equipment, facilities, and transportation, among others.

The Cost Management Plan is the document that sets out the format and establishes activities and criteria for planning, structuring, and controlling project costs. The Cost Management Plan is typically incorporated within the Project Management Plan.

In the Government of Canada (GC) context, there are two scenarios for the Cost Management process. In the first scenario, a project conducts an estimation exercise and develops a cost baseline for delivering the scope of the project. This baseline is approved and the project then controls the variance from this baseline through its cost management procedures and the integrated Change Control process.

In the second scenario, an Investment Proposal or similar process has resulted in a pre-determined budget ceiling being assigned to a project. The project allocates resources in accordance with this budgetary ceiling and manages the budgetary variance.

Cost management considerations must be applied throughout the life of the project. This process is described below in relation to the nine phases of the NPMS. A Cost Management Plan is to be prepared for every project, and associated documents, such as the project budget expenditure tracking spreadsheets linked to the Cost Management Plan, are to be updated throughout the project lifecycle as the project evolves.

Objectives

The objective of a Cost Management Plan is to provide a methodology for:

  • deriving the project baseline budget and associated tracking tools;
  • defining how cost reporting will occur; and
  • describing how cost variances will be managed for the project.

Cost Management Process by NPMS Stage and Phase

Inception Stage

Definition Phase

In this phase, a spending breakdown is provided in the Statement of Requirements (SoR) for the Identification Stage activities.

Identification Stage

Initiation Phase

During the Initiation Phase, the Project Lead on the business side produces high-level cost estimates for conducting the Identification Stage activities. These estimates are included in the Preliminary Project Plan (PPP). The PPP includes a financial component to describe the funding source and the approvals required for funding the project in its early stages. The PPP also contains a cost component. This section provides a high-level budget for the Identification Stage, a description of the cash flow management process, a detailed set of activities, deliverables and their respective costs and a high-level Cost Management process.

Feasibility Phase

The Feasibility Report is produced in the Feasibility Phase, and includes high-level project cost requirements for the Delivery Stage, such as capital and relevant operational costs. High-level cost estimates are provided for all options including assumptions, constraints, and contingency funds/allowances in order to assess the options and make recommendations as to which viable options are recommended for further analysis.

Analysis Phase

The Business Case and the Project Charter are the core deliverables produced as a result of the Analysis Phase. Additional deliverables include a Logical Architecture Solution document. The costing review and analysis contained in these documents includes potential contracting costs. Each viable option and the recommended option contain detailed cost estimates including assumptions, constraints and contingency funds/allowances.

Identification Close-Out Phase

The purpose of the Identification Close-Out Phase is to ensure an appropriate level of assessment, reporting, evaluation, hand-over exchange, and administrative closure has taken place for the delivery organization Project Manager to seamlessly proceed to the Delivery Stage.

In light of the Preliminary Project Approval (PPA) decision, obtained in the Analysis Phase, projects ensure that the document records prepared in this phase include an updated budget, accurate records of expenditures incurred to the end of the project Identification Phase, and that payments have been made for services and materials received.

Delivery Stage

Planning Phase

The delivery organization Business Manager is responsible for creating a Cost Management Plan that describes in detail how the project will manage its costs. The Cost Management Plan is normally a subsidiary plan of the Project Management Plan (PMP). The Business Manager also produces subsidiary costing and budgetary tracking documentation as well as tools for capturing and reporting variance.

The detailed Cost Management process of the Delivery Stage has four major steps, as follows:

Planning the Resources

Detailed Cost Management begins by planning the resources that will be used to execute the project. Assuming bottom-up estimation is the chosen technique, the Budget Manager analyzes the tasks and deliverables described in the Work Breakdown Structure (WBS) along with the Project Scope statement, organizational policies, and historical information from previous similar projects, available resources, and activity duration estimates to develop resource requirements. The Budget Manager looks at alternatives in timing and choosing resources. The output of this process is a description of the resources needed, when they are needed, and for how long. This will include all types of resources, people, facilities, equipment, and materials. Once there is a resource plan, the process of estimating begins.

If the budget and scope are largely predetermined, the Budget Manager begins with the predetermined budgetary ceiling, and in consultation with the Project Manager, determines the minimal available resources required to complete the Project Scope. The Budget Manager allocates the available funds to those resources deemed essential to completing the project work packages.

