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Project Cost

Management

What Is Project Cost


Management
Project

Cost Management includes the processes


involved in
planning, estimating, budgeting, and controlling costs so that
the
project that can be completed within the approved budget
It is primarily concerned with the cost of the resources needed
to
complete schedule activities
Should consider the information needs of the project
stakeholders
Without proper planning, you cant:
Adjust the project plan to conform to the budget
Track and manage cost once the project execution begins
Compare actual cost to the original planned cost and analyze

any variances between the two

Life Cycle Costing


Project

Cost Management should consider the effect of


project decisions on the cost of using, maintaining, and
supporting the project's product, service, or result; this
broader view is often called
Life Cycle Costing
Life Cycle Costing together with value engineering can
improve decision-making and is used to reduce cost and
execution time and to improve the quality and performance of
the project deliverable
Value

Engineering (VE) - Creative approach used


to optimize
project life cycle costs, save time, increase profits, improve
quality, expand market share, solve problems, and/or use
resources more effectively

Cost Management Plan


Cost

Management Plan (Output/Input) is the document


that sets out the format and establishes the activities and
criteria for planning, structuring, and controlling the project costs
Cost management plan can establish:
Precision level - The prescribed precision for rounding data related to

schedule activity cost estimates


Units of measure - Define units of measurement for each of the resources
Organizational procedure links - The WBS component used for the project
cost accounting is called a control account (CA); each CA is assigned a
code or account number
Earned value rules - Earned value management computation formulas for
determining the estimate to complete; earned value credit criteria; the
WBS level at which earned value technique analysis will be performed
Reporting formats - The format for various cost reports
Process descriptions - Descriptions of each of the three cost
management processes

Cost Estimating 7.1


Cost

Estimating is the process of


developing an approximation (estimate)
of the cost of the resources needed to
complete each schedule activity
Estimator must consider the possible causes
of variation of cost estimates, including risks
Includes identifying and considering various
costing alternatives
Costs for schedule activities are estimated
for all resources that will be charged to the
project

Cost Estimating Inputs Additional Focus


Organization

Process Assets
Existing cost estimating-related policies, procedures, and guidelines are
considered in developing the cost management plan, selecting the cost
estimating tools, and monitoring and reporting methods to be used
Project Scope Statement
Provides important information about project requirements that is
considered during cost estimating; includes constraints, assumptions,
and requirements
Work Breakdown Structure
Provides the relationship among all the components of the project and the
project deliverables
Schedule Management Plan
The type and quantity of resources and the amount of time those
resources are applied to complete the work of the project is a major part
of determining the project cost
Schedule activity resources and their respective durations are used as
key inputs

Cost Estimating Tools


Costing Estimating Tools
Analogous Estimating
Bottom-up Estimating
Parametric Estimating
Reserve Analysis

Cost Aggregation
Cost Aggregation (Tool)
Schedule activity cost estimates are
aggregated by work packages in
accordance with the WBS
Work package cost estimates are
then aggregated for the higher
component levels of the WBS, such
as the control account, and
ultimately for the entire project

Accuracy of Estimates
Accuracy

of Estimates
Order of Magnitude
Range: -25% + 75%
Typical method of estimating used: Expert opinion
An approximate estimate made without detailed data; used during the

initial evaluation of the project (Concept)


Budgetary
Range: -10% + 25%
Typical method of estimating used: Top-down or Analogous; used to
establish the funds required for the project (Development)

Definitive
Range: -5% + 10%
Typical method of estimating used: Bottom-up (WBS)
Prepared from well-defined specifications, data, drawings, and so forth;
Used for bid proposals, bid evaluations, contract changes, extra work, legal

claims, permit and government approvals

Activity Cost Estimates


Activity

Cost Estimates (Output/Input)

Quantitative assessment of the likely cost of the resources required

to complete schedule activities


Costs are estimated for all resources that are applied to the activity
cost estimate
Generally expressed in units of currency
May benefit from being refined during the course of the project to
reflect additional details
Activity

Cost Estimate Supporting Detail


(Output/Input)
Amount and type of additional details supporting the schedule

activity cost estimate will vary by application area but should


provide a clear, professional, and complete picture by which the
cost estimate was derived

Cost Budgeting 7.2


Cost

Budgeting is the process of aggregating the


estimated costs of individual activities or work packages to
establish a total cost baseline for measuring project
performance
Project scope statement provides the summary budget
Estimate should be done prior to the budget request wherever
possible Budgeting involves:
Allocating of the cost estimate over the time period required to do the

work.
Determining the specific time period needed to perform each project
task or activity
Developing a time-phased cost baseline that becomes the plan-ofrecord based on how the "should cost" have been spread out over time
Using the estimate to determine how much time and money is allocated
to each work package

