Project Cost Management Essay

Words: 2219
Pages: 9

Overview of Project Cost Management

According to an accounting textbook, cost is defined as a resource sacrificed or foregone to achieve a specific objective. It is something given up in exchange. It is necessary for project managers to understand project cost management since project costs money and consumes resources.

There are reasons for project cost overrun and these are as follows: * Not emphasizing the importance of realistic project cost estimates from the outset. IT project cost estimates are low to start with or based on unclear project requirements. * Many IT professionals think that preparing cost estimates is a job for accountants when in fact, it is a very demanding and important skill that project managers need
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Estimating Costs

Cost estimating involves developing an approximation (estimate) of the costs of the resources needed to complete project activities. It also involves developing an assessment of the likely quantitative result - how much will it cost the performing organization to provide the product or service involved?

The three basic types of cost estimates are rough order of magnitude (ROM), budgetary estimate and definitive estimate.

Rough Order of Magnitude (ROM)

ROM estimate gives an estimation of the project’s costs. It can be also referred to as a ballpark estimate or a broad gauge. ROM estimate is done very early in a project, or even before a project is officially started. It is used by project managers and top management in making project selection decisions. Its timeframe is often three or more years prior to the project completion. The typical accuracy of ROM estimate is from -50% to +100% -- that is, the project’s actual costs could be 50% below the ROM estimate or 100% above. Many IT professionals automatically double the estimates for software development due to cost overruns on IT projects.

Budgetary Estimate

This is used to allocate money into the budget of an organization. Many organizations develop budgets at least two years into the future. Budgetary estimates are made one to two years prior to project completion. The typical accuracy of budgetary estimates is from -10% to +25% -- that is, the actual costs should be