SlideShare a Scribd company logo
1 of 65
Project cost management
Chapter 9
Horror stories of project failures due to extraordinary
cost overruns are reported in the business press on
almost a daily basis
As a general rule, management and customers
are always concerned with how much a project is
going to cost in relation to how much a project is
going to earn
Project cost management
• Includes processes involved in planning,
estimating, budgeting, financing, funding,
managing, and controlling costs so that the project
can be completed within the approved budget
Why Do We Manage Cost?
• Part of triple constraint, can’t manage one without
the others (scope, time, and quality)
• Plots of cost and scope against plan can help spot
problems early
Cumulative
Value
Time
Planned
Value (PV)
Actual
Costs (AC)
Earned
Value (EV)
Today
Is this project
over/under budget?
Is it ahead of/behind
schedule?
Project cost management processes
•
•
•
• Plan cost management—establishes the policies,
procedures, and documentation for planning,
managing, expending, and controlling project costs
Estimate costs—an approximation of the monetary
resources needed to complete project activities
Determine budget— aggregating the estimated costs
of individual activities or work packages to establish
an authorized cost baseline
Control costs—monitoring the status of the project to
update the project costs and managing changes to
the cost baseline
Importance of cost estimation
• Provides standard against which actual expenditures
incurred during the course of a project can be
compared, and serve as the basis for cost control
• They provide the mechanism for managing cash flow
during the course of the project
• They give the project manager a framework for
allocating scarce resources as the project progresses
Errors during project progress
Potential for errors in estimates during the various stages of
the project progress
Classification of project costs
• Direct Vs. Indirect
• Recurring Vs. Nonrecurring
• Fixed Vs. Variable
• Normal Vs. Expedited
Direct Vs. Indirect
• Direct costs- can be directly charged against the
project; for example, the costs of personnel who
are directly involved in the project, or the costs of
materials directly used for project work
• Indirect costs- include overhead, as well as
selling and administrative expenses
Examples of overhead costs include costs associated
with taxes, insurance, utilities, and so forth. Costs
associated with selling and administrative expenses,
commissions, advertising, etc
Recurring Vs. Nonrecurring
• Recurring costs- such as labor and materials,
are repeatedly incurred throughout the project
life cycle
• Nonrecurring costs- are one-time costs that are
typically incurred at the beginning or at the end
of the project, such as market research and
labor training
Fixed Vs. Variable
• Fixed costs- do not vary with usage. Example,
costs incurred in the purchase of capital
equipment remain fixed, regardless of the extent
of equipment use
• Variable costs- vary directly with usage. They are
typically associated with labor and materials
Normal Vs. Expedited
• Normal costs- are incurred when project tasks are
completed according to the original planned
duration
• Expedited costs- or crash costs are unplanned
costs incurred as a result of steps taken to
accelerate project completion
Example, costs associated with using additional overtime
or hiring additional workers specifically to hasten project
completion can be regarded as expedited costs
Cost classifications
X
X
X
X
X X X
X X X
X X X
X X X
Costs
Direct labor
Building lease
Expedite
Material
Direct
Indirect
Recurring
Non-recurring
Fixed
Variable
Normal
Expedited
Cost estimating methods
• Ballpark estimates
• Feasibility estimates
• Definitive estimates
• Comparative estimates
Ballpark estimates
• Also known as ‘‘order of magnitude’’ estimates,
often used when there is not sufficient information
or time available
• Typically, used for making competitive bids for
project contracts, or for initial rough-cut estimates
of resources needed for a project
• As a general rule, ballpark estimates should
attempt an accuracy of ±30 percent
Feasibility estimates
• Are developed after preliminary project design
work is completed
• Are often used in construction projects, where
published information on material costs is widely
available
• As more relevant information becomes available
further down the project life cycle, the ±10 percent
margin of error
Definitive estimates
• Can be developed only after the completion of
most design work
• Clear understanding of the scope and capabilities
of the project, changes to project specifications
are virtually nonexistent
• Developed further down the project life cycle with
more accurate information and fewer project
uncertainties, provide a much more accurate
expected cost of the project at completion, with a
±5 percent margin of error
Comparative estimates
• Uses historical data from previous project activities
as the frame of reference for current estimates
• One of the method is parametric estimation-most
projects are similar to previous projects by way of
similar features or parameters and, therefore, are
likely to incur similar costs. Steps:
– Identifying the features/parameters of an older or well-known
project that can be directly related to the cost of the current
project
– Defining the mathematical nature of that relationship
Use of learning curves in estimation
• Human performance usually improves
when a task is repeated
• This happens by a fixed percent each
time the production doubles
• Percentage is called the learning rate
Learning curve calculations
N
n r
r 
n 1
1 
To t a l t i m e  T
lograte
lo g 2
n 1 n
T  T n r
T = Time for nth unit
T = Time for first unit
1
N = Number of units
R = log decimal rate/log 2
