This video explains the importance of effective budgeting, accounting for the estimated costs and managing ongoing and forecasted costs.
- Projects always have a cost. Planning for these properly means setting a realistic budget that takes into account the estimated costs as well as managing ongoing and forecast costs. It's an important part project management because if costs get out of control the business case for project could be in danger. Ultimately, cost planning has a direct impact on many other control processes involved in a project. Let's start off by talking about the project budget. As you'd expect, a project budget takes into account the entire expenditure of the project. It's used as a benchmark and decision gates, and again at the end of the project, to help you learn lessons. Cost estimates need to be reevaluated throughout the life cycle to keep them relevant. There are three major components that make up the project budget. The base cost estimate, which is the cost of producing the project outputs, the contingency reserve, which is money set aside to deal with any risks, and the management reserve, which covers the cost of unexpected events. Let's talk a little more about the base cost estimate. As it's made up of a few things, including direct costs, which are exclusive to the project, like the resources it needs. Indirect costs, which cannot be directly associated with a specific work element and include other heads and other charges that may be shared across multiple activities. Fixed costs, which happen once in a project's life cycle and include things like buying equipment. And variable costs, which happen throughout a life cycle and could include things like salaries. Okay, so now we've covered what budgets tend to take into account. Let's move on now to how you can analyze and understand the costs in a cost breakdown structure or CBS. The CBS should look something like this. And it's great because it orders budget into a hierarchy, so you can easily understand how much money is being spent and where the money is going. This is especially useful for the finance departments and project sponsors. With the CBS in home, let's delve a little bit deeper to talk about the expenditure profile. Now that you've got both a cost estimate, as well as the reserve budget sorted out, you can create an S curve graph. This shows all the budgetary elements in it. And, is again very useful for the business to help them manage cashflow over time. Of course, as a project moves through its life cycle, this will need to be monitored as things change, so that the cash is available when it needs to be. There are three types of costs you need to be aware of. Committed costs, which is money set aside for future goods or services the projects will need. Accrued, which work that's been partially or fully completed and will need to be paid for at some point. And actual costs, which is the money that's already been paid from the budget for goods and services. As a project manager, you'll also be required to forecast out term costs. This is the total of all three costs above, plus an estimate of the cost remaining in outstanding work packages. Last up for this video, let's talk about some of the benefits you'll get out of effective cost planning. Cost planning will give you and your organization better visibility of cash flow, help with financial planning, and create insights for the profitability of the project. It will also help establish payment terms with suppliers, make informed decisions and analyze the impact of budgetary changes if they happen. And that's it for this video. Cost planning helps you to maintain the integrity of the business case and keep projects profitable.