→ Compare actual cost to the original planned cost and analyze any
variances between the two
PROJECT COST MANAGEMENT
• 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. Value engineering is a
systematic and organized approach to provide the necessary functions in a project
at the lowest cost. Value engineering promotes the substitution of materials and
methods with less expensive alternatives, without sacrificing functionality.
PROJECT COST MANAGEMENT PROCESSES
ESTIMATE COSTS
DETERMINE BUDGET
CONTROL COSTS
These processes interact with each other as well as with the processes of other
knowledge areas.
PROJECT COST MANAGEMENT PROCESSES
• On some projects, cost estimating & cost budgeting processes are so tightly
linked that they are viewed as a single process & can be performed by a person
• All the selected cost management processes & their associated tools &
• Different stakeholder will measure project costs in different ways & at different
times.
Plan Cost Management is the process that establishes the policies, procedures,
costs. The key benefit of this process is that it provides guidance and direction
INPUTS OUTPUTS
TOOLS & TECHNIQUES
1. Project
management plan 1. Expert judgment
1. Cost management
plan
2. Project charter 2. Analytical techniques
3. Enterprise 3. Meetings
environmental
factors
4. Organizational
process assets
PLAN COST MANAGEMENT
INPUTS
The project management plan contains information used to develop the cost
management plan, which contains, but is not limited to:
• Scope baseline. The scope baseline includes the project scope statement and
WBS detail for cost estimation and management.
• Schedule baseline. The schedule baseline defines when the project costs will be
incurred.
INPUTS (cont.)
2. Project charter
The project charter provides the summary budget from which the detailed project
costs are developed. The project charter also defines the project approval
requirements that will influence the management of the project costs.
INPUTS (cont.)
The organizational process assets that influence the Plan Cost Management process
include, but are not limited to:
1. Expert Judgment
• Provides valuable insight about the environment and information from prior
similar projects.
3. Meetings
Project teams may hold planning meetings to develop the cost management plan.
Attendees at these meetings may include the project manager, the project
sponsor, selected project team members, selected stakeholders, anyone with
responsibility for project costs, and others as needed.
PLAN COST MANAGEMENT
OUTPUT
The cost management processes and their associated tools and techniques are
documented in the cost management plan.
For example, the cost management plan can establish the following:
• Units of measure. Each unit used in measurements (such as staff hours, staff
days, weeks for time measures; or meters, liters, tons, kilometers, or cubic
yards for quantity measures; or lump sum in currency form) is defined for
each of the resources.
OUTPUT
• Level of accuracy. The acceptable range (e.g., +-10%) used in determining realistic
activity cost estimates is specified, and may include an amount for contingencies
• Organizational procedures links. The work breakdown structure (WBS) provides the
framework for the cost management plan, allowing for consistency with the estimates,
budgets, and control of costs. The WBS component used for the project cost
accounting is called the control account. Each control account is assigned a unique
code or account number(s) that links directly to the performing organization’s
accounting system.
OUTPUT
• Define the points in the WBS at which measurement of control accounts will be
performed
• Establish the earned value measurement techniques to be employed
• Specify tracking methodologies and the earned value management computation
equations for calculating projected estimate at completion (EAC) forecasts to
provide a validity check on the bottom-up EAC.
PROJECT COST MANAGEMENT
PROCESSES
ESTIMATE COSTS
• Identifying & considering alternative ways of reducing cost, this is called Value
analysis/engineering
• Should consider Life cycle costing, which considers the overall cost of the product
not just the project cost.
• Costs for schedule activities are estimated for all resources that will be charged to
the project.
• Estimates are further refined as the project progresses. This is for improved
accuracy. A cost baseline is created & changed only through the Integrated Change
Control process.
ESTIMATE COSTS
Types of Costs:
→ Direct Costs – which are costs directly to the work of the project.
→ Fixed Costs – which are the costs that remain the same throughout the project
such as rentals.
→ Variable Costs – which are the costs that change as the work changes such as
the cost of material.
→ Indirect Costs – are those costs that are incurred by the company as a result of
the work e.g. taxes, overhead costs & etc.
→ Opportunity Costs – which refers to a project selection & the money that was
lost when selecting one project for another.
INPUTS
The cost management plan defines how project costs will be managed and
controlled. It includes the method used and the level of accuracy required to estimate
activity cost.