One worker will be tasked to produce all 25 units of air filters. In
addition, after production of the 20th unit, there is no significant
time reduction associated with learning, and production reaches
a steady state of 70 hours. Learning rate is 85%. Time to
complete the first activity?
r = log 0.85/ log 2
r= −0.1626/0.693
r= −0.235
70 hours = T1 ( 20)-0.235
T1= 141.3 hours
Cost estimation and budgeting
• Cost estimation and project budgeting are
closely linked
• Without reasonable cost estimation, project
budgets are essentially useless, and without
accurate budgeting, cost estimation is a
wasted exercise
Budgeting
• A plan for the costs of project resources
• A budget implies constraints
• Thus, it implies that managers will not
get everything they want or need
Budgeting
• The budget for an activity also implies
management support for that activity
• Higher the budget, relative to cost, higher
the managerial support
• The budget is also a control mechanism
• Many organizations have controls in place
that prohibit exceeding the budget
• Comparisons are against the budget
Issues in project budgeting
• A project budget identifies the project’s
allocated resources, goals, and the schedule
that allows the organization to achieve those
goals
• Developing a project budget requires not only a
knowledge of the resources needed, but also
information regarding how many will be needed
and when, as well as how much they will cost
Estimating project budgets
• On most projects
– Material + Labor + Equipment + Capital +
Overhead + Profits = Bid
• In other words
– Resources + Profits = Bid
• So we are left with the task of forecasting
resources
Estimating project budgets
• Like any forecast, this includes some
uncertainty
• There is uncertainty regarding usage
and price
– Especially true for material and labor
• The more standardized the project and
components, the lower the uncertainty
• The more experienced the cost
estimator, the lower the uncertainty
Rule of thumb
• Some estimates are prepared by rules
of thumb
• Construction cost by square feet
• Printing cost by number of pages
• Lawn care cost by square feet of lawn
• These rules of thumb may be adjusted
for special conditions
• However, this is still easier than starting
the estimate from scratch
Difficulties
•
•
•
There may not be as much historical
data or none at all
Even with similar projects, there may
be significant differences
Many people have input and some
control over the budget
Difficulties
•
•
•
There is more “flexibility” regarding the
estimates of inputs (material and labor)
The accounting system may not be set
up to track project data
Usage of labor and material is very
lumpy over time
Types of budgeting
•
•
•
•
Top-down
Bottom-up
Negotiated
Activity based costing
Top-down
• Top managers estimate/decide on the
overall budget for the project
• These trickle down through the
organization where the estimates are
broken down into greater detail at each
lower level
• The process continues to the bottom
level
Advantages
• Overall project budgets can be set/controlled very
accurately
• Management has more control over budgets
Disadvantages
• More difficult to get buy in
• Leads to low level competition for larger shares of
budget
Bottom-up budgeting
• Project is broken down into work packages
• Low level managers price out each work
package
• Overhead and profits are added to develop
the budget
Advantages
• Greater buy in by low level managers
• More likely to catch unusual expenses
Disadvantages
• People tend to overstate their budget
requirements
• Management tends to cut the budget
An iterative budgeting process–
negotiation-in-action
• Most projects use some combination of
top-down and bottom-up budgeting
• Both are prepared and compared
• Any differences are negotiated
Snapshot How do you estimate the
from practicecost of a nuclear power
plant?
Activity based costing
• Activity-based costing (ABC) is frequently
used for project budgeting. The basis of
activity-based costing is that projects
consume activities, and activities consume
resources
Steps in activity-based costing
• Assign costs to activities that use resources
(costs are assigned to each work package)
• Identify cost drivers associated with this
activity( like human resource in many cases)
• Compute a cost rate per cost driver unit or
transaction (cost of labor per hour)
• Multiply the cost driver rate times the volume of
cost driver units used by the project
Rs50/hour ∗100 hours = Rs5,000.00
Budget contingencies
• The allocation of extra funds to cover uncertainties
and improve the chance of finishing on time
• It is an important aspect of project finance,
because it provides a certain amount of protection
against unknown and uncertain elements that can
derail a project
Contingencies are needed because
• Project scope may change
• Murphy’s Law is present
“If anything can go wrong, it will”
• Cost estimation must anticipate interaction costs
Hidden cost
• Normal conditions are rarely encountered
Benefits to include contingency
• Recognizes that the future is uncertain, and
that unexpected problems can increase
overall project costs
• Contingency estimates make explicit
provisions for potential and unexpected cost
increase in project plans and budgets
• The use of contingency funds provides an
early warning signal of potential cost overruns
More on Project Cost
Management
Cost Management Key Terms
•
•
•
•
•
•
•
PV - Planned Value, estimated value of the planned work
EV – Earned Value, estimated value of work done
AC – Actual Cost, what you paid
BAC – Budget at Completion, the budget for the total job
EAC –Estimate at Completion, what is the total job
expected to cost?
ETC – Estimate to Complete, forecasted costs to complete
job
VAC – Variance at Completion, how much over/under
budget do we expect to be?
How Do We Manage Cost?
