Project CoProject Co$$t t ManagementManagement

Presenter- R MasilamaniPresenter- R Masilamani(misilamani@yahoo.com)(misilamani@yahoo.com)

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Objectves of PresentationObjectves of PresentationThrough this interaction, participants Through this interaction, participants

will enhance their:will enhance their:

Level of Level of KnowledgeKnowledge and and skillsskills of project cost of project cost managementmanagement

Appreciation of the Appreciation of the planningplanning, , estimatingestimating, , budgetingbudgeting and and controllingcontrolling of project costs of project costs

Understanding of the Understanding of the professional cost management professional cost management methodologies, tools and techniques of PMBOKmethodologies, tools and techniques of PMBOK

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The Presenter:The Presenter:Mr R Masilamani PMP,Mr R Masilamani PMP, collated this module collated this module

Current Head of PMCE - OUMCurrent Head of PMCE - OUM

Has a Bachelor degree in Economics & Has a Bachelor degree in Economics & Statistics and MBA in Finance and ManagementStatistics and MBA in Finance and Management

Has worked through employee to employer Has worked through employee to employer status over 35 yearsstatus over 35 years

Has an active working, consulting and managing Has an active working, consulting and managing presence in industrypresence in industry

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Project Cost Management

• PMI definition

“Project Cost Management includes the processes involved in planning, estimating, budgeting, and controlling costs so that the project can be completed within the approved budget”:

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Project Cost ManagementProject Cost ManagementKey Words:Key Words:

project cost management, resource, planning,project cost management, resource, planning,

estimating, budget, control, forecasting estimating, budget, control, forecasting

Area of PM Application:Area of PM Application: Universal Universal

Topic Level:Topic Level: Process Process

Related Topics:Related Topics: Project planning, WBS Project planning, WBS

Reference:Reference: Wideman, R.M. Cost Control of Capital Projects, Wideman, R.M. Cost Control of Capital Projects, BiTech Publishers Ltd., 1995 BiTech Publishers Ltd., 1995

'What is Project Cost Management, why bother and 'What is Project Cost Management, why bother and

why is it so important?'why is it so important?'

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– Project Cost Management Project Cost Management (PCM)(PCM)

What is PCM?What is PCM?

·· You might think that PCM is managing the You might think that PCM is managing the "costs" on your project "costs" on your project

·· The reality is that you must manage The reality is that you must manage everything else that incurs cost everything else that incurs cost

·· Because if you don't, the costs will just Because if you don't, the costs will just keep on climbing keep on climbing

·· Whether you like it or not!Whether you like it or not!

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– So, what is PCM?So, what is PCM?• Project Cost Management isProject Cost Management is

··The placing of responsibility on those in charge of any aspect The placing of responsibility on those in charge of any aspect

of the project of the project

··E.g. the managers, designers and implementers E.g. the managers, designers and implementers

··To perform their respective roles and responsibilities within To perform their respective roles and responsibilities within prescribed limits prescribed limits

··Specifically, agreed cost allowances or budgets Specifically, agreed cost allowances or budgets

··Then collecting cost data and comparing it to the Then collecting cost data and comparing it to the corresponding allowances corresponding allowances

··And taking appropriate management action And taking appropriate management action

··To contain the final resultsTo contain the final results

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– How would you define PCM?How would you define PCM?• Project Cost Management may be defined asProject Cost Management may be defined as

·· The process of placing responsibility on the The process of placing responsibility on the

• project's project's designers and implementers designers and implementers

·· To perform within agreed budget limits To perform within agreed budget limits

·· Either under contract Either under contract

·· Or, through verbal commitment Or, through verbal commitment

·· The collecting of actual cost data in a suitable The collecting of actual cost data in a suitable

• format format

·· Comparing that to corresponding budget data Comparing that to corresponding budget data

·· And taking corrective action as necessary And taking corrective action as necessary

·· Throughout, and as appropriate to, the project life Throughout, and as appropriate to, the project life spanspan

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– What does PCM encompass?What does PCM encompass?• As with time managementAs with time management

·· You have to carefully manage what you do with You have to carefully manage what you do with the money available the money available

·· PCM is another vital function of project PCM is another vital function of project management that includes management that includes

·· Resource planning Resource planning

·· Cost estimating Cost estimating

·· Cost budgeting Cost budgeting

·· Cost control Cost control

·· Change controlChange control

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– Is it that simple?Is it that simple?No, it certainly is not!No, it certainly is not!

