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June 2, 2007 2037 comments so far

Planning Project Costs

For many project managers project cost planning is some kind of "black magic". The major reason for this is probably that there are very few general rules. Instead, the personal experience of the project manager is the most valuable ingredient.

Let us begin with the easy part, namely the structure of a "cost baseline" (basically the standard name for a project cost plan). The cost baseline is a table which typically has an activity number and/or a PSP code as the first columns, followed by the activity name and a number of columns containing different cost types. Typical cost types are personnel or staff costs, external costs (e.g., for contractors), material costs, travel costs and miscellaneous costs (this is where you add all costs which do not "fit" the other cost types).

The decision you have to make is whether you use "top down" or "bottom up" planning. Top down planning is if you start with fixed project costs and distribute them across your activities. Bottom up planning is if you plan costs for individual activities and aggregate the costs for collection activities until you get a sum for the project itself. I personally prefer the bottom up method, because I think it provides most of the time more realistic results.

I think the major question when you create a cost baseline is whether you are in "uncharted territory" or not, i.e., whether you are planning a type of project you have never planned before, or if you already have experience in planning this type of project. If you do not have sufficient experience with this type of project you might find yourself in a situation where you will try to compensate your uncertainty with project structure. Please note that this often results in a lot of activities where each activity includes a cost buffer which in turn creates an unrealistically high estimation for the overall project costs.

A good rule might be to try limiting the complexity of the cost baseline to a certain degree until you reach a comfortable level of certainty; do not get into too much detail too early - especially, if you use the bottom up approach. Use your experience to fill out the "blanks" and add more detail step by step as you gain more certainty. If you are very uncertain about structure and costs it might also help if two different persons create a cost baseline each (one bottom up, the other one top down). You can then compare both baselines and derive a more meaningful plan from what you learn.

Finally, there are several tools which can help you create and maintain cost baselines

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  • Personnel costs are often easier to measure in person hours than in money, i.e., if you have a tool which automatically calculates personnel costs based on hours and hourly rates it may help
  • Another helpful tool which we have already covered earlier is the work breakdown structure (WBS): It can help you keep oversight of your estimated project costs
  • Also convenient are project templates if you often encounter similar projects where you can reuse previous estimations

What are your experiences with project cost planning? Do you know any "black magic"? ;-)