Project Management Day 4 Cost ٌ R02.pdf

4
Course Outline
Day 1: Introduction + Project Integration Management.
Day 2: Project Scope Management.
Day 3: Project Schedule Management.
Day 4: Project Cost Management.
Day 5: Project Risk Management.
Day 6: Scrum.
Day 7: Final Presentation Day!

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Project Cost Management
Rev.221102
3

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Processes
Orientation
4
Dr Mohamed Elfarran

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● 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.

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Project Cost Management Overview :
Control Costs
Determine
Budget
Estimate
Costs

4
Definitions
1. Estimate Costs-The process of developing an approximation of the monetary
resources needed to complete project activates.
2. Determining Budget-The process of aggregating the estimated costs of
individual activates or work packages to establish an authorized cost baseline.
3. Control Costs: The process on monitoring the status of the project to update
the project budget and managing changes to the cost baseline.

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Planning the
Project under
Triple
Constraints

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Planning
Process
Costs/Budget

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Using Gantt
Chart for
Project
Control
http://en.wikipedia.org/wiki/File:GanttChartAnatomy.svg

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Performance
Measurement
Baseline

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Plan Cost Management
The process of how the project costs will be estimated,
budgeted, managed, monitored, and controlled. The key benefit
of this process is to provide guidance and direction on how the
project costs will be managed throughout the project.
Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK®
Guide) – Fifth Edition, Project Management Institute, Inc., 2013, Page 195.

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Plan Cost Management, Output
Plan Cost Management can establish:
● Unites of measure (Hrs – Days - $ - SAR)
● Level of precision (995.59$ to 1000$)
● Level of accuracy (+- 10%)
● Organization procedures links
● Control thresholds
● Rules of performance measurement
● Reporting format
● Additional details such as Funding & Fluctuation

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Estimate Costs
Estimate Costs is Process of developing an approximation of the cost of
the resources needed to complete the project work. The key benefit of
this process is that it determines the monetary resources required for the
project.
○ Cost estimating: Assessing how much it will cost the organization
to provide the product or service.
○ Pricing: Assessing how much the organization will charge for the
product or service.

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Estimate costs, Inputs
● Enterprise Environmental Factors (EEFs)
○ Marketplace conditions
○ Published Commercial Information
○ Exchange rates and inflation
● Organizational Process Assets (OPAs)
○ Cost estimating policies
○ Cost estimating templates
○ Historical information and Lessons learned repository

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Estimate costs: Tools & Tech.
● Analogous estimating (Expert judgment)
○ Used to estimate total project costs if there is a limited amount of detailed
information
● Parametric estimating
○ Using project characteristics (or parameters) in a mathematical model to predict
costs (e.g., price per square foot)
● Bottom-up estimating
○ Estimating the cost of individual work items and then rolling up the costs to arrive
at a project total

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Estimate costs: Tools & Tech.
● Three Point Estimate
- Most likely (cM): the cost of the activity based on realistic effort assessment for the
required work and any predicted expenses.
- Optimistic (cO): The cost based on analysis of the best case scenario for the activity.
- Pessimistic (cP): The cost based on analysis of the worst case scenario for the activity.
Two commonly used formulas:
Triangular distribution cE = (cO + cM + cP)/ 3
Beta distribution cE = (cO + 4 cM + cP)/ 6

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Estimate Cost, Outputs
● Activity Cost estimates:
Quantitative assessments of the probable cost required to complete project works, as well as contingency
amount.
Types of estimates
➢ Order of magnitude (-25% to + 75%)
(It's usually performed during the selection and approval stage of a project. Generally, it’s used for estimating a project budget that doesn’t have
a lot of detail.)
➢ Budget estimate (-10% to + 25%)
(This type of estimate is useful when a project proceeds in its planning or when budgets need to be allocated across the
work breakdown structure.)
➢ Definitive estimate (-5% to + 10%)
(This high level of accuracy can normally only be achieved when the project has been planned in detail and the information
relevant for a reliable estimation of the work is available.)

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● Resource Cost
Estimation
● Activity Cost
Estimation
23
Dr Mohamed Elfarran

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Determine Budget
Determine Budget is the process of aggregating the estimated cost of
the individual activities or work packages, to establish an authorized
baseline. The key benefit of this process is that it determines the cost
baseline against which performance can be monitored and controlled.