The human resource management plan provides project staffing attributes, personnel
rates, and related rewards/recognition, which are necessary components for
developing the project cost estimates.
ESTIMATE COSTS
INPUTS (cont.)
3. Scope Baseline
• Project scope statement. The project scope statement provides the product
description, acceptance criteria, key deliverables, project boundaries,
assumptions, and constraints about the project.
• Work breakdown structure. The WBS provides the relationships among all the
components of the project and the project deliverables.
• WBS dictionary . The WBS dictionary provides detailed information about the
deliverables and a description of the work for each component in the WBS
required to produce each deliverable.
ESTIMATE COSTS
INPUTS (cont.)
4. Project Schedule
The type and quantity of resources and the amount of time which those
resources are applied to complete the work of the project are major factors in
determining the project cost. Schedule activity resources and their respective
durations are used as key inputs to this process.
5. Risk register
The risk register should be reviewed to consider risk response costs. Risks,
which can be either threats or opportunities, typically have an impact on
both activity and overall project costs. As a general rule, when the project
experiences a negative risk event, the near-term cost of the project will
usually increase, and there will sometimes be a delay in the project schedule.
ESTIMATE COSTS
INPUTS (cont.)
The enterprise environmental factors that influence the Estimate Costs process
include, but are not limited to:
INPUTS (cont.)
The organizational process assets that influence the Estimate Costs process include,
but are not limited to:
1. Expert Judgment
• Provides valuable insight about the environment and information from prior
similar projects.
2. Analogous Estimating
• Technique used when little information is available to perform estimating
activities.
• Relies on the actual costs from previous, similar projects.
• Also uses Expert Judgment.
• Less costly method but less accurate.
ESTIMATE COSTS
Parametric Estimating
Bottom-Up Estimating
• A method of estimating a component of work.
• More precise due to individual work package estimation.
• The detailed cost is rolled up to higher levels for reporting & tracking
purposes.
• Helpful when schedule activity of work is large & complex.
ESTIMATE COSTS
Three-Point Estimating
• Most likely (cM). The cost of the activity, based on realistic effort assessment for
the required work and any predicted expenses.
• optimistic (cO). The activity cost based on analysis of the best-case scenario for the
activity.
• Pesimistic (cP). The activity cost based on analysis of the worst-case scenario for
the activity.
ESTIMATE COSTS
Depending on the assumed distribution of values within the range of the three estimates
the expected cost, cE, can be calculated using a formula. Two commonly used formulas
are triangular and beta distributions. The formulas are:
Cost estimates based on three points with an assumed distribution provide an expected
cost and clarify the range of uncertainty around the expected cost.
ESTIMATE COSTS
Reserve Analysis
• Reserves analysis should include making sure individual activity estimates are
not padded.
Cost of Quality
• The cost of work added to the project to accommodate quality efforts should
be included in project estimate.
TOOLS & TECHNIQUES (cont.)
• To examine the price of individual deliverables, and derive a cost that supports
the final total project cost.
• Vendor Bid Analysis. Vendor analysis can be used to estimate what the
project should cost by comparing the bids submitted by multiple vendors.
Using some of these tools and techniques when you're planning your project
can help with your project budgeting.
ESTIMATE COSTS
• Costs are estimated for all resources that are applied to the activity cost
estimate. This includes: labor, materials, equipment, services, facilities,
information technology, and special categories such as an inflation allowance
or cost contingency reserve.
OUTPUTS (cont.)
Basis of Estimates
• The amount and type of additional details supporting the cost estimate
vary by application area.
• Provide a clear, professional, and complete picture by which the cost
estimate was derived.
• Include:
- Documentation supporting how the estimate was developed.
- Any assumptions made,
- Any known constraints,
- Estimate range
- Final estimate confidence level.
OUTPUTS (cont.)
Think about someone walking into your office now and asking you to
estimate the total cost of a new project. The first question you would probably
ask is, “How accurate do you want me to be?”
Estimates made in the early part of the project will be less accurate than those
made later, when more is known about the project.
In the early part of the project, you typically provide wide-ranging estimates.
Over time, as you determine more information about the project during
planning, you can narrow the estimate range.
