Project cost management-slides


Published on

Published in: Business, Technology
  • Be the first to comment

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

Project cost management-slides

  1. 1. Project Co$tManagementPresenter- R Masilamani (
  2. 2.  Content Content:   1. Objectives of Presentation(pg3)  2. The presenter(pg4)  3. Project Cost Management(PCM)-a definition & overview(pgs 5-17)  4. PCM Processes(pg18)  5. Why, What & How of PCM(Pgs19-22)  6. PCM Estimation(pgs23-36)  7. PCM Budgeting(pgs37-57)  8. PCM Control(pgs58-70)  9. Quick Test(pgs71-76)  10.PCM – Other  11.PCM Tools-a Summary(pgs 86-88)  12.References(Pg 89)  13.END(pg 90)05/19/12 2
  3. 3. Objectves of Presentation Through this interaction, participants will enhance their: • Level of Knowledge and skills of project cost management • Appreciation of the planning, estimating, budgeting and controlling of project costs • Understanding of the professional cost management methodologies, tools and techniques of PMBOK05/19/12 3
  4. 4. file:///C:/Users/dell/Pictures/2011-09-22/014.jpg The Presenter: • Mr R Masilamani, collated & will lead manage this module Current Head of PMCE - IPD/OUM Has a Bachelor degree in Economics & Statistics and MBA in Finance and Management Has worked through employee to employer status over 35 years • Has an active working, consulting and managing presence in industry05/19/12 4
  5. 5. Project Cost Management• PMI definition“Project Cost Management includes theprocesses involved in planning, estimating,budgeting, and controlling costs so that theproject can be completed within theapproved budget”:05/19/12 5
  6. 6. Project Cost Management Key Words: • project cost management, resource, planning • estimating, budget, control, forecasting Area of PM Application: Universal Topic Level: Process Related Topics: Project planning, WBS Reference: Wideman, R.M. Cost Control of Capital Projects, BiTech Publishers Ltd., 1995 What is Project Cost Management, why bother and why is it so important?05/19/12 6
  7. 7. – Project Cost Management (PCM)  What is PCM? • You might think that PCM is managing the "costs" on your project • The reality is that you must manage everything else that incurs cost • Because if you dont, the costs will just keep on climbing • Whether you like it or not!05/19/12 7
  8. 8. – So, what is PCM? • Project Cost Management is •The placing of responsibility on those in charge of any aspect of the project •E.g. the managers, designers and implementers •To perform their respective roles and responsibilities within prescribed limits •Specifically, agreed cost allowances or budgets •Then collecting cost data and comparing it to the corresponding allowances •And taking appropriate management action •To contain the final results05/19/12 8
  9. 9. – How would you define PCM? – Project Cost Management may be defined as • The process of placing responsibility on the • projects designers and implementers • To perform within agreed budget limits • Either under contract • Or, through verbal commitment • The collecting of actual cost data in a suitable • format • Comparing that to corresponding budget data • And taking corrective action as necessary • Throughout, and as appropriate to, the project life span05/19/12 9
  10. 10. – What does PCM encompass? • As with time management • You have to carefully manage what you do with the money available • PCM is another vital function of project management that includes • Resource planning • Cost estimating • Cost budgeting • Cost control • Change control05/19/12 10
  11. 11. – Is it that simple? No, it certainly is not! • Two simple but essential principles must be clearly understood: 1. There must always be a basis for comparison • 2. Only future costs can be controlled •• Therefore, PCM involves • Careful project planning • Especially a WBS extended to the activity level • Estimating the costs of the planned resources • Converting that estimate to a viable control budget • Monitoring expenditures as work proceeds, and • Modifying the approach if the findings are not satisfactory05/19/12 11
  12. 12. – That sounds easy? - 1 • Not really. There are a number of • challenges, such as: • • First and foremost, the problem of managing Project scope – • A lack of understanding generally that estimates are no better than just best available assessments • And only as good as the data they are based on an unrealistic expectation of accuracy • Hence an estimate should be expressed as arange, not as a single number!05/19/12 12
  13. 13. – That sounds easy? - 2 • More challenges . . . • The nature of PCM changes with the project life span • As well explain later • The historical view of accounting • Which is not the primary focus of PCM • The difficulty of getting timely cost information out of the normal accounting process • The necessary data support facilities for effective PCM are not available within the organization05/19/12 13
