Cost Estimation & Control

Cost Reviews

Cost Reviews: A Vital Tool for Cost Estimation & Control

Effective cost management is paramount in any project, from building a skyscraper to launching a software product. As a project progresses, the initial cost estimates often require adjustments due to changing scope, unforeseen challenges, and evolving market conditions. This is where cost reviews come into play.

Cost reviews are planned, systematic, and rigorous reassessments of the estimated cost at completion of the scope of work in a cost class. They involve a detailed examination of the project's current status, comparing actual costs incurred with the original estimates, and identifying any potential deviations.

Key features of cost reviews:

  • Planned: Cost reviews are not ad hoc but scheduled at regular intervals throughout the project lifecycle. This ensures timely identification of cost variances and allows for proactive corrective measures.
  • Systematic: They follow a structured approach, typically involving:
    • Data gathering: Collecting accurate information on actual costs, work completed, and remaining work.
    • Analysis: Comparing actual costs with planned costs, identifying variances, and analyzing their root causes.
    • Reporting: Communicating findings and recommendations to stakeholders.
  • Rigorous: They delve into the details, scrutinizing every cost category to ensure a comprehensive understanding of the project's financial health.

Benefits of Cost Reviews:

  • Improved Accuracy: Cost reviews help refine cost estimates and reduce the risk of cost overruns.
  • Enhanced Control: They provide a mechanism for monitoring and controlling project costs, enabling proactive measures to address cost deviations.
  • Informed Decision-Making: Cost reviews equip stakeholders with valuable insights, allowing for more informed decisions regarding project scope, schedule, and resources.
  • Early Warning System: They act as an early warning system, identifying potential cost issues before they escalate into major problems.

Cost Reviews & Design Reviews:

Each design review should be accompanied by a reforecast of cost, ensuring that design changes are reflected in the revised cost estimates. This reforecast process is an integral part of cost reviews, allowing for accurate cost projections throughout the project lifecycle.

Estimate to Complete (ETC):

The outcome of a cost review often results in an Estimate to Complete (ETC). This is a projection of the remaining cost required to complete the project based on the current status and identified cost variances.

In Conclusion:

Cost reviews are an essential element of successful cost estimation and control. By meticulously analyzing project costs, identifying deviations, and forecasting future expenses, they provide valuable insights for effective project management and financial stability. Regular and comprehensive cost reviews empower project teams to navigate potential challenges, make informed decisions, and ultimately achieve project success within budget constraints.


Test Your Knowledge

Cost Reviews Quiz:

Instructions: Choose the best answer for each question.

1. What is the primary purpose of cost reviews?

a) To identify and address potential cost issues early in the project. b) To create a detailed budget for the project. c) To track project expenses and reconcile them with the budget. d) To negotiate with vendors and secure favorable pricing.

Answer

The correct answer is **a) To identify and address potential cost issues early in the project.** Cost reviews aim to proactively identify and address cost variances to prevent major problems and ensure project success within budget constraints.

2. What is a key characteristic of cost reviews?

a) They are conducted only at the end of a project. b) They are conducted on an ad-hoc basis, as needed. c) They are planned and scheduled at regular intervals. d) They are optional and depend on project complexity.

Answer

The correct answer is **c) They are planned and scheduled at regular intervals.** Cost reviews should be conducted at regular intervals throughout the project lifecycle to ensure timely identification of cost variances and proactive corrective measures.

3. What is the "Estimate to Complete (ETC)"?

a) The original budget allocated for the project. b) The actual cost incurred for the project so far. c) A projection of the remaining cost to complete the project. d) A comparison of actual costs with planned costs.

Answer

The correct answer is **c) A projection of the remaining cost to complete the project.** The ETC is calculated after a cost review, considering the current project status and identified cost variances.

4. What is the relationship between cost reviews and design reviews?

a) Cost reviews are independent of design reviews and have no connection. b) Design reviews should be conducted before cost reviews to inform the cost estimations. c) Cost reviews should be conducted before design reviews to establish a budget baseline. d) Each design review should be accompanied by a cost reforecast to ensure changes are reflected in the estimates.

Answer

The correct answer is **d) Each design review should be accompanied by a cost reforecast to ensure changes are reflected in the estimates.** Design changes can significantly impact project costs, so reforecasting costs after each design review is crucial for maintaining accurate cost projections.

