Project Cost Management


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Project Cost Management

  1. 1. Project Cost Management09/15/12 1
  2. 2. Project Cost Management Process GroupProcess Group Cost Management ProcessInitiatingPlanning Estimate Costs, Determine BudgetExecutingMonitoring & Control Control CostsClosing Costs are estimated for all resources that will be charged to the project, including labor, material, equipment, services, facilities,…as well as an inflation allowance or contingency costs…09/15/12 2
  3. 3. 3 6.1 Estimate Costs The process of developing an approximation of the monetary resources needed to complete project activities. Cost Estimate is made for each activity by a prediction base on the information known at a given point in time, including the identification & consideration of costing alternatives to initiate and complete the project…how to achieve optimal cost for the project.Inputs • Scope baseline • Risk register • Project schedule • Enterprise environmental factor • Human resource plan • Organizational process assetsTools & • Expert judgment • Reserve analysisTechniques • Analogous estimating • Cost quality • Parametric estimating • Project Management estimating • Bottom-up estimating software • Three-point estimates • Vender bid analysisOutputs • Activity cost estimates • Project document updates • Basis of estimates09/15/12 3
  4. 4. Inputs 1. Scope Baseline 2. Project Schedule 3. Human Resource Plan: Information about resource quantities, rates as well as when they are available 4. Risk Register: should be reviewed to identify risk mitigation costs 5. Enterprise Environment Factors – Market conditions – Published commercial information6. Organizational Process Assets – Cost estimating policies – Cost estimating templates – Historical information – Team knowledge – Lessons learned 09/15/12 4
  5. 5. Tools & Techniques 1. Expert Judgment – Use historical information to provide valuable insight about the environment and information from prior similar project. 1. Analogous Estimating ( Top-down ) – Use (actual costs) the values of parameters of scope/ cost/ budget/ duration, or measures of scale of size/ weight/ complexity, from similar, completed project as basic for estimating the same parameter/ measure for current project costs. – Be used most frequently during planning process, when there is a limited amount of detailed information about the project. – Relies on Expert Judgment ( is a form of Expert Judgment ) – Typically: • Less costly than other estimating techniques • Less accurate: -50% to +50% range 1. Parametric Estimating – Uses a statistical relationship between historical data and other variable to calculate an estimate for activity parameters, such as cost, budget, duration. – Higher level of accuracy than Analogous Estimating09/15/12 5
  6. 6. Tools & Techniques 1. Bottom-up Estimating – Detailed estimating is done for each activity (if available) or work package (if activities are not defined), and then rolled up into control accounts and into an overall project estimate. – To do this estimate well…requires an accurate & detailed WBS – Accuracy is +/- 20% 1. Three-point Estimate – Adds estimation of uncertainty and risk to cost estimate to improve accuracy – Use a weighed average of thee estimates: CE=(CO+4CM+CP)/6 • Most likely (CM) • Optimistic (CO) • Pessimistic (CP) 1. Reserve analysis – Many cost estimator follow the practice of identifying and including a cost reserve, also call contingency reserve (contingency allowances) to work packages. – Contingency Reserve are a part of the Funding Requirement –09/15/12Reserve analysis means putting some cash away just in case. 6
  7. 7. Tools & Techniques 1. Cost of Quality (COQ): Cost of making the project’s product work properly and fixing it when it does not – Cost of Conformance • Preventing defects • Appraisal of product quality – Cost of Nonconformance • Internal failures • External failures 1. Project management estimating software: - Software applications, spreadsheets, simulation tools, and statistics packages. 1. Vendor Bid Analysis – Analysis of what an appropriate cost for the project should be, based on bids from qualified vendors09/15/12 7