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Budget
http://pm-foundations.com/tag/project-budgeting/

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Determine Budget, Outputs
Cost baseline
The cost baseline is the approved version of the time-phased project
budget at, excluding any management reserves, which can only be
changed through formal change control procedures. It is used as a basis
for comparison.

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SN Activity List Cost EGP 1 2 3 4 5 6 7 8 9 10 11
A1
A2
A3
A4
A5
A6
A7
A8
A9
A10
A11
A12
Start
BBB
CCC
DDD
EEE
FFF
GGG
HHH
III
JJJ
KKK
LLL
0
100
1600
600
200
330
50
200
900
50
250
80
50 50
400 400 400 400
150 150 150 150
100 100
110
110
110
50
100 100
300 300 300
50
250
80

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● Resource Cost
Estimation
● Activity Cost
Estimation
30
Dr Mohamed Elfarran

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Control costs
Cost control is the process of monitoring the status of the project to update
the project costs and managing changes to the cost baseline.
The key benefit of this process is that the cast baseline is maintained
throughout the project.
32
*This definition is taken from the Glossary of the Project Management Institute, A Guide to the Project Management
Body of Knowledge, (PMBOK® Guide) – Sixth Edition, Project Management Institute, Inc., 2017.

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Control costs
● Project Cost Control includes:
○ Influencing the factors that create changes to the authorized cost baseline.
○ Ensuring that all change requests are acted on in a timely manner.
○ Managing the actual changes when and as they occur.
○ Ensuring that cost expenditure do not exceed the authorized funding by
period, by WAS, by activity, and in total for the project.
33

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Control costs
● Monitoring cost performance to isolate and understand variances from the
approved cost baseline.
● Monitor work performance against funds expended.
● Preventing unapproved changed from being included in the reported cost or
resources usage.
● Informing appropriate stakeholders of all approved changes and associated cost.
● Bring expected cost overruns within acceptable limits.
34

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Acronym Name Formula
AC Actual Cost
AC = actual cost of the
project up to the
measurement period
BAC Budget at Completion BAC = total budgeted cost
of the project
EV Earned Value EV = Actual % complete x
BAC
PV Planned Value PV = Planned % complete x
BAC
CV Cost Variance CV = EV - AC
Control Costs Formulas:

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Acronym Name Formula
SV Schedule Variance SV = EV - PV
CPI Cost Performance Index CPI = EV / AC
SPI Schedule Performance Index SPI = EV / PV
EAC Estimate at Completion EAC = BAC / CPI
ETC Estimate to Complete ETC = EAC - AC
VAR Variance at Completion VAR = BAC - EAC

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Earned Value
● Earned Value (EV)
A method of measuring project performance by comparing
the amount of work planned with that actually accomplished,
in order to determine if cost and schedule performance are
as planned.

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Example:
•4-month project: Total budget $1,000,000 = Budget at completion (BAC)
•Project cost at end of month three: $950,000 = Actual cost (AC)
•Estimated work complete at end of month three: 80%
•Actual work complete at end month three: 75%
4-month project (BAC) =
1,000,000
M 1 M 2 M 3 M 4
Planned work complete = 80%
Actual work complete = 75%

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Planned value
PV = Planned % Complete x BAC
PV = 80% x $1,000,000 = $800,000
Earned value
EV = Actual % Complete x BAC
EV = 75% x $1000,000 = $750,500
Cost variance
CV = EV – AC
CV = $750,000 - $950,000 = -$200,000
Planned Value (PV) is how much
work was expected to be completed
Earned Value (EV) is how much
work has actually been completed
Cost Variance (CV) is how the cost
of the project is comparing to the
value of work completed

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Cost performance index
CPI = EV / AC
CPI = $750,500 / $950,000 = 0.79
For every $1 input (cost) , we are earning only $0.8 in work output
Cost Performance Index (CPI)
shows how much work is being
completed for every unit of cost
spent (Output/Input)

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Schedule performance index
SPI = EV / PV
SPI = $750,500 / $800,000 = 0.94
For every hour we planned , we are completing only 0.94 hours.
Schedule Performance Index
(SPI) shows how close the actual
completed work compared to the
schedule

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Estimate at completion
EAC = BAC / CPI
EAC = $1000,000 / 0.94 = $1,063,829
Based on current performance, the project
will be completed at cost = $1,063,829.
Estimate to complete
ETC = EAC - AC
ETC = $1,063,829 - 950,000 = $113,829
Based on current performance, the project
requires $113,829 to get it finished
Estimate At Completion (EAC)
forecasts the total cost of the
project based on current project
performance
Estimate To Complete (ETC)
forecasts how much more money
will be required to finish the project

