4. PROJECT COST MANAGEMENT
Project cost management is the processes involved in
planning, estimating, budgeting, financing, funding,
managing, and controlling costs so that the project can be
completed within the approved budget.
7. KEY
TERMS
Earned value management (EVM): A project management technique that provides a
systematic and objective way to measure a project's performance and progress
throughout its lifecycle. It involves comparing the work that has been actually performed
(earned value) with the work that was planned to be performed (planned value) and the
actual cost incurred (actual cost).
Here are the key components of Earned Value Management:
• Earned Value (EV): This represents the value of the work that has been completed at a specific
point in time. It is typically measured in monetary terms.
• Planned Value (PV): Also known as the Budgeted Cost of Work Scheduled (BCWS), this is the
value of the work that was planned to be completed by a specific point in time. It represents the
baseline cost according to the project schedule.
• Actual Cost (AC): Also known as the Actual Cost of Work Performed (ACWP), this is the actual
cost incurred to complete the work at a specific point in time.
The comparison of these values provides three key performance indicators:
• Cost Variance (CV): CV = EV - AC. It indicates whether the project is under or over budget at a
specific point in time.
• Cost Performance Index (CPI): CPI = EV / AC. It represents the efficiency of cost performance. A
CPI value greater than 1 indicates efficient cost performance.
8. KEY TERMS
Life cycle costing: the concept of looking at cost over the entire
life of the product, not just the cost of the project to create the
product.
Value analysis (value engineering): the concept that focuses on
finding a less costly way to do the same work.
Cost risk: cost-related risks.
9. KEY TERMS
(CONTINUED)
Types of costs:
• Variable costs: costs that change with the amount of work.
• Fixed costs: costs that do not change with the amount of work.
• Direct costs: costs directly attributable to the work on the project
• Indirect costs: overhead items or costs incurred for the benefit of more than
one projects.
Cost estimate ranges:
• Rough order of magnitude (ROM): used during project initiating; typical
range -25 to +75 percent.
• Budget estimate: when starting the plan iteration; typical range -10 to +25
percent.
• Definitive estimate: as progress planning progresses; typical range ± 10
percent or -5 to +10 percent.
10. TRENDS & EMERGING
PRACTICES
• The expansion of Earned Value Management (EVM) to include Earned Schedule (ES)
represents a significant evolution within Project Cost Management.
• ES Concept: Earned Schedule (ES) introduces a new dimension to EVM by replacing
traditional schedule variance measures with ES and actual time (AT).
• In traditional EVM, schedule variance is calculated as earned value minus planned value,
whereas in ES, it is determined as ES minus actual time (ES − AT).
• The use of Earned Schedule allows project managers to assess whether a project is ahead of
schedule by determining if the earned schedule is greater than 0 at a given point in time.
• Schedule Performance Index (SPI): The Schedule Performance Index (SPI) is computed
using earned schedule metrics, specifically as ES divided by AT. This index provides insights
into the efficiency of work accomplishment.
• Forecasting Project Completion: ES theory provides formulas for forecasting the project
completion date, incorporating earned schedule, actual time, and estimated duration. This
enhances the ability to make informed predictions about project timelines.
12. CONSIDERATIONS FOR ADAPTIVE
ENVIRONMENTS
• Agile practice uses lightweight estimation methods to generate
high-level forecast for project costs.
• Detailed estimates are reserved for short-term planning
horizons in a just-in-time fashion.
• In a strict-budget projects, the scope and schedule are more
often adjusted to stay within the cost constraints.
13. PLAN COST MANAGEMENT
OVERVIEW
Plan cost management is the process of defining how the project costs will be
estimated, budgeted, managed, and controlled.
The key benefit: it provides guidance and direction on ho the project costs will be
managed throughout the project.
15. COST MANAGEMENT PLAN
Project management plan
• Cost management plan
• Units of measure
• Level of precision
• Level of accuracy
• Organizational procedure links
• Control thresholds
• Rules of performance measurements
• Reporting formats
• Additional details
16. ESTIMATE COSTS OVERVIEW
Estimate costs is the process of developing an approximation of cost of
resources needed to complete project work.
Key benefit: it determines the monetary resources required for the
project.
18. ESTIMATE COSTS TOOLS
& TECHNIQUES
Expert judgment
One-point estimating
Analogous estimating
Parametric estimating
Bottom-up estimating
Three-point estimating
• Triangular distribution
• Beta distribution
Data analysis
• Alternative analysis
• Reserve analysis
• Cost of quality
Project management
information system
Decision making
• Voting
19. THREE-POINT
ESTIMATING FORMULA
One-point estimating:
"One-point estimating" is a project estimation technique where a single value is
used to represent the most likely estimate for the duration, cost, or any other
variable associated with a project task or activity. This method involves considering
a single, specific value without factoring in any range of possibilities or
uncertainties.
