Project Cost Management

Project Cost Management

Project Cost Management includes the processes involved in estimating,
budgeting and controlling costs so that the project can be completed
within the approved budget.




Ref: PMBOK

Guide
$
Project Cost
Management
Process
Estimate
Costs
Control Costs
Determine
Budget
Cost
approximation
based on
certain
assumptions
Determine
budget
baseline by
aggregation
Update,
monitor and
manage
changes to the
budget baseline
Initiating Planning Executing Monitoring &
Controlling
Closing

Project Cost
Management
Process
Estimate
Costs
Control
Costs
Determine
Budget
Ref: PMBOK

Guide
Process of estimating cost of resources needed to complete the
project

Various costing alternatives are considered e.g. make vs buy vs
lease, resources sharing

Accuracy of estimates improves as project progresses




Estimate Cost
1/3
Rough Order of Magnitude
Definitive
This type of estimating has a 10% to +15% accuracy
rate. This type of estimate is also known as a bottom
up estimate.
This is a ballpark estimate e.g.
range of a particular estimate is +/-50% to +/- 100%
Accuracy of Estimates
Initiating
Planning
Tools & Techniques
Scope Baseline
Project Schedule
Human Resource Plan
Risk Register
Enterprise Environmental
Factors
Organizational Process
Assets


Expert Judgment
Analogous Estimating
Parametric Estimating
Bottom-up Estimating
Three-point Estimates
Project Management
Estimating Software
Reserve Analysis
Cost of Quality
Vendor Bid analysis

Activity Cost Estimates
Basis of Estimates
Project Document
Updates

Input
Output
Estimate Costs
Cost prediction based on certain information
Ref: PMBOK

Guide Fourth Edition

Scope Baseline e.g. scope statement, WBS, etc.

Project Schedule e.g. type, quantity and duration of
project resources to be used

Human Resource Plan includes personnel rates, etc.

Risk Register may include risk mitigation cost, etc.

Enterprise Environmental Factors

Organizational Process Assets


Estimate Cost Inputs.
Estimate Costs Tools and Techniques.

Expert Judgment provide insights about estimating methods,
relevant information e.g. rates, risks, inflation, etc.
Analogous Estimating
Parametric Estimating
Bottom-up Estimating high level ball park figure estimates
Three-point Estimates
Reserve Analysis
Cost of Quality
Project Management Estimating Software
Vendor Bid Analysis



Analogous Estimating
Also known as top-down
Rely on actual cost from previous projects
Quick and less costly but less accurate
Reliable if based on similar projects
Can use expert judgment & historical information


Tip < Opposite of Bottom-up Estimating
Parametric Estimating
Relationship between historical data and other variables e.g. cost
of coding is USD 5.0 per line x 100,000 lines
Cost and accuracy varies.
2 types: -
1.Regression Analysis (scatter diagram)
2.Learning curve (100
th
room painted will cost less)


Bottom-up Estimating
Used to estimate a component of work
Cost of individual work packages are the rolled-up
Detail estimate is possible
Accuracy and cost is influenced by complexity of
work package
Three-point Estimates
Take into account Risk and Uncertainty
Original idea is called Program Evaluation and
Review Technique (PERT)
Three estimates are : Most-likely (C
M
), Optimistic
(C
O
) and Pessimistic (C
P
)
PERT formula to calculate expected (C
E
) activity
cost is :
C
O
+ 4
M
+ C
P
C
E
=
6
Reserve Analysis
Contingency Reserves maybe needed to account for
cost uncertainty (known unknown).
Can be in percentage or fixed number
Part of funding requirements
Cost of Quality cost of conformance / non conformance

Project Management Estimating Software automated tools

Vendor Bid analysis based on responses from reliable suppliers

Other Tools and Techniques.
Estimate Cost Outputs.

Activity Cost Estimates

Quantitative assessment of possible costs :

Direct costs such as labor, materials, equipment, services,
facilities, office supplies
Special categories e.g. inflation allowance, cost contingency
If considered relevant, indirect costs should be included at
the activity level or higher
Presented in summary form or detailed.

