PMGT401-07 Project Cost Management-04

PMGT- 401: Project Management Fundamentals © 2009 Bob Xourafas, P.Eng, PMP, Proprietary

07 Project Cost Management

PMGT- 401:Project Management Fundamentals




07 Project Cost Management:Definition

Processes:

• 7.1 Estimate Costs- Planning

• 7.2 Determine Budget - Planning

• 7.3 Control Costs- Monitoring and Control

Definition:

Project Cost Management includes the

processes involved in estimating,

budgeting, and controlling costs so that

the project can be completed within the

approved budget

You have to

remember the

definition



Learning Objectives

By the end of this chapter you will be able to:

Understand the main activities that take place during Estimate Costs

and Determine Budget Planning and Control Costs

The topics that will be covered are:

• Estimate Costs

• Estimates of the approximate costs of the resources (human, materials, etc.) needed to complete the activities identified on the project schedule

• Determine Budget

• The process of aggregating the estimated costs of individual activities or

work packages to establish an authorized cost baseline

• Control Costs

• The process of monitoring the status of the project to update the project

budget and managing changes to the cost baseline.



Reading Materials

• Text:

• Chapter 7

• References:

• PMBOK: Section 7



PMGT- 401: Project Management Fundamentals Bob Xourafas, P.Eng, PMP

04 Project Integration Management

07 Project Cost Management:Process Mapping

Initiating

4.1 Develop Project Charter

Planning

4.2 Develop Project Management Plan

5.1 Collect Requirements

5.2 Define Scope

5.3 Create WBS

6.1 Define Activities

6.2 Sequence Activities

6.3 Estimate Activity Resources

6.4 Estimate Activity Durations

6.5 Develop Schedule

7.1 Estimate Costs

7.2 Determine Budget

Executing

4.3 Direct and Manage Project Execution

Monitoring & Controlling

4.4 Monitor and Control Project Work

4.5 Perform Integrated Change Control

5.4 Verify Scope

5.5 Control Scope

6.6 Control Schedule

7.3 Control Costs

Closing

4.6 Close Project or Phase



Project Cost Management Processes

• Since you finished your project schedule development, you now have an exhaustive breakdown of project activities, and you have some pretty good duration estimates.

• Now the question that’s forever on the mind of the executive management staff: how much is it going to cost?

• The purpose of the Estimate Costs process is to answer that question.

• Every project has a budget, and part of completing a project successfully is completing it within the approved budget.

• Sometimes project managers are not responsible for the budget portion of the project. This function is assigned instead to a functional manager who is responsible for tracking and reporting all the project costs.

• Keep in mind that if you, as the project manager, don’t have responsibility for the project budget, your performance evaluation for the project should not include budget or cost measurements (tracking and reporting on project costs).



Cost Management Plan

• Before diving into the Project Cost Management processes, you should know that these processes are governed by the Cost Management Plan

• Cost Management Plan is created during the Develop Project Management Plan process (see “04 Project Integration Management, 4.3 Develop Project Management Plan‖).

• Sets out the format and establishes the criteria for planning, structuring, estimating, budgeting, and controlling project costs.

• The cost management processes and their associated tools and techniques are usually selected during the project life cycle definition and are documented in the cost management plan.



Cost Management Plan

• It is a subsidiary of the Project Management Plan and some of the elements of this plan include, but aren’t limited to, are the following:

• Precision levels, or the rounding you’ll use for project costs (hundreds, thousands, and so on)

• Units of measure for resources such has hours for staff resources and hourly rates for contractor staff

• Control account links so that cost estimates for WBS elements can be linked directly to the accounting system

• Variance thresholds for costs

• Earned value rules (covered in the ―Estimate Costs Tools and Techniques‖ section)

• Reporting formats

• Process descriptions

• How risk budgets, contingencies and management reserves will be reported and assessed (11-Project Risk Management)



7.1 Estimate Costs



7.1 Estimate Costs: Inputs-Tools & Techniques-Outputs

Inputs

1. Scope baseline

2. Project schedule

3. Human resource plan

4. Risk register

5. Enterprise environmental factors

6. Organizational process assets

Tools & Techniques

1. Expert judgment

2. Analogous estimating

3. Parametric estimating

4. Bottom-up estimating

5. Three point estimates

6. Reserve analysis

7. Cost of quality

8. Project management estimating software

9. Vendor bid analysis

Outputs

1. Activity Cost estimates

2. Basis of Estimates

3. Project document updates



• Estimate Costs

• Project Estimate Costs involves developing an approximation (estimate) of the costs of the resources (people, equipment, materials) needed to complete project activities

• In approximating cost, the estimator considers the causes of variation of the final estimate for purposes of better managing the project.