  8. 8. Outputs1. Activity Cost Estimates – Quantitative assessment of resource costs to complete schedule activities in your activity list – Should: • Be traceable to WBS work package items • Show all unit costs, pricing factors, and resource quantities • Document all assumptions2. Basis Cost Estimates – Supporting detail just like the WBS has a WBS Dictionary – Documentation of: • Basis of the estimate (i.e., how it was developed) • All assumptions • Any known constraints • The range of possible estimates (e.g., $10,000 (±10%)3. Project Document Updates – Risk register updates 09/15/12 8
  9. 9. 9 6.2 Determine Budget The process of aggregating the estimated cots of individual activities or work packages to establish an authorized cost baseline, which includes all authorized budgets, but excludes Management reservesInputs • Activity cost estimates • Resource calendars • Basis of estimates • Contracts • Scope baseline • Organizational process assets • Project scheduleTools & • Cost aggregation • Historical relationshipsTechniques • Reserve analysis • Funding limit reconciliation • Expert judgmentOutputs • Cost performance baseline • Project documents updates • Project funding requirements 09/15/12 9
  10. 10. Inputs1. Activity Cost Estimates2. Basic of Estimates3. Scope Baseline1. Project Schedule: Planned start and finish dates for activities, work packages, planning packages, and control accounts. Used to allocate the estimated costs to their calendar periods1. Resource Calendar: Provides information on which resources are assigned and when. Used to determine resource costs over project1. Contracts: Provides information about which product, services, or results have been purchased, along with their costs.1. Organizational Process Assets: – Any formal and informal cost budgeting-related policies, procedures, and guidelines that exist – Cost budgeting tools09/15/12 10
  11. 11. Tools & Techniques 8. Cost budget 1. Cost Aggregation: 7. Management reserve 6. Cost baseline 5. Contingency reserve 4. Project estimates 3. Control account estimates 2. Work package estimates 1. Activity estimates09/15/12 11
  12. 12. Tools & Techniques1. Reserve Analysis:Management Reserve Contingency Reserve"Unknown Unknown" "Known Unknown"Use to counteract unforeseen changes Used to plan for risk eventsto scope or costNot part of project cost baseline or Part of project cost baseline. But not useEarn Value calculations to compensate poor planning( Part of project budget ) ( Not part of project budget )Example: unexpected labor strike Example: resource availabilityAuthorized by senior management Authorized by PM09/15/12 12
  13. 13. Tools & Techniques 1. Expert Judgment 1. Historical Relationships: Both the cost and accuracy of analogous and parametric models can vary widely. They are most likely to be reliable when: – Historical information used to develop the model is accurate – Parameters used in the model are readily quantifiable, and – Models are scalable, such that they work for a large project, a small project, and phases of a project. 1. Funding Limit Reconciliation ( Related to Cash Flow ! ): Reconcile expenditure of funds with any limits on the funds committed to the project: – Funds are typically disbursed shortly before the start of the fiscal year. They can be used only to pay invoices related to work completed in the same fiscal year – Unused funds expire at the end of the fiscal year; any overrun must be accomplished through additional fund disbursed in the same fiscal year.09/15/12 13
  14. 14. Outputs 1. Cost Performance Baseline (Cost Baseline = Project Cost (estimated) + Contingency Reserves ) – The cost performance baseline is an authorized time-phased budget at completion (BAC) used to measure, monitor, and control the overall project cost performance on the project. 1. Project Funding Requirements (Cost Budge/ Project Budget = Cost Baseline + Management Reserves ) – Total funding requirements and periodic (quarterly, annual, etc.) funding requirements are derived from the cost performance baseline – The total funds required always higher than the project cost baseline’s S-Curve, as the total fund include the cost baseline plus the management reserve 1. Project Document Updates – Risk register – Cost estimates – Project schedule09/15/12 14
