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Amarayya Hiremath MBA Gulbarga University Gulbarga Dert of Management

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- 1. How Do We Manage Cost?Three processes Cost Estimating Cost Budgeting Cost ControlCost Estimating Cost Budgeting Cost ControlThe process involved in estimating, budgeting, and controlling costso that the project can be completed within approved budgetProject Cost Management
- 2. Project Cost EstimationProject cost estimation is the process ofdeveloping an approximation of themonetary resources needed to completeproject activities.Cost estimates are a prediction that isbased on the information known at a givenpoint in time.
- 3. Cost EstimatingEnterpriseEnvironmentalFactorsOrganizationalProcess AssetsProject ScopeStatementAnalogous estimatingBottom up estimatingParametric estimatingThree- Points estimateProject managementsoftwareVendor bid analysisReserve analysisCost of qualityInputsOutputsTools & TechniquesWork BreakdownStructureWBS DictionaryCostEstimatingCostBudgetingCostControlProjectManagement Plan•Schedule Mgmt Pln•Staffing Mgmt Pln•Risk RegisterActivity CostEstimatesActivity CostEstimatesSupporting DetailRequestedChangesCost ManagementPlan Updates
- 4. Analogous estimatingBottom up estimatingParametric estimatingThree- Points estimateProject management softwareVendor bid analysisReserve analysisCost of quality
- 5. Types of Cost EstimatesType of Estimate When Done Why Done How AccurateRough Order ofMagnitude (ROM)Very early in theproject life cycle,often 3–5 yearsbefore projectcompletionProvides roughballpark of cost forselection decisions–25%, +75%Budgetary Early, 1–2 years out Puts dollars in thebudget plans–10%, +25%Definitive Later in the project, <1 year outProvides details forpurchases, estimateactual costs–5%, +10%
- 6. 6www.ciklum.netCost BaselineCost performance baseline is a time-phased budget usedto measure, monitor and control cost performance overthe project.Determine BudgetProcess of aggregating the estimated cost of individual activities or workpackages to establish an authorized cost baseline
- 7. Cost control:Cost control: controlling changes to the project budget.Earned value management is an important tool for costcontrol
- 8. 8Earned Value Management(EVM)EVM is a project performance measurementtechnique that integrates scope, time, and costdata.Given a baseline (original plan plus approvedchanges), you can determine how well the projectis meeting its goals.You must enter actual information periodically touse EVM.More and more organizations around the worldare using EVM to help control project costs.
- 9. 9www.ciklum.netEarned Value ManagementPlanned Value, Earned Value, Actual CostsVariancesPerformance Indices
- 10. Earned Value FormulasNAME FORMULA NOTESCost Variance (CV) EV-AC Negative = Over budgetPositive = Under budgetSchedule Variance(SV)EV-PV Negative = Behind SchedulePositive = Ahead of ScheduleCost PerformanceIndex (CPI)EV/AC How much are we getting for everydollar we spend?Schedule PerformIndex (SPI)EV/PV Progress as % against planEstimate toComplete (ETC)EAC-AC How much more do we have tospend?Variance atCompletion (VAC)BAC-EAC At the end of the day, how close willwe be to plan?Estimate atCompletion (EAC)See following slide
- 11. Earned Value Formulas (Cont’d)NAME FORMULA NOTESEstimate atCompletion (EAC)BAC/CPI Use if no variances fromBAC have occurredAC+ATC Use when originalestimate was bad. Actuals+ New estimateAC+BAC-EV Use when currentvariances are not expectedto be there in the futureAC+(BAC-EV)/CPI Use when currentvariances are expected tocontinue
- 12. Earned Value Calculations
- 13. 13Figure 7-5. Earned Value Chartfor Project after Five MonthsIf the EVline isbelow theAC or PVline, thereareproblemsin thoseareas.
- 14. Earned Value ChartThe chart helps visualize how the project isperforming. If the project goes as planned, it will finish in 12months at a cost of $100,000 The actual cost line is always right on or abovethe earned value line.Interpretation: This means costs are equal to or morethan planned The planned value line is pretty close to the EVline, just slightly higher in the last monthInterpretation: The project has been right on scheduleuntil last month when the project fell behind schedule
- 15. PV, EV, AC
- 16. Variances• CV (Cost Variance): difference between the budgetedcost of an activity and the actual cost of that activity.CV = EV – AC• SV (Schedule Variance): difference between thescheduled completion of an activity and the actualcompletion of the activity.SV = EV – PV
- 17. 17www.ciklum.netPerformance Indices• CPI (Cost Performance Index): The cost-efficiency factorrepresenting the relationship between the actual costsexpended and the value of the physical work performed.CPI = EV/AC• SPI (Schedule Performance Index): The scheduleefficiency ratio of earned value accomplished against theplanned value. The SPI describes what portion of theplanned schedule was actually accomplished.SPI = EV/PV
- 18. 18www.ciklum.netForecasting• Budget at Completion (BAC)• Forecasted Estimate at Completion (EAC) at thebudgeted rateEAC = BAC + AC – EV• Forecasted Estimate at Completion (EAC) at the presentCPIEAC = BAC / CPI• To-Complete Performance Index (TCPI) – projection ofcost performance that must be achieved on the remainingto meet a specified goal(BAC – EV) / (BAC – AC)

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