  14. 14. – That sounds easy? - 3 • Still more challenges . . . •• The difficulty of getting people to peer into the future, or commit themselves • During progress of the actual work they feel they have more important things to do like getting the work done! • Some people think you can control costs simply by turning off the money taps • There is a tendency to ignore risks, and • The result of "political interference" to get a project approved05/19/12 14
  15. 15. – Why bother with cost management? • The fact is, cost management is essential if you want to • Keep people on their toes • Highlight misuse or wastage of resources • Track budget change approvals • Finish a project within approved budgets • Avoid unwelcome surprises, for your corporate or financial sponsor!05/19/12 15
  16. 16. – Why is PCM so important? • PCM has a high profile in project management because • management is a way of life in all organizations • Financially successful organizations depend on strict financial control and the corporate accounting to support it • They are comfortable with the idea of budgeting and expenditure • Most people understand the consequences of the money running out • Cost is seen as a major metric of successful project management05/19/12 16
  17. 17. – The most significant aspect of PCM • From a project perspective, it is important to understand that • Cost, or rather money, is simply the common denominator, or metric, for bringing together disparate types of resources • I.e. accounting for use of labor, materials, • equipment • For management and control purposes • However, like time, money itself should not be considered as a resource υnlike in corporate financial management ωhere money is the central purpose and is treated like a commodity05/19/12 17
  18. 18. . The Project Cost Management processes include the following: Cost Estimating Developing an approximation of the costs of the resources needed to complete project activities. Cost budgeting Aggregating the estimated costs of individual schedule activities or work packages to establish a total cost baseline for measuring project performance Cost Control Influencing the factors that create changes to the cost baseline05/19/12 18
  19. 19. 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 Today Actual Costs (AC) Planned Value (PV) Is this project Cumulative over/under Value budget? Earned Is it ahead Value (EV) of/behind schedule? Time05/19/12 19
  20. 20. What Do We Want to Know by Managing Cost? through answering three questions, How did we perform ? How much we differ from plan? What is the implication for future!05/19/12 20
  21. 21. 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?05/19/12 21
  22. 22. How Do We Manage Cost? Three processes Cost Estimating Cost Budgeting Cost Control Cost Cost Cost Budgeting Control Estimating05/19/12 22
  23. 23. Cost Estimating Enterprise Inputs Tools & Techniques Environmental Factors Analogous estimating Outputs Organizational Determine resource cost Activity Cost Process Assets Estimates rates Project Activity Scope Bottom up estimating Cost Statement Parametric estimating Estimates Work Supporting Breakdown Project management Detail Structure software Requested WBS Vendor bid analysis Changes Dictionary Reserve analysis Project Cost Management Cost of quality Manageme Plan nt Plan •Schedule Mgmt Updates Pln •Staffing Mgmt Pln Cost Cost Cost •Risk Register Estimating Budgeting Control05/19/12 23
  24. 24. Work Breakdown structure Company owners and project managers use the Work Breakdown Structure (WBS) to make complex projects more manageable. The WBS is designed to help break down a project into manageable chunks that can be effectively estimated and supervised. Some widely used reasons for creating a WBS include: • Assists with accurate project organization • Helps with assigning responsibilities • Shows the control points and project milestones • Allows for more accurate estimation of cost, risk and time • Helps explain the project scope to stakeholders05/19/12 24
  25. 25. 05/19/12 25
  26. 26. 05/19/12 26
  27. 27. Estimating Methods • Analogous (Top Down) estimating – Managers use expert judgment or similar project costs [quick, less accurate] • Bottom-Up estimating – People doing work estimate based on WBS, rolled up into project estimate [slow, most accurate] • 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 gains05/19/12 27
  28. 28. Estimating Methods• 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]05/19/12 28