• Estimate Costs vs. pricing

• Estimate Costs is coming up with the most likely cost for completing the project

• When a project is performed under contract, pricing is a business decision.

• Pricing: how much will an organization charge for completing the project under the contract?

7.1 Estimate Costs: Definitions



Types of Costs

• A decision must be made as to what “type” of costs will be included in the estimates. This decision is documented in the Cost Management Plan

• Variable Cost

•Any cost that change with the amount of production or the amount of work

• e.g., cost of materials, supplies, wages

• Fixed Cost

•Non-recurring costs that do not change as production changes

• e.g., set-up, rental

• Direct Cost

•Costs that are directly attributable to the work on the project

• e.g., team travel, team wages, cost of material used on project

• Indirect Cost

•Overhead items or costs incurred for the benefit of more that one project; typically allocated to the project through accounting system

• e.g., taxes, fringe benefits, facilities





• Working Capital

• Amount of money the company has to invest, including investment in projects or current assets, minus current liabilities

• Depreciation

• Large assets (e.g. equipment) purchased by a company lose value over time. Accounting standards call this depreciation.

• There are two forms of depreciation:

• Straight line depreciation: The same amount of depreciation is taken each year.

• A $1,000 item with a ten year useful life and no salvage value

(worth at the end of its life) would be depreciated at $100 per

year

• Accelerated depreciation: depreciates faster than Straight Line. Depreciates more in first few years and less in later years

• A $1,000 item with a ten year useful life and no salvage value

(worth at the end of its life) would be depreciated at $180 the first

year, $150 the second year, $130 the next, etc.



7.1 Estimate Costs: Inputs

1. Scope baseline

2. Project schedule

3. Human resource plan

• Skills, rates, performance reward/recognition (see 09 Human Resource Project Management)

4. Risk register

• An understanding of any risk uncovered to date. Remember, a full risk analysis of the details of the project will not have been completed before costs are estimated.

• The project team should consider the extent to which the effect of risk is included in the cost estimates for each activity.

5. Enterprise environmental factors

• Market conditions in terms of procurements from outside the organization


• As with several other processes I’ve covered, keep in mind organizational policies (such as Estimate Costs policies or templates), historical information, previous project files, constraints, and assumptions when deriving your cost estimates.



7.1 Estimate Costs: Tools & Techniques

• Expert Judgment

• Expert judgment gained, guided by historical information can be used for cost estimating and also decide what methods of estimation (tools and techniques) should be used.

• Analogous or Top-Down estimating

• Top or middle managers use expert judgment or the actual time and cost on a previous, similar project as the basis for estimating the current project.

• Analogous estimating uses historical information and thus is a form of expert judgment.

• It is generally less costly and time consuming than other project estimation techniques, but it is also less accurate.

• Used to estimate project cost early in the project, when detail project information is scarce.




• Bottom-Up Estimating

• Involves estimating the cost of individual activities or work packages from WBS, and summarizing, or rolling up, to get the project level




• Parametric Estimating

• Parametric estimating involves using project characteristics (parameters) in a mathematical model to predict project costs.

• Example: Cost/line-of-code, cost/linear meter, cost/installation

• Two types of parametric modeling:

• Regression analysis: scatter diagram

• Tracks two variables to see if they are related and creates a mathematical formula to use in future parametric estimating

100

80

60

40

20

0

0 2 4 6

• Learning Curve: Graphical presentations or repetitive activities in which continuous operations will lead in reduction in time, cost and resources.

• The 100th room painted will cost less than the first room because of

improved efficiencies.