Estimate Cost Outputs.


Basis of Estimates
How the estimates is arrived at, assumptions made, constraints,
an indication of range of possible estimates, confidence level

Project Document Updates
e.g. risk registers

Aggregating estimated costs of individual work packages to arrive
at a cost baseline
Includes all authorised budgets except management reserves
Cost performance will be measured against authorized budget






Determine Budget
2/3
Tools & Techniques
Activity Cost Estimates
Basis of Estimates
Scope Baseline
Project Schedule
Resource Calendars
Contracts
Organizational Process
Assets
Cost Aggregation
Reserve Analysis
Expert Judgement
Historical Relationships
Funding Limit Reconciliation
Cost Performance
Baseline
Project Funding
Requirements.
Project Document
Updates

Input
Output
Determine Budget
Budget baseline based on the estimated individual costs put together

Determine Budget Inputs.
Activity Cost Estimates sum up estimate for each work
package
Basis of Estimates supporting details of estimates
Scope Baseline
Project Schedule start & finish date of each activity,
milestones, etc.
Resource Calendars which & when resources are assigned
Contracts
Organizational Process Assets budgeting guidelines, tools,
reporting standards
Cost Aggregation
Reserve Analysis contingency and management reserves
Expert Judgment
Historical Relationships
Funding Limit Reconciliation
Determine Budget Tools and Techniques.
Cost Aggregation & Reserves

Cost Budget

Management Reserve
---------------------------------------------
Cost Baseline

Contingency Reserve

Project Summary

Control Account

Work Packages

Activities List
Cost Aggregation
Reserve Analysis
Determine Budget
Aggregation using WBS
3.0 Lay Pipes

task Time ( days)
labor rate
(RM) resources total cost (RM)

3.1 Lay bedding
9 125.00 5 5,625.00

3.2 Lay pipes
phase 1
10 120.00 6 7,200.00

3.3 Lay pipes
phase 2
10 120.00 6 7,200.00

3.4 Test and
commission
6 130.00 4 3,120.00
work
package
cost
23,145.00
The project budget must tell us not just what is to be spent
but also when it is to be spent

In doing so the budget draws heavily on the
content of the project plan which tells us what:
- The start and finish times of activities are
- Duration of each activity
- Resource demands of the project activities
Determining a Project Budget
Considerations before finalising the budget:

Evaluate the total cost of the project to
ensure that the project will be completed within the set budget.

Can individual costs for resources be lowered to reduce the cost
of the project?

Can the costs of the project be lowered?
Determining a Project Budget
Strategies for reducing project costs:

Replace expensive resources with less costly ones

Reschedule work within available float

Cut the scope of the project or individual tasks
Developing a Project Budget
Determine Budget Outputs.
Cost Performance Baseline authorized budget at completion used
for measuring cost performance

Project Funding Requirements timing of funds requirements

Project Document Updates risk register, cost estimates, schedule

Monitor project status
Update budget
Update actual cost spent to date
Manage changes to the cost baseline




Control Cost
3/3
Tools & Techniques
Project Management
Plan
Project Funding
Requirements
Work Performance
Information
Organizational
Process Assets

Earned Value Management
Forecasting
To Complete Performance
Index (TCPI)
Performance Reviews
Variance Analysis
Project Management
Software

Work Performance
Measurements
Budget Forecasts
Organizational
Process Updates
Change Requests
Project Management
Plan Updates
Project Document
Updates
Input
Output
Control Cost
Update actual costs, monitor and manage changes to budget

Control Costs Inputs.
Project Management Plan e.g. cost performance baseline,
cost management plan, etc

Project Funding Requirements

Work Performance Information project progress and forecasts
to completion

Organizational Process Assets e.g. cost control-related
policies, etc

Progress Reporting
Report to control costs:

Percentage Complete for each task
e.g: 50/50 Rule, 20/80 Rule, 0/100 Rule

Earned Value Analysis
Earned Value Management
A management methodology for integrating scope, schedule,
and resources, and for objectively measuring
Project performance and progress