  29. 29. ANALOGOUS COSTING Analogous cost estimating means using the actual cost of previous, similar projects as the basis for estimating the cost of the current project. Analogous cost estimating is frequently used to estimate costs when there is a limited amount of detailed information about the project (e.g., in the early phases). Analogous cost estimating uses expert judgment PARAMETRIC COSTING Parametric estimating is a technique that uses a statistical relationship between historical data and other to calculate a cost estimate for a schedule activity resource. This technique can produce higher levels of accuracy depending upon the sophistication, as well as the underlying resource quantity and cost data built into the model BOTTOM-UP COSTING This technique involves estimating the cost of individual work packages or individual schedule activities with the lowest level of detail. This detailed cost is then summarized or “rolled up” to higher levels for reporting and tracking purposes. The cost and accuracy of bottom-up cost estimating is typically motivated by the size and complexity of the individual schedule activity or work package. Generally, activities with associated effort increase the accuracy of the schedule activity cost estimate05/19/12 29
  30. 30. Determine Resource Cost Rate The person determining the rates or the group preparing the estimates must know the unit cost rates, such as staff cost per hour and bulk material cost per cubic yard, for each resource to estimate schedule activity costs. Gathering quotes is one method of obtaining rates. For products, services, or results to be obtained under contract, standard rates with escalation factors can be included in the contract. Reserve Analysis reserves are estimated costs to be used at the discretion of the project manager to deal with anticipated, but not certain, events. These events are “known unknowns” and are part of the project scope and cost baselines05/19/12 30
  31. 31. Assigning resources Availability Skills More experienced people Less experienced people Desire Similar tasks to one person to use learning curve Assign critical tasks to most reliable people Tasks that need interaction or are similar Same person Two who communicate Personality and team communication does matter and again, Availability05/19/12 31
  32. 32. Resource Loading and Optimizing Gantt withResource Histogram05/19/12 32
  33. 33. Resource leveling - possible rescheduling Gantt with Resource Histogram Automatic resource leveling: use only as ‘suggestion’Manual resource leveling: fast vs good vs cheap05/19/12 33
  34. 34. Costed WBS Use Software to roll costs up the WBS ID Tas k Nam e A ccount F ix e d C o s t T o ta l C o s t Paym e nt 36 F in a l S u b m is s io n $ 0 .0 0 $ 3 3 ,0 0 0 .0 0 $ 0 .0 0 37 F in a l D e s ig n W o r k C14 $ 5 ,0 0 0 .0 0 $ 2 5 ,0 0 0 .0 0 $ 0 .0 0 38 F in a l P la n C14 $ 0 .0 0 $ 8 ,0 0 0 .0 0 $ 0 .0 0 39 T B S u b m is s io n $ 0 .0 0 $ 0 .0 0 $ 0 .0 0 40 EPA $ 0 .0 0 $ 0 .0 0 $ 4 0 ,0 0 0 .0 0 41 S o ftw a r e (S u b c o n tr a c t 5 0 -B ) $ 0 .0 0 $ 1 3 3 ,0 0 0 .0 0 $ 0 .0 0 42 S W D e s ig n $ 1 2 ,0 0 0 .0 0 $ 6 2 ,0 0 0 .0 0 $ 0 .0 0 43 D o P r e lim S W d e s ig n S21 $ 0 .0 0 $ 2 0 ,0 0 0 .0 0 $ 0 .0 0 44 PDR $ 0 .0 0 $ 0 .0 0 $ 0 .0 0 45 D o F in a l S W d e s ig n S22 $ 0 .0 0 $ 3 0 ,0 0 0 .0 0 $ 0 .0 0 46 CDR $ 0 .0 0 $ 0 .0 0 $ 7 0 ,0 0 0 .0 0 47 S W C o n s t r u c t io n $ 1 2 ,0 0 0 .0 0 $ 7 1 ,0 0 0 .0 0 $ 0 .0 0 48 Code CSC A S31 $ 0 .0 0 $ 6 ,0 0 0 .0 0 $ 0 .0 0 49 Code CSC B S31 $ 0 .0 0 $ 8 ,0 0 0 .0 0 $ 0 .0 0 50 In t e g r a t e & T s t C S C I 1 S32 $ 0 .0 0 $ 2 0 ,0 0 0 .0 0 $ 0 .0 005/19/12 34
  35. 35. Cost Ramp-Up Use Software to report cash flow1 9 9 7 19 97 1998 1 998 Q3 Q3 Q 4Q 4 Q1 Q 2Q 2 Q3 Q3 Q4 Q 4 Q1 Q1 $ 4 0 0 ,0 0$ 40 0. 0 0, 0 0 0 . 0 0 $ 3 0 0 ,0 0$ 30 0. 0 0, 0 0 0 . 0 0 $ 2 0 0 ,0 0$ 20 0. 0 0, 0 0 0 . 0 0 $ 1 0 0 ,0 0$ 10 0. 0 0, 0 0 0 . 0 0C u m u l a tCivu em uC lao t siv t e: C o $s 5t : 3 ,9$ 25 03 ., 90 20 0 . 0 0 $ 1 2$ 71 ,2 17 6, 10 6. 0 .00 0 $ $22 77 44 ,33 6 00 . .0 00 0 , $ 3$ 331 3, 41 4, 40 40 00 .0 0 $ 3 4 9$ , 39 42 09 . ,9 0 2 0 . 0 $03 6 8 , 4 $0 30 6. 0 80 , 4 0 0$ .0 7 06 , 5 0 0 $. 03 07 6 , 5$ 03 07 .6 0, 50 0 0 . 0 0$ 3 7 6 ,5 0 0 . 0 0 . 0 3 F i lt e Fr ei l tde r re ed s roe us ro cu er cs e s T To ot taa ll:: C P MC P M T To ot taa ll:: 05/19/12 35
  36. 36. Cost - Sanity checks Cost Estimate Error Range – same as Time Estimate +75% 25 10 0 -8 -25% -10 Indicative Budget Budget PPA EPA EPA Init Plan Final Plan Final Plan PPA - Preliminary Project Approval EPA - Effective PDR - Preliminary Design Review05/19/12 36
  37. 37. How Do We Manage Cost?• Three processes  Cost Estimating  Cost Budgeting  Cost Control Cost Cost Cost Estimatin Budgeting Control g05/19/12 37
  38. 38. Cost Budgeting Tools & Techniques Outputs Project Scope Cost aggregation Cost Baseline Statement Reserve analysis Work Breakdown Project Structure Parametric estimating Funding WBS Dictionary Requireme Inputs Funding limit reconciliation Activity Cost nts Estimates Cost Activity Cost Manageme Estimates nt Plan Supporting Detail Updates Project Schedule Requested Resource Changes Calendars Contract Cost Management Cost Cost Cost Plan Estimating Budgeting Control05/19/12 38