·· Two simple but essential principles must Two simple but essential principles must be clearly understood: be clearly understood:

1. There must always be a basis for comparison 1. There must always be a basis for comparison

2. Only future costs can be controlled 2. Only future costs can be controlled

·· Therefore, PCM involves Therefore, PCM involves ·· Careful project planning Careful project planning

·· Especially a WBS extended to the activity level Especially a WBS extended to the activity level

·· Estimating the costs of the planned resources Estimating the costs of the planned resources

·· Converting that estimate to a viable control budget Converting that estimate to a viable control budget

·· Monitoring expenditures as work proceeds, and Monitoring expenditures as work proceeds, and

·· Modifying the approach if the findings are not satisfactoryModifying the approach if the findings are not satisfactory

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– That sounds easy? - 1That sounds easy? - 1• Not really. There are a number of Not really. There are a number of

• challenges, such as:challenges, such as: ·· First and foremost, the problem of managing First and foremost, the problem of managing

• Project Project scope scope

·· A lack of understanding generally that estimates are A lack of understanding generally that estimates are no better than just best available assessments no better than just best available assessments

·· And only as good as the data they are based on And only as good as the data they are based on

·· An unrealistic expectation of accuracy An unrealistic expectation of accuracy

·· Hence an estimate should be expressed as a range, Hence an estimate should be expressed as a range, not as a single number!not as a single number!

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– That sounds easy? - 1That sounds easy? - 1• Not really. There are a number of challenges, Not really. There are a number of challenges,

such as:such as: ·· First and foremost, the problem of managing project First and foremost, the problem of managing project

scope scope

·· A lack of understanding generally that estimates are A lack of understanding generally that estimates are no better than just best available assessments no better than just best available assessments

·· And only as good as the data they are based on And only as good as the data they are based on

·· An unrealistic expectation of accuracy An unrealistic expectation of accuracy

·· Hence an estimate should be expressed as a range, Hence an estimate should be expressed as a range, not as a single number!not as a single number!

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– That sounds easy? - 2That sounds easy? - 2• More challenges More challenges . . . . . .

·· The nature of PCM changes with the projectThe nature of PCM changes with the project life span life span

·· As we'll explain later As we'll explain later

·· The historical view of accounting The historical view of accounting

·· Which is not the primary focus of PCM Which is not the primary focus of PCM

·· The difficulty of getting timely cost The difficulty of getting timely cost information out of the normal accounting information out of the normal accounting process process

·· The necessary data support facilities for The necessary data support facilities for effective PCM are not available within the effective PCM are not available within the organizationorganization

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– That sounds easy? - 3That sounds easy? - 3• Still more challengesStill more challenges . . . . . .

·· The difficulty of getting people to peer into the The difficulty of getting people to peer into the future, or commit themselvesfuture, or commit themselves

·· During progress of the actual work they feel During progress of the actual work they feel

• they have more important things to do like they have more important things to do like getting the work done! getting the work done!

·· Some people think you can control costs simply Some people think you can control costs simply by turning off the money taps by turning off the money taps

·· There is a tendency to ignore risks, and There is a tendency to ignore risks, and

·· The result of "political interference" to get a The result of "political interference" to get a project approvedproject approved

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– Why bother with cost management?Why bother with cost management?• The fact is, cost managementThe fact is, cost management

is essential if you want tois essential if you want to ·· Keep people on their toes Keep people on their toes

·· Highlight misuse or wastage of Highlight misuse or wastage of resources resources

·· Track budget change approvals Track budget change approvals

·· Finish a project within approved Finish a project within approved budgets budgets

·· Avoid unwelcome surprises, Avoid unwelcome surprises,

for your corporate or financial sponsor!for your corporate or financial sponsor!

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– Why is PCM so important?Why is PCM so important?• PCM has a high profile in project management PCM has a high profile in project management

because because

·· Financial management is a way of life in all Financial management is a way of life in all organizations organizations

·· Financially successful organizations depend on strict Financially successful organizations depend on strict financial control and the corporate accounting to financial control and the corporate accounting to support it support it

·· They are comfortable with the idea of budgeting and They are comfortable with the idea of budgeting and expenditure expenditure

·· Most people understand the consequences of the Most people understand the consequences of the money running out money running out

·· Cost is seen as a major metric of successful project Cost is seen as a major metric of successful project managementmanagement

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– The most significant aspect of PCMThe most significant aspect of PCM• From a project perspective, it is important to From a project perspective, it is important to

understand thatunderstand that ·· Cost, or rather money, is simply the common Cost, or rather money, is simply the common

denominator, or metric, for bringing together denominator, or metric, for bringing together disparate types of resources disparate types of resources

·· I.e. accounting for use of labor, materials, I.e. accounting for use of labor, materials,

• equipment equipment

·· For management and control purposes For management and control purposes

·· However, like time, money itself should not be However, like time, money itself should not be considered as a resourceconsidered as a resource uunlike in corporate nlike in corporate financial managementfinancial management w where money is the central here money is the central purpose and is treated like a commoditypurpose and is treated like a commodity

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..

