Understanding Project Management

Assignment 1 - Understanding Project Management

This report is based on the assignment 1 of MBS641-Project Management. I have selected the topic - "Project Cost Management". Project Cost Management includes the processes involved in estimating, budgeting and controlling costs so that the project can be completed within the approved budget (PMBOK Guide 2008). In these 3 Project Cost Management processes, my area of discussion is the "Cost Estimation".

Before going into any other further details, we must first know that there are different ways to look at a cost. Costs can be categorized into 4 types - Variable Cost, Fixed Cost, Opportunity Cost and Sunk Cost. These 4 types are discussed below in detail.

Variable Cost: Any cost that vary with the quantity of production.

Example: cost of electricity, water, material etc.

Fixed Cost: Costs that does not vary with the quantity of production.

Example: Installation cost, rent of machineries etc.

Opportunity Cost: It is the cost related to the next-best choice available among several mutually exclusive choices.

Example: Project A with an NPV $60,000.

Project B with an NPV $50,000.

Then the opportunity cost of selecting Project A is

$50,000. (Wikipedia-The Free Encyclopedia n.d.).

Sunk Cost: Costs already incurred in a project are known as Sunk Costs.

The above 4 types of costs are then grouped into Direct Costs and Indirect Costs.

Estimate costs are one of the most important decisions in project cost management. It is the process of developing an approximation of the monetary resources needed to complete project activities (PMBOK Guide 2008). Therefore it is a quantitative estimation of the possible outlay for resources essential to complete the activity. This quantitative estimation generates a schedule of various cost estimates. We estimate costs for resources such as infrastructure, labor, materials, equipments etc. and unusual categories like inflation or contingency (aspalliance 2007).

Figure 1-1. Estimate Costs: Inputs, Tools & Techniques, and Outputs (PMI 2008)

Now we shall discuss each of the above components in detail.

Estimate Costs: Inputs

* WBS

It is a process of breaking down a project into convenient and controllable components.