One of the constraint for project is to complete the project within budget, to this you have to manage project costs.

1. 5. COST MANAGEMENT
Project Management Training,
Qais Ur Rehman Rasooli, PMP

2. Cost Management
• Project cost management includes the
processes involved in,
• Planning
• Estimating
• Budgeting
• Financing
• Funding
• Managing and Controlling cost

3. So What is Project Cost Management?..cont’d
Financial
performance
of the
product
Product Life
cycle costing
Stakeholder
Cost
Management
Requirements
Acquisition decision,
Order placed,
Delivered
Actual cost incurred / recorded
Cost of Use – Operating Cost
Maintenance,
Support of the product
RoI, Return on investment
Investment payback
Discounted Cash Flow

4. 1. Plan Cost Management
2. Estimate costs
3. Determine budget
4. Control cost

5. Plan Cost Management
• Establishes policies , procedures and documentation for
planning managing, expending, controlling costs,
• Provides guidance and direction on project cost
management throughout the project,
• Inputs: PMP, Charter,EEF,OPA

6. Plan Cost Management: Inputs
Project Management Plan
Scope Baseline – project scope statement + WBS Details
Schedule baseline
Project Charter
Summary Budget
Project Approval Criteria
Enterprise Environmental Factors
Market Conditions
Currency Exchange rates
Published commercial Information
Organizational Process Assets
Financial control procedures
Historical Information and lessons learned
Existing formal/Informal cost estimating policies,
procedures and guidelines

7. Plan Cost Management: Tool &
Technics
• Tools and technics include
• Expert Judgement
• Analytical Technics
• Payback Period,
• Return on Investment RoI,
• Internal Rate of return,
• Net Present Value,
• Meetings

8. Plan Cost Management: Output
• Cost Management Plan
• Units of Measure
• Level of accuracy and precision
• Control Thresholds
• Rules of performance Measurement
• Define control Accounts,
• Establish Earned value measurement
technics
• Reporting Formats and frequency
• Cost change control procedures
Cost
Management
plan

9. 1. Plan Cost Management
2. Estimate costs
3. Determine budget
4. Control cost

10. Cost included in estimates
• Cost of quality efforts,
• Cost of risk efforts,
• Cost of PM Time,
• Cost directly associated with the project,
• Expenses of physical office spaces,
• Profit,
• Overhead costs

11. Types of Cost
• Variable Cost :
Change with the amount of production or work,
Material , supplies, Wages
• Fixed Cost:
Cost does not change as production changes,
Setup, rent, utilities
• Direct Cost: directly attributable to work of the project
Indirect Costs: cost incurred for the benefit of more than
one project

12. Estimate Cost: Inputs
Human Resource Management Plan
• Project staffing plan,
• Personnel Rates,
• Reward and recognition
Project Schedule
• Type and quantity of resource req
• Equipment and material required
• Activity durations can impact Costs
Scope baseline
• Product description, WBS & Dictionary
• Key deliverables and acceptance Criteria,
• Project boundaries and assumptions
Risk Register
• Risk Response costs,
• Threats or Opportunities

13. Estimate Costs: Tools and Techniques
• Includes,
• Expert Judgment
• Analogous Estimating
• Parametric Estimating
• Bottom up estimating
• Three point estimating
• Reserve Analysis
• Cost of Quality
• Project Management Software
• Vendor Bid Analysis
• Group Decision Making

14. Estimate Costs: Outputs
Activity Cost
Estimates
Basis of Estimates
Project Document
Updates

15. Accuracy of Estimates
• Rough order of Magnitude:
Done during initiating
Range : -25% to +75%
• Budget Estimate:
Done during Planning
Range:-10% to +25%
• Definitive Estimate:
Done when project progress and more info is available
Range: -5% to 10% from actual

16. 1. Plan Cost Management
2. Estimate costs
3. Determine budget
4. Control cost

17. Determine Budget
• Determine the amount of funding required for the project,
• Risk management to be applied to include reserves in
estimates ,
• Inputs include;
Activity Cost estimates, BoE, Scope
baseline, Project schedule, Resource
calendars, OPA, Contracts
• Cost baseline and Cost Budget

18. Determine Budget: Tools and
Techniques
• Cost Aggregation
• Reserve analysis
• Expert judgment
• Historical relationships
• Funding limit reconciliation
-Check cashflow,
-Reconciliation with cost constraints in the project charter

19. Determine Budget: Output
• Includes,
• Cost Baseline
• Project Funding Requirements
• Project Document updates

20. 1. Plan Cost Management
2. Estimate costs
3. Determine budget
4. Control cost

