The Project Management Body of Knowledge (PMBOK) identifies four phases within project cost management.

Resource Planning
Resource Planning involves defining the work required for each work breakdown structure element (at the appropriate level of the WBS) and allocating the correct resource required to the work.

Cost Estimating
Following the allocation of resources to WBS elements, cost estimating involves planning the duration of project activities and determining a 'dollar' amount for each WBS element.  The 'dollar' amount is derived from

• resource cost rates,
• direct costs associated with the elements,
• and allocations of appropriate overheads.

Cost Budget
Using the cost estimates and the project schedule, cost budgeting involves establishing the cost baseline against which project performance will be measured. Budgets are time phased and spending and income plans can be derived.

Cost Control
Cost control involves measuring the performance of the project against the established cost baselines (budgets). It relies on the effective capture of actual expenditure and information on actual progress.
Cost control involves the analysis and communication of the variances between the budgets and the actual outcomes. Agreed changes to project scope, quality or duration will usually occur in a project. These changes must be reflected in formal change management of the project budgets.

PROJECT PHASE ACTIVITIES

• Concept Phase
• Lifecycle Costs

The concept phase of a project defines the broad boundaries of the project scope. To do this, the concept phase normally includes a comparison of alternative concepts.
Some examples of concept comparison are:
• One large building versus a complex of small buildings.
• An expensive piece of prime equipment with a small maintenance requirement versus an inexpensive piece of equipment with a high maintenance requirement.
• Internal development of a system versus an out sourced development.
Each concept needs to be assessed and compared and this generally requires estimation of the life cycle cost of each alternative.
A life cycle cost is the total cost of ownership over an asset's life span.

Projects by definition have a defined scope and schedule and usually the defined project will cover the development, production and introduction into service of an asset. Non-acquisition costs usually fall outside the scope of the defined project.

Nevertheless it is good project management practice to be aware of the trade off between project costs and life cycle costs. For example, extra design effort (which may result in extra project costs) could realise operations and maintenance savings. Project managers should therefore be willing to adjust their project to realise these savings when it is justified.

Business Case
Often the selection of a preferred concept is followed by a detailed business case. The business case contains the broad definition of the project scope and is the vehicle to secure project authority and funding. As such, the business case will need to contain a budgetary cost estimate as well as a quantification of the project benefits.

Budgetary Estimates
In the concept phase, estimating will normally concentrate on the upper levels of the WBS. It will be unusual for all project elements to be accurately costed. In the concept phase it is common to talk of order-of-magnitude and preliminary estimates where the accuracy will be as follows:
• Order-of-magnitude estimates 30%
• Preliminary estimates 20%

It is important that expectations are correctly established in the Concept phase and project managers, clients and sponsors must all understand the estimating methods used and the variability associated with the methods. Until a detailed design is completed, it is difficult if not impossible to commit to an accurate project cost.

Development Phase
The Development phase of a project is where the low-level analysis, design and planning are carried out to establish solid project baselines.
With the design detail, the exact scope of each project element is defined and an accurate cost estimate can be derived. Some project elements costs will be able to be estimated to a greater accuracy than others. For example, earlier activities may be better defined than later activities and it is reasonable to expect different accuracy in the estimates.

Accuracies shown below are normally achieved in the Development phase:
• Early activities 5%
• Later activities 10%
It is also in the Development phase that the project's budget baselines are firmly established for future performance measurement.
The budgets should be time-phased to reflect the expected 'flow' of costs as the project progresses.

Apart from the flow of project costs, project managers are sometimes expected to control the cash flow on their projects. It is in the Development phase that cash-flow budgets will also be established. During this phase, and having more accurate design and costing information available, the project manager should also confirm whether the business case benefits will still be achieved. At this point there is often a major 'go or no-go'
decision made whether to proceed to the Implementation phase.

Implementation Phase

Cost Management Activities
The Implementation phase of a project involves the performance of the project plan against the established project baselines.
From the cost management perspective the Implementation phase includes:
• Periodic review of the project's actual costs and the allocation of actual costs to the WBS elements.
• Monitoring of the progress being made on WBS elements regarding scope and quality. Progress should be measured in comparison to the established
baselines.
• Periodic revision of the project's estimated cost at completion
• Analysis of any variance between the established cost baseline, the actual realised costs and the progress-to-date.
• Planning and implementing corrective actions to address significant variance.
• Implementing the change management plan including the maintenance of the project budgets and monitoring of the flow between budgets.