ACCURACY OF ESTIMATE
Budgeting involves:
→ Allocating of the cost estimate over the time period required to do the work.
The estimate provides the "should cost" for each task or activity.
→ Determining the specific time period needed to perform each project task or
activity.
→ Developing a time-phased cost baseline that becomes the plan-of-record
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.
DETERMINE BUDGET
INPUTS
.1 Cost management
TOOLS & TECHNIQUES OUTPUTS
plan
.2 Scope baseline .1 Cost baseline
1. Cost aggregation
.3 Activity cost .2 Project funding
estimates 2. Reserve analysis
requirements
.4 Basis of estimates 3. Expert Judgment
.3 Project documents
4. Historical relationships
.5 Project schedule updates
5. Funding limit reconciliation
.6 Resource calendars
.7 Risk register
.8 Agreements
.9 Organizational
process
assets
DETERMINE BUDGET
Cost Aggregation
The work package cost estimates are then aggregated for the higher
component levels of the WBS, such as control accounts, and ultimately
for the entire project
DETERMINE BUDGET
Cost Aggregation
DETERMINE BUDGET
Reserves Analysis
Reserve analysis establishes contingency reserves and the management
contingency reserve for the project.
These reserves are not part of the Cost Baseline but instead part of the
Overall Budget.
DETERMINE BUDGET
Reserves Analysis
DETERMINE BUDGET
Historical Relationships
It is like looking at the funding constraints of the project. Our cash flow may
not be consistent throughout out the duration of the project and hence the
spend needs to planned accordingly.
For eg: in the first month the cash flow is only $x and project cannot spend
more than that but in the next we can spend $x+3. Once these limits are
know we need to adjust the schedule, resourcing etc in line with this.
Output
Cost Performance Baseline
A time-phased budget at completion (BAC) used to measure, monitor, and
Output
cost baseline”
This process influence the factors that create cost variance within
the project, and control changes to the project budget.
CONTROL COST
Project Cost Control process is concerned with:
• Influencing the factors that create changes to the authorized cost baseline,
• Ensuring that all change requests are acted on in a timely manner,
• Managing the actual changes as and when they occur,
• Ensuring that cost expenditures do not exceed the authorized funding
periodically and in total for the project,
• Monitoring cost performance to isolate and understand variances from the
approved cost baseline,
• Monitoring work performance against funds expended,
• Preventing unapproved changes from being included in the reported cost or
resource usage,
• Informing appropriate stakeholders of approved changes & associated cost,
Acting to bring expected cost overruns within acceptable limits.
CONTROL COST
INPUTS
• Cost Management Plan: Describes how the project costs will be managed
and controlled.
CONTROL COST
INPUTS
INPUTS
TOOLS
TOOLS &&TECHNIQUES
TECHNIQUES
• Integrates project scope, cost, and schedule measures to help the project
management team assess & measure project performance & progress.
→ EVT involves developing these key values for each schedule activity, work
package, or control account.
Reserve Analysis
During cost control, reserve analysis is used to monitor the status of
contingency and management reserves for the project to determine if
these reserves are still needed or if additional reserves need to be
requested.
OUTPUTS
OUTPUTS (cont.)
• The calculated CV, SV, CPI, and SPI values for WBS components,
in particular the work packages and control accounts, are documented
and communicated to stakeholders.
Cost Forecasts
• Either a calculated EAC value or a bottom-up EAC value is
documented and communicated to stakeholders.
OUTPUTS (cont.)
OUTPUTS (cont.)
Updates include:
• Cause of variances,
• Corrective action chosen and the reasons, and
• Other types of lessons learned from project cost control.
Change Requests
• Analysis of project performance can result in a change request to
cost performance baseline or other components of project
management plan.
• Include: Preventive or corrective actions.
OUTPUTS (cont.)
Updates include:
• Cost Performance Baseline – updated due to the approved changes
in scope, activity resources, or cost estimates.
• Cost Management Plan.
Question: What is the EV, if your CPI is 1.1 and SPI is 0.92, and your AC is
$10,000?
Question: Using the information from the previous question, determine AC.
Question: In the latest Earn Value Report for your project, you see the CPI is
1.2, the SPI is 0.8, the PV is $600,000, and SV is -$120,000. You cant find CV
in the report. So you need to calculate it based on the information given. What
is the CV?