The Project Cost Management processes include The Project Cost Management processes include the followingthe following::

Cost EstimatingCost Estimating

Cost budgetingCost budgetingAAggregating the estimated costs of individual schedule activities or work ggregating the estimated costs of individual schedule activities or work packages to establish a total cost baseline for measuring project performancepackages to establish a total cost baseline for measuring project performance

Cost ControlCost ControlInfluencing the factors that create changes to the cost baselineInfluencing the factors that create changes to the cost baseline

Developing an approximation of the costs of the resources needed to complete project activities.

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Why Do We Manage Cost?

• Part of triple constraint, can’t manage one

• without the others (scope, time, and quality)

• Plots of cost and scope against plan can help

• spot problems early

Cumulative Value

Time

Planned Value (PV)

Actual Costs (AC)

Earned Value (EV)

Today

Is this project over/under budget?

Is it ahead of/behind schedule?

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What Do We Want to Know by Managing Cost?

through answering three questions, How did we perform ? How much we differ from plan? What is the implication for future!

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Cost Management Key Terms

• PV - Planned Value, estimated value of the planned work

• EV – Earned Value, estimated value of work done

• AC – Actual Cost, what you paid

• BAC – Budget at Completion, the budget for the total job

• EAC –Estimate at Completion, what is the total job expected to cost?

• ETC – Estimate to Complete, forecasted costs to complete job

• VAC – Variance at Completion, how much over/under budget do we expect to be?

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Cost EstimatingEnterprise Environmental Factors

Organizational Process Assets

Project Scope Statement

Analogous estimating

Determine resource cost rates

Bottom up estimating

Parametric estimating

Project management software

Vendor bid analysis

Reserve analysis

Cost of quality

Inputs OutputsTools & Techniques

Work Breakdown Structure

WBS Dictionary

Cost Estimating

Cost Budgeting

Cost Control

Project Management Plan

•Schedule Mgmt Pln

•Staffing Mgmt Pln

•Risk Register

Activity Cost Estimates

Activity Cost Estimates Supporting Detail

Requested

Changes

Cost Management Plan Updates

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Work Breakdown structureWork Breakdown structureCompany owners and project managers use the Work Breakdown Company owners and project managers use the Work Breakdown Structure (WBS) to make complex projects more manageable. The Structure (WBS) to make complex projects more manageable. The

WBS is designed to help break down a project into manageable chunks WBS is designed to help break down a project into manageable chunks that can be effectively estimated and supervised.that can be effectively estimated and supervised.

Some widely used reasons for creating a WBS include:Some widely used reasons for creating a WBS include:

·· Assists with accurate project organization Assists with accurate project organization

·· Helps with assigning responsibilities Helps with assigning responsibilities

·· Shows the control points and project milestones Shows the control points and project milestones

·· Allows for more accurate estimation of cost, risk Allows for more accurate estimation of cost, risk and timeand time

·· Helps explain the project scope to stakeholdersHelps explain the project scope to stakeholders

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Estimating Methods

• Analogous (Top Down) estimating – Managers use expert judgment or similar project costs [quick, less accurate]

• Bottom-Up estimating – People doing work estimate based on WBS, rolled up into project estimate [slow, most accurate]

• Parametric estimating – Use mathematical model • (i.e. cost per sq ft). [accuracy varies] Two types:

• Regression analysis – based on analysis of multiple • data points• Learning Curve – The first unit costs more than the • 100th, forecasts efficiency gains

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Estimating Methods

• Vendor Bid Analysis – Estimating using bids + allowances for gaps in bid scope [slow,

• accuracy depends on gaps]• Reserve Analysis – Adding contingency to each

activity cost estimates as zero duration item • [slow, overstates cost]

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ANALOGOUS COSTINGANALOGOUS COSTING

Analogous cost estimating means Analogous cost estimating means using the actual cost of previous, similar projects as the using the actual cost of previous, similar projects as the basis for estimatingbasis for estimating the cost of the current project. Analogous cost estimating is frequently the cost of the current project. Analogous cost estimating is frequently used to estimate costs when there is a limited amount of detailed information about the project used to estimate costs when there is a limited amount of detailed information about the project (e.g., in the early phases). Analogous cost estimating uses expert judgment(e.g., in the early phases). Analogous cost estimating uses expert judgment