Analogous estimating:
Analogous cost estimating uses values, or attributes, of a previous project that are
similar to the current project. Values and attributes of the projects may include but
are not limited to: scope, cost, budget, duration, and measures of scale (e.g., size,
weight). Comparison of these project values, or attributes, becomes the basis for
estimating the same parameter or measurement for the current project.
20. THREE-POINT
ESTIMATING FORMULA
Parametric estimating:
Parametric estimating uses a statistical relationship between relevant historical
data and other variables (e.g., square footage in construction) to calculate a cost
estimate for project work using mathematical models. This technique can produce
higher levels of accuracy depending on the sophistication and underlying data built
into the model. Parametric cost estimates can be applied to a total project or to
segments of a project, in conjunction with other estimating methods.
Bottom-up estimating:
Bottom-up estimating is a method of estimating a component of work. The cost of
individual work packages or activities is estimated to the greatest level of specified
detail. The detailed cost is then summarized or “rolled up” to higher levels for
subsequent reporting and tracking purposes. The cost and accuracy of bottom-up
cost estimating are typically influenced by the size or other attributes of the
individual activity or work package.
22. Determine budget is the
process of aggregating the
estimated costs of individual
activities or work packages to
establish an authorized cost
baseline.
Key benefit: it determines the
cost baseline against which
project performance can be
monitored or controlled.
DETERMINE BUDGET
OVERVIEW
26. The approved version
of the time-phased
project budget, without
any management
reserves, is known as
the cost baseline and
can only be altered by
following formal
change control
procedures. It serves
as a foundation for
comparison with actual
outcomes. The
approved budgets for
the various schedule
activities are added
together to create the
cost baseline.
COST BASELINE
27. TERMS EXPLAINED
• Project Budget:
• Definition: The project budget is a detailed financial plan that outlines the estimated
costs required to complete the entire project. It includes costs for resources,
materials, labor, equipment, and other project-related expenses. A project budget
includes all the funds authorized to execute the project. The cost baseline is the
approved version of the time-phased project budget that includes contingency
reserves but excludes management reserves.
• Purpose: The project budget provides a financial framework for planning, executing,
monitoring, and controlling the project. It serves as a baseline against which actual
costs are compared throughout the project's lifecycle.
• Management Reserve:
• Definition: Management reserves are added to the cost baseline to produce the
project budget. As changes warranting the use of management reserves arise, the
change control process is used to obtain approval to move the applicable
management reserve funds into the cost baseline.
• Purpose: Management reserve provides a contingency fund to address unknown
risks and uncertainties, ensuring that the project can absorb unexpected costs
without jeopardizing the overall budget.
28. TERMS EXPLAINED
• Cost Baseline:
• Definition: The cost baseline is the approved version of the time-phased project
budget, excluding any management reserves, which can only be changed through
formal change control procedures. It is used as a basis for comparison to actual
• results. The cost baseline is developed as a summation of the approved budgets for
the different schedule activities.
• Purpose: The cost baseline provides a stable reference for comparing actual project
performance. Any changes to the baseline may require formal approval to ensure
proper control of project costs.
• Control Accounts:
• Definition: Control accounts are specific points in the project where management
control is established. They are typically associated with major work packages and
represent a level in the project's WBS (Work Breakdown Structure).
• Purpose: Control accounts facilitate effective project management by providing a
focal point for monitoring and controlling costs, schedule, and performance at a
higher level in the project structure.
29. TERMS EXPLAINED
• Contingency Reserve:
• Definition: Contingency reserve is a portion of the project budget set aside for
identified risks or uncertainties that have been quantified and assessed during
the project planning phase.
• Purpose: The contingency reserve is used to cover the cost impact of known
risks. It is drawn upon when specific events or conditions occur, reducing the
potential negative impact on the project.
• Work Package Cost Estimates:
• Definition: Work package cost estimates are detailed assessments of the costs
associated with individual work packages in the project. They contribute to the
overall project budget and are typically more granular in nature.
• Purpose: Work package cost estimates provide detailed information about the
costs associated with specific tasks or deliverables, aiding in accurate
budgeting and resource allocation.
30. TERMS EXPLAINED
• Activity Cost Estimates:
• Definition: Activity cost estimates are estimates of the costs associated with
specific activities or tasks in the project schedule. They provide detailed
information on the financial requirements for executing each project activity.
