Cost Management Past, Present, and Future
A recent experience with a large project reinforced the different perspectives involved with managing project costs that has to do with time frame and uncertainty. I look at this perspective in terms of past, present, and future. You need to understand all three perspectives to truly manage the cost of the project effectively.
The past perspective of cost is tracking actual costs that your project has incurred. If you consider that the most common cost in projects is typically people, this means that you know how many hours each member of your project team has worked on the project, and what their loaded cost is in terms of dollars per hour charged to the project. If your accounting system is anything like the one at my company, the actual rates assigned to individuals is not explicitly stated for project managers who don't also serve as the HR manager of their team members. As a result this cost is usually expressed as a number of hours per team member, and a total cost of increment team member cost associated with the project. This perspective is important for managing a project budget so that you know how much of your allotted amount you have spent, but it does not give you the full picture on whether you are going to stay under budget for a given year or for the entire project. In order to determine that, you need to know the present and future pictures.
The present perspective of cost corresponds to costs you suspect your project has incurred, but has not been completely reported through your organization's financial reporting apparatus. This is typically the case where you know the number of hours that project team members have booked to a project but you don't know the actual financial impact because you aren't privy to the actual per hour rate for each specific team member. The way to get around this is to use a blended rate per hour as an approximation until the actual project financials are determined. This blended rate is also the rate you should have used to estimate the budget for the project originally, which represents the initial picture of the future perspective.
Your initial picture of the future perspective is your estimate of project costs that you put together to get funding approved. This is determined by estimating the number of hours that your project team members will spend on the project and multiplying that number of hours by the blended rate I mentioned above. This perspective incorporates uncertainty about the amount of effort needed, as well as the cost of each hour of that work. As you proceed through the project, don't fall prey to the temptation to ignore this perspective. At each status reporting period, you will want to combine the past and present perspectives as well as an update to how much work you have left to get a true understanding of what the ultimate project expenditure will be. This practice will become important if you need to determine how much money the project is projected to expend within a time frame less than the completed project duration. A prime example is when you have a project that stretches across two fiscal years, you may need to keep a close eye on expenditures within the first fiscal year.
Of course, this entire discussion is a little short sighted, because it only discusses the cost of the project team members. You also have to consider what other costs are incurred by your organization as the result of the project. These can be things such as capital expenditures, software, consulting fees, as well as other items. The key things to remember – include all potential costs, and don't be afraid to mix certainty (the past perspective) with some uncertainty (present and future) on a regular basis to keep an update picture of the cost position of your project.