  39. 39. Essential definitions Enterprise Environmental factors-refer to both internal and external factors that surround or influence a project’s success. These factors may come from any or all of the enterprises involved in the project. Enterprise environmental factors may enhance or constrain project management options and may have a positive or negative influence on the outcome. They are considered as inputs to most planning processes Organisational process Assets- are any or all process related assets, from any or all of the organizations involved in the project that can be used to influence the project’s success.” Examples include: plans, procedures, lessons learned, historical information, schedules, risk data and earned value data. Organizational Process Assets fall into two broad categories—Processes and Procedures, and the Corporate Knowledge Base. WBS Dictionary-The WBS dictionary includes entries for each WBS component that briefly defines the scope or statement of the work, defines deliverables, contains a list of associated activities, and provides a list of recognized milestones to gage progress Approved change requests-refers to a change request that has been submitted by the requestors, has been reviewed by the appropriate parties through use of the integrated change control process, and has been granted authorization to be take place05/19/12 39
  40. 40. Essential definitions Risk Register-The risk register or risk log becomes essential as it records identified risks, their severity, and the actions steps to be taken. It can be a simple document, spreadsheet, or a database system, but the most effective format is a table. A table presents a great deal of information in just a few pages Cost Baseline-ultimately, project management includes a variety of responsibilities within one’s team in order to achieve maximum results for their employer. In regards to money and remaining in business, providing a budget that is adjusted to time is considered a cost baseline. Performance reports- is filled out by the project manager and submitted on a regular basis to the sponsor, project portfolio management group, Project Management Office or other project oversight person or group Earned Value Analysis-report shows specific mathematical metrics that are designed to reflect the health of the project by integrating scope, schedule, and cost information. Information can be reported for the current reporting period and on a cumulative basis05/19/12 40
  41. 41. Essential Definitions Resource Calendar-Keeping track of schedules and time management is one of the most fundamentally important tasks that are the responsibility of the project management team and or the project management team leader. One of the best ways to accomplish this feat is through the careful and well orchestrated use of calendars to keep track of the multitude of project related events, occurrences, and dates that will take place during the project’s life cycle. Enterprise environmental factors – Market condition – Published commercial information Cost performance baseline – Authorized time‐phased Budget at Completion (BAC) used to measure, monitor and control overall cost performance (S shape curve)05/19/12 41
  42. 42. Cost Budgeting• 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 05/19/12 42
  43. 43. Cost Aggregation Schedule activity cost estimates are aggregated by work packages in accordance with the WBS. The work package cost estimates are then aggregated for the higher component levels of the WBS, such as control accounts, and ultimately for the entire project. Reserve analysis establishes contingency reserves, such as the management contingency reserve, that are allowances for unplanned, but potentially required, changes. Such changes may result from risks identified in the risk register Reserve Analysis Management contingency reserves are budgets reserved for unplanned, but potentially required, changes to project scope and cost. These are “unknown unknowns,” and the project manager must obtain approval before obligating or spending this reserve. Management contingency reserves are not a part of the project cost baseline, but are included in the budget for the project. They are not distributed as budget and, therefore, are not a part of the earned value calculations Parametric estimating ). The parametric estimating technique involves using project characteristics (parameters) in a mathematical model to predict total project costs. Models can be simple (e.g., one model of software development costs uses thirteen separate adjustment factors, each of which has five to seven points within it).05/19/12 43
  44. 44. COST TYPES Sunk Costs: A historical or expended cost. Since the cost has been expended, we no longer have control over the cost. Sunk costs are not included when considering alternative courses of action. Costs: Nonrecurring costs that do not change based on the number of units, like expenses related to equipment required to complete a project. Variable Costs: Costs that rise directly with the size of the project, like expenses related to consumable materials used to accomplish the project. Indirect Costs: Costs that are part of the overall organization’s cost of doing business and are shared among all the current projects. These include salaries of corporate executives, administrative expenses, any cost that would be considered part of overhead. Opportunity Costs: The cost of choosing one alternative and, therefore, giving up the potential benefits of another alternative. Direct Costs: Costs incurred directly by a specific project. These include cost for materials associated with the project, salary of the project staff, expenses associated with subcontractors.05/19/12 44