Accuracy of EstimatesProject cost estimates should come with an indication of

the range of possible results, especially at the project

detail level

Accuracy RangesQ: Why do ranges tighten up? A: ―progressive elaboration‖


Level Estimating Phase RangeTime to Prepare

Rough order of magnitude (ROM)

Top Down Initiation ±50%. Days

Budget Top Down Planning ± 10% Weeks

Definitive Bottom Up Planning ± 5% Months




• Three-Point Estimates

• PERT analysis-see 06 Project Time Management

• The most likely estimate, CM the cost of the activity, based on realistic effort assessment for the required work and any predicted expenses.

• The optimistic estimate, CO the activity cost based on analysis of the

best-case scenario for the activity

• The pessimistic estimate, CP the activity cost based on analysis of the worst-case scenario for the activity.

• Average Cost = (CP + 4 CM + CO) / 6

• Standard Deviation : (CP - CO) / 6

• Variance = {(CP - CO) / 6}2

• PERT is a probabilistic approach (follows the beta probability distribution)

• PERT indicates the estimate's degree of uncertainty




• Reserve Analysis

• Cost estimates may include contingency reserves (also known as contingency allowances) to account for cost uncertainty.

• You might choose to add a percentage of the total estimated cost, a fixed number or estimated using quantitative methods.

• We will discuss contingency reserves in detail in Chapter 11, Project Risk Management

• Contingency reserves can later be reduced or eliminated, as more precise information about the activity becomes available.

• Cost of Quality

• The cost of quality should also be included in activity cost estimating

• We will discuss the cost of quality in Chapter 08 Project Quality Management




• Project Management Software

• The project management software is a tool that can help you establish project cost estimates and can help you quickly determine estimates given different variables and alternatives.

• Vendor Bid Analysis

• As the name implies, this is a process of gathering information from vendors to help you establish cost estimates.

• You can accomplish this by requesting bids or quotes or working with some of your trusted vendor sources for estimates.

• You should compare vendor bids when using this tool and technique and not rely solely on one vendor to provide you with estimates.



7.1 Estimate Costs:Outputs

• Activity Cost estimates

• Costs are estimated for all resources that are applied to the activity cost estimate. This includes direct labor, materials, equipment, services, facilities, information technology, and special categories such as an inflation allowance or a cost contingency reserve. Indirect costs, if they are included in the project estimate, can be included at the activity level or at higher levels.

• Estimate Costs generally includes considering appropriate risk response planning, such as contingency plans

• Basis of Estimates

• A description of the work that was estimated.

• A description of how the estimate was developed or the basis for the estimate.

• A description of the assumptions made about the estimates or the method used to determine them.

• A description of the constraints.

• A range of possible results. Like the time estimates, you should state the cost estimates within ranges such as $500 ± $75.



7.1 Estimate Costs:Outputs

• Project Document Updates

• All documents associated with cost estimating may require updating



7.2 Determine Budget



• Determine Budget

• The next process concerns determining the cost baseline, which is the primary output of the Determine Budget process.

• The Determine Budget process aggregates the cost estimates of activities and establishes the cost baseline for the project that is used to measure performance of the project throughout the remaining process groups.

• Only the costs associated with the project become part of the project budget. For example, future period operating costs are not project costs and therefore aren’t included in the project budget.

• The cost baseline is the expected cost for the project. Remember that costs are tied to the financial system through the chart of accounts—or code of accounts—and are assigned to project activities at the work package level of the WBS.

• The budget will be used as a plan for allocating costs to project activities.

7.2 Determine Budget: Definition



Determine Budget (CB): Inputs-Tools & Techniques-Outputs

Inputs

1. Activity cost estimates

2. Basis of estimates

3. Scope baseline

4. Project schedule

5. Resource calendars

6. Contracts


Tools & Techniques

1. Cost aggregation

2. Reserve analysis

3. Expert judgment

4. Historical

relationships

5. Funding limit

reconciliation

Outputs

1. Cost performance baseline

2. Project funding requirements




1. Activity cost estimates

2. Basis of estimates

3. Scope baseline

4. Project schedule

5. Resource calendars

6. Contracts


I’ve covered all these inputs before except ―Contract‖

• ―Contract‖ will be covered in Chapter 12, Procurement Management

7.2 Determine Budget:Inputs



• Cost aggregation

• Cost aggregation is the process of tallying the schedule activity cost estimates at the work package level and then totaling the work package levels to higher-level WBS component levels (such as the control accounts).

