Project Cost Management

Chapter 5: Project Cost Management

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Overview Ini%a%ng

process group

Planning process group

Execu%ng process group

Monitoring & controlling process group

Closing process group

Project cost management

•  Plan Cost Management

•  EsHmate Costs

•  Determine Budget

•  Control Costs


Cost Concepts

Life cycle cosHng •  Looking at the cost of whole life of the product (include maintenance)

Value analysis (value engineering) •  Looking at less costly way to do the same work within the same scope


Cost Concepts A Cost can be either variable or fixed:

•  Variable cost: cost that change with the amount of producHon or the amount of work. Ex., cost of material, supplies, wages… •  Fixed cost: cost that do not change as producHon changes. Ex., set-‐up, rental…

A Cost can be either direct or indirect: •  Direct cost: cost that are directly aVributable to the work on the project, Ex., team travel, team wages, recogniHon, and costs of material used on the project… •  Indirect cost: overhead items or costs incurred for the benefit of more than one project, Ex., taxes, fringe benefits and janitorial services


Plan cost management

•  The process that establishes the policies, procedures, and documentaHon for planning, managing, expending, and controlling project costs. The key benefit of this process is that it provides guidance and direcHon on how the project costs will be managed throughout the project.


A Guide to the Project Management Body of Knowledge, FiBh Edi9on (PMBOK® Guide) ©2013 Project Management Ins9tute, Inc. All Rights Reserved. Figure 7-‐2 Page 195.

Inputs 1.   Project Management Plan

•  contains informaHon used to develop the cost management plan: Scope baseline, Schedule baseline, Other informaHon.

2.   Project Charter •  provides the summary budget from which the detailed project costs are developed.

3.   Enterprise Environmental Factors •  organizaHonal culture and structure can all influence cost management; market condiHons; currency exchange rates; published commercial informaHon; PMIS.

4.   Organiza%onal Process Assets •  financial controls procedures; historical informaHon and lessons learned knowledge bases; financial databases; and exisHng formal and informal cost esHmaHng and budgeHng-‐related policies, procedures, and guidelines.


Tools and techniques

1.   Expert Judgment •  guided by historical informaHon, provides valuable insight about the environment and informaHon from prior similar projects.

2.   Analy%cal Techniques •  involve choosing strategic opHons to fund the project such as: self-‐funding, funding with equity, or funding with debt. The cost management plan may also detail ways to finance project resources such as making, purchasing, renHng, or leasing.

•  techniques may include: payback period, return on investment, internal rate of return, discounted cash flow, and net present value.

3.   Mee%ngs •  aVendees at these meeHngs may include the project manager, the project sponsor, selected project team members, selected stakeholders, anyone with responsibility for project costs, and others as needed.


Outputs 1.  Cost Management Plan

•  describes how the project costs will be planned, structured, and controlled. the cost management plan can establish the following: ü units of measure. ü Level of precision: the degree to which acHvity cost esHmates will be rounded up or down (e.g., US$100.49 to US$100, or US$995.59 to US$1,000)

ü Level of accuracy: the acceptable range (e.g., ±10%) ü OrganizaHonal procedures links: the WBS provides the framework for the cost management plan, allowing for consistency with the esHmates, budgets, and control of costs.

ü control thresholds. ü Rules of performance measurement: EVM rules of performance ü ReporHng formats ü Process descripHons ü AddiHonal details


EsHmate costs •  The process of developing an approximaHon of the monetary

resources needed to complete project acHviHes. The key benefit of this process is that it determines the amount of cost required to complete project work.



EsHmaHng techniques

•  The accuracy of a project esHmate will increase as the project progresses through the project life cycle. For example, a project in the iniHaHon phase may have a rough order of magnitude (ROM) esHmate in the range of −25% to +75%. Later in the project, as more informaHon is known, definiHve esHmates could narrow the range of accuracy to -‐5% to +10%.

•  EsHmaHng techniques: analogous esHmaHng (top down esHmaHng), parametric esHmaHng, boVom up esHmaHng, three point esHmaHng.