  45. 45. Cost Types Direct Costs Related “Directly” to the project ex. Labor hours, material, equipment, food, travel Indirect Costs Overhead used for more than one project ex. Building rent, taxes, janitorial services05/19/12 45
  46. 46. Cost Types A cost by any other name, really isn’t the same! Variable Cost – Changes with volume Fixed Cost – Stays the same, regardless of volume TC = VC+FC COST vs VOLUME05/19/12 46
  47. 47. Cost Types Project Costs Are incurred while the project is being fulfilled. Life Cycle Costs includes the costs after project completion. There may be temptation to lower project costs at the expense of long term costs. Life Cycle Costing gives the PM a way to consider costs outside of the scope of project fulfillment05/19/12 47
  48. 48. Important Concepts Sunk Costs Forget ‘em, they’re gone Working Capital - Current Assets (Cash, Inventories, Accounts Receivable) - Liabilities (Notes, AP, Accruals)05/19/12 48
  49. 49. Cost and Project Selection Present Value Is $10,000 in your pocket now worth more than the $10,000 in your pocket one year from now? Yes! You can use the money now to make more money. The 10,000 in a year from now should be “discounted” to the present, since it’s not worth as much.05/19/12 49
  50. 50. Present Value of Your PMP Consulting Gig Time Income Present Value 1 10,000 10,000 2 10,000 9,090 3 10,000 8,264 4 10,000 7,513 5 10,000 6,830 TOTAL 50,000 41,69705/19/12 50
  51. 51. Internal Rate of Return What is the return on the money invested? Expressed as percentage Great for comparing between two projects of different value Project A has an IRR of 21% and Project B has an IRR of 14%. Which would I choose?05/19/12 51
  52. 52. Payback Period How long until we get the money back? “Quick and Dirty” method for project selection Does not take into account the Time Value of Money Your Project costs $50,000, and the cash flow it will bring is $11,000 a year. The Payback Period is. . . 5 years Discount rate/Interest Rate....10%05/19/12 52
  53. 53. Payback Period Cumulative Inflow (with Cumulative discount@10%) Inflow Resulting Value of Note:the two (withReturn (without cash flow(end of discount year, with discount) or without discount do not differ too @10%) much in duration11,000 11,000 10,891 10,89111,000 22,000 10,783 21,67411,000 33,000 10,676 32,34711,000 44,000 10,571 42,91411,000 55,000 10,476 53,394Break Even at The BE Point is With Discount Pay- Back Pay-Back Period is50,000 4yrs 7mths is Different 4yrs 8 mths.05/19/12 53
  54. 54. Net Present Value NPV, like Present Value, discounts future cash flows to the present PV of Revenue – PV of Costs05/19/12 54
  55. 55. Net Present Value: Your PMP GigTime Revenue Present Costs PV of Costs NPV Value0 10,000 10,000 12,000 12,000 -2,0001 10,000 9,090 2,000 1,818 7,2722 10,000 8,264 2,000 1,653 6,6113 10,000 7,513 2,000 1,502 6,0114 10,000 6,830 2,000 1,366 5.464Total 50,000 41,697 20,000 18,339 23,35805/19/12 55
  56. 56. Payback Period How long until we get the money back? “Quick and Dirty” method for project selection Does not take into account the Time Value of Money Your Project costs $50,000, and the cash flow it will bring is $11,000 a year. The Payback Period is. . . 5 years05/19/12 56
  57. 57. Benefit Cost Ratio Compares the revenues to the costs Revenue in this is the same as “payback” 1 is the magic number where costs = revenue Less than 1, costs are greater than benefits Greater than 1, and the benefits are greater than costs. If Project A has a BCR of 2.2 and Project B has a BCR of 1.2, pick A.05/19/12 57
  58. 58. How Do We Manage Cost? Three processes Cost Estimating Cost Budgeting Cost Control Cost Cost Cost Estimating Budgeting Control05/19/12 58
  59. 59. Cost Control Inputs Tools & Techniques Outputs Cost Baseline Cost Estimate Cost change control system Updates Project Funding Performance measurement Cost Baseline Requirements analysis Updates Forecasting Performance Performance Measurements Reports Project performance reviews Forecasted Work Project management Completion Performance software Requested Information Variance management Changes Approved Recommende Change d Corrective Requests Actions Project Management Organizatio Plan Cost Cost Cost nal Process Estimating Budgeting Control Assets Updates Project Manageme nt Plan Updates05/19/12 59
  60. 60. Earned Value• Progress is compared against the Planned Value (PV) – Budgeted baseline to determine whether Cost project is ahead of or behind plan Earned Value (EV) – Actual• Percent complete can be difficult work completed to measure, some managers use Actual Cost (AC) rules – Costs incurred Estimate to  50/50 Rule – Assumed 50% Complete (ETC) complete when task started, final – What’s Left 50% at completion Estimate at  20/80 Rule – 20% at start Completion (EAC) – What  0/100 Rule – No credit until complete final cost will be05/19/12 60