• Three processes
– Estimate Costs
– Determine Budget
– Control Costs
Estimate
Costs
Determine
Budget
Control
Costs
Estimate Costs
Enterprise
Environmental
Factors
Organizational
Process Assets
Inputs
Outputs
Tools & Techniques
❑Analogous estimating
❑Determine resource cost
rates
❑Bottom up estimating
❑Parametric estimating
❑Project management
software
❑Vendor bid analysis
❑Reserve analysis
❑Cost of quality
Project Scope
Statement
Work Breakdown
Structure
WBS Dictionary
Project
Management Plan
•Schedule Mgmt Pln
•Staffing Mgmt Pln
•Risk Register
Activity Cost
Estimates
Activity Cost
Estimates
Supporting Detail
Requested Changes
Cost Management
Plan Updates
Estimate
Costs
Determine
Budget
Control
Costs
Other Estimating Methods
• Parametric estimating – Use mathematical model
(i.e. cost per sq ft). [accuracy varies] Two types:
• Regression analysis – based on analysis of multiple
data points
• Learning Curve – The first unit costs more than the
100th, forecasts efficiency gains
• Vendor Bid Analysis – Estimating using bids +
allowances for gaps in bid scope [slow, accuracy
depends on gaps]
• Reserve Analysis – Adding contingency to each
activity cost estimates as zero duration item [slow,
overstates cost]
Determine Budget
❑Cost aggregation
❑Reserve analysis
❑Parametric estimating
❑Funding limit reconciliation
Inputs
Outputs
Tools & Techniques
Cost Baseline
Project Funding
Requirements
Cost Management
Plan Updates
Requested Changes
Project Scope Statement
Work Breakdown Structure
WBS Dictionary
Activity Cost Estimates
Activity Cost Estimates
Supporting Detail
Project Schedule
Resource Calendars
Contract
Cost Management Plan
Estimate
Costs
Determine
Budget
Control
Costs
Determine Budget
• Budgeting is allocating costs to work
packages to establish a cost baseline to
measure project performance
• Remember Contingency items are for
unplanned but required changes it is not to
cover things such as:
– Price escalation
– Scope & Quality Changes
• Funding Limit Reconciliation – Smoothing out
the project spend to meet management
expectations
Control Costs
Cost Baseline
Project Funding
Requirements
Inputs
Outputs
Tools & Techniques
❑Cost change control system
❑Performance measurement
analysis
❑Forecasting
❑Project performance reviews
❑Project management
software
❑Variance management
Performance
Reports
Work Performance
Information
Approved Change
Requests
Project
Management Plan
Cost Estimate
Updates
Cost Baseline
Updates
Performance
Measurements
Forecasted
Completion
Requested Changes
Recommended
Corrective Actions
Organizational
Process Assets
Updates
Project Management
Plan Updates
Estimate
Costs
Determine
Budget
Control
Costs
Earned Value
• Progress is compared against the
baseline to determine whether
project is ahead of or behind plan
• Percent complete can be difficult to
measure, some managers use
rules
– 50/50 Rule – Assumed 50% complete
when task started, final 50% at
completion
– 20/80 Rule – 20% at start
– 0/100 Rule – No credit until complete
•
•
•
•
•
Planned Value
(PV) – Budgeted
Cost
Earned Value
(EV) – Actual
work completed
Actual Cost (AC)
– Costs incurred
Estimate to
Complete (ETC)
– What’s Left
Estimate at
Completion
(EAC) – What
final cost will be
Earned
Value
Graph
Variance at
Completion
(VAC)
Target
Cost &
Schedule
Schedule
Variance
(Time)
Planned
Value
(PV)
Earned
Value
(EV)
Earned Value Formulas
NAME
Cost Variance (CV)
FORMULA
EV-AC
EV-PV
EV/AC
EV/PV
NOTES
Negative = Over budget
Positive = Under budget
Negative = Behind Schedule
Positive = Ahead of Schedule
How much are we getting for every
dollar we spend?
Progress as % against plan
EAC-AC
BAC-EAC
How much more do we have to
spend?
At the end of the day, how close will
we be to plan?
Schedule Variance
(SV)
Cost Performance
Index (CPI)
Schedule Perform
Index (SPI)
Estimate to Complete
(ETC)
Variance at
Completion (VAC)
Estimate at
Completion (EAC)
See following slide
Earned Value Formulas (Cont’d)
NAME
Estimate at
Completion (EAC)
FORMULA
•BAC/CPI
•AC+ATC
•AC+BAC-EV
•AC+(BAC-EV)/CPI
NOTES
Use if no variances from
BAC have occurred
Use when original
estimate was bad. Actuals
+ New estimate
Use when current
variances are not expected
to be there in the future
Use when current
variances are expected to
continue
Tricks for Earned Value
•
•
•
•
•
•
•
EV is always first
Variance = EV minus something
Index = EV divided by something
If the formula relates to cost use AC
If the formula relates to schedule use PV
Interpreting results: negative is bad and positive is
good
Interpreting results: greater than one is good, less
than one is bad
PV
AC ETC
EAC
BAC
Project
Start
Current
Status
Terms to Remember
•
•
•
•
•
•
•
Present Value
Net Present Value (NPV)
Internal Rate of Return
(IRR)
Payback Period
Benefit Cost Ratio =
BCR>1, Payback is greater
than the cost
Opportunity Cost
Sunk Cost
•
•
•
Working Capital
Straight Line Depreciation
Accelerated Depreciation
•
•
Double Declining Balance
Sum of Years Digits
• Value Analysis (Value
Engineering)
• To illustrate the concept of EVM and all the
formulas, assume a project that has exactly
one task. The task was baselined at 8 hours,
but 11 hours have been spent and the
estimate to complete is 1 additional hour. The
task would have been completed already.
Assume an Hourly Rate of $100 per hour.
•
•
•
•
Budget at Completion
(BAC) is the total budget
allocated to the project.
Estimate to Complete
(ETC) is the estimated
cost required to complete
the remainder of the
project.
Estimate at Completion
(EAC) is the estimated
cost of the project at the
end of the project.
Variance at completion
(VAC) is the variance on
the total budget at the end
of the project.
Appendices
Sample project
activity cost
estimating sheet
Sample budget showing planned and
actual activity costs and variances
Sample of a time-phased budget
Calculating direct labor costs