• Reserve analysis

• I’ve covered reserve analysis already.

• Note that reserve analysis in this process also takes into consideration management AND contingency reserves for unplanned changes to project scope and project costs.

• “Management AND contingency reserves” will be covered in detail in Chapter 11, Project Risk Management

• Historical relations

• Historical relations of project parameters that are used in analogous of parametric estimation should be closely examined in determining the project budget

7.2 Determine Budget:Tools & Techniques




$25 $25 $25 $25

$100

1 ACTIVITIES

2 WORK

PACKAGES$250 $500

$8503 CONTROL

ACCOUNTS$400

$12504 PROJECT

5 CONTINGENCY

RESERVE$105

$13556 COST

BASELINE

$687 MANAGEMENT

RESERVE

$14238 COST BUDGET

Cost Aggregation



• Expert judgment – Always to be used as a tool in any process

• Funding limit reconciliation

• The next thing to be check is the project cash flow (for example monthly cash flow) against the funding available for the project (in this example, monthly funding available).

• Funding may not be available when it is required causing changes to the project (usually rescheduling of work) and iterations of the project management plan.

• There is an other obvious reconciliation needed before the cost baseline and cost budget become final:

• Reconciliation with any funding constraints identified in the project scope statement.




• Cost Baseline

• You develop the cost baseline, the first output of Determine Budget, by adding the costs of the WBS elements (remember, these costs were aggregated with the cost aggregation tool and technique) according to time periods.

• This is also known as the project’s time-phased budget at completion (BAC).

• Most projects span some length of time, and most organizations time the funding with the project.

• In other words, you won’t get all the funds for the project at the beginning of the project; they’ll likely be disbursed over time.

• The cost baseline is used to measure, monitor and control the overall actual cost performance of the project against the project cost requirements.

7.2 Determine Budget:Outputs



• Cost Baseline…


• Cost baselines can be displayed graphically, with time increments on one axis and dollars expended on the other axis, as an S curveshown above.

• The reason for this is that project spending starts out slowly, gradually increases over the project’s life until it reaches a peak, and then tapers off again as the project wraps up. Large projects are difficult to graph in this manner because the timescale isn’t wide enough to accurately show fluctuations in spending. There are other methods that more accurately graph costs that you’ll look at in the Control Costs process.



• Project Funding Requirements

• Project funding requirements are the total amount of money spent on the project.

• They are determined from the cost baseline and might include a management contingency reserve that’s used to manage cost overruns, particularly early in the project.

• As I said earlier, spending usually starts out slowly on the project and picks up speed as you progress.

• Sometimes, the expected cash flows don’t match the pace of spending.

• Project funding requirements accounts for this by using a management reserve contingency (usually a margin or percentage of the cost baseline) that’s released in increments with the project budget.





$25 $25 $25 $25

$100

1 ACTIVITIES

2 WORK

PACKAGES$250 $500

$8503 CONTROL

ACCOUNTS$400

$12504 PROJECT

5 CONTINGENCY

RESERVE$105

$13556 COST

BASELINE

$687 MANAGEMENT

RESERVE

$14238 COST BUDGET



• Project Document updates

• Project documents associated with budgeting may require updates

• Specifically,

• Risk register

• Cost estimates

• Project schedule




7.3 Control Costs



The Control Costs process manages changes to project costs as outlined in the cost management plan.

Control Costs Includes:

Monitoring actual cost performance to detect and understand variances from the cost baseline

Ensuring all appropriate cost changes are recorded accurately in the cost baseline

Preventing incorrect, inappropriate, or unauthorized cost changes from being included in the cost baseline

Informing stakeholders of authorized changes

Acting to bring expected costs within acceptable limits

All budget changes should be agreed to and approved by the project sponsor where applicable (the criteria for approvals should be outlined in the change control system documentation).

