Project Cost Management

PMBOK Chapter 7

PROCESS GROUPS

Cost Estimating

Cost Budgeting

Cost Control

I

Planning

E

Controlling

C

Cost Estimating

Cost estimating and Pricing:

Cost estimating: how much will it cost the performing

organization to provide the product or service

involved?

Pricing: how much will the performing organization

charge for the product or service? Business decision.

Estimating should be done by the person doing

the work.

Cost Estimating

Based on the WBS to increase the accuracy.

Project managers should analyze the needs of

the project, to compare and reconcile any

differences with cost requirements from

management.

1. WBS

2. Resource

requirements

3. Resource rates.

4. Act. duration est.

5. Historical info.

6. Chart of accounts

7. Risks

1. Analogous est.

2. Parametric

modeling

3. Bottom-up est.

1. Cost estimates

2. Cost

management plan

Inputs Tools Outputs

Cost Estimating

Cost estimates for all resources that will be

charged to the project.

Generally expressed in units of currency to facilitate

comparisons both within and across projects.

Generally includes appropriate risk response planning.

Supporting detail must include:

Reference to WBS.

How it was developed?

Assumptions made.

Range of possible results.

Cost management plan how cost variances will

be managed.

Cost Budgeting

Allocate the overall cost estimates to individual

activities or work packages to establish a cost

baseline for measuring project performance.

1. Cost estimates

2. WBS

3. Project schedule

4. Cost

management plan

1. Cost budgeting

tools and

techniques

1. Cost baseline

Inputs Tools Outputs

Cost Budgeting

The cost baseline will be used to measure and

monitor cost performance of the project.

Expected

Cash Flow

Cost

Baseline

Cumulative

Values

Time

Estimates vs. Accuracy

Most difficult to estimate as very

little project info is available

Estimate Accuracy

Order of

Magnitude

(Early)

-25%

+75%

Budget

Estimate

-10%

+25

Definitive

Estimate

-5%

10%

Used to finalize the Request for

Authorization (RFA), and establish

commitment

Development stage estimate.

Needed to predict revised project

completion date

Tools for Estimating (and

Budgeting)

Top Down

Estimating

Accuracy depends on experience

Fast, but estimates are rough

Bottom Up

Estimating

Slow, but reliable

High cost (time) / WBS needed

Buy-in from the team

Parametric

Modeling

Mathematical models to predict costs

Two types: REGRESSION ANALYSIS,

and LEARNING CURVE

Delphi

Method

(analogous)

Expert judgment

Tasks need not to be identified

Considerable experience needed

Cost Control

Monitor Cost Performance

Detect and understand variances from plan

Ensure all changes are recorded and agreed upon

Prevent bogus changes from being included in cost baseline

Inform stakeholders of authorized changes

Bring costs within acceptable limits

Cost Control

Understand what is driving variances, good and

bad, and decide what action to take.

1. Cost Baseline

2. Performance

Reports

3. Change Requests

4. Cost

Management

Plan

1. Cost Change

Control System

2. Performance

Measurement

3. Earned Value

Management

4. Additional

Planning

5. Computerized

Tools

1. Revised Cost

Estimates

2. Budget Updates

3. Corrective Action

4. Estimate at

Completion

5. Project Closeout

6. Lessons learned

Inputs Tools Outputs

Cost Control

Work completion methods: • 0/100 Conservative approach. No work, no

money.

• 20/80 20% at start of the project, the rest when

it is completed.

• 50/50 Liberal approach.

Cost Control: Earned Value

Management Earned Value:

Integrates cost, time and scope. Used to forecast future performance and project completion dates

Key concepts:

EV = Earned Value (BCWP) Estimated value of the work actually accomplished

PV = Planned Value (BCWS) Estimated value of the work planned to be done

AC = Actual Cost (ACWP) Actual cost incurred for the work accomplished

Earned Value Management

BAC = Budget At Completion Estimated total cost of the project when done

EAC = Estimate At Completion Forecast of most likely total project cost based on

project

performance and risk quantification

CPI = Cost Performance Index Ratio of budgeted costs to actual cost

SPI = Scheduled Performance Index Estimated total cost of the project when done

Earned Value Management Key Formulas:

CV = Cost Variance = EV- AC Negative is over budget, Positive is under budget

SV = Schedule Variance = EV- PV

Negative is behind schedule, Positive is ahead schedule

CPI = Cost Performance Index = EV / AC

SPI = Schedule Performance Index = EV / PV

EAC = Estimate At Completion = BAC / CPI Most often used formula

AC + ETC

AC + BAC - EV

AC + (BAC - EV) / CPI

EAC = Estimate At Completion = EAC - AC

VAC = Variance At Completion = BAC - EAC

Cost Types

Direct Costs

Related “Directly” to the project

ex. Labor hours, material, equipment,

food, travel. . .

Indirect Costs

Overhead used for more than one project

ex. Building rent, taxes, janitorial

services

Cost Types

A cost by any other name, really isn’t the same! • Variable Cost – Changes with volume

• Fixed Cost – Stay the same, regardless of volume

COST

Volume

TC = VC+FC

VC

FC

Cost Types

Project Costs

Are incurred while the project is being fulfilled.

Life Cycle Costs

Includes the costs after project completion.

There may be temptation to lower project costs at the expense of long term costs. Life Cycle Costing gives the PM a way to consider costs outside of the scope of project fulfillment