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Pm deep dive cost management

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  • 1. PM DeepDiveProject Cost Management - Niraj Agarwal May 2011 Slide 1
  • 2. Project Cost ManagementDefinitionProject Cost Management includes the processes involved in planning planning,estimating, budgeting, and controlling costs so that the project can becompleted within the approved budget.• Cost Estimating – developing an approximation of the costs of themonetary resources needed to complete project activities.• Cost Budgeting – aggregating the estimated costs of individualactivities or work packages t establish a cost b li ti iti k k to t bli h t baseline.• Cost Control – influencing the factors that create cost variances andcontrolling changes to the project budget. May 2011 Slide 2
  • 3. Project Cost ManagementTypes of Project Costs• Direct Project Cost - The costs directly attributable to a project project,including all personnel, goods and/or services together with all theirassociated costs. E.g. team travel, team wages, training,material,etc.• Indirect Project Cost - All costs which do not form a part of the finalproduct, but which are none the less required for the orderlycompletion of the project and which may include, but not necessarily belimited to field administration, direct supervision, incidental tools andequipment, startup costs, contractor’s fees, insurance, taxes, etc.• Fixed Project Costs - Those costs which do not change with change involume of output E g set-up rental etc output. E.g. set-up, rental, etc.• Variable Project Costs - Those costs that vary proportionately with volume of output. E.g. material cost, supplies, wages, etc. May 2011 Slide 3
  • 4. Project Cost ManagementAnalogous Estimating• It means using the actual cost of previous similar projects as the previous,basis for estimating the cost of the current project.• It uses expert judgment.• This type of estimate is typically done as part of the business casedevelopment or during the early stages of scope planning when thereisn’t a lot of detail on the project.• An analogous estimate may be done for the project as a whole or forselected phases or deliverables. It is not typically used to estimateindividual work packages.• Analogous estimates are the least accurate of all the estimatingtechniques but also the least costly. May 2011 Slide 4
  • 5. Project Cost ManagementParametric Estimating• Same as the technique used in duration estimating estimating.• This technique uses a mathematical model to compute costs, and itmost often uses the quantity of work multiplied by the rate.• Parametric estimating is dependent on the accuracy of the data usedto create the model. May 2011 Slide 5
  • 6. Project Cost ManagementBottom - Up Estimating• Assigns a cost estimate to each work package on the project project.• The WBS and the project resource requirements are critical inputsfor a bottom - up estimate.• The idea is that you start at the work package level of the WBS andcalculate the cost of each activity assigned to that work package.• The sum of all the work package estimates p p g provides the estimate ofthe total project cost.• Bottom - up estimates are the most accurate of all the estimatingtec ques,techniques, but t ey ’re a so t e most t e - consuming to pe o . they e also the ost time co su g perform. May 2011 Slide 6
  • 7. Project Time ManagementThree Point Estimates• Three point estimates used: - Most likely(M) : Most likely cost of the schedule activity - Optimistic(O) : Activity cost is based on a best-case scenario - Pessimistic(P) : Activity cost is based on a worst-case scenario• Estimating based on 3 formulas: i. i PERT Activity Cost : C = (P + 4M + O)/6 May 2011 Slide 7
  • 8. Project Cost ManagementSample project cost estimate May 2011 Slide 8
  • 9. Cost EstimatingITTO May 2011 Slide 9
  • 10. Cost EstimatingITTO May 2011 Slide 10
  • 11. Project Cost ManagementEstimating Tips• Brainstorm with your project team• Communicate the type of estimate you are providing & the level ofaccuracy they provide.• Make use of any available templates• Get estimates from the people doing the work.• Document any assumptions you have made May 2011 Slide 11
  • 12. Cost BudgetingDefinitionCost Budgeting is the process of aggregating all the cost estimates andestablishing a cost baseline for the project.The cost baseline is the total expected cost for the project. Onceapproved, it’sapproved it s used throughout the remainder of the project to measurethe overall cost performance. May 2011 Slide 12
  • 13. Cost BudgetingITTO May 2011 Slide 13
  • 14. Cost BudgetingITTO May 2011 Slide 14
  • 15. Cost BudgetingReservesContingency Reserves “A separately planned quantity used to allow for Afuture situations which may be planned for only in part (sometimescalled ‘known unknowns’). For example, rework is certain, theamount of rework is not. The contingency fund is usually under the g y ydiscretion of the project manager, who controls how these funds arespent.Management Reserve “ A separately planned quantity used to allow l l d i d llfor future situations which are impossible to predict (sometimes called“unknown-Unknowns”). Management reserves may involve cost orschedule.schedule Management reserves are intended to reduce the risk ofmissing cost or schedule objectives. The management fund is usuallycontrolled by upper management. May 2011 Slide 15