  15. 15. 6.3 Control Costs The process of monitoring the status of the project to update the project budget and managing changes to the cost baseline. Project cost control seeks out the causes of positive and negative variances and is part of the Perform Integrated Change Control processInputs • Project management plan • Work performance • Project funding requirements information • Organizational process assetsTools & • Earned value management • Performance reviewsTechniques • Forecasting • Variance analysis • To‐complete performance • Project management index (TCP) softwareOutputs • Work performance • Change requests measurements • Project management plan • Budget forecasts • Project document updates • Organizational process assets updates 09/15/12 15
  16. 16. Inputs1. Project Management Plan – Cost management plan – Cost performance baseline ( Cost baseline )2. Project Funding Requirements ( Project Budget )3. Work Performance Information – Deliverables that have started and their progress, deliverables that have been completed. – Cost that have authorized and incurred, it tells how are you spending your budget right now.4. Organizational Process Assets – Existing cost control-related policies, procedures, and guidelines – Tools for controlling costs – Methods used for monitoring and reporting09/15/12 16
  17. 17. Tools & Techniques 1. Earned Value Management (EVM): is the most common tool which help project managers measure project performance and determine where the project stands in relation to the budget and the schedule at a point in time  BAC- Budget At Completion ( Project budget ) – How much money you’ll spend on the project – Total amount of budget that you have for your project  PV—Planned Value ( Value of work schedule ) – Is the authorized budget assigned to the work to be accomplished for an activity or WBS component. – The total planned value for project is also known as Budget At Completion ( BAC ) when planned complete 100%.  EV—Earned Value ( Value of work performed ) – EV is the value of work performed expressed in terms of the approved budget assigned to that work for an activity or WBS component…. – EV is often used to describe the % completion of a project  AC—Actual Cost ( Spent cost ) – Is the total cost actually incurred and recorded in accomplishing work performed for an activity or WBS component.09/15/12 17
  18. 18. Tools & Techniques (Cont.)  SPI—Schedule Performance Index – Whether you’re behind or ahead of schedule – If SPI > 1, you’re ahead of schedule – If SPI < 1, you’re behind schedule  SV—Schedule Variance – How much ahead or behind schedule you are – If SV > 0, it tells you how many dollars you’re ahead – If SV < 0, it tells you how many dollars you’re behind  CPI—Cost Performance Index – Whether you’re within your budget or not – If CPI > 1, you’re under budget – If CPI < 1, you’re over budget  CV—Cost Variance – How much above or below your budget you are – If CV > 0, it tells you how many dollars you’re above – If CV < 0, it tells you how many dollars you’re below09/15/12 18
  19. 19. Tools and Techniques (Cont.)09/15/12 19
  20. 20. Tools & Techniques 1. Forecasting: A technique for extrapolating current performance data to create an estimate of future project performance – Estimate to Complete (ETC), which tells you how much more money you’ll probably spend on your project – Estimate at Completion (EAC) is used to predict what your project will actually cost when it’s complete ETC = EAC-AC – EAC using manual Bottom-up summation EAC = AC + bottom-up ETC – EAC forecast for ETC Work Performance at the Budgeted Rate EAC = AC + BAC-EV – EAC forecast for ETC Work Performance at the Present CPI Rate EAC = BAC/ cumulative CPI – EAC forecast for ETC Work Performance considering both SPI and CPI Factors EAC = AC + [(BAC-EV)/ (cumulative CPI * cumulative SPI)]09/15/12 20
  21. 21. Tools & Techniques 1. To-Complete Performance Index (TCPI) – Answers the question, “How efficiently are you using your remaining resources?” – How well your project must perform to stay on budget – Two methods: • Base on the BAC: • Base on the EAC:09/15/12 21