More Related Content

Similar to 9-180307064518 (1).pptx

Software Project Cost Management and estimation
Software Project Cost Management and estimationSoftware Project Cost Management and estimation
Software Project Cost Management and estimationssuser9d62d6
 
Monitoring and information systems
Monitoring and information systemsMonitoring and information systems
Monitoring and information systemsLibra chudry
 
8. (lecture 6) Project Cost Control.ppt
8. (lecture 6) Project Cost Control.ppt8. (lecture 6) Project Cost Control.ppt
8. (lecture 6) Project Cost Control.pptPedadaSaikumar
 
GOLL+-+Practical+Project+Management+for+Clinical-Biomedical+Engineering.pdf
GOLL+-+Practical+Project+Management+for+Clinical-Biomedical+Engineering.pdfGOLL+-+Practical+Project+Management+for+Clinical-Biomedical+Engineering.pdf
GOLL+-+Practical+Project+Management+for+Clinical-Biomedical+Engineering.pdfKarthikaSampathkumar2
 
Session 04 - Project Planning II
Session 04 - Project Planning IISession 04 - Project Planning II
Session 04 - Project Planning IIRakeshSinhaPMP
 
CISA_WK_3.pptx
CISA_WK_3.pptxCISA_WK_3.pptx
CISA_WK_3.pptxdotco
 
A brief on project cost management
A brief on project cost managementA brief on project cost management
A brief on project cost managementImran Jamil
 
Mba ii pmom_unit-4.1 project management a
Mba ii pmom_unit-4.1 project management aMba ii pmom_unit-4.1 project management a
Mba ii pmom_unit-4.1 project management aRai University
 
4. PAE AcFn621Ch-4a Project Alaysis and Selection.ppt
4. PAE AcFn621Ch-4a Project Alaysis and Selection.ppt4. PAE AcFn621Ch-4a Project Alaysis and Selection.ppt
4. PAE AcFn621Ch-4a Project Alaysis and Selection.pptProfDrAnbalaganChinn
 
component 5 project planning, monitoring and evaluation.pdf
component 5 project planning, monitoring and evaluation.pdfcomponent 5 project planning, monitoring and evaluation.pdf
component 5 project planning, monitoring and evaluation.pdfAnatole9
 
Managing the Consulting Engagement
Managing the Consulting EngagementManaging the Consulting Engagement
Managing the Consulting EngagementSaumya Ganguly
 
Project management overview
Project management overviewProject management overview
Project management overviewBudi Setiawan
 

Similar to 9-180307064518 (1).pptx (20)

Software Project Cost Management and estimation
Software Project Cost Management and estimationSoftware Project Cost Management and estimation
Software Project Cost Management and estimation
 
Monitoring and information systems
Monitoring and information systemsMonitoring and information systems
Monitoring and information systems
 
8. (lecture 6) Project Cost Control.ppt
8. (lecture 6) Project Cost Control.ppt8. (lecture 6) Project Cost Control.ppt
8. (lecture 6) Project Cost Control.ppt
 
MandC.pdf
MandC.pdfMandC.pdf
MandC.pdf
 
PEEM 4.pptx
PEEM 4.pptxPEEM 4.pptx
PEEM 4.pptx
 
GOLL+-+Practical+Project+Management+for+Clinical-Biomedical+Engineering.pdf
GOLL+-+Practical+Project+Management+for+Clinical-Biomedical+Engineering.pdfGOLL+-+Practical+Project+Management+for+Clinical-Biomedical+Engineering.pdf
GOLL+-+Practical+Project+Management+for+Clinical-Biomedical+Engineering.pdf
 
Project management
Project managementProject management
Project management
 
Session 04 - Project Planning II
Session 04 - Project Planning IISession 04 - Project Planning II
Session 04 - Project Planning II
 
CISA_WK_3.pptx
CISA_WK_3.pptxCISA_WK_3.pptx
CISA_WK_3.pptx
 
ATCO Engineering - Process Evaluation
ATCO Engineering - Process EvaluationATCO Engineering - Process Evaluation
ATCO Engineering - Process Evaluation
 
A brief on project cost management
A brief on project cost managementA brief on project cost management
A brief on project cost management
 
Business case writing presentation
Business case writing presentationBusiness case writing presentation
Business case writing presentation
 
4.Cost management
4.Cost management4.Cost management
4.Cost management
 
Mba ii pmom_unit-4.1 project management a
Mba ii pmom_unit-4.1 project management aMba ii pmom_unit-4.1 project management a
Mba ii pmom_unit-4.1 project management a
 
4. PAE AcFn621Ch-4a Project Alaysis and Selection.ppt
4. PAE AcFn621Ch-4a Project Alaysis and Selection.ppt4. PAE AcFn621Ch-4a Project Alaysis and Selection.ppt
4. PAE AcFn621Ch-4a Project Alaysis and Selection.ppt
 
component 5 project planning, monitoring and evaluation.pdf
component 5 project planning, monitoring and evaluation.pdfcomponent 5 project planning, monitoring and evaluation.pdf
component 5 project planning, monitoring and evaluation.pdf
 
Managing the Consulting Engagement
Managing the Consulting EngagementManaging the Consulting Engagement
Managing the Consulting Engagement
 
Vm presentation
Vm presentationVm presentation
Vm presentation
 
Project management overview
Project management overviewProject management overview
Project management overview
 
Project Cost Management
Project Cost ManagementProject Cost Management
Project Cost Management
 

Recently uploaded

Intermediate Accounting, Volume 2, 13th Canadian Edition by Donald E. Kieso t...
Intermediate Accounting, Volume 2, 13th Canadian Edition by Donald E. Kieso t...Intermediate Accounting, Volume 2, 13th Canadian Edition by Donald E. Kieso t...
Intermediate Accounting, Volume 2, 13th Canadian Edition by Donald E. Kieso t...ssuserf63bd7
 
Annual General Meeting Presentation Slides
Annual General Meeting Presentation SlidesAnnual General Meeting Presentation Slides
Annual General Meeting Presentation SlidesKeppelCorporation
 
Horngren’s Financial & Managerial Accounting, 7th edition by Miller-Nobles so...
Horngren’s Financial & Managerial Accounting, 7th edition by Miller-Nobles so...Horngren’s Financial & Managerial Accounting, 7th edition by Miller-Nobles so...
Horngren’s Financial & Managerial Accounting, 7th edition by Miller-Nobles so...ssuserf63bd7
 
Traction part 2 - EOS Model JAX Bridges.
Traction part 2 - EOS Model JAX Bridges.Traction part 2 - EOS Model JAX Bridges.
Traction part 2 - EOS Model JAX Bridges.Anamaria Contreras
 
Healthcare Feb. & Mar. Healthcare Newsletter
Healthcare Feb. & Mar. Healthcare NewsletterHealthcare Feb. & Mar. Healthcare Newsletter
Healthcare Feb. & Mar. Healthcare NewsletterJamesConcepcion7
 