7.3 Control Costs: Definitions



7.3 Control Costs: Definitions

Communications

10.3 Performance Reporting

Integration

4.6 Integrated Change Control

Subsidiary Change Control Process

•Scope Change Control•Schedule Change Control•Cost Change Control•Quality Change Control•Contract Administration

Change Control

Integrated Change Control lays the foundation for all the change control processes in other knowledge areas



7.3 Control Costs: Inputs-Tools & Techniques- Outputs

InputsTools &

Techniques

1. Earned Value Management

2. Forecasting

3. To-complete performance index

4. Performance reviews

5. Variance analysis

6. Project management software

Outputs

1. Project management plan


3. Work performance information


1. Work performance measurements

2. Budget forecasts

3. Organizational process assets updates (lessons learned)

4. Change requests

5. Project management plan updates




1. Project management plan

• Cost baseline and cost management plan


• Already discusses in 7.2

3. Work performance information

• Include information on actual work performance such as how much work has been completed and at what actual costs


• Existing cost-control policies, procedures and guidelines

• Cost control tools

• Reporting cost methods

7.3 Control Costs: Inputs



7.3 Control Costs: Tools & Techniques

• Earned Value Management

• Many project managers manage their project performance by comparing planned to actual results.

• With this approach, you could easily be on time but overspend according to your plan.

• A better method is Earned Value Management (EVM)

• Simply stated, EMV compares what you’ve received or produced to what you’ve spent.

Earned value management integrates cost, time and scope:

• to measure project performance to date, • forecast future project performance, and • forecast future project completion dates




• Earned Value Management…

• The EVM continuously monitors the percent complete of the project, the planned value (PV), earned value (EV), and actual costs (AC) expended to produce the work of the project (I’ll cover the definition of these terms shortly).

• When variances that result in cost changes are discovered (including schedule variances and cost variances), those changes are managed using the cost change control system.

• The primary function of this analysis technique is to:

• determine and document the cause of the variance,

• to determine the impact of the variance (you’ll do this with the EVM formulas shortly), and

• to determine whether a corrective action should be implemented as a result.




• To perform the EVM calculations, you need to first gather the four measurements mentioned earlier:

• The percent complete of the project,

• The Planned value (PV)

• The Actual cost (AC), and

• The Earned value (EV).




• Percent complete of project

• Many project managers determine how much work has been completed by asking team members for an estimate of percent complete for each task.

• On projects where work cannot be measured, this estimate is simply a guess. This is time consuming and almost always a complete waste of time because a guess does not provide a confident estimate of the actual percent complete.

• If a project has been planned using a WBS, and tasks require about 80 hours of work, we have alternatives to percent complete.

• Because tasks will be completed faster and more frequently, we can forget percent complete and use one of the following:

• 50/50 RULE - A task is considered 50% complete when it starts. The remaining 50% credit is given when the task is completed

• 20/80 RULE - A task is considered 20% complete when it starts. The remaining 80% credit is given when the task is completed

• 0/100 RULE - A task does not get credit for partial completion, it get 100% credit only full completion




• Planned value (PV)

• The planned value (PV) is the cost of work that has been approved (budgeted) for a schedule activity or WBS component to be completed during a given time period.

• These budgets are established during the planning processes.

• The total PV is also referred as “Budget at Completion” (BAC), and/or “Performance Measurement Baseline” (PMB)

• PV is also called budgeted cost of work scheduled (BCWS).

• Example:

• According to my project plan by July , I plan to complete several activities that have been approved (budgeted) at $ 400.

• Therefore at the end of July the planned value PV = $ 400.




• Earned value

• Earned value (EV) is the value of the work (schedule activity or WBS component) completed to date as it compares to the budgeted amount (PV) assigned to the work component.

• EV is also called budgeted cost of work performed (BCWP).

• EV cannot be greater than PV

• EV = PV * percent complete

• Example:

• Suppose that at July 1, I completed only 81% of my planned activities

• Therefore at July 1,

• EV = $ 400 * 81% = $ 325




• Actual cost

• Actual cost (AC) is the cost of completing the work (a schedule activity or WBS component) in a given time period. AC is also called actual cost of work performed (ACWP).

• Actual costs might include direct and indirect costs but must correspond to what was budgeted for the activity.

