Glossary of Technical Terms Used in Cost Estimation & Control: Cost

Cost

Understanding Cost in Cost Estimation & Control: A Two-Sided Coin

Cost estimation and control are fundamental pillars of successful project management. They ensure projects stay within budget and deliver value to stakeholders. A key element in this process is understanding the different types of costs involved, specifically the distinction between internal and external expenses.

External Costs: The Outsourced Budget

External costs refer to expenses incurred for resources sourced from outside the organization. This includes:

  • Vendor services: Contractors, consultants, suppliers, and other third-party providers.
  • Materials: Raw materials, components, equipment, and other consumables required for the project.
  • Licenses: Software licenses, permits, and other legal requirements.

Controlling External Costs:

  • Contracts: Carefully crafted contracts with vendors, outlining deliverables, payment terms, and responsibilities, offer a strong framework for managing external costs.
  • Budgets: Allocating specific budgets for each project phase and for each deliverable or work product ensures efficient resource allocation and prevents overspending.
  • Competitive bidding: Soliciting bids from multiple vendors allows for cost comparison and negotiation, optimizing value for money.
  • Regular monitoring: Tracking vendor performance against contractual obligations and budget constraints is essential for timely intervention and cost mitigation.

Internal Costs: The Team's Impact

Internal costs encompass expenses related to resources within the organization. These include:

  • Salaries and benefits: Compensation for project team members, including salaries, bonuses, and benefits.
  • Overheads: Administrative expenses, office rent, utilities, and other indirect costs associated with the project.
  • Internal resources: Time and effort dedicated by internal teams, such as project management, engineering, or marketing.

Managing Internal Costs:

  • Resource allocation: Optimizing team size and expertise based on project needs, avoiding overstaffing and unnecessary expenses.
  • Time management: Encouraging efficient time utilization through clear task allocation, realistic deadlines, and efficient project planning.
  • Performance tracking: Monitoring individual and team productivity, identifying bottlenecks and inefficiencies to ensure cost-effectiveness.
  • Internal communication: Clear and consistent communication between team members minimizes delays, misunderstandings, and potential cost overruns.

The Interplay of Internal and External Costs:

While internal and external costs may appear separate, they are intricately linked. Effective cost estimation and control requires a holistic approach that considers both:

  • Strategic sourcing: Balancing the use of internal and external resources based on project needs and cost-effectiveness.
  • Collaboration: Fostering communication and coordination between internal teams and external vendors to ensure efficient resource utilization and cost optimization.
  • Data analysis: Leveraging data from previous projects and market trends to refine internal and external cost estimates for future projects.

By mastering the intricacies of internal and external costs, project managers can optimize resource allocation, mitigate financial risks, and ultimately achieve project success within budget constraints.


Test Your Knowledge

Quiz: Understanding Cost in Cost Estimation & Control

Instructions: Choose the best answer for each question.

1. Which of the following is NOT an example of an external cost?

a) Vendor services

Answer

This is an example of an external cost, as vendors are outside the organization.

b) Salaries and benefits
Answer

This is an example of an internal cost, as it relates to employees within the organization.

c) Materials
Answer

This is an example of an external cost, as materials are often sourced from outside the organization.

d) Licenses
Answer

This is an example of an external cost, as licenses are typically acquired from third-party providers.

2. Which of the following is a key strategy for managing internal costs?

a) Competitive bidding

Answer

This is a strategy primarily associated with managing external costs, specifically for sourcing goods and services from vendors.

b) Resource allocation
Answer

This is a key strategy for managing internal costs, as it involves optimizing the use of internal resources like employees and their skills.

c) Regular monitoring of vendor performance
Answer

This is a strategy for managing external costs, ensuring vendors meet contractual obligations and budget requirements.

d) Crafting detailed contracts with vendors
Answer

This is a strategy for managing external costs, setting clear expectations and managing deliverables with external partners.

3. How can project managers effectively manage the interplay between internal and external costs?

a) By only focusing on external costs, as they are the most significant

Answer

This is incorrect. Both internal and external costs are crucial and should be considered for effective cost management.

b) By using a holistic approach that considers both internal and external factors
Answer

This is the correct answer. A comprehensive view of both internal and external costs is necessary for optimized resource allocation and cost control.

c) By focusing primarily on internal costs, as they are easier to control
Answer

This is incorrect. While internal costs can be managed, external costs play a significant role in project budgets and need attention.

d) By ignoring internal costs entirely, as they are not directly related to project deliverables
Answer

This is incorrect. Internal costs, such as salaries and overhead, are essential components of a project budget.

4. What is the primary benefit of leveraging data analysis in cost estimation and control?

a) To ensure all vendors are using the same pricing structure

Answer

While consistent pricing is important, data analysis is not solely focused on vendor pricing.

b) To improve the accuracy of cost estimates for future projects
Answer

This is the correct answer. Data analysis helps refine cost estimates by considering past project data and market trends.

c) To track individual employee performance more closely
Answer

This is a benefit of performance tracking, but not the primary benefit of data analysis in cost management.

d) To eliminate the need for detailed project planning
Answer

This is incorrect. Data analysis complements project planning, but does not replace it.