Organizational Structure Running A Successful Business
Organizational Structure Running A Successful BusinessOrganizational Structure Running A Successful Business
Organizational Structure Running A Successful BusinessSeta Wicaksana
 
Flow Your Strategy at Flight Levels Day 2024
Flow Your Strategy at Flight Levels Day 2024Flow Your Strategy at Flight Levels Day 2024
Flow Your Strategy at Flight Levels Day 2024Kirill Klimov
 
WSMM Technology February.March Newsletter_vF.pdf
WSMM Technology February.March Newsletter_vF.pdfWSMM Technology February.March Newsletter_vF.pdf
WSMM Technology February.March Newsletter_vF.pdfJamesConcepcion7
 
WSMM Media and Entertainment Feb_March_Final.pdf
WSMM Media and Entertainment Feb_March_Final.pdfWSMM Media and Entertainment Feb_March_Final.pdf
WSMM Media and Entertainment Feb_March_Final.pdfJamesConcepcion7
 
Investment in The Coconut Industry by Nancy Cheruiyot
Investment in The Coconut Industry by Nancy CheruiyotInvestment in The Coconut Industry by Nancy Cheruiyot
Investment in The Coconut Industry by Nancy Cheruiyotictsugar
 
Fordham -How effective decision-making is within the IT department - Analysis...
Fordham -How effective decision-making is within the IT department - Analysis...Fordham -How effective decision-making is within the IT department - Analysis...
Fordham -How effective decision-making is within the IT department - Analysis...Peter Ward
 
8447779800, Low rate Call girls in Saket Delhi NCR
8447779800, Low rate Call girls in Saket Delhi NCR8447779800, Low rate Call girls in Saket Delhi NCR
8447779800, Low rate Call girls in Saket Delhi NCRashishs7044
 
TriStar Gold Corporate Presentation - April 2024
TriStar Gold Corporate Presentation - April 2024TriStar Gold Corporate Presentation - April 2024
TriStar Gold Corporate Presentation - April 2024Adnet Communications
 
Onemonitar Android Spy App Features: Explore Advanced Monitoring Capabilities
Onemonitar Android Spy App Features: Explore Advanced Monitoring CapabilitiesOnemonitar Android Spy App Features: Explore Advanced Monitoring Capabilities
Onemonitar Android Spy App Features: Explore Advanced Monitoring CapabilitiesOne Monitar
 
APRIL2024_UKRAINE_xml_0000000000000 .pdf
APRIL2024_UKRAINE_xml_0000000000000 .pdfAPRIL2024_UKRAINE_xml_0000000000000 .pdf
APRIL2024_UKRAINE_xml_0000000000000 .pdfRbc Rbcua
 
Technical Leaders - Working with the Management Team
Technical Leaders - Working with the Management TeamTechnical Leaders - Working with the Management Team
Technical Leaders - Working with the Management TeamArik Fletcher
 
Call Us 📲8800102216📞 Call Girls In DLF City Gurgaon
Call Us 📲8800102216📞 Call Girls In DLF City GurgaonCall Us 📲8800102216📞 Call Girls In DLF City Gurgaon
Call Us 📲8800102216📞 Call Girls In DLF City Gurgaoncallgirls2057
 

Recently uploaded (20)

Intermediate Accounting, Volume 2, 13th Canadian Edition by Donald E. Kieso t...
Intermediate Accounting, Volume 2, 13th Canadian Edition by Donald E. Kieso t...Intermediate Accounting, Volume 2, 13th Canadian Edition by Donald E. Kieso t...
Intermediate Accounting, Volume 2, 13th Canadian Edition by Donald E. Kieso t...
 
Annual General Meeting Presentation Slides
Annual General Meeting Presentation SlidesAnnual General Meeting Presentation Slides
Annual General Meeting Presentation Slides
 
Horngren’s Financial & Managerial Accounting, 7th edition by Miller-Nobles so...
Horngren’s Financial & Managerial Accounting, 7th edition by Miller-Nobles so...Horngren’s Financial & Managerial Accounting, 7th edition by Miller-Nobles so...
Horngren’s Financial & Managerial Accounting, 7th edition by Miller-Nobles so...
 
Traction part 2 - EOS Model JAX Bridges.
Traction part 2 - EOS Model JAX Bridges.Traction part 2 - EOS Model JAX Bridges.
Traction part 2 - EOS Model JAX Bridges.
 
Healthcare Feb. & Mar. Healthcare Newsletter
Healthcare Feb. & Mar. Healthcare NewsletterHealthcare Feb. & Mar. Healthcare Newsletter
Healthcare Feb. & Mar. Healthcare Newsletter
 
Organizational Structure Running A Successful Business
Organizational Structure Running A Successful BusinessOrganizational Structure Running A Successful Business
Organizational Structure Running A Successful Business
 
Flow Your Strategy at Flight Levels Day 2024
Flow Your Strategy at Flight Levels Day 2024Flow Your Strategy at Flight Levels Day 2024
Flow Your Strategy at Flight Levels Day 2024
 
Corporate Profile 47Billion Information Technology
Corporate Profile 47Billion Information TechnologyCorporate Profile 47Billion Information Technology
Corporate Profile 47Billion Information Technology
 
WSMM Technology February.March Newsletter_vF.pdf
WSMM Technology February.March Newsletter_vF.pdfWSMM Technology February.March Newsletter_vF.pdf
WSMM Technology February.March Newsletter_vF.pdf
 
WSMM Media and Entertainment Feb_March_Final.pdf
WSMM Media and Entertainment Feb_March_Final.pdfWSMM Media and Entertainment Feb_March_Final.pdf
WSMM Media and Entertainment Feb_March_Final.pdf
 
Investment in The Coconut Industry by Nancy Cheruiyot
Investment in The Coconut Industry by Nancy CheruiyotInvestment in The Coconut Industry by Nancy Cheruiyot
Investment in The Coconut Industry by Nancy Cheruiyot
 
Fordham -How effective decision-making is within the IT department - Analysis...
Fordham -How effective decision-making is within the IT department - Analysis...Fordham -How effective decision-making is within the IT department - Analysis...
Fordham -How effective decision-making is within the IT department - Analysis...
 