Cost Budgeting Inputs Additional Focus


Project
Work

Scope Statement

Breakdown Structure

Project

Schedule

Funding Limit Reconciliation


Funding Limit Reconciliation (Tool)
Since large variations in the periodic expenditure of funds
are usually undesirable for organizational operations,
reconciliation of these expenditures with the funding limits
set by the customer or performing organization on the
disbursement of funds for the project is required
Reconciliation of funding limits necessitates the scheduling
of work to be adjusted to smooth or regulate these
expenditures, which is accomplished by placing imposed
date constraints for some work packages, schedule
milestones, or WBS components into the project schedule
The final product of these planning iterations is a cost
baseline

Cost Baseline
Cost Baseline (Output)
Time-phased budget which serves as the basis
for measuring, monitoring, and controlling
overall project cost performance.
It is developed by summing estimated cost by
period and is usually displayed in the form of an
S-curve
It is a component of the project management
plan
Many projects may have multiple cost baselines
to measure different aspects of cost performance

Project Funding
Requirements
Project Funding Requirements (Output)
Total and periodic funding requirements are
derived from the cost baseline and can be
established to exceed in order to allow for either
early progress or cost overruns
Usually occurs in incremental amounts that are
not continuous
Total funds required are those in the cost
baseline plus the management contingency
reserve amount (funds held outside the PM's
domain and used at senior management
judgment)

Cost Control (7.3)


Cost Control is the process of:
Influencing the factors that create changes to the cost
baseline to ensure that changes are agreed upon
Determining that the cost baseline has changed
Managing the actual changes when and as they occur
Cost control includes:
Monitoring cost performance to detect and understand
variances from plan
Ensuring that all appropriate changes are recorded accurately
in the cost baseline
Preventing incorrect, inappropriate, or unauthorized changes
from being included in the cost baseline
Informing appropriate stakeholders of authorized changes
Acting to bring expected cost within acceptable limits

Cost Change Control System


Cost Change Control System (Tool)
Defines the procedures by which the
cost baseline may be changed
Includes the paperwork, tracking system
and approval levels necessary for
authorizing changes
Should be integrated with the overall
change control system
Documented in the cost management
plan

Performance Measurement
Analysis
Performance Measurement Analysis (Tool)
Performance measurement techniques help to access the
magnitude of any variations that invariably occur
Earned Value Technique (EVT) compares the cumulative value
of the earned value (EV) at the original allocated budget
amount to both the planned value (PV) and actual cost (AC)
Especially useful for cost control, resource management, and
production
Important part of cost control is to determine the cause of a
variance, the magnitude of the variance and to decide if the
variance requires corrective action
Use the cost baseline contained in the project management
plan to assess project progress and the magnitude of any
variations that occur

The Role of Earned Value


Management
Earned Value Management (EVM) is a management methodology for
integrating scope, schedule, and resources, and for objectively measuring
project performance and progress.
Performance is measured by determining the budgeted cost of work performed
(earned value) and comparing it to the actual cost of work performed (actual
cost).
Progress is measured by comparing the earned value to the budgeted cost of
work scheduled (planned value)
EVM has proven itself to be one of the most effective performance
measurement and feedback tools for managing projects. It enables managers
to close the loop in the Plan, Do, Check, Act cycle
EVM provides organizations with the methodology needed to integrate the
management of project scope, schedule, and cost
EVM has been called management with the lights on because it can help
clearly and objectively illuminate where a project is and where it is going
compared to
where it was supposed to be and where it was supposed to be going
EVM uses the fundamental principle that patterns and trends in the past can be
good predictors of the future

Earned Value Management


Analysis
Earned Value Management (EVM) Analysis - Uses performance
management techniques to help assess the magnitude of any variances that
will invariably occur
One technique used is called earned value technique (EVT) which
compares the cumulative value of the budgeted cost of work performed
(earned at the original) allocated budget amount to both the budgeted cost of
work scheduled (planned) and to the actual cost or work performed (actual)
EVT uses the cost baseline contained in the project management plan
to
assess project progress and the magnitude of any variations that occur
EVT involves developing these key values for each schedule activity,
work
package, or control account
Planned Value (PV)
Earned Value (EV)
Actual Cost (AC)
Estimate to Complete (ETC)
Estimate at Completion (EAC)

Basic EVM Elements