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Denise Robertson Information quoted or derived from PMI, Mulcahy, and Looking Glass Development's PMP exam prep materials
Page 1
PMI PMP Exam Prep PMI Mile High Chapter North Area Study Group
Cost PresentationPrepared by Denise Robertson
8 March 2003
Denise Robertson Information quoted or derived from PMI, Mulcahy, and Looking Glass Development's PMP exam prep materials
Page 2
Cost Estimating Concepts for working with cost
estimates: Estimates are resource driven and
based on the WBS Estimates should be made by person
responsible for the work Estimate accuracy is improved by
historical information
Denise Robertson Information quoted or derived from PMI, Mulcahy, and Looking Glass Development's PMP exam prep materials
Page 3
Cost Estimating Concepts for working with cost
estimates (continued): Costs should be managed to cost
estimates (“toe the line”) A cost baseline should be kept and not
changed except for project changes Plans should be revised as necessary
during work
Denise Robertson Information quoted or derived from PMI, Mulcahy, and Looking Glass Development's PMP exam prep materials
Page 4
Cost Estimating Concepts for working with cost
estimates (continued): Corrective action should be taken
when (cost) problems occur Management estimates should not be
taken at face value; the PM is responsible for performing his own estimates and reconciling any differences
Denise Robertson Information quoted or derived from PMI, Mulcahy, and Looking Glass Development's PMP exam prep materials
Page 5
Earned Value Analysis Measures scope, time project performance Integrates cost, time, scope Can be used to forecast future
performance and project completion date EV charts are in texts. You may want to
substitute them for old terminology “placemat” features or use the following to match the placement format.
Denise Robertson Information quoted or derived from PMI, Mulcahy, and Looking Glass Development's PMP exam prep materials
Page 6
Cost Estimating Terms
Old and New Terminology
OLD TERM OLD ACRONYM NEW ACRONYM NEW TERM
Budgeted Cost of Work Scheduled
BCWS PV Planned Value
Budgeted Cost of Work Performed
BCWP EV Earned Value
Actual Cost of Work Performed
ACWP AC Actual Cost
Denise Robertson Information quoted or derived from PMI, Mulcahy, and Looking Glass Development's PMP exam prep materials
Page 7
New Placemat EV ChartIn Alphabetical Order
AC EV PV
CV = = SV
MINUS MINUS
CPI = = SPI
DIVIDED BY DIVIDED BY
Denise Robertson Information quoted or derived from PMI, Mulcahy, and Looking Glass Development's PMP exam prep materials
Page 8
New Placemat Cost AnalysisIF AC > EV AC = EV AC < EV
THEN CV < 0 CV = 0 CV > 0
CPI < 1 CPI = 1 CPI > 1
The project is
Over Budget On Budget Under Budget
Denise Robertson Information quoted or derived from PMI, Mulcahy, and Looking Glass Development's PMP exam prep materials
Page 9
New Placemat Schedule Analysis
IF PV > EV PV = EV PV < EV
THEN SV < 0 SV = 0 SV > 0
SPI < 1 SPI = 1 SPI > 1
The project is
Behind Schedule
On Schedule Ahead of Schedule
Denise Robertson Information quoted or derived from PMI, Mulcahy, and Looking Glass Development's PMP exam prep materials
Page 10
New Terminology Formulae(table slightly expanded)
CV Cost Variance CV = EV - AC
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 Completion ETC = EAC - AC
VAC
Variance At Completion VAC = BAC - EAC
Denise Robertson Information quoted or derived from PMI, Mulcahy, and Looking Glass Development's PMP exam prep materials
Page 11
Types of Cost Estimating
Analogous Top-down estimating using expert judgment performed by managers based on previous similar products. Least accurate.
Bottom-up Based on WBS tasks, staff contributes estimates to roll up into project total. Most accurate.
Parametric Mathematical modeling to predict project costs. 2 types:
1. Regression Scatter diagram.
2. Learning Curve
Improved efficiency based on repetition.
Computerized Tools
Software packages for many industries that automate Analogous, Bottom-up and Parametric estimating.