  61. 61. The earned value Management involves developing these key values for each schedule activity, work package, or control account: Planned value (PV). PV is the budgeted cost for the work scheduled to be completed on an activity or WBS component up to a given point in time. Earned value (EV). EV is the budgeted amount for the work actually completed on the schedule activity or WBS component during a given time period. Actual cost (AC). AC is the total cost incurred in accomplishing work on the schedule activity or WBS component during a given time period. This AC must correspond in definition and coverage to whatever was budgeted for the PV and the EV (e.g., direct hours only, direct costs only, or all costs including indirect costs). Cost variance (CV). CV equals earned value (EV) minus actual cost (AC). The cost variance at the end of the project will be the difference between the budget at completion (BAC) and the actual amount spent. Formula: CV= EV - AC05/19/12 61
  62. 62. The earned value Management involves developing these key values for each schedule activity, work package, or control account: Schedule variance (SV). SV equals earned value (EV) minus planned value (PV). Schedule variance will ultimately equal zero when the project is completed because all of the planned values will have been earned. Formula: SV = EV - PV. These two values, the CV and SV, can be converted to efficiency indicators to reflect the cost and schedule performance of any project. Cost performance index (CPI). A CPI value less than 1.0 indicates a cost overrun of the estimates. A CPI value greater than 1.0 indicates a cost underrun of the estimates. CPI equals the ratio of the EV to the AC. The CPI is the most commonly used cost-efficiency indicator. Formula: CPI = EV/AC Schedule performance index (SPI). The SPI is used, in addition to the schedule status to predict the completion date and is sometimes used in conjunction with the CPI to forecast the project completion estimates. SPI equals the ratio of the EV to the PV. Formula: SPI = EV/ PV05/19/12 62
  63. 63. Earned Variance atValue Completion (VAC)Graph Target Cost & Schedule Planned Schedule Value (PV) Variance (Time) Earned Value (EV)05/19/12 63
  64. 64. Earned Value Formulas NAME FORMULA NOTES Cost Variance (CV) EV-AC Negative = Over budget Positive = Under budget Schedule Variance EV-PV Negative = Behind (SV) Schedule Positive = Ahead of Schedule Cost Performance EV/AC How much are we Index (CPI) getting for every dollar we spend? Schedule Perform EV/PV Progress as % against Index (SPI) plan Estimate to Complete EAC-AC How much more do we (ETC) have to spend? Variance at BAC-EAC At the end of the day, Completion (VAC) how close will we be to plan? Estimate at See the following Completion (EAC) page05/19/12 64
  65. 65. Earned Value Formulas (Cont’d) NAME FORMULA NOTES Estimate at Complrtion (EAC) Use if no variances from BAC/CPI BAC have occurred Use when original estimate AC+ETC was bad. Actuals + New estimate Use when current AC+BAC variances are not expected to be there in -EV the future Use when current AC+(BAC variances are expected to continue -EV)/CPI05/19/12 65
  66. 66. Building A Farm Hut Exercise• You have a project to build a new farm hut (Barn). The specs for building the hut are to construct 4 sides and then an angled roof.• Each side of the hut is to take one day to build as is the roof. The budgeted amount is $2,000 per side and $2000 applied to the roof cost.• The sides are to be completed one after the other. Today is the end of day four.05/19/12 66
  67. 67. FORECASTING Forecasting includes making estimates or predictions of conditions in the projects future based on information and knowledge available at the time of the forecast.( Forecasts are generated, updated, and reissued based on work performance information provided as the project is executed and progressed). BAC is equal to the total PV at completion for a schedule activity, work package, control account, or other WBS component. Formula: BAC = total cumulative PV at completion. ETC is the estimate for completing the remaining work for a schedule activity, work package, or control account. ETC based on new estimate. ETC equals the revised estimate for the work remaining, as determined by the performing organization. This more accurate and comprehensive completion estimate is an independent, non-calculated estimate to complete for all the work remaining, and considers the performance or production of the resource(s) to date. Alternatively, to calculate ETC using earned value data, one of two formulas is typically used: ETC based on atypical variances. This approach is most often used when current variances are seen as atypical and the project management team expectations are that similar variances will not occur in the future. ETC equals the BAC minus the cumulative earned value to date (EVC). Formula: ETC = (BAC - EVC)05/19/12 67
