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Top 10 Project Manager interview questions (4th part) -- All answers about project cost management

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Have you sent a job application for a PM role? The interview questions asked by GoogleLinkedIn, and Facebook recruiters do not really matter: what matters is the knowledge you need to give the right answers to any question! So, stop reading hundredth of interview questions: it is a waste of time. Rather learn the key concepts  (processes, frameworks, methodologies, templates, steps, and tools) described in this series of posts and you will be in a much better position the day of the interview.

Many questions are about the project cost management methodology you would follow as a project manager, or you have used in your past projects. Let's see what you should know to answer these questions correctly.

NB: if you want more details, I advise you to read the PMBOK.

Basic cost information to document at the start of any project

At the start of any project you need to know:
  • How much the project is supposed to cost to the company - this is often called the cost baseline
    • For example: cost of equipment required for the project, cost of external staff, cost the man days spent by internal staff for the project...
  • When these expenses will occur- this is often called the schedule baseline
These elements must be documented in the Project Management Plan (PMP).

How to estimate the cost baseline

It's always the same thing: if I ask you how much it costs to build a house, you will not be able to answer... Until you decompose the project (building a house) into smaller tasks (build the foundations, build the walls, put the roof on, install the electricity, deal with the plumber stuff, etc).

The decomposition of a big project into better defined tasks is called the Work Breakdown Structure (WBS). You can estimate the cost of every task of the project, and the sum of all these costs is the cost of the project.

How to estimate the schedule baseline

To know when the project expenses will occur, you need to have a clear idea of the project's timeline and milestones. Once you have your WBS, you need to work on the project planning, and the schedule baseline will directly derive from the project planning.

Cost related decisions in a project

If the project needs to procure something, you will need to work on the following analysis:
  • make vs buy
  • buy vs lease
You may also need to change the staffing allocation to work packages depending on the issues arising during the project.

How to monitor the project costs through variance analysis

You should of course ensure that the project does not cost 10 times the initial cost baseline. Otherwise, you will soon get fired. Concretely this means that in the project management plan, you must define 
  • dates at which you will periodically audit the costs of the project and 
  • the methodology you will use for that. 
Variance analysis is the method to see if where the project stands for a measurable project's key performance indicator such as:
  • Coverage versus scope,
  • Resource consumption versus cost baseline, 
  • Time elapsed versus planning.
To understand cost variance analysis, you need to understand the definition of the following variables:
  • Earned Value (EV): the budgeted value of completed project work to date. That means how much you had planned to spend for the work that has been done to date.
  • Actual Cost (AC) of work performed (ACWP): that means how much you have really spent for the work that has been done to date.
The cost variance (CV) is given by:
CV = EV - AC 
It is positive (>0) if you have done a good job a spent less than planned. It's negative otherwise. Note that we use exactly the same method to see if the project is behind schedule or in advance.

To estimate the earned values, you can use various methods. If a task is finished you can take into account its full budget. But, if the task is not ended, you need to use an estimate. A classical way to process is to count 30% of the budget when the task is started, and the remaining 70% when the task is completed.

The classical traps of project cost management

In your project cost estimation and monitoring, you should pay special attention to:
  • Specifying the level of inaccuracy of the cost estimations, for instance (+- 25%) 
    • And refining the accuracy of the baseline as the project progresses and uncertainty disappears
  • Changes in exchange rates
  • Units
    • Example : converting man days to man months is not always easy. Do you take holidays into account? Their number changes depending on the countries.
    • How do you convert man days to monetary units? Labor cost varies a lot among countries, and its the same for the taxes on top of salaries... And salaries depend of course on the function of the people: a technician is paid less than a manager of managers.
To close this post, I advise you to read the PMBOK, it's the best way to learn all aspects of cost managements.


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