Denise Robertson Information quoted or derived from PMI, Mulcahy, and Looking Glass Development's PMP exam prep materials
Page 12
Analogous Estimating Advantages
Quick Less Costly Tasks need not be identified Causes overall project costs to be capped
Disadvantages Least accurate Difficult to use for projects with uncertainty Risks management politicking
Denise Robertson Information quoted or derived from PMI, Mulcahy, and Looking Glass Development's PMP exam prep materials
Page 13
Bottom-up Cost Estimating Advantages
Most accurate Gains buy-in from team Provides basis for monitoring and control
Disadvantages Time intensive Encourages padding Risks team politicking
Denise Robertson Information quoted or derived from PMI, Mulcahy, and Looking Glass Development's PMP exam prep materials
Page 14
Earned Value Associations Per Mulcahy, the PMP exam
associates “Measure project performance
continually.” “Refine control limits.” “Evaluate the effectiveness of corrective
action.”
with the controlling process group so consider thinking of them with EV.
Denise Robertson Information quoted or derived from PMI, Mulcahy, and Looking Glass Development's PMP exam prep materials
Page 15
Resource Planning Activities Pertaining to Cost Estimation Construct responsibility assignment
matrix Intersection of WBS and OBS (Organization
Breakdown Structure) Identification of management leads and WBS
resources Calculate staff availability Calculate amount of work that can be
completed within a given period of time Work = (total hrs. * availability) * efficiency
where efficiency is .70
Denise Robertson Information quoted or derived from PMI, Mulcahy, and Looking Glass Development's PMP exam prep materials
Page 16
Resources and Cost Estimating Cost estimating involves
developing an approximation of the cost of resources needed to complete project activities
Cost estimating is resource driven Resource requirements are based
on quantities of each element at the lowest level of the WBS.
Denise Robertson Information quoted or derived from PMI, Mulcahy, and Looking Glass Development's PMP exam prep materials
Page 17
Estimating AccuracyPhase Range Accuracy Category Subcategor
y
Initiating -25% to +75%
lowest Order of Magnitude
Order of Magnitude
Planning -10% to +25%
Conceptual Budget
Planning -10% to +25%
Preliminary Budget
Planning -5% to +10% Definitive Definitive
Planning fixed highest Control Definitive
Denise Robertson Information quoted or derived from PMI, Mulcahy, and Looking Glass Development's PMP exam prep materials
Page 18
Forecasting Concepts Learning Curve: Over time the total cost
will rise, but the cost per unit will drop because repetition increases efficiency.
Law of Diminishing Returns: Over time, adding more resources may increase overall output, but will eventually decrease individual productivity. Adding twice as many people to the same
task may not cause the task to be finished twice as fast.
Denise Robertson Information quoted or derived from PMI, Mulcahy, and Looking Glass Development's PMP exam prep materials
Page 19
Project Selection Tools Project Selection Tools are used to
evaluate whether to go forward on Cost Estimating Phase. Tools include: Payback Period (PBP) Cost Benefit Analysis Present Value/Future Value (PV/FV) Net Present Value (NPV) Internal Rate of Return (IRR) Return on Investment (ROI)
Denise Robertson Information quoted or derived from PMI, Mulcahy, and Looking Glass Development's PMP exam prep materials
Page 20
Payback Period (PBP) PBP is speed of financial return
expressed as number of time periods required to recover investments before profit starts to accumulate.
If NPV > PBP then ignore PBP
Denise Robertson Information quoted or derived from PMI, Mulcahy, and Looking Glass Development's PMP exam prep materials
Page 21
Cost Benefit Analysis Cost Benefit Analysis determines
the Benefit to Cost Ratio (BCR) in which benefits are revenue or “payback” If BCR > 1 then Benefits > Costs If BCR = 1 then Costs = Benefits If BCR < 1 then Costs > Benefits
Denise Robertson Information quoted or derived from PMI, Mulcahy, and Looking Glass Development's PMP exam prep materials
Page 22
Present Value and Net Present Value
Present Value (PV) is the value today of future cash flows.
Net Present Value (NPV) is the present value of the total benefits (income or revenue) minus the costs.
NPV is normally used to evaluate project candidacy. A higher NPV is the better choice between projects
because it means a better return. On exam questions, the time factor of the NPV is
already calculated into the NPV, so choose higher NPV and ignore additional time data in question.
If the Payback Period (PBP) is less, the NPV takes precedence in evaluation.
Denise Robertson Information quoted or derived from PMI, Mulcahy, and Looking Glass Development's PMP exam prep materials
Page 23
PV and NPV Formulae You will probably not be expected to
calculate according PV and NPV formulae on the exam.