Inputs(1/2) 1.   Cost Management Plan •  defines how project costs will be managed and controlled.

2.   Human Resource Management Plan •  provides project staffing aVributes, personnel rates, and related rewards/recogniHon, which are necessary components for developing the project cost esHmates.

3.   Scope Baseline •  addiHonal informaHon that may be found in the scope baseline with contractual and legal implicaHons, such as health, safety, security, performance, environmental, insurance, intellectual property rights, licenses, and permits. All of this informaHon should be considered when developing the cost esHmates.


Inputs(2/2) 4.   Project Schedule

•  the type and quanHty of resources and the amount of Hme which those resources are applied to complete the work of the project are major factors in determining the project cost. Schedule acHvity resources and their respecHve duraHons are used as key inputs to this process.

5.   Risk Register •  as a general rule, when the project experiences a negaHve risk event, the

near-‐term cost of the project will usually increase, and there will someHmes be a delay in the project schedule. In a similar way, the project team should be sensiHve to potenHal opportuniHes that can benefit the business either by directly reducing acHvity costs or by acceleraHng the schedule.

6.   Enterprise Environmental Factors •  market condiHons, published commercial informaHon.

7.   Organiza%onal Process Assets •  cost esHmaHng policies, cost esHmaHng templates, historical informaHon,

and lessons learned. Copyright@STEVBROS Project Management Fundamentals 12

Tools and techniques(1/3)

1.   Expert Judgment •  guided by historical informaHon, provides valuable insight about the environment and informaHon from prior similar projects.

2.   Analogous Es%ma%ng •  uses the values such as scope, cost, budget, and duraHon or measures of scale such as size, weight, and complexity from a previous, similar project as the basis for esHmaHng the same parameter or measurement for a current project.

3.   Parametric Es%ma%ng •  uses a staHsHcal relaHonship between relevant historical data and other variables (e.g., square footage in construcHon) to calculate a cost esHmate for project work. This technique can produce higher levels of accuracy depending upon the sophisHcaHon and underlying data built into the model.



4.   BoVom-‐Up Es%ma%ng •  is a method of esHmaHng a component of work. The cost of individual

work packages or acHviHes is esHmated to the greatest level of specified detail. The detailed cost is then summarized or “rolled up” to higher levels for subsequent reporHng and tracking purposes.

5.   Three-‐Point Es%ma%ng •  Most likely (cM). The cost of the acHvity, based on realisHc effort

assessment for the required work and any predicted expenses. •  OpHmisHc (cO). The acHvity cost based on analysis of the best-‐case

scenario for the acHvity. •  PessimisHc (cP). The acHvity cost based on analysis of the worst-‐case

scenario for the acHvity. •  Two commonly used formulas are triangular and beta distribuHons:

ü Triangular DistribuHon. cE = (cO + cM + cP) / 3 ü Beta DistribuHon (from a tradiHonal PERT analysis). cE = (cO + 4cM + cP) / 6



6.   Reserve Analysis •  Cost esHmates may include conHngency reserves (someHmes called

conHngency allowances) to account for cost uncertainty. 7.   Cost of Quality (COQ) (details in next slide) 8.   Project Management So^ware 9.   Vendor Bid Analysis

•  include analysis of what the project should cost, based on the responsive bids from qualified vendors. When projects are awarded to a vendor under compeHHve processes, addiHonal cost esHmaHng work may be required of the project team to examine the price of individual deliverables and to derive a cost that supports the final total project cost.

10.   Group Decision-‐Making Techniques •  team-‐based approaches, such as brainstorming, the Delphi or nominal

group techniques, are useful for engaging team members to improve esHmate accuracy and commitment to the emerging esHmates.