The Bizz Quiz-E-Summit-E-Cell-IITPatna.pptx
The Bizz Quiz-E-Summit-E-Cell-IITPatna.pptxThe Bizz Quiz-E-Summit-E-Cell-IITPatna.pptx
The Bizz Quiz-E-Summit-E-Cell-IITPatna.pptx
 
8447779800, Low rate Call girls in Saket Delhi NCR
8447779800, Low rate Call girls in Saket Delhi NCR8447779800, Low rate Call girls in Saket Delhi NCR
8447779800, Low rate Call girls in Saket Delhi NCR
 
TriStar Gold Corporate Presentation - April 2024
TriStar Gold Corporate Presentation - April 2024TriStar Gold Corporate Presentation - April 2024
TriStar Gold Corporate Presentation - April 2024
 
Onemonitar Android Spy App Features: Explore Advanced Monitoring Capabilities
Onemonitar Android Spy App Features: Explore Advanced Monitoring CapabilitiesOnemonitar Android Spy App Features: Explore Advanced Monitoring Capabilities
Onemonitar Android Spy App Features: Explore Advanced Monitoring Capabilities
 
APRIL2024_UKRAINE_xml_0000000000000 .pdf
APRIL2024_UKRAINE_xml_0000000000000 .pdfAPRIL2024_UKRAINE_xml_0000000000000 .pdf
APRIL2024_UKRAINE_xml_0000000000000 .pdf
 
Technical Leaders - Working with the Management Team
Technical Leaders - Working with the Management TeamTechnical Leaders - Working with the Management Team
Technical Leaders - Working with the Management Team
 
Call Us 📲8800102216📞 Call Girls In DLF City Gurgaon
Call Us 📲8800102216📞 Call Girls In DLF City GurgaonCall Us 📲8800102216📞 Call Girls In DLF City Gurgaon
Call Us 📲8800102216📞 Call Girls In DLF City Gurgaon
 
Call Us ➥9319373153▻Call Girls In North Goa
Call Us ➥9319373153▻Call Girls In North GoaCall Us ➥9319373153▻Call Girls In North Goa
Call Us ➥9319373153▻Call Girls In North Goa
 