Ref: PMBOK

Guide
Earned Value Analysis
Method of performance measurement
Usually Actual vs Planed where it maybe on
time but not on budget
But EVA integrates cost, schedule and scope
Used to forecast future performance and
projection completion dates
Earned Value, Planed Value and Actual
Costs
Planned Value
(PV)
Actual Costs
(AC)
Earned value
EV
Data Date
Cumulative
Values
Time
Budget at
Completion
(BAC)
Project Management in the dark
RM
Time
It tells you how much youve spent and
compares it to the budget.
Does it give an accurate picture of
where you are on the project?
NO! It doesnt tell you if

1. Youre ahead or behind schedule
2. Youre over or under budget
3. Youve spent money on the right thing
4. Youre getting value for money
5. Your problems are over or have just begun
What is missing?
Knowing how much has been accomplished
Project Cost Management
RM
Time
Accomplishment is (Planned) work that
has been carried out successfully.
The budgeted cost of that work quantifies
the accomplishment.
This is called Earned Value (EV)
Project Cost Management
Earned Value
Budgeted Cost for the Work Performed
(BCWP) or EV
What is the estimated value of the work already done?
Planned Value (PV)
Budgeted Cost for the Work Scheduled
(BCWS) or PV

What is the estimated value of the work to be done to date at a given point

Actual Cost of Work Performed
(ACWP) or AC
This is the actual cost incurred ( we spent to do the
Budgeted cost for the work performed (BCWP) )
Budget At Completion (BAC)
This is the BCWS for the whole project. Theoretically
this is a baseline number, so it should remain static or fixed for the
duration of the project
Estimate At Completion (EAC)
The key with the EAC is to compare your
budget to your actual
Estimate To Completion (ETC)
ETC, is what you expect to spend from this point
forward to the end of the project
Earned Value Management
Original
Plan
Actual
Plan
Today
PV
BAC
AC ETC
EAC
VAC
To Complete Performance Index
(TCPI)
Project performance which must be achieved on all remaining
work in order to meet the financial goal set by management.

TCPI = Work remaining / Funds remaining

TCPI= Total Budget Earned Value
BAC Actual Costs

TCPI= BAC EV
BAC AC


To Complete Performance Index
(TCPI)
Status Date
$10,000
BAC
PV=$4,000
AC=$3,800
EV=$3,600
Cost
Time


TCPI=(BAC)/(BAC-AC)
TCPI=(10,000-3600) / (10,000-3,800)
TCPI=6,400/6,200
TCPI=1.03
Earned Value Management
Acronym Term Interpretation
PV (BCWS) Planned Value What is the estimated value of the work
planned to be done?
EV (BCWP) Earned Value What is the estimated value of the work
actually accomplished?
AC (ACWP) Actual Cost What is the actual cost incurred?
BAC Budget at
completion
How much did we budget for the total
project?
EAC Estimate at
completion
What do we currently expect the total
project to cost?
ETC Estimate to
completion
From this point on, how much more do we
expect it to cost to finish the project?
VAC Variance at
completion
How much over or under budget do we
expect to be at the end of the project?
Earned Value Management
Name Formula Interpretation
Cost Variance (CV) EV AC Negative is over budget. Positive is
under budget.
Schedule Variance (SV) EV - PV Negative is behind schedule.
Positive is ahead of schedule.
Cost Performance
Index (CPI)
EV
AC
We are getting R out of every R1
invested.
Schedule Performance
Index (SPI)
EV
PV
We are progressing at % of the
rate originally planned.
Estimate at
Completion (EAC)
BAC
CPI
As of now, how much do we expect
the total project to cost?
Estimate to Complete
(ETC)
EAC AC How much more will the project
cost?
Variance at Completion
(VAC)
BAC EAC How much over budget will we be
at the end of the project?
Scheduled Variance
Scheduled Variance (SV), is
Earned Value minus the Planned Value
Cost Variance
Cost Variance (CV), is the Budgeted Cost of Work
Performed (EV), minus the Actual Cost of Work Performed (AC)
Cost Performance Index
Schedule Performance Index
Performance Indicators