Cost Estimation

The Budget Manager uses the WBS work packages, the resource requirements determined in the previous step, resource cost rates, for example, from the competency centres that use internal departmental agreements such as Organizational-Level Agreements or User Recovery Agreements, and the activity duration estimates to calculate cost estimates for each activity. Estimating publications, historical information, and risk information are used to help determine which techniques and methods would yield the most accurate estimates. Treasury Board Rates of Pay (e.g. travel), a Chart of Accounts (e.g. accounting categories), and Standing Offers for goods and services are used to assign costs to the different accounting ledgers for fixed price or non-human resource costs.

A variety of tools can be used to perform the actual estimating. Bottom-up estimating, for example, uses computer tools to perform its estimation process. It consists of examining each individual work package or activity and estimating its costs for labour, materials, facilities, equipment, etc. This method is usually time-consuming and laborious but results in accurate estimates provided the estimate is well prepared, that detailed input documents are used.

Cost Budgeting

The estimated costs for each WBS task are aggregated for an overall project cost to create the project budget or cost baseline. The budget is a spending plan, detailing how and at what rate the project funding will be spent. All project activities, cost estimates, WBS tasks, resource availability, and expected funding are integrated with the project schedule in a plan to apply funds to resources and tasks. The spending plan forms the cost baseline or budget, against which cost control measures will be applied to ensure the rate of spending closely parallels the re-source availability and funding.

Cost Control

Cost Control continues throughout the project lifecycle. Cost Control compares cost performance reports with the cost baseline to detect variances. Cost Control tools include com-puter-based programs like Microsoft (MS), Excel spreadsheets and MS Project, and techniques such as Earned Value Analysis. The outputs of Cost Control include the following deliverables, which will be updated throughout the project lifecycle:

  • revised cost esti-mates,
  • budget updates,
  • corrective actions, and
  • estimates of what the total project cost will be at completion.

Corrective actions are applied to anything that incurs cost, and include updating the budget/cost baseline to realign it with project realities or changes in scope.

Cost Control is made up of the following activities:

  • monitoring project spending to ensure it stays within the baseline plan for spending rates and totals;
  • updating forecasts based on actuals and approved changes;
  • identifying cost variances and determining the cause of the variance; and
  • taking corrective action to remedy the variance.

The Project Manager has several means of dealing with variance. Where the budget is insufficient, a prioritization exercise takes place with the client/business line owner regarding time, cost, scope and quality. Changes are made subject to client approval. In some instances the Project Manager can, subject to approval, without altering scope, change the execution of the project to bring the spending back in line within approved limits. If the Project Manager recognizes that the original estimates were incorrect, the Project Manager can either seek additional funding or reduce the scope of the project, based on client approval. Finally, when it is not possible to maintain the current cost baseline, the Project Manager can apply to change the budget/cost baseline to allow for a new approved baseline. Change requests to the cost baseline are submitted and either approved or rejected in accordance with the project Change Management and cash flow management processes.

Design Phase

The Project Manager and/or Budget Manager repeats the process described in the Planning Phase. The updated Cost Management Plan and associated project forms and documents that result from this process are approved at the Effective Project Approval (EPA) control point that concludes this project phase.

Implementation Phase

Actuals are entered as budgetary reports are generated. Subsequently, the budget and related cost tracking documents are reviewed. In response to project change requests, the Project Manager and/or Budget Manager repeats the process steps described above to conduct cost/budget impact assessments. Approved changes are managed in accordance with the cost-control procedures described above.

Delivery Close-Out Phase

Once the project is complete, the project team prepares the Project Close-Out report, and the Lessons Learned report. It also conducts the administrative and contract close-out activities, documenting the process thoroughly. The budget, records of costs and payments and any other subsidiary financial and cost management documents must be updated. A summary of all cost and budgetary changes that were proposed and either approved or rejected, must be prepared. The summary should also detail how cost variance was managed and whether project contingency or other alternative funding sources were accessed.

6. SCOPE:

This Knowledge Area applies to all PSPC projects.

For projects carried out for and funded by other government departments (OGDs), the NPMS practices are to be applied in keeping with client approvals and governance, as per the Business Projects-IT-Enabled OGD procedure.