• If the budgeted amount did not include indirect costs, do not include them here.

• Later you’ll see how to compare this to PV to come up with variance calculation results.

• Example:

• Suppose that at July 1, I collect all the actual costs and the total figure is $ 325.

• Therefore at the end of the first month AC = $325




• We can plot all the PV, AC, and EV measurements graphically to show the variances between them.

• If there are no variances in the measurements, all the lines on the graph remain the same, which means the project is progressing as planned.

• The following figure shows an example that plots these three measurements.

PV = 400, EV = 375, AC = 325




• Cost Variance

• Cost variance is one of the most popular variances that project managers use

• Cost variance shows whether your actual costs are higher than budgeted (with a resulting negative number) or lower than budgeted (with a resulting positive number).

• The cost variance (CV) is calculated as follows:

• CV = EV – AC

• CV = Negative, OVER BUDGET

• CV = Positive, UNDER BUDGET

• In our Example

• CV = $ 375-$ 345 = $ 50 ($50 under budget as of July 1)

• A negative cost variance is often non-recoverable




• Schedule Variance

• Schedule variance, also a popular variance, tells you whether the schedule is ahead or behind what was planned for this period in time. The schedule variance (SV) is calculated as follows:

• SV = EV – PV

• SV = Negative, BEHIND SCHEDULE

• SV = Positive, AHEAD OF SCHEDULE

• Lets plug in the numbers:

• SV = $375-$400 = -$25 (Behind schedule as of July 1)




• Performance Indexes

• Together, the CV and SV are known as efficiency indicators for the project.

• Cost and schedule performance indexes, (CPI and SPI)are primarily used to calculate performance efficiencies.

• They’re often used in trend analysis to predict future performance.

• You’ll need to know the calculations and what the results mean.

• If CPI or SPI is greater than 1, you’ve got better than expected performance. If the result is less than 1, you’ve got poor performance. If it equals 1, you’re right on target.




• Cost Performance Index (CPI)

• The cost performance index (CPI) is calculated this way:

• CPI = EV ÷ AC

• Let’s plug in the numbers:

• CPI = 375 ÷ 325 =1.15

• Interpretation: as of July 1, we are getting $1.15 for every dollar invested on this project

• “Burn Rate”= 1/CPI

• Schedule Performance Index (SPI)

• The schedule performance index (SPI) is calculated this way:

• SPI = EV ÷ PV

• Let’s plug in the numbers:

• SPI = 375 ÷ 400 =0.94

• Interpretation: Uh-oh, not so good. You are only progressing at 94% of the rate planned




• Forecasting

• Forecasting uses the information you’ve gathered to date and estimates the future conditions or performance of the project based on what you know when the calculation is performed.

• Forecasts are based on work performance information (an output from the Executing process group).

• There are two types of forecasting techniques: estimate to complete (ETC) and estimate at completion (EAC).

• ETC: From this point onwards, how much MORE do we expect to cost to finish the job?

• EAC: What do we currently expect the total project to cost at this rate?

• Each has three variations. Both of these formulas use a new parameter you haven’t seen yet called budget at completion (BAC).

• BAC is the sum of all the budget values established for all the work of the project. How much did we BUDGET for the TOTAL job? (includes approved change requests)



Baseline Plan

Start

DateToday

PVBAC

Current PlanAC ETC

EAC


One of the areas of confusion is the difference between EAC, ETC and the other terms. The following diagram may help.




• Estimate to Complete (ETC)

• Estimate to complete (ETC) tells you how much it will cost to complete all the remaining work for a schedule activity or WBS component or the project.

• ETC based on a new estimate using bottom-up estimating

• This ETC does not require a formula.

• This is simply a revised estimate based on the performance of the resources to date. By examining how quickly or how productively the resources have been utilized so far, the project team can determine an ETC by looking at the remaining work and determining a new estimate based on the comparison to past work.

• This ETC method is the most accurate and comprehensive ETC calculation.




• Estimate to Complete (ETC)…

• The two remaining ETC calculations use earned value data. These are quick to perform but not as accurate as the project team manually examining the remaining work and making a new estimate based on past performance.