  22. 22. Tools & Techniques 1. Performance Review – Compare cost performance over time, schedule activities or work packages over-running and under-running the budget, and estimated funds needed to complete work in progress. – If EVM is used, the following is determined:  Variance analysis. compares actual project performance to planned or expected performance  Trend analysis. examines project performance over time to determine if performance is improving or deteriorating ( EAC vs. BAC )  Earned value performance. compares the baseline plan to actual schedule and cost performance ( CPI & SPI ) 1. Variance analysis – Identify differences between the work results and the project management plan: CV, SV – Determine what caused the variances (root cause) and plan a corrective actions 1. Project management software: Project management software is often used to monitor the 3 EVM dimensions (PV, EV, AC) to display graphical trends, and to forecast a range of possible final project results.09/15/12 22
  23. 23. Outputs1. Work Performance Measurements – Calculated CV, SV, CPI, and SPI values for WBS components, in particular the work packages and control accounts, are documented and communicated to stakeholders2. Budget Forecasts – ETC, EAC3. Organizational Process Assets Updates – Causes of variances, corrective action and rationale4. Change Requests – To adjust the cost performance baseline, project management plan, corrective, or preventive action5. Project Management Plan Updates – Cost performance baseline – Cost management plan6. Project Document Updates – Cost Estimates – Basic of Estimates 09/15/12 23
  24. 24. EVM Example• Project: 400 meters fence.• Objectives – To build a fence surrounding Sponsor’s & PM’s garden – The scope consists of 4 legs each 100 meters long. Gates are included.09/15/12 24
  25. 25. Exercise• Resources – Contract signed with Contractor with fixed material price & installation incl. necessary civil work at cost plus. – Contractor have planned the work with a workforce of five skilled labor working fulltime for 4 consecutive weeks• Budget – Material: $10,000 – Installation: $16,000 (800 man hours at $20/hour normal working hours) – Total: $26,000• Schedule – The work to be completed within 4 weeks. Lasted delivery is Friday week 4.09/15/12 25
  26. 26. Explain – Material: $10,000 for 400 m=> $25/m for material – Installation: $16,000 ⇒$20/hour normal working hours – Total: $26,000=> $65/m for earned value09/15/12 26
  27. 27. Week1• Status: leg 1 of the fence is 100% completed (100 meters)• Task: fill in appropriate numbers in the column for wk1:Budget:BACPV BAC*planned % completeActual:ACEV BAC*actual % completeCPI EV/ACSPI EV/PVForecast:EAC BAC/CPI09/15/12 27
  28. 28. Week1Budget:BAC 26 000 26 000PV 26 000 * 25% 6 500Actual:AC 100*25 + 5*8*5*20 6 500EV 100*65 6 500CPI 1SPI 1Forecast:EAC 26 000/1 26 00009/15/12 28
  29. 29. Week2• Status: leg 2 of the fence is 50% completed (50 meters)• Reason: the soil was harder than expected, no soil investigation took place before contract was signed• Task: fill in appropriate numbers in the column for wk2, suggest corrective action to get the project back on trackBudget:BACPV BAC*planned % completeActual:ACEV BAC*actual % completeCPI EV/ACSPI EV/PVForecast:EAC BAC/CPI 09/15/12 29
  30. 30. Week2Budget:BAC 26 000 26 000PV 6500+ 26 000 * 13 000 25%Actual:AC 6500+50*25+5*8*5* 11750 20EV 6500+50*65 9750CPI 0.83SPI 0.75Forecast:EAC 26 000/0.83 31 32509/15/12 30
  31. 31. Week3• Status: leg 2 is completed/ Leg 3 is 25% completed (75 meters)• Previous corrective action: overtime 2 hours/day for the whole workforce at a cost of $30 per man-hour• Task: fill in appropriate numbers in the column for wk3, and suggest corrective action to get project back on trackBudget:BACPV BAC*planned % completeActual:ACEV BAC*actual % completeCPI EV/ACSPI EV/PVForecast:EAC BAC/CPI09/15/12 31
  32. 32. Week3Budget:BAC 26 000 26 000PV 13 000 + 26 000 * 19 500 25%Actual:AC 11750+75*25+5*8*5 19125 *20+5*2*5*30EV 9750+75*65 14625CPI 0.76SPI 0.75Forecast:EAC 26 000/0.76 3421109/15/12 32
  33. 33. Week4• Status: leg 3 and 4 completed (175 meters)• Previous corrective actions: 2 additional men, overtime 2 hours/day for the whole workforce• Task: fill in appropriate numbers in the column for wk4:Budget:BACPV BAC*planned % completeActual:ACEV BAC*actual % completeCPI EV/ACSPI EV/PVForecast:EAC BAC/CPI09/15/12 33
  34. 34. Week4Budget:BAC 26 000PV 26 000Actual:AC 19125+175*25+7*8 31200 *5*20+7*2*5*30EV 14625+175*65 26000CPI 0.83SPI 1Forecast:EAC 31200009/15/12 34