Tuesday 7 December 2021

Project Cost Analysis

The project costs is an extremely important element of a project management system. Let's imagine that the project is executed for the thousandth time in a row by the same optimal composition of professionals according to the optimal technological sequence of work. No planning and control costs. No risks. 


No managers. Clean production of the project product. The perfect super conveyor.Cost analysis

Such execution determines the lowest possible cost of the project in existing technologies. Let's call this cost technological:

Ideal Project Cost = Cost Tech

Projects never execute so perfectly. Real projects have more or less uncertainty in product characteristics, scope of work, available resources, management procedures, composition and influence of stakeholders, external environment, etc. Real projects usually spend more. 

Let's call the costs of projects that exceed the ideal technological level the unproductive cost:

Real Project Cost = Cost Tech + Cost Waste

The main objective of cost analysis and project cost management is to reduce unproductive costs. We introduce management into the project in order to bring the project closer to ideal. Let's name the cost of managing the cost of project management:

Project Cost = Cost Tech + Cost PM + Cost Waste

Using cost analysis, it can be found that in the absence of management, unproductive costs can be many times higher than the technological cost of the project. Increased management costs lead to fewer unproductive costs. 

Project management is effective as long as its cost is less than the reduction in unproductive costs. Figure 1 shows how introducing management costs into a project can reduce project waste and achieve savings.

The cost of the project without management and with management.

Project management costs reduce the cost of the project and its product! This, of course, is about reasonable and reasonable costs.

Optimal project management

Do I need to improve project management all the time? It would seem, yes. However, let's find out. In the absence of project management, we will have significant unproductive losses – alterations and simply technologically unnecessary work. Adding management costs to the project will reduce these costs.

The increase in management costs will lead to a further reduction in unproductive losses, up to reducing them to zero. 

Figure 2 shows the behavior of project costs under different levels of management.

An increase in management costs (blue line) leads to a decrease in unproductive costs (red line), the level of technological costs is shown by a green straight line. 


The cost of the project is the sum of all three components of the costs and has the form of a parabola (brown line) with a pronounced minimum. At the minimum point of the project total cost curve, optimal management is achieved. 


Optimal in the sense that the deviation of management costs in any direction from this level leads to a proportionally greater increase in the cost of the project.

  • Cost analysis
  • Technological costs
  • Dependence of the project cost

Each project has some optimal level of management, which is determined by the ratio of management and unproductive costs in the total cost of the project.

Let's look at the main components of each of these types of project costs.

  • Components of unproductive value
  • All the costs of the project caused by the difference between the real execution and the ideal, we attributed to the unproductive cost of Cost Waste. This includes:
  • Loss of time, resources and money for excess work
  • Preventive and corrective actions
  • Responding to risks (not identified)
  • Rework
  • Complaints
  • Loss of image and customers
  • Reduction of the sales market
  • Components of unproductive value can be reduced by project management costs.

Components of the cost of management

Cost PM management costs include costs designed to reduce unproductive costs and bring the project to an ideal technological level. We called the ideal purely technological execution of the project without any management and unproductive costs. 


In this sense, all RM processes described in the PMBoK are unproductive and the costs of their application are related to the cost of management. The set of PMBoK processes itself and the assignment of each of the processes to one of the areas of knowledge or a group of RM processes are an excellent basis for classifying the components of the project management cost.

The costs are the costs incurred in the execution of any of the processes described in the standard and applied in the project. We can further group and summarize these costs either by process groups:

  • Initiation
  • Planning
  • Execution
  • Control
  • Completion.

Of course, in real projects, we never pay for every specific application of one of the UE processes. We pay salaries to the project manager and employees of the project management office, incur costs for the use of the UE information system, provide managers with office equipment and stationery, pay for phones, air tickets, hotels, etc. We pay for the tools that ensure the performance of project management functions. And the main question is the question of the effectiveness of these investments.

Effectiveness of UP tools

Any project management tool is effective as long as the cost of its application does not exceed the income from this application, that is, the difference between the costs without the tool and the costs with the tool is greater than the cost of the tool itself. Of course, we must take into account all costs, both direct and indirect.

The cost of management tools is easy enough to estimate. These are salaries, prices, overhead costs. Much more difficult is the case with the assessment of the effect of using the tool, that is, the difference between "costs without a tool" and "costs with a tool". 


The main problem is to estimate the cost of execution without using a tool. We cannot run a parallel project without management to estimate such costs. The only thing that can be used is a comparison with similar projects, your own and others, that is, bench marking.


 As a result, the accumulation of project performance statistics is not just useful fun, but an absolutely necessary tool for assessing management effectiveness.

Let's take a quick look at some of the NC tools from this perspective.

Project Manager

He defines all the processes of the UP and participates in their implementation. A project manager is effective if his salary is less than the effect of the project management system he has built. The effect can be assessed by comparison with the technological and management costs of similar projects.

Project Management Information System (PMS)

The cost of IGS consists of the cost of software, implementation and operation. The effect of the system is to reduce the time of making management decisions and improve their quality. The effect of the information system is as intangible as the effect of the project manager.

Corporate Project Management System (CSS)

Its main purpose is to improve the quality of execution of all projects of the organization. This is achieved by regulating the main project management procedures and centralizing the main management functions. A sign of the effectiveness of the CSS can be a reduction in all costs (both managerial and technological) per "unit volume" of project activities. 


Despite the abundance of recommendations for the construction of such systems, insufficient attention is paid to the effectiveness of THEP. This is the main reason for the problems of improving organizational project management.


Project management, as well as product quality management systems, should be considered not as fashion trends, but as tools for achieving business goals, including profits.

Improvements in the management of any project should be made in order to reduce the cost of the project, and not to achieve perfection. An effective project management system can only be based on a constant accounting of all production and management costs.

The first step of improvement should be an audit of the existing OC system with an emphasis on the identification and measurement of current costs, which should then be carried out systematically throughout the life cycle of the project. The UE system must measure its own effectiveness. This applies in full, if perhaps more so, to corporate project management systems.

It is necessary to conduct research on the issues of the cost of management - the components of the cost, the statistics of the components in different industries, the influence of the components of the cost of management on the components of non-productive costs. 


Such studies and discussions will be of interest to all managers due to the fundamental impact of the cost of management on the effectiveness of management.

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