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5. Cost Management

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IT is about cost management of project,types of cost, some terminologies you need to know, output, Estimate Costs,

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5. Cost Management

  1. 1. www.testudaan.com1 Cost Management Best PMP Exam Simulator
  2. 2. 7.1 Plan Cost Management www.Testudaan.com The process that establishes the policies, procedures, and documentation for planning, managing, expending, and controlling project costs 2 Best PMP Exam Simulator
  3. 3. Plan Cost Management -Types of Cost www.testudaan.com 3 Variable cost • Costs that change with the amount of production or the amount of work (raw material, wages, utility, electricity, sales commission, inventory, packaging supplies, shipping costs, etc.) Fixed cost • Costs that do not change as production changes (setup, rent, insurance, depreciation, advertising, dues and subscription, equipment leases, payments on loans, management salaries, etc.) Direct cost • Costs that are directly attributable to the work on the project (Cost of material, travel, recognition, cost of hardware & software purchased , etc.) Indirect Cost • Overhead costs incurred for the benefit of more than one project. (fringe benefits, perks, supervisor’s salaries, indirect labor, factory supplies used, taxes, utilities, depreciation on building and equipment, factory rent, tools expense, patent expense, internet, etc.) Best PMP Exam Simulator
  4. 4. Some terminologies you need to know .. www.testudaan.com 4 PurchaseValue • The initial cost to purchase the resources (or equipment) SalvageValue • The scrap value of the resources (or equipment) at the end of the project Depreciation • Large assets purchased by the company lose value over time (PurchaseValue – SalvageValue) ▪ Straight Line Depreciation ❖ The same amount of depreciation is provided for every year, so a car with a price tag of $10,000 and a useful life of 10 years, is depreciated by $1000 per year. ▪ Accelerated Depreciation ❖ The asset depreciates faster than the straight line depreciation, so a car with a price tag of $10,000 depreciates $3000 the first year, $1500 next year, $1000 the third year and so on…. (also called as Double-Declining or Sum ofYear Digits) Best PMP Exam Simulator
  5. 5. 7.1 Plan Cost Management - Output 5 www.testudaan.com Cost management plan can include the following: •Units of measure •Level of precision •Level of accuracy – the acceptable range •Organizational procedure links:TheWBS component used for project cost accounting is called control account •Control thresholds: variance thresholds for monitoring cost performance •Rules of performance measurement •Description of strategic funding choices •Procedure to account for fluctuations in currency exchange •Procedure for project cost recording
  6. 6. 7.2 Estimate Costs www.testudaan.com 6 Developing an approximation or estimate of the monetary resources needed to complete a project activity.
  7. 7. • Cost trade-offs and risks should be considered – make versus buy, buy versus lease and sharing of resources to achieve optimal costs for the project • The accuracy of the project estimate will increase as the project progresses through the project life cycle - Case :A project in the initiation phase may have a rough order of magnitude (ROM) estimate in the range of -25% to +75%. Later in the project, as more information is known, definitive estimates could narrow the range of accuracy to -5% to +10% 7 Estimate Costs .. www.testudaan.com
  8. 8. RFP 40 h 1.1.2 Work Package Std Rates / hr R1 – 10 / hr R2 – 5 / hr R3 – 8 / hr R4 – 6 / hr Budget : 10,000 WBS Cd Act Id Activity Description Dependency Resources Duration Costs Estimates 1.1.2 WP2 Request For Proposal 40 h 1.1.2.1 A1 Invite sellers for discussion R1 1 h 10 1.1.2.2 A2 Meeting with sellers A1 R2,R3,R4 30 h 570 1.1.2.3 A3 Send RFP templates to sellers A2 R2 1 h 5 1.1.2.4 A4 Receive RFP from sellers A2,A3 R2 8 h 40 Output :Activity Cost Estimates www.testudaan.com 8 Best PMP Exam Simulator
  9. 9. The output of estimate costs is the activity cost estimates of the resources required to complete the project work. Costs are estimated for all resources that are applied to the activity cost estimate. ✓ Direct labor ✓ Material costs ✓ Equipment ✓ Services ✓ Facilities ✓ Travel costs ✓ Hardware costs ✓ Software costs ✓ Special categories (inflation, cost reserve, and so on) 9 Estimate Costs - Outputs www.testudaan.com Best PMP Exam Simulator