7. DEFINITIONS:

Budget
According to the Project Management Body of Knowledge (PMBOK®), a budget is defined as any approved estimate for the project or any approved work breakdown structure component or any scheduled activity.
Cost
A cost is the amount of expenditure (actual or notional) incurred on, or attributable to, a specific activity or cost item.
Cost Control
Cost Control compares cost performance reports with the cost baseline to detect variances. Cost Control is made up of the following activities:
  • monitoring project spending to ensure it stays within the baseline plan for spending rates and totals;
  • updating forecasts based on actuals and approved changes;
  • identifying cost variances and determining the cause of the variance; and
  • taking corrective action to remedy the variance.
Cost Management Plan
PMBOK® defines a Cost Management Plan as establishing the format, activities and criteria for planning, structuring, and controlling the project costs. It is also a subsidiary of the Project Management Plan.
Project Cost Management
As per TBS (Guide to Costing), Project Cost Management includes the processes involved in planning, estimating, budgeting and controlling costs so that the project can be completed within the approved budget.
Variance
PMBOK® defines variance as a quantifiable deviation, departure, or divergence away from a known baseline or expected value.

8. RESPONSIBILITIES:

All parties responsible for developing the project Cost Management process and Cost Management Plan are strongly encouraged to consult with other project leaders/managers and senior project managers when developing the Cost Management Plan. It is also recommended that project managers and budget managers seek advice from technical experts and other Subject Matter Expert (SME)s within PSPC. As well, they should consider historical information and lessons learned from similar projects within PSPC when producing/updating the Cost Management Plan, budgets, costing documents and related financial documents.

Project Lead (Business Side)

The Project Lead on the business side is accountable to the client/business line owner for the effective cost management of project funds and is specifically responsible for:

  • ensuring that cost estimates are included in the Preliminary Project Plan for the Identification Stage work effort;
  • ensuring that a thorough and accurate indicative cost analysis is conducted for the options described in the Feasibility Report;
  • ensuring that the Business Case includes thorough costing analysis for viable options;
  • ensuring that the Project Charter represents an accurate representation of the cost of delivering the project scope;
  • setting up and activating a Change Management process for the Identification Stage;
  • ensuring that accurate final costs are prepared for the Effective Project Approval (EPA) control point;
  • managing the Preliminary Project Approval and EPA processes, including the provision of sufficient and thorough cost analysis to justify cost approval at both control points;
  • providing current and forecast cost reporting data to senior managers on the business side;
  • endorsing changes to the cost baseline; and
  • obtaining funding approval for the project.

Project Manager

The Project Manager is ultimately accountable for all components of project costing during the Delivery Stage and is specifically responsible for the following:

  • ensuring that a Cost Management Plan is prepared;
  • ensuring that adequate resources are available to implement the Cost Management Plan (e.g. personnel, tools, required documentation, etc.);
  • approving the Cost Management Plan;
  • setting up and activating a Change Management process for the Delivery Stage;
  • assessing and validating proposed changes to the cost baseline;
  • taking proposed changes that affect the cost baseline through the Change Management process;
  • obtaining approval for the baseline budget and Cost Management procedures;
  • ensuring that all personnel are following the established Cost Management process; and
  • reporting on the budget and cost variance.

Budget Manager

Note: A dedicated resource may be required to fill the Budget Manager role in larger projects; otherwise, it is normally filled by the Project Manager of the Delivery Stage.

The Budget Manager is responsible for the development of the Cost Management Plan, cost estimates, cost baseline and for performing cost-control activities. The Budget Manager is specifically responsible for the following:

  • developing, implementing and maintaining the Cost Management Plan, costing estimates and project budget;
  • identifying and addressing cost variances;
  • managing the Cost Control process;
  • costing change requests;
  • ensuring that all project personnel are following the established Cost Control processes;
  • reporting on project budgeted and actual cost; and
  • identifying and reporting on Cost Management lessons learned.

Project Team Leaders and Members

The project team leaders and/or team members are responsible for the following activities:

  • assisting in the cost estimation process for their area of expertise;
  • following the Cost Control process and submission of required materials;
  • verifying information and estimates;
  • identifying and reporting on lessons learned; and
  • responding to corrective action requests as required.

Client/Business Line Owner

The client/business line owner is responsible for the following activities:

  • providing funding for the project and securing additional funding when applicable;
  • approving the Business Case, Project Charter and other detailed cost-estimate documentation;
  • providing timely direction and decisions on project cost-related issues;
  • monitoring the distribution and usage of the project funds in consultation with the Project Manager;
  • approving recommended changes that affect the cost baseline;
  • assisting the Project Manager in preventing unauthorized scope expansion; and
  • providing timely decisions on project costing issues and problems as they arise.

9. REFERENCES:

10. ATTACHMENTS:

Nil

11. ENQUIRIES:

Please direct enquiries about this Knowledge Area to the Director, Centre of Excellence, ITSB Project Delivery Office.