In my previous post Project finances and decision making I elaborated why effective decisions making is essential for a successful outcome of the project finances. Decisions making however relies on accurate and real time information, when this information is not structured and managed correctly project costs will/can descent into a full chaos. Some of the worst-case scenario could be when stakeholders ultimately loose confidence in the project finances due to lack of clarity and accurate information.
Throughout the project life cycle four key elements of cost management can be identified:
The objective of the estimating process is to complete a quantitative assessment of the probable costs required to complete project work, as well as contingency amounts for identified risks, management reserves for unplanned work etc. Estimating the cost means to determine the monetary resources required for the project.
Developing the budget is the process of aggregating the estimated cost of individual activities or work packages to establish an authorized cost baseline. Budgeting is especially important because it outlines a financial roadmap for the project which will be used as reference point to determine project cost performance.
Controlling project costs is the process of monitoring the status of the project costs and managing changes to the cost baselines. The benefit is that the cost baseline is maintained throughout the project. Only monitoring the expenditure of funds without regard to the work being accomplished for such expenditures has little value other than to track the outflow of funds.
In industrial projects invoicing is the process of validating and approving billable charges to the project owners and capital stakeholders. Depending the type of project this is usually accomplished with a Progress Payment Certificate which reflects the relationship of project cost in relationship to project progress.
Adequately combining and integrating these elements along with the right decisions making will assure the successful outcome of the project finances.