Cost of quality



Outputs 1.   Ac%vity Cost Es%mates

•  Direct Cost: costs that are directly aVribute to work on the project. eg. training cost, travel cost, wages, cost of material used in the project, etc

•  Indirect Cost: overhead items or costs incurred for the benefit of more than one project. eg. taxes, fringe benefits, etc

•  Variable Cost: change with the amount of producHon/work. e.g. material, supplies, wages

•  Fixed Cost: do not change as producHon change. e.g. set-‐up, rental 2.   Basis of Es%mates

•  DocumentaHon of the basis of the esHmate (i.e., how it was developed), •  DocumentaHon of all assumpHons made, •  DocumentaHon of any known constraints, •  IndicaHon of the range of possible esHmates (e.g., €10,000 (±10%) to

indicate that the item is expected to cost between a range of values), and •  IndicaHon of the confidence level of the final esHmate.

3.   Project Documents Updates Copyright@STEVBROS Project Management Fundamentals 17

Determine budget •  The process of aggregaHng the esHmated costs of individual

acHviHes or work packages to establish an authorized cost baseline. The key benefit of this process is that it determines the cost baseline against which project performance can be monitored and controlled.



Inputs(1/2) 1.   Cost Management Plan

•  describes how the project costs will be managed and controlled. 2.   Scope Baseline

•  includes project scope statement, WBS, WBS dicHonary. 3.   Ac%vity Cost Es%mates

•  cost esHmates for each acHvity within a work package are aggregated to obtain a cost esHmate for each work package.

4.   Basis of Es%mates •  supporHng detail for cost esHmates contained in the basis for esHmates should specify any basic assumpHons dealing with the inclusion or exclusion of indirect or other costs in the project budget.


Inputs(2/2) 5.   Project Schedule

•  This informaHon can be used to aggregate costs to the calendar periods in which the costs are planned to be incurred.

6.   Resource Calendars 7.   Risk Register

•  The risk register should be reviewed to consider how to aggregate the risk response costs.

8.   Agreements •  Applicable agreement informaHon and costs relaHng to products, services, or results that have been or will be purchased are included when determining the budget.

9.   Organiza%onal Process Assets •  ExisHng formal and informal cost budgeHng-‐related policies, procedures, and guidelines; cost budgeHng tools; and reporHng methods.



1.   Cost Aggrega%on •  Cost esHmates are aggregated by work packages in accordance with the WBS. The

work package cost esHmates are then aggregated for the higher component levels of the WBS (such as control accounts) and ulHmately for the enHre project.

2.   Reserve Analysis •  Budget reserve analysis can establish both the conHngency reserves and the

management reserves for the project. 3.   Expert Judgment

•  guided by experience in an applicaHon area, knowledge area, discipline, industry, or similar project, aids in determining the budget.

4.   Historical Rela%onships •  Any historical relaHonships that result in parametric esHmates or analogous

esHmates involve the use of project characterisHcs (parameters) to develop mathemaHcal models to predict total project costs.

5.   Funding Limit Reconcilia%on •  The expenditure of funds should be reconciled with any funding limits on the

commitment of funds for the project. A variance between the funding limits and the planned expenditures will someHmes necessitate the rescheduling of work to level out the rate of expenditures.


Outputs 1.   Cost Baseline

•  is the approved version of the Hme-‐phased project budget, excluding any management reserves (details at next slide)

2.   Project Funding Requirements •  total funding requirements and periodic funding requirements (e.g., quarterly, annually) are derived from the cost baseline. The cost baseline will include projected expenditures plus anHcipated liabiliHes.

•  the total funds required are those included in the cost baseline, plus management reserves, if any.

3.   Project Documents Updates •  such as risk register, acHvity cost esHmates, and project schedule.


Project budget



Control cost •  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 it provides the means to recognize variance from the plan in order to take correcHve acHon and minimize risk.



Inputs 1.  Project Management Plan

•  contains cost baseline and cost management plan. 2.  Project Funding Requirements

•  requirements include projected expenditures plus anHcipated liabiliHes.

3.  Work Performance Data •  data includes informaHon about project progress, such as which acHviHes have started, their progress, and which deliverables have finished. InformaHon also includes costs that have been authorized and incurred.

4.  OrganizaHonal Process Assets •  include exisHng formal and informal cost control-‐related policies, procedures, and guidelines; cost control tools; and monitoring and reporHng methods to be used.