  10. 10. Basis of estimates • Once the estimates have been completed, supporting documentation should provide a clear and complete of how the estimates were derived. • It may include : ▪ Documentation of the basis of the estimate ▪ Documentation of all assumptions made ▪ Documentation of any constraints ▪ Indication of range of possible estimates ▪ Indication of confidence of the final estimate 10 Estimate Costs - Outputs www.testudaan.com Best PMP Exam Simulator
  11. 11. The process of aggregating the estimated costs of individual activities or work packages to establish an authorized baseline It determines the cost baseline (CBL) against which project performance can be monitored and controlled 11 7.3 Determine Budget www.testudaan.com Best PMP Exam Simulator
  12. 12. 12 Activity Activity Activity Activity WP CA Project CR CBL MR CBT WP WP CA Work Package ----- Control Account ----------- Contingency Reserves ----------- Cost Baseline ----------- Management Reserves ----------- Project Budget ----------- Project Costs ----------- Management Controls This PM Controls This Determine Budget –Tools andTechniques www.testudaan.com Best PMP Exam Simulator
  13. 13. RFP 40 h 1.1.2 Std Rates / hr R1 – 10 / hr R2 – 5 / hr R3 – 8 / hr R4 – 6 / hr CBL (BAC) : 10,000 To determine whether you are within your CBL or not, add ‘Estimated Costs’ of all activities .. Total 625 WBS Cd Act Id Activity Description Dependency Resources Duration Cost Estimates 1.1.2 WP2 Request For Proposal 40 h 1.1.2.1 A1 Invite sellers for discussion R1 1 h 10 1.1.2.2 A2 Meeting with sellers A1 R2,R3,R4 30 h 570 1.1.2.3 A3 Send RFP templates to sellers A2 R2 1 h 5 1.1.2.4 A4 Receive RFP from sellers A2,A3 R2 8 h 40 Output : Cost Baseline www.testudaan.com 13 Best PMP Exam Simulator
  14. 14. Funding Limit Reconciliation : • The expenditure of funds is reconciled with funding limits • Reconciliation necessitate the scheduling of work to be adjusted to regulate the expenditures • This is typically accomplished by placing imposed date constraints for some‘work packages, schedule milestones orWBS components’ into the project schedule Project Funding Requirements • Project funding requirements refers to the entire cost baseline plus any management reserves • Funding often occurs in incremental amounts that are not continuous and may not be evenly distributed, which appear as steps 14 Determine Budget:Tools &Techniques www.testudaan.com Best PMP Exam Simulator
  15. 15. 15 • Is the authorized time-phased BudgetAt Completion (BAC) used to measure, monitor and control overall cost performance on the project • Is developed as the summation of the approved budgets by time period and is typically displayed in the form of an S-curve (please refer next slide) Cost Baseline - Output www.testudaan.com Best PMP Exam Simulator
  16. 16. 16 Time CumulativeValues Cost Baseline (CBL) Expenditures Funding Requirements S - Curve Management Reserve Project Budget BAC Cost Baseline - Output www.testudaan.com
  17. 17. It is the process of monitoring the status of the project to update the project costs and managing changes to the cost baseline 17 7.4 Control Costs www.testudaan.com
  18. 18. Control cost includes : • Ensuring cost expenditures do not exceed the authorized funding by period, byWBS component, by activity and in total for the project • Ensuring that all the change requests are acted on in a timely manner • Monitoring cost performance to isolate and understand variances from the approved cost baseline • Monitoring work performances against funds expended • Preventing unapproved changes from included in the reported cost • Informing all the stakeholders of all approved changes and the associated cost • Bringing expected cost overruns within acceptable limits 18 Control Costs www.testudaan.com
  19. 19. What is EarnedValue Management System ? • Earned Value Management System (EVMS) is a very effective and a commonly used project performance measurement tool • In a typical and conventional project management methodology, project progress comprising of thousands of activities is measured against schedule and cost as two different scales • The technique of Earned Value Analysis (EVA) integrates cost and schedule performance in one report unlike traditional reports in which cost and schedule are reported separately Note : Examining the cost and schedule variances concurrently, it is possible to get a holistic and a much more realistic view of the project's progress 19 Control Cost –Tools andTechniques www.testudaan.com Best PMP Exam Simulator
