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1. Project Cost
Management
Sections of this presentation were adapted
from A Guide to the Project Management
Body of Knowledge 3rd Edition, Project
Management Institute Inc., © 2004

2. Project Cost Management
“The processes involved in planning,
estimating, budgeting, and controlling
costs so that the budget can be completed
within the approved budget”

3. 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
Cumulative
Value
Time
Planned
Value (PV)
Actual
Costs (AC)
Earned
Value (EV)
Today
Is this project
over/under budget?
Is it ahead of/behind
schedule?

4. 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?

5. How Do We Manage Cost?
Three processes
 Cost Estimating
 Cost Budgeting
 Cost Control
Cost
Estimating
Cost
Budgeting
Cost
Control

6. Cost Estimating
Enterprise
Environmental
Factors
Organizational
Process Assets
Project Scope
Statement
Analogous estimating
Determine resource cost
rates
Bottom up estimating
Parametric estimating
Project management
software
Vendor bid analysis
Reserve analysis
Cost of quality
Inputs
Outputs
Tools & Techniques
Work Breakdown
Structure
WBS Dictionary
Cost
Estimating
Cost
Budgeting
Cost
Control
Project
Management Plan
•Schedule Mgmt Pln
•Staffing Mgmt Pln
•Risk Register
Activity Cost
Estimates
Activity Cost
Estimates
Supporting Detail
Requested Changes
Cost Management
Plan Updates

7. 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 gains

8. 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]

9. Cost Budgeting
Project Scope Statement Cost aggregation
Reserve analysis
Parametric estimating
Funding limit reconciliation
Inputs
Outputs
Tools & Techniques
Cost
Estimating
Cost
Budgeting
Cost
Control
Cost Baseline
Project Funding
Requirements
Cost Management
Plan Updates
Requested Changes
Work Breakdown Structure
WBS Dictionary
Activity Cost Estimates
Activity Cost Estimates
Supporting Detail
Project Schedule
Resource Calendars
Contract
Cost Management Plan

10. 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

11. Cost Control
Cost Baseline
Project Funding
Requirements
Performance
Reports
Cost change control system
Performance measurement
analysis
Forecasting
Project performance reviews
Project management
software
Variance management
Inputs
Outputs
Tools & Techniques
Work Performance
Information
Approved Change
Requests
Cost
Estimating
Cost
Budgeting
Cost
Control
Project
Management Plan
Cost Estimate
Updates
Cost Baseline
Updates
Performance
Measurements
Forecasted
Completion
Requested Changes
Recommended
Corrective Actions
Organizational
Process Assets
Updates
Project Management
Plan Updates

12. Earned Value
Progress is compared against the
baseline to determine whether
project is ahead of or behind plan
Percent complete can be difficult
to measure, some managers use
rules
 50/50 Rule – Assumed 50%
complete when task started, final
50% at completion
 20/80 Rule – 20% at start
 0/100 Rule – No credit until complete
Planned Value
(PV) – Budgeted
Cost
Earned Value
(EV) – Actual
work completed
Actual Cost (AC)
– Costs incurred
Estimate to
Complete (ETC)
– What’s Left
Estimate at
Completion
(EAC) – What
final cost will be

13. Earned
Value
Graph
Variance at
Completion
(VAC)
Target
Cost &
Schedule
Schedule
Variance
(Time)
Planned
Value (PV)
Earned
Value (EV)

14. Earned Value Formulas
NAME FORMULA NOTES
Cost Variance (CV) EV-AC Negative = Over budget
Positive = Under budget
Schedule Variance
(SV)
EV-PV Negative = Behind Schedule
Positive = Ahead of Schedule
Cost Performance
Index (CPI)
EV/AC How much are we getting for every
dollar we spend?
Schedule Perform
Index (SPI)
EV/PV Progress as % against plan
Estimate to
Complete (ETC)
EAC-AC How much more do we have to
spend?
Variance at
Completion (VAC)
BAC-EAC At the end of the day, how close will
we be to plan?
Estimate at
Completion (EAC)
See following slide

15. Earned Value Formulas (Cont’d)
NAME FORMULA NOTES
Estimate at
Completion (EAC)
BAC/CPI Use if no variances from
BAC have occurred
AC+ATC Use when original
estimate was bad. Actuals
+ New estimate
AC+BAC-EV Use when current
variances are not expected
to be there in the future
AC+(BAC-EV)/CPI Use when current
variances are expected to
continue

16. Barn Exercise
You have a project to build a new barn.
The specs for building the barn are to
construct 4 sides and then an angled roof.
Each side of the barn 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.

17. 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
PV
AC ETC
EAC
BAC
Project
Start
Current
Status

18. Terms to Remember
Present Value
Net Present Value (NPV)
Internal Rate of Return
(IRR)
Payback Period
Benefit Cost Ratio =
BCR>1, Payback is greater
than the cost
Opportunity Cost
Sunk Cost
Working Capital
Straight Line Depreciation
Accelerated Depreciation
 Double Declining Balance
 Sum of Years Digits
Value Analysis (Value
Engineering)
You won’t be calculating most of these numbers on the test,
just remember the concepts for general questions

19. Answers to Questions
1 – C
2 – D
3 – B
4 – A
5 – C
6 – B
7 – C
8 – A

20. Answers to Questions (Cont’d)
What is: Calculation: Answer: Interpretation of Answer:
PV $500+$500+$500 $1,500 We should have completed $1500
EV $500+$500+$250 $1,250
We actually completed $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
CPI $1,250/$1,750 0.714
We are only getting $0.71 out of
every dollar that we are spending
on the project
SV $1,250 - $1,500 -$250 We are behind schedule
SPI $1,250/$1,500 0.833
We are progressing at 83% of the
planned rate
EAC $2,000/0.714 $2,801
We currently estimate the project
will cost $2,801
ETC $2,801-$1,750 $1,051
We need to spend $1,051 to finish
the project
VAC $2,000 - $2,801 -$801
We currently expect to be $801
over budget when the project is
completed