• Purpose: Activity cost estimates contribute to the overall project budget by
breaking down costs at a more detailed level, helping in the identification of
resource needs and cost control measures.
• Activity Contingency Reserve:
• Definition: Activity contingency reserve is a portion of the budget allocated to
specific activities or tasks to account for uncertainties or risks associated with
those activities.
• Purpose: Activity contingency reserves are used to cover unforeseen costs that
may arise during the execution of specific activities, ensuring that these
uncertainties are addressed without affecting the overall project budget.
31.
32. Control cost is the
process of
monitoring the
status of the
project to update
the project costs
and managing
changes to the
cost baseline.
Key benefit: the
cost baseline is
maintained
throughout the
project.
CONTROL COST
OVERVIEW
34. EVM
FORMULA
Earned value management (EVM): A project management technique that provides a
systematic and objective way to measure a project's performance and progress
throughout its lifecycle. It involves comparing the work that has been actually performed
(earned value) with the work that was planned to be performed (planned value) and the
actual cost incurred (actual cost).
Here are the key components of Earned Value Management:
• Earned Value (EV): This represents the value of the work that has been completed at a specific
point in time. It is typically measured in monetary terms.
• Planned Value (PV): Also known as the Budgeted Cost of Work Scheduled (BCWS), this is the
value of the work that was planned to be completed by a specific point in time. It represents the
baseline cost according to the project schedule.
• Actual Cost (AC): Also known as the Actual Cost of Work Performed (ACWP), this is the actual
cost incurred to complete the work at a specific point in time.
35. EVM
FORMULA • Cost Variance (CV) :
• Formula: CV=EV−AC
• Explanation: Cost Variance (CV) is a measure of the cost performance of the project. It
represents the difference between the Earned Value (EV) and the Actual Cost (AC). A
positive CV indicates that the project is under budget, while a negative CV suggests that
the project is over budget.
• Schedule Variance (SV):
• Formula: SV=EV−PV
• Explanation: Schedule Variance (SV) is a measure of the schedule performance of the
project. It represents the difference between the Earned Value (EV) and the Planned
Value (PV). A positive SV indicates that the project is ahead of schedule, while a
negative SV suggests that the project is behind schedule.
• Variance at Completion (VAC):
• Formula: VAC=BAC−EAC
• Explanation: Variance at Completion (VAC) is a projection of the potential cost variance
at the end of the project. It represents the difference between the Budget at
Completion (BAC) and the Estimate at Completion (EAC). A positive VAC indicates a
favorable projection (under budget), while a negative VAC suggests an unfavorable
projection (over budget).
36. EVM
FORMULA • EV (Earned Value): The value of work performed,
measured in terms of the budget assigned to that work.
• AC (Actual Cost): The actual cost incurred in completing
the work.
• PV (Planned Value): The budgeted cost of work scheduled
up to a specific point in time.
• BAC (Budget at Completion): The total budgeted cost for
the entire project.
• EAC (Estimate at Completion): The projected total cost of
completing the project based on current performance.
37. EVM
FORMULA Estimate at Completion (EAC):
• Formula: EAC = AC + bottom up ETC
• Explanation: This formula calculates the Estimate at Completion (EAC) by adding the Actual Cost
(AC) to the Bottom-up Estimate to Complete (ETC). The Bottom-up ETC involves re-estimating the
remaining work at a detailed level.
• Formula: EAC = BAC / CPI
• Explanation: This formula uses the Cost Performance Index (CPI) to calculate the EAC. It divides the
Budget at Completion (BAC) by the CPI, representing the efficiency of cost performance. This
assumes that the current cost performance will continue until the end of the project.
• Formula: EAC = AC + BAC – EV
• Explanation: This formula calculates the EAC by taking into account the current cost performance. It
adds the Actual Cost (AC) to the remaining Budget at Completion (BAC - EV). It assumes that the
original budget was flawed, and the actual performance will continue.
• Formula: EAC = AC + ( (𝐵𝐴𝐶 − 𝐸𝑉)/(𝑆𝑃𝐼 × 𝐶𝑃𝐼))
• Explanation: This formula incorporates both the Schedule Performance Index (SPI) and the Cost
Performance Index (CPI) to calculate the EAC. It considers the impact of both schedule and cost
performance on the estimate. The SPI reflects schedule efficiency, and the CPI reflects cost
efficiency.
38. EVM FORMULA
Suppose you have a construction project, and the following information is available:
• Earned Value (EV): $50,000
• Actual Cost (AC): $45,000
• Planned Value (PV) = $55,000
• Now, let's calculate the Cost Variance (CV):
• CV=EV−AC
• CV = $50,000 - $45,000
• CV = $5,000
• Interpretation:
• A positive Cost Variance (CV>0) indicates that the project is under budget.