9-180307064518 (1).pptx

  • 2. Horror stories of project failures due to extraordinary cost overruns are reported in the business press on almost a daily basis
  • 3. As a general rule, management and customers are always concerned with how much a project is going to cost in relation to how much a project is going to earn
  • 4. Project cost management • Includes processes involved in planning, estimating, budgeting, financing, funding, managing, and controlling costs so that the project can be completed within the approved budget
  • 5. Why Do We Manage Cost? • Part of triple constraint, can’t manage one without the others (scope, time, and quality) • Plots of cost and scope against plan can help spot problems early Cumulative Value Time Planned Value (PV) Actual Costs (AC) Earned Value (EV) Today Is this project over/under budget? Is it ahead of/behind schedule?
  • 6. Project cost management processes • • • • Plan cost management—establishes the policies, procedures, and documentation for planning, managing, expending, and controlling project costs Estimate costs—an approximation of the monetary resources needed to complete project activities Determine budget— aggregating the estimated costs of individual activities or work packages to establish an authorized cost baseline Control costs—monitoring the status of the project to update the project costs and managing changes to the cost baseline
  • 7. Importance of cost estimation • Provides standard against which actual expenditures incurred during the course of a project can be compared, and serve as the basis for cost control • They provide the mechanism for managing cash flow during the course of the project • They give the project manager a framework for allocating scarce resources as the project progresses
  • 8. Errors during project progress Potential for errors in estimates during the various stages of the project progress
  • 9. Classification of project costs • Direct Vs. Indirect • Recurring Vs. Nonrecurring • Fixed Vs. Variable • Normal Vs. Expedited
  • 10. Direct Vs. Indirect • Direct costs- can be directly charged against the project; for example, the costs of personnel who are directly involved in the project, or the costs of materials directly used for project work • Indirect costs- include overhead, as well as selling and administrative expenses Examples of overhead costs include costs associated with taxes, insurance, utilities, and so forth. Costs associated with selling and administrative expenses, commissions, advertising, etc
  • 11. Recurring Vs. Nonrecurring • Recurring costs- such as labor and materials, are repeatedly incurred throughout the project life cycle • Nonrecurring costs- are one-time costs that are typically incurred at the beginning or at the end of the project, such as market research and labor training
  • 12. Fixed Vs. Variable • Fixed costs- do not vary with usage. Example, costs incurred in the purchase of capital equipment remain fixed, regardless of the extent of equipment use • Variable costs- vary directly with usage. They are typically associated with labor and materials
  • 13. Normal Vs. Expedited • Normal costs- are incurred when project tasks are completed according to the original planned duration • Expedited costs- or crash costs are unplanned costs incurred as a result of steps taken to accelerate project completion Example, costs associated with using additional overtime or hiring additional workers specifically to hasten project completion can be regarded as expedited costs
  • 14. Cost classifications X X X X X X X X X X X X X X X X Costs Direct labor Building lease Expedite Material Direct Indirect Recurring Non-recurring Fixed Variable Normal Expedited
  • 15. Cost estimating methods • Ballpark estimates • Feasibility estimates • Definitive estimates • Comparative estimates
  • 16. Ballpark estimates • Also known as ‘‘order of magnitude’’ estimates, often used when there is not sufficient information or time available • Typically, used for making competitive bids for project contracts, or for initial rough-cut estimates of resources needed for a project • As a general rule, ballpark estimates should attempt an accuracy of ±30 percent
  • 17. Feasibility estimates • Are developed after preliminary project design work is completed • Are often used in construction projects, where published information on material costs is widely available • As more relevant information becomes available further down the project life cycle, the ±10 percent margin of error
  • 18. Definitive estimates • Can be developed only after the completion of most design work • Clear understanding of the scope and capabilities of the project, changes to project specifications are virtually nonexistent • Developed further down the project life cycle with more accurate information and fewer project uncertainties, provide a much more accurate expected cost of the project at completion, with a ±5 percent margin of error
  • 19. Comparative estimates • Uses historical data from previous project activities as the frame of reference for current estimates • One of the method is parametric estimation-most projects are similar to previous projects by way of similar features or parameters and, therefore, are likely to incur similar costs. Steps: – Identifying the features/parameters of an older or well-known project that can be directly related to the cost of the current project – Defining the mathematical nature of that relationship
  • 20. Use of learning curves in estimation • Human performance usually improves when a task is repeated • This happens by a fixed percent each time the production doubles • Percentage is called the learning rate
  • 21. Learning curve calculations N n r r  n 1 1  To t a l t i m e  T lograte lo g 2 n 1 n T  T n r T = Time for nth unit T = Time for first unit 1 N = Number of units R = log decimal rate/log 2 One worker will be tasked to produce all 25 units of air filters. In addition, after production of the 20th unit, there is no significant time reduction associated with learning, and production reaches a steady state of 70 hours. Learning rate is 85%. Time to complete the first activity? r = log 0.85/ log 2 r= −0.1626/0.693 r= −0.235 70 hours = T1 ( 20)-0.235 T1= 141.3 hours
  • 22. Cost estimation and budgeting • Cost estimation and project budgeting are closely linked • Without reasonable cost estimation, project budgets are essentially useless, and without accurate budgeting, cost estimation is a wasted exercise
  • 23. Budgeting • A plan for the costs of project resources • A budget implies constraints • Thus, it implies that managers will not get everything they want or need
  • 24. Budgeting • The budget for an activity also implies management support for that activity • Higher the budget, relative to cost, higher the managerial support • The budget is also a control mechanism • Many organizations have controls in place that prohibit exceeding the budget • Comparisons are against the budget
  • 25. Issues in project budgeting • A project budget identifies the project’s allocated resources, goals, and the schedule that allows the organization to achieve those goals • Developing a project budget requires not only a knowledge of the resources needed, but also information regarding how many will be needed and when, as well as how much they will cost
  • 26. Estimating project budgets • On most projects – Material + Labor + Equipment + Capital + Overhead + Profits = Bid • In other words – Resources + Profits = Bid • So we are left with the task of forecasting resources
  • 27. Estimating project budgets • Like any forecast, this includes some uncertainty • There is uncertainty regarding usage and price – Especially true for material and labor • The more standardized the project and components, the lower the uncertainty • The more experienced the cost estimator, the lower the uncertainty
  • 28. Rule of thumb • Some estimates are prepared by rules of thumb • Construction cost by square feet • Printing cost by number of pages • Lawn care cost by square feet of lawn • These rules of thumb may be adjusted for special conditions • However, this is still easier than starting the estimate from scratch
  • 29. Difficulties • • • There may not be as much historical data or none at all Even with similar projects, there may be significant differences Many people have input and some control over the budget
  • 30. Difficulties • • • There is more “flexibility” regarding the estimates of inputs (material and labor) The accounting system may not be set up to track project data Usage of labor and material is very lumpy over time
  • 32. Top-down • Top managers estimate/decide on the overall budget for the project • These trickle down through the organization where the estimates are broken down into greater detail at each lower level • The process continues to the bottom level