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Variance at completion
VAR = BAC – EAC
VAR = $1,000,000 - $1,063,829 = -$63,829
Based on current performance, the project will
run about $63,829 over budget
Variance At Completion (VAR)
predicts difference between the
budgeted and actual project cost at
the end of the project

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Planned Value
Using the example above, let’s calculate the planned value.
1. After 2 months
*As you can see in the graphic, the project is scheduled for four months. Meaning, after two months,
you should have completed 50% of the work.
Given:
● Project duration: 4 months
● Project budget (BAC): $4,000
● Elapsed time: 2 months
● % complete (planned): 50%
PV = % complete (planned) x BAC
PV = 50% x $4,000
PV = $2,000

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Earned Value
1. You spent $750 after the first month and you only completed 20% of the project.
Given:
● Project duration: 4 months
● Project budget (BAC): $4,000
● Elapsed time: 1 month
● Planned value: $1,000
● Actual cost: $750
● % complete (planned): 25%
● % complete (actual): 20%
EV = % complete (actual) x BAC
EV = 20% x $4,000
EV = $800
*The value of the work done is $800 even when you only spent $750.

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Cost Variance (CV)
● Comparing EV to AC:
○ EV: the amount originally budgeted for the work completed or in-
process
○ AC: the actual costs of that work
● CV = EV – AC
● A negative CV means more dollars were spent to accomplish the
work than was planned

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Cost Variance
CV = EV - AC
CV = $800 - $750
CV = $50
*Because the cost variance is positive, this project is under budget.
Cost Performance Index = EV/AC
CPI = $800/$750
CPI = 1.067
*Because the CPI is greater than 1, this project is under budget.

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Schedule Variance (SV)
● Comparing EV to PV:
○ EV, the amount originally budgeted for the work that has been
completed or is in-process
○ PV, the amount budgeted for the work that was planned to have
been accomplished
● SV = EV – PV
● A negative result means less work has been performed than was
planned

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Schedule Variance
SV = EV - PV
SV = $800 - $1,000
SV = -$200
*Because the schedule variance is negative, this project is behind schedule
Schedule Performance Index (SPI) = EV/PV
SPI = $800/$1,000
SPI = 0.8
*Because the SPI is less than 1, this project is behind schedule.

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Quick Revision
Rev.221102
63

4
Performance Measurement
Cost
Time
VAC
EAC
Data Date
AC
ETC
CV
SV
PV
EV
Schedule Slippage
(to date)
Project Schedule Slippage
(at completion)
BAC

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Earned Value
AC
EV
PV
On cost
On Schedule
$1
$1
$1
Under cost
On Schedule
$1
$2
$2
Over cost
On Schedule
$2
$1
$1
On cost
Ahead of Schedule
$2
$2
$1
Over cost
Ahead of Schedule
$3
$2
$1
Under cost
Ahead of Schedule
$1
$2
$1
Under cost
Behind Schedule
$1
$2
$3
Over cost
Behind Schedule
$3
$1
$2
On cost
Behind Schedule
$1
$1
$2

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Earned Value example
● PV= $ 3000, EV= $ 2500, AC= $ 2800, BAC= $ 4000
● Find: CV, CPI, SV, SPI, EAC, ETC & VAC

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Earned Value Example
● CV= EV – AC = 2500 – 2800 = - 300
○ we are over budget by $ 300
● CPI= EV / AC = 2500 / 2800 = 0.893
○ we are getting 89 cents out of every dollar we put in the project
● SV= EV – PV = 2500 – 3000 = - 500
○ we are behind schedule
● SPI= EV / PV = 2500 / 3000 = 0.833
○ we are only progressing at 83% of the rate of the planned

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Earned Value Example
● EAC= BAC / CPI = 4000 / 0.893 = 4479
○ we are currently estimate that the total project will cost $ 4479
● ETC= EAC – AC = 4479 – 2800 = 1679
○ we need to spend $ 1679 to finish the project
● VAC= BAC - EAC = 4000 - 4479 = - 479
○ we are currently expect to be $ 479 over budget, when the project is
completed

Project Management Day 4 Cost ٌ R02.pdf

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