• In this example, the project has a positive CV of $5,000, meaning that the earned value (the value of
work performed) exceeds the actual cost incurred. This is a favorable situation, indicating cost efficiency.
39. EVM
FORMULA Cost Performance Index (CPI):
• Formula: 𝐶𝑃𝐼= 𝐸𝑉⁄𝐴𝐶
• Explanation: Cost Performance Index (CPI) is a key metric in EVM. It is calculated
by dividing the Earned Value (EV) by the Actual Cost (AC). The CPI measures the
efficiency of cost performance. A CPI greater than 1 indicates favorable cost
performance, while a CPI less than 1 suggests unfavorable cost performance.
Schedule Performance Index (SPI) :
• Formula: 𝑆𝑃𝐼= 𝐸𝑉⁄𝑃𝑉
• Explanation: Schedule Performance Index (SPI) is another EVM performance
index. It is calculated by dividing the Earned Value (EV) by the Planned Value (PV).
The SPI measures the efficiency of schedule performance. An SPI greater than 1
indicates favorable schedule performance, while an SPI less than 1 suggests
unfavorable schedule performance.
40. EVM
FORMULA • To-Complete Performance Index (TCPI):
• Formula: 𝑇𝐶𝑃𝐼 =
𝐵𝐴𝐶 −𝐸𝑉
𝐵𝐴𝐶 −𝐴𝐶
• Explanation: This formula represents one version of the To-Complete Performance
Index (TCPI). The TCPI is a measure used in EVM to assess the efficiency needed to
achieve certain project objectives, such as completing the project within the budget. In
this case, it compares the remaining budgeted cost to complete the project (BAC - EV)
with the remaining budgeted cost available (BAC - AC). A TCPI value greater than 1
indicates that more efficiency is needed to meet the budget.
• Formula: 𝑇𝐶𝑃𝐼=
𝐵𝐴𝐶 −𝐸𝑉
𝐸𝐴𝐶 −𝐴𝐶
• Explanation: This formula represents another version of the To-Complete Performance
Index (TCPI). It compares the remaining budgeted cost to complete the project (BAC -
EV) with the remaining estimate at completion (EAC - AC). This version of TCPI is often
used when there has been a significant variance in project performance, and the
Estimate at Completion (EAC) is adjusted based on current project conditions.
41. EVM FORMULA
Variances
• 𝐶𝑉 = 𝐸𝑉 − 𝐴𝐶
• 𝑆𝑉 = 𝐸𝑉 − 𝑃𝑉
• 𝑉𝐴𝐶 = 𝐵𝐴𝐶 − 𝐸𝐴𝐶
Indexes
• 𝐶𝑃𝐼 = Τ
𝐸𝑉
𝐴𝐶
• 𝑆𝑃𝐼 = Τ
𝐸𝑉
𝑃𝑉
To-complete performance index
• 𝑇𝐶𝑃𝐼=
𝐵𝐴𝐶 −𝐸𝑉
𝐵𝐴𝐶 −𝐴𝐶
or
• 𝑇𝐶𝑃𝐼=
𝐵𝐴𝐶 −𝐸𝑉
𝐸𝐴𝐶 −𝐴𝐶
• Estimate at completion
• EAC = AC + bottom up
ETC
• EAC = BAC / CPI
• EAC = AC + BAC – EV
• EAC = AC + 𝐵𝐴𝐶 − 𝐸𝑉
𝑆𝑃𝐼 × 𝐶𝑃𝐼
42. QUESTION 1
For the construction project at ABC the project team has calculated the following at one
point in its lifecycle:
• Earned Value = CAN 5.4M
• Actual Costs = CAN 6.9M
• Total budgeted cost for the entire project = CAD 17.8M
PART 1: Calculate the following:
• Current Cost performance Index
• Estimate at Completion using the BAC/CPI method.
• Variance at Completion.
• To-Complete Performance Index.
PART 2: What are your conclusions about Cost Management and Control of this project?
43. QUESTION 2
For a systems project at LLK the project team has calculated the following at one point in its lifecycle:
• Earned Value = CAN 65,000
• Actual Costs = CAN 59,000
• Planned Value = CAN 55,000
• Total budgeted cost for the entire project = CAD 123,000
PART 1: Calculate the following:
• Current Cost performance Index
• Current Schedule performance Index
• Estimate at Completion using the SPI/CPI method.
• Variance at Completion.
• To-Complete Performance Index.
PART 2: What are your conclusions about Cost Management and Control of this project?