• ETC = (BAC – EV) ÷ cumulative CPI

• Used when you believe that future cost variances will be similar to the types of variances you’ve seen to date


• ETC = (1000 – 375) ÷ 1.15 = $ 543

• ETC = (BAC – EV)

• When you believe that future cost variances will not be similar to the types of variances you’ve seen to date


• ETC = (1000-375)= $625




EAC Equations Application

1 BAC / cumulative CPIAccepts that the project performance to date will be continued in the future. The ETC work will be performed at the same cumulative CPI

2 AC + ETC

Past Estimating Assumptions are not valid -This method is used when the past estimating assumptions are not valid and fresh estimates are applied to the project. ETC should be based on bottom-up estimating

3 AC + BAC - EV

Accepts the actual project performance (good or bad) and predicts that all future ETC work will be accomplished as per the plan (at the budgeted rate)

4 AC+(BAC-EV)/ (cumulative CPI x cumulative SPI)

Variances will be present in the future - This method is used when the assumption is that the current variances will be continue to be present in the future.

• Estimate at completion (EAC) estimates (or forecasts) the expected total cost of a work component, a schedule activity, or the project at its

completion.




• To-Complete Performance Index (TCPI)

• TCPI is the calculated projection of the cost performance that must be achieved on the remaining work to meet a specified management goal, i.e., BAC or EAC

• TCPI is the ratio of the ―remaining work‖ to the ―funds remaining‖

• TCPI has its focus on future performance.

• In other words, TCPI shows the efficiency at which the resources on the project should be utilized for the remainder of the project.

• TCPI value above 1 indicates utilization of the project team for the remainder of the project can be stringent.

• TCPI value below 1 indicates utilization of the project team for the remainder of the project should be lenient




• To-Complete Performance Index (TCPI)…

• At the status date:

• If the cumulative CPI falls below the baseline plan, all future work will need immediately to be performed at the BAC range in order to stay within the authorized BAC.

• If BAC is no longer attainable, a new estimate at completion must de determined and once approved, the project must perform at the EAC level.

• The equation of TCPI is:

)( )( Remaining

)( Remaining

ACEACorACBACFunds

EVBACWork




Tricks to Remember the Formulas

1. PV = BCWS (Budgeted Cost of Work Scheduled)

2. EV = BCWP (Budgeted Cost of Work Performed)

3. AC = ACWP (Actual Cost of Work Performed)

4. EV comes first in every formula

5. Variance: EV minus something

6. Indices : EV divided by something

7. Cost: use AC

8. Schedule: use PV

9. For variance interpretation, negative is bad, positive is good

10. For CPI and SPI interpretation, >1 is good, <1 is bad

11. For TCPI interpretation, >1 your future efficiency must

increase, <1 continuing with the present efficiency is fine



Earned Value Analysis: Exercise

Enough of these formulas – how do I use them?

A B C D

1 10 11 20 21 30 31 40

$5,000 $5,000 $10,000 $15,000

Task ID

Start Finish

Notation

A B C D

1 10 11 20 21 30 31 40

$5,000 $5,000 $10,000 $15,000

Task ID

Start Finish

Notation

Task A, B, C and D are the critical path of the project. Each task is 10 days in duration and their costs are as shown in the diagram. At the end of day 23, Tasks A and B are complete, Task C is 50% complete, and $14, 000 over all have been spent up to this point.

Lets do some calculations at the end of day 23.

Planned Value (PV)= The planned value of the work planned to be done= Estimated cost of the planned work at the end of day 23= Task A + Task B + 3* $1,000 (Task C)= $ 5,000+$ 5,000+$ 3,000= $ 13, 000




A B C D

1 10 11 20 21 30 31 40

$5,000 $5,000 $10,000 $15,000

Task ID

Start Finish

Notation

A B C D

1 10 11 20 21 30 31 40

$5,000 $5,000 $10,000 $15,000

Task ID

Start Finish

Notation

Actual Cost (AC) = Actual Cost of work completed= $ 14,000

Budget at Completion (BAC) = Budget for the full project= $ 5,000(Task A) + $ 5,000(Task B) + $ 10,000(Task C) + $ 15,000(Task D) = $ 35,000