PV = FV / (1 + r)n or PV = CF / (1 + r)n
NPV = CF0 + CF1/(1 + r)1 + CF2/(1 + r)2 + CF3/(1 + r)3… CFn/(1 + r)n
Where FV is future value, CF is future Cash Flow, r interest Rate, and n is number of time periods
Denise Robertson Information quoted or derived from PMI, Mulcahy, and Looking Glass Development's PMP exam prep materials
Page 24
Internal Rate of Return (IRR) IRR is the rate of interest at which
revenues and costs are equal. NPV = 0 Higher IRR is better than lower IRR Used to compare multiple projects In good investments:
IRR > Business Cost of Capital or Discount Rate
Denise Robertson Information quoted or derived from PMI, Mulcahy, and Looking Glass Development's PMP exam prep materials
Page 25
Return on Investment (ROI) ROI = Income / Invested Capital Measures overall effectiveness of
generating profits with available assets.
Higher ROI is better than lower ROI
Denise Robertson Information quoted or derived from PMI, Mulcahy, and Looking Glass Development's PMP exam prep materials
Page 26
Cost Considerations 3 types of project costs to
consider: 1. Life Cycle Costing (cradle-to-grave)2. Opportunity Cost (cost of next best
project)3. Sunk Costs (monies already spent)
Denise Robertson Information quoted or derived from PMI, Mulcahy, and Looking Glass Development's PMP exam prep materials
Page 27
Life Cycle Costing(cradle-to-grave) Concept that PMs should not
manage project costs to the exclusion of overall costs for Operations and Maintenance Phases.
Project costs may be low at the expense of costs for the rest of the life of the project.
Denise Robertson Information quoted or derived from PMI, Mulcahy, and Looking Glass Development's PMP exam prep materials
Page 28
Opportunity Cost(cost of next best project) Impacts cost estimating by
reducing options to perform other projects.
Value of the project that was not selected or the “cost of the lost opportunity.”
Denise Robertson Information quoted or derived from PMI, Mulcahy, and Looking Glass Development's PMP exam prep materials
Page 29
Sunk Costs (monies already spent) Sunk costs should not be
considered in the estimating process.
Never use them. Bad Project Manager, bad, bad!
Denise Robertson Information quoted or derived from PMI, Mulcahy, and Looking Glass Development's PMP exam prep materials
Page 30
Cost Budgeting Definition Cost Budgeting is allocating the
overall project cost estimates to the individual work packages and activities to establish a Cost Baseline for measuring project performance.
Denise Robertson Information quoted or derived from PMI, Mulcahy, and Looking Glass Development's PMP exam prep materials
Page 31
Cost Budgeting Concepts An estimate is an approximation A budget is what you’re allowed to
spend WBS must be deliverable based Assign costs to deliverables Cost budget may be described by
a cumulative S curve mapping cost of deliverables against time period
Denise Robertson Information quoted or derived from PMI, Mulcahy, and Looking Glass Development's PMP exam prep materials
Page 32
Cost Budgeting Activities Establish control accounts Delineate accounting categories Establish management reserves Forecast cash flows Create cost baseline
Denise Robertson Information quoted or derived from PMI, Mulcahy, and Looking Glass Development's PMP exam prep materials
Page 33
Control Accounts Used in Cost Budgeting to divide
WBS into cost packages to facilitate one or more cost baselines through: cost assignment schedule tracking cost control reporting
Denise Robertson Information quoted or derived from PMI, Mulcahy, and Looking Glass Development's PMP exam prep materials
Page 34
Accounting Categories The following Accounting
Categories are delineated during Cost Budgeting for consideration by PMs: variable vs. fixed direct vs. indirect recurring vs. non-recurring capital vs. expense,
(I.e., durable vs. consumable)
Denise Robertson Information quoted or derived from PMI, Mulcahy, and Looking Glass Development's PMP exam prep materials
Page 35
Managerial Reserves Provided for risks outside defined
project scope (Unknown-Unknowns)
Not controlled by PM Granted through Change Control
Denise Robertson Information quoted or derived from PMI, Mulcahy, and Looking Glass Development's PMP exam prep materials
Page 36
Cash Flow Forecasting Forecasting cash flows that can be
demonstrated as a cumulative S curve of cost vs. time for deliverables on a time based budget is a Cost Budgeting activity.