5. What does strategic sourcing involve in terms of managing internal and external costs?

a) Prioritizing internal resources over external resources

Answer

This is not always the best approach. Strategic sourcing involves a flexible approach, not solely prioritizing internal resources.

b) Choosing the most expensive option regardless of the source
Answer

This is incorrect. Strategic sourcing aims to optimize costs, not necessarily choose the most expensive options.

c) Balancing the use of internal and external resources based on project needs and cost-effectiveness
Answer

This is the correct answer. Strategic sourcing involves carefully evaluating the needs and costs associated with both internal and external resources.

d) Exclusively using external resources to reduce internal workload
Answer

This is not always the best approach. Strategic sourcing involves a balanced approach considering the benefits and limitations of both internal and external resources.

Exercise: Analyzing Project Costs

Scenario:

Imagine you are the project manager for a software development project. Your team consists of 5 developers with an average annual salary of $80,000. The project will require a specialized software license costing $10,000, and you have received bids from three different vendors for development services:

  • Vendor A: $50,000
  • Vendor B: $45,000
  • Vendor C: $60,000

Task:

  1. Calculate the estimated internal costs for the project.
  2. Identify the most cost-effective vendor option.
  3. Explain how you would approach the decision of whether to use internal developers or external vendors for the project, considering both cost and project needs.

Exercise Correction

1. Estimated Internal Costs:

  • Developer Salaries: (5 developers * $80,000/developer * (1 year/12 months)) = $33,333.33 (Assuming the project lasts one month)
  • Software License: $10,000
  • **Total Internal Costs:** $33,333.33 + $10,000 = $43,333.33

2. Most Cost-Effective Vendor:

Vendor B offers the lowest price at $45,000.

3. Decision on Internal vs. External:

To make this decision, consider the following:

  • Project Complexity: If the project requires highly specialized skills that your internal team may not possess, external vendors may be a better choice.
  • Project Timeline: If the project has a tight deadline, using external vendors may accelerate development.
  • Budget Constraints: While internal resources may seem cheaper on the surface, factor in the hidden costs of training, managing, and potential delays.
  • Long-Term Considerations: If the project is part of a larger initiative or ongoing development effort, building internal expertise through this project may be more beneficial in the long run.

In this scenario, Vendor B appears cost-effective compared to internal resources. However, if the project requires skills not readily available within the team, or if the project is part of a larger development effort, using internal resources may be a better strategic decision in the long term.


Books

  • Project Management Institute (PMI). (2017). A Guide to the Project Management Body of Knowledge (PMBOK® Guide) (7th ed.). Project Management Institute. - Provides a comprehensive overview of cost management principles and practices.
  • Kerzner, H. (2017). Project Management: A Systems Approach to Planning, Scheduling, and Controlling (12th ed.). John Wiley & Sons. - Explores various aspects of project management, including cost estimation, control, and risk management.
  • Cleland, D. I., & Gareis, R. (2019). Project Management: Strategic Design and Implementation (6th ed.). McGraw-Hill Education. - Focuses on strategic project management, with dedicated chapters on cost estimation and control.
  • Gray, C. F., & Larson, E. W. (2019). Project Management: The Managerial Process (7th ed.). McGraw-Hill Education. - Provides a practical guide to managing projects, including cost management techniques.

Articles

  • Cost Estimating Techniques: A Review. *Published in * Journal of Construction Engineering and Management, ASCE * - Discusses various methods for cost estimation in construction projects.
  • A Framework for Cost Control in Construction Projects. *Published in * International Journal of Project Management * - Examines the importance of cost control and provides a framework for its implementation.
  • Risk Management in Project Cost Estimation. *Published in * Project Management Journal * - Emphasizes the role of risk management in accurate cost estimation.
  • The Impact of External Costs on Project Success: A Case Study. *Published in * Journal of Engineering Management * - Analyzes the influence of external costs on project outcomes.

Online Resources

  • Project Management Institute (PMI): https://www.pmi.org/ - Offers resources, certification programs, and publications related to project management, including cost management.
  • CostX: https://www.costx.com/ - Provides software and resources for cost estimation and control in construction projects.
  • Construction Management Association of America (CMAA): https://www.cmaa.org/ - A resource for construction professionals, offering information on cost management and other construction-related topics.

Search Tips

  • Use specific keywords: Include terms like "cost estimation," "cost control," "external costs," "internal costs," "project management," and "construction management."
  • Combine keywords with project types: Specify the project type (e.g., "software development," "infrastructure," "construction") for more relevant results.
  • Use quotation marks: Enclose specific phrases (e.g., "cost-benefit analysis," "risk assessment") to find exact matches.
  • Refine results with filters: Utilize search filters (e.g., "time," "source") to narrow down your search based on relevance, date, or source type.
Similar Terms
Oil & Gas Processing
Cost Estimation & Control
Project Planning & Scheduling
Budgeting & Financial Control
Oil & Gas Specific Terms
General Technical Terms
Most Viewed

Comments


No Comments
POST COMMENT
captcha
Back