  68. 68. FORECASTING ETC based on typical variances. This approach is most often used when current variances are seen as typical of future variances. ETC equals the BAC minus the cumulative EVC (the remaining PV) divided by the cumulative cost performance index (CPIC). Formula: ETC = (BAC - EVC) / CPIC EAC is the projected or anticipated total final value for a schedule activity, WBS component, or project when the defined work of the project is completed. One EAC forecasting technique is based upon the performing organization providing an estimate at completion: EAC using a new estimate. EAC equals the actual costs to date (ACC) plus a new ETC that is provided by the performing organization. This approach is most often used when past performance shows that the original estimating assumptions were fundamentally flawed or that they are no longer relevant due to a change in conditions. Formula: EAC = ACC + ETC The two most common forecasting techniques for calculating EAC using earned value data are some variation of: EAC using remaining budget. EAC equals ACC plus the budget required to complete the remaining work, which is the budget at completion (BAC) minus the earned value (EV). This approach is most often used when current variances are seen as atypical and the project management team expectations are that similar variances will not occur in the future. Formula: EAC = ACC + BAC - EV EAC using CPIC. EAC equals actual costs to date (ACC) plus the budget required to complete the remaining project work, which is the BAC minus the EV, modified by a performance factor (often the CPIC). This approach is most often used when current variances are seen as typical of future variances. Formula: EAC = ACC + ((BAC - EV) / CPIC)05/19/12 68
  69. 69. 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 Project Current Start Status BAC PV EAC AC ETC05/19/12 69
  70. 70. Terms to Remember• Present Value Working Capital• Net Present Value (NPV) Straight Line Depreciation• Internal Rate of Return (IRR) Accelerated Depreciation• Payback Period  Double Declining Balance• Benefit Cost Ratio = BCR>1,  Sum of Years Digits Payback is greater than the Value Analysis (Value cost Engineering)• Opportunity Cost• Sunk Cost You won’t be calculating most of these numbers on the test, just remember the concepts for general questions05/19/12 70
  71. 71. Questions Q1-project cost management includes all the following functions, except; a. resource planning b. cost estimating c. resource leveling d. cost budgeting d. cost control Q2-The output from resource planning includes; a. job descriptions b. Salary descriptions c. The types of resources required d. All of the above e.05/19/12 None of the above 71
  72. 72. QuestionsQ3- Cost estimates may be expressed in;a. labourb. materialsc. suppliesd. inflation allowancese. none of the aboveQ4- resource planning must include consideration of the use of;a. contractors, equipment, materialsb. people, computers, equipmentc. people, equipment, materialsd. contractors, computers, raw materialsE. none of the above.05/19/12 72
  73. 73. QuestionsQ5- In the erarned value system, cost variance is computed as;a. BCWP less BCWSb. BCWP less ACWPc. ACWP less BCWPd. ACWP less BCWSe. BCWS less BCWPQ6- Earned value is;a. percent completeb. budgeted cost of work performedc. completed work valued. all of the abovee. b and c only05/19/12 73
  74. 74. QuestionsQ7- if BCWS=100, BCWP=98, and ACWP=104, the project is,a. ahead of scheduleb. headed for a cost overrunc. doing the businessd. a and b onlye. a and c onlyQ8- inputs to resource planning are;a. the WBSb. the scope statementc. a resource pool descriptiond. organisational policiese. all of the above05/19/12 74
  75. 75. QuestionsQ9- Which of the following choices would indicate that your project was 10 percent under budget?a. BCWS=100, BCWP=110b. ACWP=100, BCWP=110c. BCWS=100, ACWP=110d. ACWP=110, BCWP=100e. BCWP=100, BCWS=110Q10- Parametric cost estimating involves;a. using the WBS as the basis of estimatingb. defining the parameters of the project life cyclec. calculating individual cost estimates for each work packaged. using rates and factors based on historical experience to estimate costse. b and c only05/19/12 75
  76. 76. Answers to Questions 1–a  6–e – 2–b  7-d – 3–a  8-a – 4–c  9-b – 5–a  10 - a05/19/12 76
  77. 77. EVA Question Given a lawn to be cleaned up within four days at an estimated budget Of Rm2,000, and today after three days the status of the project being; EV=Rm1250, AC-Rm1750 with a daily planned expenditure=Rm500, calculate the following: PV EV CV BAC CV CPI SV SPI VAC (BACEAC) EAC(EAC/CPI) ETC(EAC-AC)05/19/12 77