Denise Robertson Information quoted or derived from PMI, Mulcahy, and Looking Glass Development's PMP exam prep materials
Page 37
Cost Baseline The Cost Baseline is an output of
the Cost Budgeting process that can be represented as a performance measurement baseline cumulative S curve showing budgeted cost of work scheduled and cumulative planned value.
Denise Robertson Information quoted or derived from PMI, Mulcahy, and Looking Glass Development's PMP exam prep materials
Page 38
Depreciation Definition Depreciation is the indirect cost of
an asset’s (piece of capital equipment’s) value over time.
The most common form of depreciation is Straight Line Depreciation (SL) in which the same amount is taken each year.
Denise Robertson Information quoted or derived from PMI, Mulcahy, and Looking Glass Development's PMP exam prep materials
Page 39
Forms of Depreciation
Usage Method Type Acronym
Description
most common
Straight Line
Straight Line SL Same amount taken each year
used formachines
Straight Line
Unit of ProductionInput/Output
UP/O [UP/O] = (Acquisition Cost – Residual Value) / Estimated Productive Output in Units
ACRS Accelerated
Double DecliningBalance
DDB Loses investment value faster than with SL depreciation
ACRS Accelerated
Sum of the Year Digits
SYD Loses investment value faster than with SL depreciation
Denise Robertson Information quoted or derived from PMI, Mulcahy, and Looking Glass Development's PMP exam prep materials
Page 40
Cost Control and Firefighting
1. Fire prevention by influencing the factors which create changes to the cost baseline to ensure that the changes are beneficial.
2. Fire detection by determining that a cost baseline has changed and…
3. Fire fighting by managing actual changes when and if they occur
Cost Budget := Cost Plan
Denise Robertson Information quoted or derived from PMI, Mulcahy, and Looking Glass Development's PMP exam prep materials
Page 41
Cost Flow Analysis Projects cash flow in and out of a
project on a monthly basis Uses 2 types of cost accounting
systems:1. Cash based2. Accrual based
Is a method of measuring project progress
Denise Robertson Information quoted or derived from PMI, Mulcahy, and Looking Glass Development's PMP exam prep materials
Page 42
Cost Accounting Methods Cash Based Cost Accounting
Can have its own baseline Accounts for cash when it leaves hand Used by Finance Department
Accrual Based Cost Accounting Can have its own baseline Check based accounting for cost at
time liability is incurred Used by Project Management
Denise Robertson Information quoted or derived from PMI, Mulcahy, and Looking Glass Development's PMP exam prep materials
Page 43
Pareto’s Principle 20% of the work packages account
for 80% of the cost variances.
Denise Robertson Information quoted or derived from PMI, Mulcahy, and Looking Glass Development's PMP exam prep materials
Page 44
Measuring Progress of Individual TasksInstead of “guesstimates,” WBS tasks use these rules:Rule Task Begins Task is
CompletedPercent
Progressed
50/50 Y N 50%
50/50 Y Y 100%
20/80 Y N 20%
20/80 Y Y 100%
0/100 Y N 0%
0/100 Y Y 100%
Denise Robertson Information quoted or derived from PMI, Mulcahy, and Looking Glass Development's PMP exam prep materials
Page 45
Risks Unknown-Unknowns: unknown risks
outside the defined Project Scope Known-Unknowns: known risks See Risk sections of study guides for
complete discussion and be aware unknown-unknowns and known-unknowns are sometimes referred to in Cost section of PMP exam.
Denise Robertson Information quoted or derived from PMI, Mulcahy, and Looking Glass Development's PMP exam prep materials
Page 46
Managing Change Crashing: adding more resources to
critical path tasks while maintaining scope. Usually results in increased costs. If a project is already late, do not crash.
Fast Tracking: doing critical path tasks in parallel that were originally planned to be performed in series. Usually results in increased risk.
Denise Robertson Information quoted or derived from PMI, Mulcahy, and Looking Glass Development's PMP exam prep materials
Page 47
Managing Tasks Leveling: Resource leveling is using
network analysis in which schedule decisions are driven by resource management concerns. Leveling lets schedule and cost slip in favor of having a stable number of resources each month.
Floating is delaying a task without delaying the project completion.