Earned Value (EV) =The sum of the approved cost estimates for activities completed during a given period = Estimated cost of work that is completed at the end of day 23= $ 5,000 + $ 5,000 + $10,000*.50 (because Task A, Task B are complete, Task C is 50% complete) = $ 15,000




A B C D

1 10 11 20 21 30 31 40

$5,000 $5,000 $10,000 $15,000

Task ID

Start Finish

Notation

A B C D

1 10 11 20 21 30 31 40

$5,000 $5,000 $10,000 $15,000

Task ID

Start Finish

Notation

CPI, Cost Performance Index= EV / AC= $ 15,000 /$ 14,000= 1.07 thus the project is below budget and has a positive cost variance

SPI, Schedule Performance Index= EV / PV= $ 15,000 / $13,000= 1.15 thus the project is progressing ahead of schedule, and has a positive schedule variance

Estimate at completion (EAC)= BAC / CPI= $ 35,000 / 1.07= $ 32,666




A B C D

1 10 11 20 21 30 31 40

$5,000 $5,000 $10,000 $15,000

Task ID

Start Finish

Notation

A B C D

1 10 11 20 21 30 31 40

$5,000 $5,000 $10,000 $15,000

Task ID

Start Finish

Notation

Schedule Variance, SVSV = EV – PV

= $15,000 - $13,000= $2,000

Cost Variance, CVCV = EV - AC

= $15,000 - $14,000= $ 1,000

Variance at Completion, VACVAC = BAC – EAC

= $35,000 - $32,666= $ 2,334

To-Complete Performance Index (TCPI)TCPI = (BAC – EV) / (BAC – AC)

= ($35,000 - $15,000) / ($35,000 - $14,000)= 0.95




• Project Performance Reviews

• Project performance reviews are similar to status reviews. They examine milestones due and those that have been met.

• They also look at the costs associated with performance and schedule activities that are over and under budget.

• Typically, performance reviews take place as meetings, and their purpose is to examine schedule activities, work packages, or cost account status and their progress to date.

• Three types of analyses are associated with performance reviews:

• Variance analysis, trend analysis, and earned value management.

• I’ve already covered the earned value management, so you’ll now look at the other two.




• Variance Analysis

• Variance management includes the processes for managing cost and schedule variances and appropriate responses based on the impact and level of variance.

• The cost management plan should describe the variance management and acceptable variance ranges

• CV, SV and VAC

• Variance at completion (VAC) calculates the difference between the budget at completion and the estimate at completion.

• It looks like this:

• VAC = BAC – EAC

• Negative means that you are not doing well, you are over budget.

• Positive means that you are doing well, you are under budget




• Project Management Software

• I’ve discussed project management software before. Obviously, you can perform and monitor many of these calculations using project management software.



• Work performance measurements

• CV, SV, CPI, SPI, ETC, EAC, etc.

• Budget forecasts

• ETC, EAC, TCPI, etc

• Organizational process assets updates

• Lessons learned, causes of variances, corrective actions chosen and reasoning

• Change requests

• Project management plan updates

• Cost performance baseline, cost management plan

• Project document updates

• Cost estimates and basis for estimates

• I’ve discussed most of these before, or they are self-explanatory. However, I’ll point out a few points you should be aware.

7.3 Control Costs: Outputs



Updated cost estimates include updating original cost estimates and other areas of the project management plan that these estimates might impact.

As an example, perhaps the cost estimate for new hardware required for your project was recently revised.

Suppose the cost estimate was needed because the equipment originally planned for in the project is no longer available and new equipment is ordered in its place.

This might require revisions to other project activities, which will require you to revisit the project Planning and Executing processes.

Control cost problems come about for many reasons, including incorrect estimating techniques, predetermined or fixed budgets with no flexibility, schedule overruns, inadequate WBS development, and so on.

Good project management planning techniques during the planning processes might prevent cost problems later in the project.

At a minimum, proper planning will reduce the impact of these problems if they do occur.

7.3 Control Costs: Outputs



Question and Answers

PMGT401-07 Project Cost Management-04

Documents

Transcript of PMGT401-07 Project Cost Management-04