Finalisation Phase
The Finalisation phase involves closing-out project financial arrangements and liquidating obligations between the contractual parties.
As part of the financial close-out, the final project cost variance reports should be produced to show the final performance against the budget-at-completion.
Cost management procedures should be reviewed and updated and cost management lessons learned should be included in post implementation reports. These reports should be widely disseminated within the organisation.

COST ESTIMATING
Cost estimating involves developing an approximation (estimate) of the costs of the resources needed to complete project activities.
Remember an old project management maxim – There is no such thing as an accurate estimate.
When a project is performed under contract, care should be taken to distinguish cost estimating from pricing. Cost estimating involves developing an assessment of the likely quantitative result, how much will it cost the organisation to provide the product or service involved. Pricing is a business decision, how much will the organisation charge for the product or service.

Cost estimating includes identifying and considering various costing alternatives. For example, in most application areas, additional work during a design phase is widely held to have the potential for reducing the cost of the production phase. The cost estimating process must consider whether the cost of the additional design work will offset the expected savings.

Inputs to Cost Estimating
• Work Breakdown Structure
• Resource Requirements and Resource Rates
• Task Durations, Program of Activities
• Chart of Accounts
• Historical Information
• Analogous Estimating
• Bottom-up Estimating
• Computer Software
Outputs from Cost Estimating
• Cost Estimates

Cost estimates are quantitative assessments of the likely costs of the resources required to complete project activities. They may be presented in
summary or in detail. Costs must be estimated for all resources that will be charged to the project.  This includes, but is not limited to, labour, materials, supplies, and special categories such as an inflation allowance or cost reserve.

Cost estimates are generally expressed in units of currency Cost estimates may benefit from being refined during the course of the project
to reflect the additional detail available

PROJECT ACCOUNTS
The financial success of a project depends not only on the project making a profit, but also financing the project through the project life cycle. The project manager must plan and control the project's cash-flow. Project accounting should not be confused with financial accounting or management accounting which are used within the corporate environment. From the definitions, however, you will see there is some common ground.

Financial Accounting
This keeps a record of all the financial transactions, payments in and payments out, together with creditors and debtors.

Management Accounting
Also called cost accounting, this uses the above financial information particularly from the profit and loss account to analyse company performance.

Project Accounting
This uses a combination of both financial accounting and management accounting together with some special project management tools to integrate the project accounts with the other project parameters.

Cash-Flow Statement
The cash-flow statement is a document which models the flow of money in and out of the project. The timeframe is usually monthly, to coincide with the normal business accounting cycle. The cash-flow statement is based on the same information used in a typical bank statement, except that here the incomes (cash inflows) and expenditures (cash outflows) are grouped together and totalled. In a project the contractor's income would come from the monthly progress payments, while the expenses would be wages, materials etc.

EARNED VALUE ANALYSIS
Earned Value Analysis is about the cost performance of a project. It indicates how much of the budget should have been spent relative to the amount of work that has been done at any given time.

In everyday language, this means that you can tell at any time whether there is enough money left in the budget to complete the project,
whether the project will be finished on time, and whether you'll run out of money before the project is finished (or run out of work before you run out of money!)

There are three fundamental values used in Earned Value Analysis. To illustrate what each means, I shall use an example task of four week’s duration and with a budget of $1,000. The analysis is being measured at the end of the third week.

• The Budgeted Cost of Work Performed (BCWP), which is the budgeted cost of the work that has been completed to date. In the example task, if 80% of the work has been completed, we should have consumed 80% of the budget for the task, or $800. This is sometimes called the ‘Earned Value’, because it is the value of the work that has been performed. (This has nothing to do with the duration of the task)
• The Budgeted Cost of Work Scheduled (BCWS), which is the budgeted cost of the work planned to be completed to date. In the example task, the total planned budget is $1,000. By the end of the third week, the task should be 75% complete, so the BCWS is $750.
• The Actual Cost of Work Performed (ACWP), which is the actual cost of performing the work completed to date. In the example task, if $300 has been incurred in each of the three weeks to date, the ACWP for this period is $900.
• Importantly, these values allow us to determine several useful indicators:

• Cost Variance (CV), which is the difference between how much should have been spent and how much has actually been spent. CV = BCWP – ACWP.
• Schedule Variance (SV), which is the difference between how much should have been spent and the scheduled progress (in terms of cost) of a task. SV =BCWP - BCWS
The variance indicators can be either positive or negative. A positive variance indicates that the task is ahead of schedule or under budget. A negative variance indicates that the task is behind schedule or over budget.
This is important because you can reallocate money and resources from tasks with positive variances to those projects with negative variances. In our example, the CV is -$100 ($800 - $900) and the SV is $50 ($800 - $750), so we are 5% ahead of schedule but 10% over budget.