  • 16. Project Cost ControlDefinition• Project Cost Control is primarily concerned with Controlling Changesto the project budget• The processes of gathering, accumulating, analyzing, reporting andmanaging the costs on an on going basis on-going basis.• Includes project procedures, project cost changes, monitoring actualversus budget, variance analysis, integrated cost/schedule reporting,progress analysis and corrective actions. l i d ti ti May 2011 Slide 16
  • 17. Project Cost ControlDefinition• Project Cost Control is primarily concerned with Controlling Changesto the project budget• The processes of gathering, accumulating, analyzing, reporting andmanaging the costs on an on going basis on-going basis.• Includes project procedures, project cost changes, monitoring actualversus budget, variance analysis, integrated cost/schedule reporting,progress analysis and corrective actions. l i d ti ti May 2011 Slide 17
  • 18. Earned Value Analysis• Integrates cost, schedule and scope• Better that comparing projected vs. actual because time and cost are analyzed separately• Terms: - PV / BCWS – Budgeted Cost of Work Scheduled /Planned Value - EV / BCWP – Budgeted Cost of Work Performed / Earned Value - AC /ACWP – Actual Cost of Work Performed / Actual Cost May 2011 Slide 18
  • 19. Earned Value Analysis• BAC – Budget at Completion (how much did you budget for the totaljob)• EAC – Estimate at Completion (what do we expect the total project tocost)• ETC – Estimate to Completion (how much more do we expect tospend to finish the job)• VAC – Variance at Completion (how much over/under budget do weexpect to be) May 2011 Slide 19
  • 20. Earned Value Analysis• Variance = (Plan – Actual) ( )• Cost Variance (CV): EV– AC; -ve is over budget , +ve is under• Schedule Variance (SV): EV– PV; +ve is behind schedule, +ve is ahead• Cost Performance Index (CPI): EV/ AC - I am only getting x¢ out of every $• Schedule Performance Index (SPI): EV/ PV - I am only progressing x % of the planned rate• Estimate at Completion (EAC): BAC / CPI - As of now we expect the total project to cost x$• E ti t t C Estimate to Complete (ETC) EAC – AC l t (ETC): - how much will it cost from now to completion• Variance at Completion: BAC – EAC; when the project is over how muchmore or less did we spend May 2011 Slide 20
  • 21. Earned Value AnalysisQuestion Work Actual Today is June 30th. —Data BudgetWork Unit Completion (in $M) Performed Cost Date Date (in $M) (in $M) PV EV AC 1. What is the Cost Variance A Jan. 31 10 10 12 2. What is the Schedule B Feb. 8 F b 28 5 4 5 Variance C Mar. 31 6 8 8 3. What is the CPI D 12-May 15 13 12 4. What is the SPI 5 5. What is the EAC E 30-Jun 30 Jun 20 20 30 6. What is the ETC F 18-Jul 3 0 0 7. What is the Percent G Aug. 30 35 0 0 Complete H Sept. Sept 22 22 0 0 8. What is the Percent Spent I Oct. 29 12 0 0 J Nov. 30 9 0 0 May 2011 Slide 21
  • 22. Earned Value AnalysisQuestion Work What is the CV ? $55 - $67 = Budget ActualWork Unit Completion (in $M) Performed Cost (in -$12 (EV AC) $12 (EV-AC) Date (in $M) PV EV $M) AC 2. What is the SV ? $55 - $56 = -$1 (EV-PV) A Jan. 31 10 10 12 3. What is the CPI? 55/67 = B Feb. 8 F b 28 5 4 5 .82 (EV/AC) C Mar. 31 6 8 8 4. What is the SPI? 55/56 = D 12-May 15 13 12 .98 (EV-PV) E 30-Jun 30 Jun 20 20 30 5. 5 What is the EAC? 137/ 82 = 137/. F 18-Jul 3 0 0 $167 (BAC/CPI) 6. What is the ETC? $167 - $67 = G Aug. 30 35 0 0 $100 (EAC-AC) H Sept. Sept 22 22 0 0 7. What is the Percent h h I Oct. 29 12 0 0 Complete? 55/137 = J Nov. 30 9 0 0 40% (EV/BAC) 8. What is the Percent Spent? 67/137 = 49% (AC/BAC) May 2011 Slide 22
  • 23. Pop QuizQuestion 1You are asked to prepare an estimate for a project businesscase to install a new group of servers at a new satellite office.There is very little detail about this project. What will you useto compute your estimate? p yA. The price the client is willing to payB. A sophisticated modeling techniqueC. The estimate provided by the project sponsorD. The actual cost of a similar project May 2011 Slide 23
  • 24. Pop QuizQuestion 2A discretionary fund used by the project manager to cover thecost of possible adverse events during the project is known aswhich of the following?A.A Management reserveB. Chart of accountsC. Contingency fund g yD. Cost baseline May 2011 Slide 24
  • 25. Pop QuizQuestion 3You are developing a bottom - up estimate for the first phase of yourproject. Which of the following is the most important input to completethis task?A.A Historic data from a similar projectB. ScheduleC. The WBSD. The scope statement May 2011 Slide 25
  • 26. Pop QuizQuestion 4What is the most accurate estimate?A. Analogous estimateB. Bottom - up estimateC. Estimates based on expert judgmentD. Parametric estimate May 2011 Slide 26
  • 27. Pop QuizQuestion 5You are the project manager for a large IT project. At the timeyou performed your cost estimates, the vendor you ’ reworking with provided you with the following estimates:Programming estimate = 320 hours at $135/hour $135/hour.Project management estimate = 320 hours at $155/hour.Testing estimate = 150 hours at $85/hour. g /What type of estimate are these?A. AnalogousB. Bottom-upC. Cost benefitD.D Parametric May 2011 Slide 27
  • 28. Thank You!

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