  20. 20. What is Earned Value Analysis ? It involves calculating key values for each activity :  Planned Value (PV) (also termed as Budgeted Cost of Work Scheduled [BCWS]) is that total budgeted planned amount to be spent on an activity up to a given point in time i.e. How much of your budget you planned on using so far  Earned Value (EV) (also termed as Budgeted Cost of Work Performed [BCWP]) is the budgeted amount for the work actually performed i.e. How much your project actually earned  Actual Cost (AC) (also termed as Actual Cost of Work Performed [ACWP]) is the total cost incurred in accomplishing work on the activity during a given period  Budget At Completion (BAC) The Budgeted amount for the total work 20 Control Cost –Tools andTechniques www.testudaan.com Best PMP Exam Simulator
  21. 21. Project Budget or Cost Base Line or BAC : 10,000 Project Start Project End Today's Date PV = 4000 EV = 90% (3600) AC = 4200 What has happened so far ? To know the status of your project : CV = 3,600 – 4,200 = - 600 SV = 3,600 – 4,000 = - 400 CPI = 3,600 / 4,200 = 0.86 SPI = 3,600 / 4,000 = 0.90 Case Study : EVA www.testudaan.com 21 Best PMP Exam Simulator
  22. 22. Earned Value Terms Formula Interpretation COSTVARIANCE CV= EV-AC -VE OVER BUDGET, +VE UNDER BUDGET SCHEDULEVARIANCE SV = EV-PV -VE BEHIND SCHEDULE +VEAHEAD SCHEDULE COST PERFORMANCE INDEX (CPI) or CRITICAL INDEX CPI = EV/AC indicates the efficiency of the project in utilizing cost budget. IF >1 PRODUCTIVITY HIGER THAN EXPECTED, favourable performance IF <1, PRODUCTIVITY LESSTHAN EXPECTED, poor performance SCHEDULE PERFORMANCE INDEX (SPI) SPI = EV/PV Indicates the efficiency of the project in using the scheduled resources ,IF SPI > 1 , PROJECT IS AHEAD OF SCHEDULE , good performance IF SPI < 1, PROJECT BEHIND SCHEDULE , poor performance 22 Control Cost –Tools andTechniques www.testudaan.com Best PMP Exam Simulator
  23. 23. Forecasting • Using the earned value analysis, team can now forecast the project performance • EstimateAt Completion (EAC) may now differ from Budget at Completion (BAC) based on project performance • EstimateAt Completion = EstimateTo Complete (ETC) all the pending work +AC • VarianceAt Completion (VAC) – the estimated difference in cost at the completion of the project = BAC-EAC 23 Control Cost –Tools andTechniques www.testudaan.com Best PMP Exam Simulator
  24. 24. Project Budget or Cost Base Line or BAC : 10,000 Project Start Project End Today's Date PV = 4000 EV = 90% (3600) AC = 4200 Forecast ?? What has happened so far ? What is going to happen in future ? To know the status of your project : CV = 3,600 – 4,200 = - 600 SV = 3,600 – 4,000 = - 400 CPI = 3,600 / 4,200 = 0.86 SPI = 3,600 / 4,000 = 0.90 Case Study : EVA www.testudaan.com 24 Best PMP Exam Simulator
  25. 25. Acronym Name Definition Various risk scenarios Equation EAC Estimate at completion The expected total cost of completing all work expressed as the sum of the actual cost to date and the estimate to complete i.e. EAC =AC + ETC If CPI is expected to be same for the remaining of the project (SPI at 100%) EAC= BAC/CPI If future work will be accomplished at the planned rate (SPI at 100% and CPI at 100%) EAC=AC + BAC-EV If both SPI and CPI influence the remaining work (What the project has experienced till date will continue in the future) EAC = AC+ {(BAC- EV)/(CPI * SPI)} 25 Control Cost –Tools andTechniques www.testudaan.com Best PMP Exam Simulator
  26. 26. 26 Acronym Name Definition How used Equation Interpretation TCPI To complete performance index A measure of cost performance that must be achieved with the remaining resources in order to meet a specified management goal expressed as a ratio of the cost to finish the outstanding work to the budget available The efficiency that must be maintained to complete on plan TCPI = ( BAC-EV)/(BAC-AC) Greater than 1, harder to complete, exactly 1 - same to complete, lesser than 1 - Easier to complete The efficiency that must be maintained to complete the current EAC TCPI = ( BAC-EV)/(EAC-AC) Greater than 1, harder to complete, exactly 1 - same to complete, lesser than 1 - Easier to complete Control Cost –Tools andTechniques www.testudaan.com Best PMP Exam Simulator
  27. 27. www.testudaan.com27 Thank you Saraca Solutions Pvt. Ltd. Best PMP Exam Simulator

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