Performance Indicators
PROJECT MANAGEMENT QUESTION EVM PERFORMANCE MEASUREMENT
How are we doing time wise? Schedule Analysis & Forecasting
- Are we ahead or behind Schedule Variance (SV)
- How efficiently are we using time Schedule Performance Index SPI
- When are we likely to finish work Time Estimate at Completion (EACt)
How are we doing cost wise? Cost Analysis and Forecasting
- Are we under or over budget Cost Variance (CV)
- How efficiently are we using resources Cost Performance Index (CPI)
- How efficiently must we use the remaining
resources
To Complete Performance Index (TCPI)
- What is the project likely to cost Estimate At Completion (EAC)
- Will we be under or over budget Variance At Completion (VAC)
- What will be the remaining work cost Estimate To Complete (ETC)
Jan Feb Mar Apr May
Time Now
Unit 1
Unit 2
Unit 3
Unit 4
Planned
Value
Earned
Value
Actual
Cost
100
100
100
100
Total budgeted cost of all work?
Budgeted value of work planned to this point in time?
The budgeted value of work accomplished?
The actual cost of the work accomplished?
= ..
= ..
=
=
Budget at Completion (BAC)
Budgeted Cost of Work Scheduled (BCWS or PV)
Budgeted Cost of Work Performed (BCWP or EV)
Actual Cost of Work Performed (ACWP or AC)
100
0
0
0
175
0
0
0
Jan Feb Mar Apr May
Time Now
Unit 1
Unit 2
Unit 3
Unit 4
Planned
Value
Earned
Value
Actual
Cost
100
100
100
100
Total budgeted cost of all work?
Budgeted value of work planned to this point in time?
The budgeted value of work accomplished?
The actual cost of the work accomplished?
= 400
= 200
= 100
= 175
Budget at Completion (BAC)
Budgeted Cost of Work Scheduled (BCWS or PV)
Budgeted Cost of Work Performed (BCWP or EV)
Actual Cost of Work Performed (ACWP or AC)
100
0
0
0
175
0
0
0
Can Planned
vs.Actual tell us
anything?

(not much of value)
PV = 200

AC = 175
Jan Feb Mar Apr May
Time Now
175
100
100
100
Time Now
300
100
200
400
What is the value of
work behind/ahead
of schedule?
How much have we over/under
spent?
Is this realistic?
Time Now
300
100
200
400
PV = 200
EV = 100
AC = 175


Its the difference
between what you
accomplished and
what you planned to
accomplish
EV - PV 100 200
When Earned Value
is included, we can
get answers
Its the difference between
what you accomplished and
how much it cost you
EV - AC
100 175
At what rate are we
overspending?
Its the ratio of earning to
spending
EV / AC
100 / 175
Schedule Variance (SV)
= (100)
Cost Variance (CV) = (75)
Cost Performance
Index (CPI) = (0.57)
$100 worth of work is
behind schedule
Over spent by $75 for work-to-
date
For every dollar we spend, we
get 0.57 cents work done
Points to Remember
In EVA questions on calculations:

If EV is involved, then it always comes first in the formula
E.g. CV= EV-AC; CPI=EV/AC, etc

Negative is bad and positive is good
- means over budget,
+ means within or under budget
Types of Costs
Sunk Costs Expended costs

Variable Costs varies according to usage
Fixed Costs can be treated as a set-up cost
Direct Costs attributable to project cost
Indirect Costs cannot be directly attributable. Admin cost 10%
Contingency Reserve Costs
- Backup plan - known unknown risks
Management Reserve Costs
unknown unknown risks .Any unforseen
Control Costs Outputs.
Work Performance Measurements
Budget Forecasts
Organizational Process Updates
Change Requests
Project Management Plan Updates
Project Document Updates
Thank you