1.   Earned Value Management (next slides) 2.   Forecas%ng (next slides) 3.   To-‐Complete Performance Index (TCPI) (next slides) 4.   Performance Reviews (next slides) 5.   Project Management So^ware 6.   Reserve Analysis

•  During cost control, reserve analysis is used to monitor the status of conHngency and management reserves for the project to determine if these reserves are sHll needed or if addiHonal reserves need to be requested.


EVM •  Earned Value Management (EVM): is the most common tool which help project managers measure project performance and determine where the project stands in relaHon to the budget and the schedule at a point in Hme.

•  Work performance informaHon: BAC, PV, EV, AC. •  Work performance measurement: CPI, CV, SPI, SV.

•  ForecasHng: ETC, EAC. •  To-‐Complete Performance Index: TCPI.


EVM

• Work performance informaHon: o BAC-‐ Budget At CompleHon (project budget). o PV -‐ Planned Value (value of work schedule): PV = BAC * planned % complete. o EV -‐ Earned Value (value of work performed): EV =BAC * actual % complete. o AC—Actual Cost (spent cost).


EVM

•  Work performance measurement: o  SPI—Schedule Performance Index = EV/PV. If SPI > 1, you’re ahead of schedule. If SPI < 1, you’re behind schedule.

o  SV—Schedule Variance = EV-‐PV. If SV > 0, it tells you how many dollars you’re ahead. If SV < 0, it tells you how many dollars you’re behind.

o  CPI—Cost Performance Index = EV/AC. If CPI > 1, you’re under budget. If CPI < 1, you’re over budget.

o  CV—Cost Variance = EV-‐AC. If CV > 0, it tells you how many dollars you’re above. If CV < 0, it tells you how many dollars you’re below.


EVM



EVM

•  ForecasHng: o EsHmate to Complete (ETC), which tells you how much more money you’ll probably spend on your project.

o EsHmate at CompleHon (EAC) is used to predict what your project will actually cost when it’s complete.

o EAC = AC + boVom-‐up ETC


EVM

•  ForecasHng: o  EAC forecast for ETC work performed at the budgeted rate. This EAC

method accepts the actual project performance to date (whether favorable or unfavorable) as represented by the actual costs, and predicts that all future ETC work will be accomplished at the budgeted rate. EquaHon: EAC = AC + (BAC -‐ EV)

o  EAC forecast for ETC work performed at the present CPI. This method assumes what the project has experienced to date can be expected to conHnue in the future. The ETC work is assumed to be performed at the same cumulaHve cost performance index (CPI) as that incurred by the project to date. EquaHon: EAC = BAC / CPI

o  EAC forecast for ETC work considering both SPI and CPI factors. In this forecast, the ETC work will be performed at an efficiency rate that considers both the cost and schedule performance indices. This method is most useful when the project schedule is a factor impacHng the ETC effort. EquaHon: EAC = AC + [(BAC -‐ EV) / (CPI × SPI)]


EVM

•  To-‐Complete Performance Index (TCPI): is a measure of the cost performance that is required to be achieved with the remaining resources in order to meet a specified management goal, expressed as the raHo of the cost to finish the outstanding work to the remaining budget.



EVM


Outputs 1.   Work Performance Informa%on

•  The calculated CV, SV, CPI, SPI, TCPI, and VAC values for WBS components, in parHcular the work packages and control accounts, are documented and communicated to stakeholders.

2.   Cost Forecasts •  EAC value is documented and communicated to stakeholders.

3.   Change Requests •  analysis of project performance may result in a change request to the cost baseline or other components of the project management plan.

4.   Project Management Plan Updates 5.   Project Documents Updates 6.   Organiza%onal Process Assets Updates


Summary

•  Cost esHmaHng techniques •  The accuracy of a project esHmate •  Project budget vs. cost baseline •  Management reserve vs. conHngence reserve •  Earned value management: PV, AC, EV, CPI, SPI, CV, SV, ETC, EAC, TCPI.


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Project Cost Management

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