Hello, everyone.
This is Archana.
I'm a project management consultant at EPMA.
In this video we're going to learn about the cost component model in project management.
That is, what is the basis of cost estimation?
What are the various components that are considered while estimating a price for the contract?
Before we start with the details, let us brush up some basics.
Firstly, the difference between cost and price.
Cost is just one of the components of price.
For example, if you're looking to buy a mobile phone what we see is the price.
That is the price that we are ready to pay for the phone.
What we don't know is the cost involved in building or making the phone.
The cost of raw materials, labor, service etc.
So cost is just one of the components of price.
Next we need to know what is the work breakdown structure.
This tree structure here is called the work breakdown structure or WBS.
Or WBS is a decomposition of the project into smaller manageable work components.
The components at the lowest level of this tree structure is called a work package, for
which we can estimate a more accurate and realistic duration and cost.
For example, in this WBS clear site, removed debris, estimate quantities and so forth are
work packages.
As a project manager, the level of decomposition will be dependent on the extent to which you'll
need to manage.
For example, "cleanup" could be a work package to a specific project manager who is not bothered
about the details.
For another project manager who wants to assign different resources to different activities
under "cleanup," he would want to go into details like "written unused materials" as
a work package and "remove scrap" as another work package.
Now let us see the cost component model.
A contract price primarily includes two components.
That is a contract cost and the profit.
Contract cost is the labor, raw materials, service etc, which is associated with the
project.
A profit could be a fixed one or a variable one based on the organization.
A contract cost in turn has two main components.
That is the baseline cost and the management reserve.
A baseline cost is basically the estimated cost based on the work packages in a WBS structure.
Management reserve is the budget allocated towards the unknown risks that the project
might encounter during the project's span.
A management reserve could be a percentage of the project cost or the baseline cost.
Baseline cost of the project also includes a budget for contingency reserve.
A contingency reserve accounts for the budget for all the known or identified risks of the
project.
In short, contingency reserves account for the identified risks of the project, and management
reserves account for all the unidentified risks of the project.
A baseline cost in turn consists of distributed budget and undistributed budget.
As we all see, distributed budget consists of the budget allocated towards work packages
and planning packages.
Undistributed budget is allocated towards those authorized efforts which are not allocated
to WBS elements.
However the efforts are authorized and soon they'll be allocated towards a WBS element.
A planning package actually includes efforts that will be eventually identified as separate
work packages.
There might be situations where you know that in order to perform a particular task, you
have a few set of activities but you're not clear with the requirements or details of
the tasks.
Those tasks can be classified under planning packages.
So do you see how the contract price is actually derived at, and what are the various components
of the contract price?
With this I end my brief overview of cost components model.
I hope the video was useful and thank you for watching my video.
To learn more about project management and PPM tools, please visit our website at epmainc.com.
Have a good one.
Bye bye.