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From planning for a new fish farm to the expansion of a shopping mall, the question of managing project costs always arises. Whether this question gets properly addressed depends on each individual situation and the expertise, experience or quality of advice available for the project manager to work with. Many would simply go for a seemingly reasonable approach of putting down a list of resources and processes, and matching these with cost estimates based on prevailing market prices. If businesses really want to manage their project costs effectively, they would need to adopt a more detailed and sophisticated system; yes, listed items plus costs to match sort of sum up the whole thing, but there’s far more to it. Unless there is a well laid out plan for dealing with cost issues, moments of unpleasant surprises may arise. Rude awakenings, such as the discovery of yawning gaps between estimates and actual market prices and ultimately distrust of the project’s initiators by their sponsors (with possibly disastrous consequences) could result from this. Even if it’s not a large-scale project, planning does need to be detailed and systematic.

It goes without saying that the first thing to be done when trying to get a comprehensive estimate of costs, is to determine what physical resources and quantities are needed to perform project tasks. It is important that these resources be noted based on the project’s Work Breakdown Structure (WBS), which is a decomposition of the entire project work into smaller processes and tasks. Resource requirements for each activity will then be costed. Costs which are attached to these resources may be obtained by direct inquiries about current prices, and by the use of various estimation techniques and tools. Forecasts may be made for project resource cost using historical information. More accurate outcomes from the use of such information would require more than just guesswork; models which help predict future costs may have to be constructed based on the pricing information. It is also possible to get a good idea of what the entire project would cost from a knowledge of similar projects carried out in the past. But specifics need to be taken care of, and on the whole, the possibility of wide disparities between prices in different periods need to be taken into consideration. Expert judgement on resource requirement and costs should be sought where it is needed.

In order to minimise the possibility of an eventual confrontation involving stakeholders over mind-boggling differences between budget estimates and definitive estimates, care should be taken to ensure that estimates are as accurate as possible. Reasonable margins of error should be set, and justification for these margins should be communicated to stakeholders. The project manager and team should be able to differentiate between various types of costs, noting those to be classified as fixed and those which may change with the amount of production (this comes in handy when the covering of production costs is being considered).

Efforts should be made to keep to cost schedules, scopes and baselines. This cannot be done without a regular review of the costs incurred as the project execution progresses, and how these costs impact upon the ultimate feasibility of the project plan and outlined costs. Corrections should also be made as quickly as possible when cost problems arise; stakeholders should be informed about these changes in cases where they involve figures that have already been discussed or agreed upon.


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This article was first published on 10th May 2016

ikenna-nwachukwu

Ikenna Nwachukwu holds a bachelor's degree in Economics from the University of Nigeria, Nsukka. He loves to look at the world through multiple lenses- economic, political, religious and philosophical- and to write about what he observes in a witty, yet reflective style.


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