  • 33. Advantages • Overall project budgets can be set/controlled very accurately • Management has more control over budgets Disadvantages • More difficult to get buy in • Leads to low level competition for larger shares of budget
  • 34. Bottom-up budgeting • Project is broken down into work packages • Low level managers price out each work package • Overhead and profits are added to develop the budget
  • 35. Advantages • Greater buy in by low level managers • More likely to catch unusual expenses Disadvantages • People tend to overstate their budget requirements • Management tends to cut the budget
  • 36. An iterative budgeting process– negotiation-in-action • Most projects use some combination of top-down and bottom-up budgeting • Both are prepared and compared • Any differences are negotiated
  • 37. Snapshot How do you estimate the from practicecost of a nuclear power plant?
  • 38. Activity based costing • Activity-based costing (ABC) is frequently used for project budgeting. The basis of activity-based costing is that projects consume activities, and activities consume resources
  • 39. Steps in activity-based costing • Assign costs to activities that use resources (costs are assigned to each work package) • Identify cost drivers associated with this activity( like human resource in many cases) • Compute a cost rate per cost driver unit or transaction (cost of labor per hour) • Multiply the cost driver rate times the volume of cost driver units used by the project Rs50/hour ∗100 hours = Rs5,000.00
  • 40. Budget contingencies • The allocation of extra funds to cover uncertainties and improve the chance of finishing on time • It is an important aspect of project finance, because it provides a certain amount of protection against unknown and uncertain elements that can derail a project
  • 41. Contingencies are needed because • Project scope may change • Murphy’s Law is present “If anything can go wrong, it will” • Cost estimation must anticipate interaction costs Hidden cost • Normal conditions are rarely encountered
  • 42. Benefits to include contingency • Recognizes that the future is uncertain, and that unexpected problems can increase overall project costs • Contingency estimates make explicit provisions for potential and unexpected cost increase in project plans and budgets • The use of contingency funds provides an early warning signal of potential cost overruns
  • 43. More on Project Cost Management
  • 44. Cost Management Key Terms • • • • • • • PV - Planned Value, estimated value of the planned work EV – Earned Value, estimated value of work done AC – Actual Cost, what you paid BAC – Budget at Completion, the budget for the total job EAC –Estimate at Completion, what is the total job expected to cost? ETC – Estimate to Complete, forecasted costs to complete job VAC – Variance at Completion, how much over/under budget do we expect to be?
  • 45. How Do We Manage Cost? • Three processes – Estimate Costs – Determine Budget – Control Costs Estimate Costs Determine Budget Control Costs
  • 46. Estimate Costs Enterprise Environmental Factors Organizational Process Assets Inputs Outputs Tools & Techniques ❑Analogous estimating ❑Determine resource cost rates ❑Bottom up estimating ❑Parametric estimating ❑Project management software ❑Vendor bid analysis ❑Reserve analysis ❑Cost of quality Project Scope Statement Work Breakdown Structure WBS Dictionary Project Management Plan •Schedule Mgmt Pln •Staffing Mgmt Pln •Risk Register Activity Cost Estimates Activity Cost Estimates Supporting Detail Requested Changes Cost Management Plan Updates Estimate Costs Determine Budget Control Costs
  • 47. Other Estimating Methods • Parametric estimating – Use mathematical model (i.e. cost per sq ft). [accuracy varies] Two types: • Regression analysis – based on analysis of multiple data points • Learning Curve – The first unit costs more than the 100th, forecasts efficiency gains • Vendor Bid Analysis – Estimating using bids + allowances for gaps in bid scope [slow, accuracy depends on gaps] • Reserve Analysis – Adding contingency to each activity cost estimates as zero duration item [slow, overstates cost]
  • 48. Determine Budget ❑Cost aggregation ❑Reserve analysis ❑Parametric estimating ❑Funding limit reconciliation Inputs Outputs Tools & Techniques Cost Baseline Project Funding Requirements Cost Management Plan Updates Requested Changes Project Scope Statement Work Breakdown Structure WBS Dictionary Activity Cost Estimates Activity Cost Estimates Supporting Detail Project Schedule Resource Calendars Contract Cost Management Plan Estimate Costs Determine Budget Control Costs
  • 49. Determine Budget • Budgeting is allocating costs to work packages to establish a cost baseline to measure project performance • Remember Contingency items are for unplanned but required changes it is not to cover things such as: – Price escalation – Scope & Quality Changes • Funding Limit Reconciliation – Smoothing out the project spend to meet management expectations
  • 50. Control Costs Cost Baseline Project Funding Requirements Inputs Outputs Tools & Techniques ❑Cost change control system ❑Performance measurement analysis ❑Forecasting ❑Project performance reviews ❑Project management software ❑Variance management Performance Reports Work Performance Information Approved Change Requests Project Management Plan Cost Estimate Updates Cost Baseline Updates Performance Measurements Forecasted Completion Requested Changes Recommended Corrective Actions Organizational Process Assets Updates Project Management Plan Updates Estimate Costs Determine Budget Control Costs
  • 51. Earned Value • Progress is compared against the baseline to determine whether project is ahead of or behind plan • Percent complete can be difficult to measure, some managers use rules – 50/50 Rule – Assumed 50% complete when task started, final 50% at completion – 20/80 Rule – 20% at start – 0/100 Rule – No credit until complete • • • • • Planned Value (PV) – Budgeted Cost Earned Value (EV) – Actual work completed Actual Cost (AC) – Costs incurred Estimate to Complete (ETC) – What’s Left Estimate at Completion (EAC) – What final cost will be
  • 53. Earned Value Formulas NAME Cost Variance (CV) FORMULA EV-AC EV-PV EV/AC EV/PV NOTES Negative = Over budget Positive = Under budget Negative = Behind Schedule Positive = Ahead of Schedule How much are we getting for every dollar we spend? Progress as % against plan EAC-AC BAC-EAC How much more do we have to spend? At the end of the day, how close will we be to plan? Schedule Variance (SV) Cost Performance Index (CPI) Schedule Perform Index (SPI) Estimate to Complete (ETC) Variance at Completion (VAC) Estimate at Completion (EAC) See following slide
  • 54. Earned Value Formulas (Cont’d) NAME Estimate at Completion (EAC) FORMULA •BAC/CPI •AC+ATC •AC+BAC-EV •AC+(BAC-EV)/CPI NOTES Use if no variances from BAC have occurred Use when original estimate was bad. Actuals + New estimate Use when current variances are not expected to be there in the future Use when current variances are expected to continue
  • 55. Tricks for Earned Value • • • • • • • EV is always first Variance = EV minus something Index = EV divided by something If the formula relates to cost use AC If the formula relates to schedule use PV Interpreting results: negative is bad and positive is good Interpreting results: greater than one is good, less than one is bad PV AC ETC EAC BAC Project Start Current Status
  • 56. Terms to Remember • • • • • • • Present Value Net Present Value (NPV) Internal Rate of Return (IRR) Payback Period Benefit Cost Ratio = BCR>1, Payback is greater than the cost Opportunity Cost Sunk Cost • • • Working Capital Straight Line Depreciation Accelerated Depreciation • • Double Declining Balance Sum of Years Digits • Value Analysis (Value Engineering)
  • 57. • To illustrate the concept of EVM and all the formulas, assume a project that has exactly one task. The task was baselined at 8 hours, but 11 hours have been spent and the estimate to complete is 1 additional hour. The task would have been completed already. Assume an Hourly Rate of $100 per hour.
  • 58. • • • • Budget at Completion (BAC) is the total budget allocated to the project. Estimate to Complete (ETC) is the estimated cost required to complete the remainder of the project. Estimate at Completion (EAC) is the estimated cost of the project at the end of the project. Variance at completion (VAC) is the variance on the total budget at the end of the project.
  • 59.
  • 60.
  • 63. Sample budget showing planned and actual activity costs and variances
  • 64. Sample of a time-phased budget