  78. 78. Answers to Questions (Cont’d) What is: Calculation: Answer: Interpretation of Answer: PV $500+$500+$500 $1,500 We should have completed $1500 We actually completed $1,250 EV $500+$500+$250 $1,250 worth of work AC $500+$1000+$250 $1,750 We have actually spent $1,750 BAC $500+$500+$500+$500 $2,000 Our project budget is $2000 CV $1,250 - $1,750 -$500 We are over budget by $500 We are only getting $0.71 out of CPI $1,250/$1,750 0.714 every dollar that we are spending on the project SV $1,250 - $1,500 -$250 We are behind schedule We are progressing at 83% of the SPI $1,250/$1,500 0.833 planned rate We currently estimate the project EAC $2,000/0.714 $2,801 will cost $2,801 We need to spend $1,051 to finish ETC $2,801-$1,750 $1,051 the project We currently expect to be $801 VAC $2,000 - $2,801 -$801 over budget when the project is completed05/19/12 78
  79. 79. Big Dig Started construction on 1991 and planned completion by 1997 (6 years), it was to cost $3 Billion, the project included 6 highways ($0.5 Billion per highway/year) At the end of the first year, 1/2 highway was completed and the cost was $2 Billion. Do the EV analysis05/19/12 79
  80. 80. Big Dig: The Numbers EV = Earned Value = $0.25 Billion ($0.5/2) PV = Planned Value = $0.5 Billion AC = Actual Cost = $2 Billion BAC = Budget At Completion = $3 Billion05/19/12 80
  81. 81. Big Dig: Performance CV = EV - AC = $0.25 - $2 = - $1.75 Billion Over Budget by $1.75 Billion SV = EV - PV = $0.25 - $0.5 = - $0.25 Billion Behind of schedule CPI =EV / AC = $0.25 / $2 = 0.12 Getting 0.12 cents out of every dollar budgeted SPI = EV / PV = $0.25 / $0.5 = 0.50 50% of progress planned EAC = BAC / CPI = $3 / 0.50 = $ 6 Billion05/19/12 81
  82. 82. Big Dig: Performance CV = EV - AC = $0.25 - $2 = - $1.75 Billion Over Budget by $1.75 Billion SV = EV - PV = $0.25 - $0.5 = - $0.25 Billion Behind of schedule CPI =EV / AC = $0.25 / $2 = 0.12 Getting 0.12 cents out of every dollar budgeted SPI = EV / PV = $0.25 / $0.5 = 0.50 50% of progress planned EAC = BAC / CPI = $3 / 0.50 = $ 6 Billion05/19/12 82
  83. 83. Big Dig  Megabina Sdn Bhd Started construction of sky- bridges in 2001 and planned completion by 2008 (8 years).They were to cost $12 Billion, the project included 8 sky-bridges ($1.5 Billion per bridge/year)  At the end of the year 4 three were completed and the cost was $2.5Billion.  Do the EV analysis05/19/12 83
  84. 84. Big Dig: The Numbers EV = Earned Value = $3.5 Billion($1.5m*3) PV = Planned Value = $6.0 Billion($1.5*4) AC = Actual Cost = $2.5 Billion BAC = Budget At Completion = $12 Billion05/19/12 84
  85. 85. Big Dig: Performance CV = EV - AC = $3.5 - $2.5 = $1.00 Billion Under Budget by $1.00 Billion SV = EV - PV = $3.5 - $6.5 = - $3.00 Billion Behind of schedule CPI =EV / AC = $3.5 / $2.5 = 1.4 Getting 1.14 cents out of every dollar budgeted SPI = EV / PV = $3.5 / $6.5 = 0.50 50% of progress planned EAC = BAC / CPI = $12 / 0.50 = $ 24 Billion05/19/12 85
  86. 86. Tools and Techniques • Performance reviews – Compare cost performance over time, schedule activities or work packages overrunning and under running the budget, and the estimated funds needed to complete work in progress – In EVM: • Variance analysis: compares actual project (cost or schedule) performance to planned or expected performance • Trend analysis: examines project performance over time to determine if performance is improving or deteriorating. Graphical comparison of BAC versus EAC and completion dates • Earned value performance: compares the baseline plan to actual schedule and cost performance05/19/12 86
  87. 87. Tools and Techniques • Variance analysis – Cost performance measurements (CV, CPI) are used to assess the magnitude of variation to the original cost baseline – Cause and degree of variance WRT the cost performance baseline? ‐‐>corrective/preventive action? – High acceptable variance range at start, lower as the project gets closer to complete • Project Management software – Monitoring PV, EV, and AC05/19/12 87
  88. 88. Outputs • Work performance measurements – Calculated CV, SV, CPI, and SPI values for WBS components, work packages and control accounts are documented and communicated to stakeholders • Budget forecasts – Calculated EAC value or bottom‐up EAC value is documented and communicated to stakeholders • Organizational Process Assets updates – Cause of variance – Corrective actions chosen and the reasons – Other types of lessons learned from project cost control • Change requests (through the Perform Integrated Change Control Process) • Project management plan updates – Cost performance baseline (scope, activity resources, cost estimates. Sometimes new cost baseline should be prepared as cost variance is severe) – Cost management plan • Project document plan – Cost estimates – Basis of estimates05/19/12 88
  89. 89. References 1. Sections of this presentation were adapted from A Guide to the Project Management Body of Knowledge , Third & Fourth Editions, Project Management Institute Inc., © 2004/9 2. it is also drawn from various other presentations, publicly uploaded 3. The presenters expertise and Ingenuity were also employed to upgrade the original presentation05/19/12 89
  90. 90. N ow I understand!05/19/12 90