1. 7. Project Cost Management
Managing Funds Effectively

2. Cost Challenges In Construction Industry
Demand Side Challenges : Recession & Falling Demand
Supply Side Challenges : Increasing Cost Of Resources
Increase In Construction Cost In India

3. Managing Construction Cost Is Critical
For Project Success And Company Profitability
Pareto's Principle - The 80-20 Rule
roughly 80% of the cost management come from effective control of
20% of the causes.
Costs Components Approx %**
Pre-acquisition costs All costs incurred for aquiring land 10-15
Construction Development and construction costs 40-45
Amenities cost 10-15
Administrative & other
Site administration 8-10
Marketing & sales 5-8
Insurance, taxes & regulatory charges 7-10
Allocation of capitalized costs 5-10
**Based on our survey with few builders in Pune for joint venture projects with
land owners

4. Costing & Quantity Survey
Surveyor plays a critical role in real estate construction project
management by supporting project manager for all commercial activities
as follows:
 Cost planning
 Cost estimating
 Cost control & monitoring budget
 Contracts negotiation
 Procurement advice
 Preparing bill of quantities (BOQ)
 Preparation of payment invoice and certification.
 Assessment of variations
 Contract dispute resolution
 Valuation for insurance purposes
Surveyor also helps project manager for preparing feasibility studies, risk
management , investment appraisal and auditing

5. Project cost management includes the processes involved in
planning, estimating, budgeting, financing, funding, managing and
controlling costs so that the project can be completed within the
approved budget.
Project Cost Management
Group 7. Project Cost Management
Initiating
Planning
7.1 Plan Cost Management
7.2 Estimate Costs
7.3 Determine Budget
Executing
M&C 7.4 Control Costs
Closing

6. It is the process that establishes the policies, procedures and
documentation for planning, managing, expending and controlling
project costs
7.1 Plan Cost Management
Fixed Cost Vs Variable Cost
Total Cost = Fixed Cost + Unit Cost X Units Used
Direct Costs Vs Indirect Costs

7. Plan Cost Management
Cost Management Plan : Also includes
 Rules for performance measurement
 Organizational procedures links : The WBS component used for
the project cost accounting is called control account.
 Control Thresholds : Variance thresholds for monitoring cost
performance to indicate an agreed-upon amount of variation
to be allowed before some action needs to be taken. Typically
expressed as percentage deviations from the baseline plan

8. Cost estimating involves developing an estimate of the costs of all
resources needed to complete the project.
The accuracy of estimates tends to improve as a project moves
though its life cycle.
7.2 Estimate Costs

9.  Order of magnitude estimates: “Ballpark” estimates without
detailed data, done at the feasibility stage for selecting right
construction project. The range of accuracy is given as -25 to
+75% and would be used for initiating or project approval.
 Budget estimates: Based on slightly better data and used to
establish initial funding during the early stages of planning. This
budget is used for alternative resource analysis and getting
funding approval for the project. The range of accuracy is given
as -10 to +25%.
 Definitive estimates: A bottom-up estimate using estimates of
WBS work packages This estimate would be done in the latter
stages of planning and be used to establish a cost baseline and
monitor spending. It is progressively elaborated. Range of
accuracy is -5 to +10%.
7.2 Estimate Costs

10. 7.2 Estimate Costs
Inputs
1. Cost Management Plan
2. Scope Baseline
3. Project Schedule
4. Risk Register
5. Human Resource
Management Plan
6. EEFs
7. OPAs
T & T
1. Expert Judgment
2. Analogous estimating
3. Parametric estimating
4. Bottom-up estimating
5. Three-point estimating
6. Reserve Analysis
7. Cost of Quality
8. Vendor bid Analysis
9. Group decision making
techniques
Outputs
1. Activity cost Estimates
2. Basis of Estimates
3. Project Documents Updates

12. Reserve Analysis
Applied to the base cost to account for uncertainties in quantities,
unit costs work elements or other project requirements during
construction.
requirements for an activity or work item.
 Contingency Reserve
 It used to manage identified risks
 It is estimated based on decision tree method or Expected
Monitory Value (EMV)
 The project manager has authority to use
 Management Reserve
 It is used to manage unidentified risks
 It is calculated as a percentage of the cost, or time of project
 Management approval is required to use management
reserve
The use of either type of reserve is intended to reduce the chance
of a cost overrun
Determine Budget

