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# Lecture 06 project_cost_management

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Lecture 06 project_cost_management

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### Lecture 06 project_cost_management

1. 1. PROJECT MANAGEMENT, PMI APPROACH (PMP) PROJECT COST MANAGEMENT Sayed Ahmed BSc. Eng. in CSc. & Eng. (BUET, Bangladesh) MSc. in CSc. (University of Manitoba, Canada) http://sayed.JustEtc.net http://www.JustETC.net sayed@justEtc.net,www.justEtc.net 1 Just E.T.C for Business, Education, Technology, and Entertainment Solutions Resources: Book: PMP in Depth by Dr. Paul Sanghera Book: The PMP Exam, How to Pass on Your First Try By Andy Crowe Project Management Lessons in Undergraduate Study Work Experience
2. 2. WHAT DOES COST INVOLVE?  Costing Involves  Cost to purchase, develop i.e. to have the system  Operation cost  Cost to disposal  Value Engineering  Get the most from a project  Decrease cost  Increase value  Increase quality  Shorten schedule  Keep project scope not reduced 2 sayed@justEtc.net,www.justEtc.net
3. 3. COST ESTIMATING  When cost estimation is done?  After project scope is defined  and work breakdown structure is created  But may be performed again and again  over the total life cycle 3 sayed@justEtc.net,www.justEtc.net
4. 4. COST ESTIMATING  Tools  Analogous Estimating  Based on the similar actual projects  Bottom up estimating  Estimate cost for each activity and sum them - time consuming  Parametric Estimating  1 mile road construction needs \$400,000.  So 10 miles will require \$10*400,000  Reserve Analysis  A buffer cost against slippage on the project  Cost of Quality  Costs required in order to get quality  Output  Activity Cost Estimates 4 sayed@justEtc.net,www.justEtc.net
5. 5. COST BUDGETING  Cost Budgeting  Maps costs and dates  How much will be spent on what and when  Also, termed Cost Baseline  When is cost budgeting done?  After  activities are defined and scheduled  Activity durations and resource requirements are also estimated 5 sayed@justEtc.net,www.justEtc.net
6. 6. COST BUDGETING  Tools  Cost Aggregation  Activity level costs should be aggregated to the work level  where they will be measured, managed, and controlled  Reserve Analysis  Financial reserve to protect projects against cost overrun  Parametric Estimating  Use simple straight forward formulas  Funding Limit Reconciliation  Comply with the project funding  Many times funds are allocated even before the scope is defined  Output  Cost Baseline  Project Funding requirements 6 sayed@justEtc.net,www.justEtc.net
7. 7. COST CONTROL  Cost Control  Monitoring, controlling, adjusting costs  When is it performed?  Over the whole life cycle  Bi-weekly or monthly analysis may be done  Tools  Cost Change Control System  How the cost baseline may be changed  Performance Measurement Analysis  Calculate  Earned Value,  Planned Value,  Actual Cost,  Estimate to complete,  Estimate at Completion,  Cost Performance Index and similar  to measure performance and control costs based on these  Forecasting  Use current and previous cost values to estimate future costs  Variance Management 7 sayed@justEtc.net,www.justEtc.net
8. 8. COST CONTROL  Output  Cost Estimate Update  Cost Baseline Update 8 sayed@justEtc.net,www.justEtc.net
9. 9. COST MANAGEMENT TERMS  Earned Value  The value the spent money brought to the project  Just like double entry accounting system  for every debit to an account there is a corresponding credit  Budgeted at Completion (BAC)  How much was originally planned for this project  Planned Value (PV)  Calculates how much of the project should be complete at a certain date according to the plan  Planned Value = Planned%complete*BAC  Earned Value (EV)  How much is actually done during a period  EV=Actual%Complete*BAC  Actual Cost  Money spent over the period 9 sayed@justEtc.net,www.justEtc.net
10. 10. COST MANAGEMENT TERMS  Cost Variance (CV)  Difference between planned cost and actual cost.  CV = EV – AC  Schedule Variance (SV)  Difference between the planned schedule and actual schedule  (as:Where the project is in the schedule).  SV=EV-PV  Cost Performance Index (CPI)  The rate at which the project cost is performing regarding cost expectations  CPI is done for a given period of time.  CPI = EV/AC  Cumulative CPI  It's the CPI from the project start time to a particular point in time.  CCPI = CEV/CAC 10 sayed@justEtc.net,www.justEtc.net
11. 11. COST MANAGEMENT TERMS  Schedule Performance Index (SPI)  The rate at which the project is performing in respect of schedule expectations up to a point in time  SPI=EV/PV  Estimate at Completion (EAC)  Forecast the total cost at project completion based on the project performance up to a point in time.  EAC = BAC/CCPI  Estimate to Completion (ETC)  How much more will be spent to complete the project based on past performance.  Variance at Completion (VAC)  Difference between what was budgeted and what will actually be spent.  VAC = BAC - EAC 11 sayed@justEtc.net,www.justEtc.net
12. 12. PROJECT COST MANAGEMENT  Project managers need to calculate these values  to get a good understanding of the project cost  He can get answers to questions like  How much is spent?  How much more are required?  Is the project progress satisfactory in terms of cost?  These will ultimately help in project cost control 12 sayed@justEtc.net,www.justEtc.net