21. Control Costs
• Monitor the status of the project to update project costs,
• Manage changes to the cost baseline,
• Provides the means to recognize variance,
• Influence the root causes of changes to cost baseline,
• Timely processing of change requests,
• Monitor use of funds to physical work completed,
• Prevent unapproved changes from being included,
• Communicate the status of changes to stakeholders
• Bring expected cost overrun within acceptable ranges

22. Control Costs: Tools & Techniques
• Progress Reporting,
• Reserve Analysis,
• Earned Value Management

23. Earned Value Management
• Earned value used to measure project performance against
Performance measurement baseline (PMB),
• EV analysis indicates potential deviations from PMB,
• EV measurements
integrate cost time and scope,
used to forecast future performance,
Forecasted project completion date and costs

24. Terms to know for EVM
Acronym Term Interpretation
PV Planned Value
EV Earned Value
AC Actual Cost
BAC Budget At
completion
EAC Estimate at
Completion
ETC Estimate to
Complete
VAC Variance at
Completion
As of today, what is the estimated value of the work
planned to be done?
As of today, what is the estimated value of the work
actually accomplished?
what is the actual cost incurred for the work
accomplished?
How much did we BUDGET for the TOTAL project effort?
What do we currently expect the TOTAL project to cost
(a forecast)?
how much MORE do we expect it to cost
to finish the project (a forecast)?
As of today, how much over or under budget do we
expect to be at the end of the project?

25. Earned Value Management

26. Terms to know for EVM
Name Formula Interpretation
Cost variance EV-AC
Schedule variance EV-PV
Cost Performance
Index (CPI)
EV/AC
Schedule
Performance Index
(SPI)
EV/PV
Neg is over budget and positive is under budget
Neg is behind schedule, Positive is ahead of schedule
We are getting $X worth of work for every $1 spent.
Funds are or are not being used efficiently. Greater
than 1 is good and <1 is bad
We are progressing at X% of the rate originally planned.
>1 is good and <1 is bad
How efficiently are we using time..

27. Terms to know for EVM
Term Formula Interpretation
Estimate at
Completion
(EAC)
AC+ ETC
BAC/CPI
AC+(BAC-EV)
AC+[ (BAC-EV)/
(CPI * SPI)]
TCPI (BAC-EV)/
(BAC-AC)
Estimate to
Complete
(ETC)
ETC= EAC-AC
Actual cost of work plus the budgeted cost of remaining
work, used original estimated was flawed
If no variance from BAC have occurred or the same burn
rate is expected to continue
Used when current variances are thought to be typical
of future
Remaining budget modified by performance. Current
variances typical, influenced by schedule constraint
How efficiently do we need to complete the remaining
work, <1 is good and >1 is bad
How much more the project cost?
Re-estimate

28. Test your EVM Knowledge

29. Exercise - 1
• You have a project to install 12 Telecom Tower in 12 Weeks.
The budget for the project is $10K
each a total of $120K
• We are in the 6th week,
• We have installed four Towers
• We have incurred a cost of $60K to
date

30. Exercise - EV calculations
Acronym Term Calculation
PV Planned Value
EV Earned Value
AC Actual Cost
BAC Budget At
completion
ETC Estimate to
Complete
EAC Estimate at
Completion
VAC Variance at
Completion
As we are in the 6th week, the PV would be 6*$10K=
$60K
We have installed four towers to date EV = 4* $10k=
$40k
We have incurred in cost $60K
The total budget for the project is $120K
We still have to install eight more towers to install, ETC=
8*$10K= $80K
AC+ETC= $60k+$80k= $140k
BAC-EAC= $120k - $140k = -$20k , Trending to be over
budget by $20K

31. Exercise EVM Calculations
Name Formula Calculation
Cost variance EV-AC
Schedule variance EV-PV
Cost Performance
Index (CPI)
EV/AC
Schedule
Performance Index
(SPI)
EV/PV
$40K-$60K = -$20K
$40K-$60K= -$20K
$40K/$60K = 0.66 - CPI is 0.66 meaning for each dollar
spent we are earning only 66 cents,
$40K/$60K = 0.66 - SPI is 0.66 meaning We are
progressing at 66% of the rate originally planned.

32. Exercise - 2
• On a project you have the CV= $10,000, your SV is -$3,000
PV is $100,000, What is the SPI?
• What is the AC in this case?
• In an earned value report for your project , you see the CPI
is 1.2 and SPI is 0.8, the PV is $ 600K, and the SV is -
$120K, you couldn’t find CV , How much is it?

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