13.  For Small construction projects use Small
internal workshops using the Pre-defined Excel
workbook
 For mid size project use Cost Risk Assessment
(CRA) workshops typically held internally
 For large projects / programs / portfolio use
Cost Estimating and Validation Process (CEVP)
workshops which includes external subject
matter experts

14. Cost budgeting involves aggregating cost estimates for all individual
activities or work packages so that a cost baseline can be
established for measuring performance.
The baseline includes authorized budgets and contingency reserves,
but excludes management reserves.
7.3 Determine Budget

15. Challenges For Budgeting In Construction Industry
 Budget / costing need to be decided at very early stage of the
project life cycle with very little room to change latter.
 The compilation and uncertainty of project may result in poor
budget reliability
 Working drawing at initial stage might result in unpractical
budget
 It is difficult to control costs especially for contracts and external
workers if basic construction procedures are followed
 The financing structure is unreasonable if it depends on one
financing channel too much which contributes to the rise of costs
 Most builders do not have relevant systems and processes in
place

16. Cost Aggregation
Cost estimates at lower level are aggregated or “rolled up” at
higher levels (including control accounts) and then finally for
the entire project.

18. Outputs
 Cost Baseline : The approved version of the time-phased project
budget excluding management reserves. The management reserves
plus the cost baseline give the project budget.
The baseline is often displayed in the form of an S-curve. Large projects
may have multiple cost baselines.
Determine Budget

20. Effective cost control requires management of the
approved cost performance baseline (often simply called
the cost baseline or approved budget) and any changes to
that baseline.
7.4 Control Costs
Tools &
Technique
1. Earned Value Management
2. Forecasting (EAC)
3. To-complete Performance index (TCPI)
4. Performance Reviews
5. Performance Management software
6. Reserve Analysis
Outputs
1. Change requests
2. Project Management Plan Updates
3. Work Performance Information

21. Earned Value Management
Term Definition & Equation
Planned
Value (PV)
Also called Budgeted cost of work scheduled (BCWS)
PV or BCWS = Hourly rate * Total hour planned or
scheduled
Earned
value (EV)
Also called budgeted cost of work performed (BCWP)
EV or BCWP = sum of the planned value of work
completed or Baseline cost * % completed actual
Actual cost
(AC)
Also called actual cost of work performed (ACWP)
AC or ACWP = Sum of all costs actually incurred for the
work completed by the specified date

23. Term Definition & Equation
(BAC) Budget At Completion- The value of total planned
work, the project cost baseline
Cost
varianc
e (CV)
CV = EV – AC
+Ve = under planned cost, Neutral = on planned cost,
-Ve = over planned cost
Schedu
le
varianc
e(SV)
SV = EV – PV
Positive = ahead of schedule, Neutral = On schedule,
Negative = Behind schedule
Varianc
e at
comple
tion
(VAC)
VAC = BAC – EAC
Positive = Under the planned cost, Neutral = On
planned cost, Negative = Over planned cost

24. Term Definition & Equation
CPI CPI = EV / AC
Greater than 1 – under planned cost, exactly 1 – on
planned cost, less than 1 – over planned cost
SPI SPI = EV / PV
1< ahead of schedule, exactly 1 – on schedule, 1>
behind schedule
Estimate
at
completi
on (EAC)
1. If the CPI is expected to be the same for the
reminder of the project, EAC can be calculated
using EAC = BAC / CPI
2. If the future work will be accomplished at planned
rate, use EAC = AC + (BAC – EV)
3. If initial plan is no longer valid , use EAC = AC +
Bottom-up ETC
4. If both the CPI and SPI influence the remaining
work , use EAC = AC + [(BAC-EV) / (CPI*SPI)]

25. Term Definition & Equation
Estimate
to
complete
(ETC)
ETC = EAC – AC
To
complete
performa
nce
index
(TCPI)
1. The efficiency that must be maintained in order to
complete on plan TCPI = (BAC-EV) / (BAC-AC)
2. The efficiency that must be maintained in order to
complete at current EAC TCPI = (BAC-EV) / (EAC-
AC)
Greater than 1 – Harder to complete, Exactly 1 –
Same to complete, Lesser than 1 – Easier to
complete

26. Trainings by Vidya Bhagwat
08 Quality Management : Gateway For Customer
Satisfaction
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