5. Which of the following is NOT a benefit of cost reviews?

a) Improved accuracy in cost estimates. b) Enhanced control over project costs. c) Informed decision-making regarding project scope and resources. d) Eliminating the risk of cost overruns completely.

Answer

The correct answer is **d) Eliminating the risk of cost overruns completely.** While cost reviews can significantly reduce the risk of cost overruns, they cannot guarantee their complete elimination. Unforeseen circumstances and external factors can still influence project costs.

Cost Reviews Exercise:

Scenario: You are managing a construction project with an initial budget of $1 million. After 6 months, the project has incurred $600,000 in expenses. However, a recent design change has added new features that will increase the overall project scope and complexity.

Task:

  1. Conduct a cost review to assess the impact of the design change on the project budget.
  2. Identify the key factors influencing the cost increase and provide an initial estimate of the new total project cost.
  3. Prepare a report to your stakeholders explaining the cost review findings and your recommendations for moving forward.

Exercise Correction

The exercise requires a thorough analysis of the project's current status, considering the design change and its impact on the budget. Here's a possible approach:

1. Cost Review:

  • Data Gathering: Collect information on:

    • Actual costs incurred so far ($600,000)
    • Work completed to date
    • Work remaining to be done
    • Details of the design change and its impact on the remaining work
    • Cost estimates for the additional work required due to the design change
  • Analysis:

    • Compare actual costs with planned costs, highlighting any significant variances.
    • Analyze the root causes of the variances, focusing on the impact of the design change.
    • Assess the feasibility of completing the remaining work within the original budget, given the increased scope and complexity.

2. Cost Increase Estimate:

  • Based on the analysis, determine the estimated cost of the additional work required due to the design change.
  • Add this cost to the original budget ($1 million) to arrive at a new total project cost estimate.

3. Report to Stakeholders:

  • Summarize the cost review findings, highlighting the impact of the design change on the project budget.
  • Explain the reasoning behind the revised cost estimate and any potential risks.
  • Outline possible strategies for addressing the cost increase, including:
    • Negotiating with vendors and contractors to reduce costs
    • Optimizing project scope and reducing unnecessary features
    • Seeking additional funding from stakeholders
  • Recommend a course of action for moving forward, considering the project's financial implications and overall goals.


Books

  • Project Management Institute (PMI). (2021). A Guide to the Project Management Body of Knowledge (PMBOK® Guide) (7th ed.). Project Management Institute. - Chapter 10, "Cost Management" covers cost estimation, budgeting, and cost control, including cost reviews.
  • Kerzner, H. (2017). Project Management: A Systems Approach to Planning, Scheduling, and Controlling. John Wiley & Sons. - Chapters 7 and 8 discuss cost management and control, with sections dedicated to cost reviews.
  • Meredith, J. R., & Mantel, S. J. (2018). Project Management: A Managerial Approach. John Wiley & Sons. - Chapter 9 covers cost management, including topics like cost reviews and cost analysis.

Articles

  • "Cost Reviews in Project Management: A Comprehensive Guide" by [Author's Name (If Available)]. - Look for articles on reputable project management websites or journals (e.g., PM World Journal, Project Management Institute publications).
  • "Cost Management and Control: A Practical Approach" by [Author's Name (If Available)]. - Search for articles on online platforms like Harvard Business Review, McKinsey Quarterly, and Deloitte Insights.

Online Resources

  • Project Management Institute (PMI): https://www.pmi.org/ - Offers resources, articles, and training materials on various aspects of project management, including cost management.
  • Project Management Institute (PMI) Knowledge Center: https://www.pmi.org/learning/knowledge-center - Provides articles and research on project management topics, including cost reviews.
  • Project Management Institute (PMI) Podcast: https://www.pmi.org/podcasts - Offers episodes related to project management, potentially covering topics like cost management and control.

Search Tips

  • Use specific keywords: Combine "cost reviews" with other relevant keywords like "project management", "construction", "software development", or "engineering".
  • Include "PDF" in your search: This will filter your results to show PDF documents, which often contain more detailed and in-depth information.
  • Utilize quotation marks: Enclose specific phrases like "cost review process" in quotation marks to find exact matches.
  • Try different search engines: Explore other search engines like Bing, DuckDuckGo, or Wolfram Alpha to broaden your results.

Techniques

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