PARAMETRIC COSTING

Parametric estimating is a technique that uses a statistical relationship between historical data and other to calculate a cost estimate for a schedule activity resource. This technique can produce higher levels of accuracy depending upon the sophistication, as well as the underlying resource quantity and cost data built into the modelBOTTOM-UP COSTINGThis technique involves estimating the cost of individual work packages or individual schedule activities with the lowest level of detail. This detailed cost is then summarized or “rolled up” to higher levels for reporting and tracking purposes. The cost and accuracy of bottom-up cost estimating is typically motivated by the size and complexity of the individual schedule activity or work package. Generally, activities with associated effort increase the accuracy of the schedule activity cost estimate

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Determine Resource Cost RateDetermine Resource Cost Rate

The person determining the rates or the group preparing theThe person determining the rates or the group preparing the

estimates must know estimates must know the unit cost ratesthe unit cost rates, such as staff cost , such as staff cost

per hour and bulk material cost per cubic yard, per hour and bulk material cost per cubic yard, for each for each

resource to estimate schedule activity costsresource to estimate schedule activity costs. Gathering . Gathering

quotes is one method of obtaining rates. For products, quotes is one method of obtaining rates. For products,

services, or results to be obtained under contract, standardservices, or results to be obtained under contract, standard

rates with escalation factors can be included in the contractrates with escalation factors can be included in the contract ..

Reserve Analysis

reserves are estimated costs to be used at the discretion of the project manager to deal with anticipated, but not certain, events. These events are “known unknowns” and are part of the project scope and cost baselines

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How Do We Manage Cost?

• Three processes Cost Estimating Cost Budgeting Cost Control

Cost Estimatin

g

Cost Budgeting

Cost Control

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Cost Budgeting

Project Scope StatementCost aggregation

Reserve analysis

Parametric estimating

Funding limit reconciliationInputs

OutputsTools & Techniques

Cost Estimating

Cost Budgeting

Cost Control

Cost Baseline

Project Funding Requirements

Cost Management Plan Updates

Requested Changes

Work Breakdown Structure

WBS Dictionary

Activity Cost Estimates

Activity Cost Estimates Supporting Detail

Project Schedule

Resource Calendars

Contract

Cost Management Plan

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Essential definitions Enterprise Environmental factors-refer to both internal and external factors that surround or

influence a project’s success. These factors may come from any or all of the enterprises involved in the project. Enterprise environmental factors may enhance or constrain project management options and may have a positive or negative influence on the outcome. They are considered as inputs to most planning processes

Organisational process Assets- are any or all process related assets, from any or all of the organizations involved in the project that can be used to influence the project’s success.” Examples include: plans, procedures, lessons learned, historical information, schedules, risk data and earned value data. Organizational Process Assets fall into two broad categories—Processes and Procedures, and the Corporate Knowledge Base.

WBS Dictionary-The WBS dictionary includes entries for each WBS component that briefly defines the scope or statement of the work, defines deliverables, contains a list of associated activities, and provides a list of recognized milestones to gage progress

Approved change requests-refers to a change request that has been submitted by the requestors, has been reviewed by the appropriate parties through use of the integrated change control process, and has been granted authorization to be take place

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Essential definitionsRisk Register-The risk register or risk log becomes essential as it records

identified risks, their severity, and the actions steps to be taken. It can be a simple document, spreadsheet, or a database system, but the most effective format is a table. A table presents a great deal of information in just a few pages

Cost Baseline-ultimately, project management includes a variety of responsibilities within one’s team in order to achieve maximum results for their employer. In regards to money and remaining in business, providing a budget that is adjusted to time is considered a cost baseline.

Performance reports- is filled out by the project manager and submitted on a regular basis to the sponsor, project portfolio management group, Project Management Office or other project oversight person or group.

Earned Value Analysis-report shows specific mathematical metrics that are designed to reflect the health of the project by integrating scope, schedule, and cost information. Information can be reported for the current reporting period and on a cumulative basis.

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Essential Definitions Resource Calendar-Keeping track of schedules and time

management is one of the most fundamentally important tasks that are the responsibility of the project management team and or the project management team leader. One of the best ways to accomplish this feat is through the careful and well orchestrated use of calendars to keep track of the multitude of project related events, occurrences, and dates that will take place during the project’s life cycle.

Enterprise environmental factors– Market condition– Published commercial informationCost performance baseline– Authorized time phased Budget at Completion‐(BAC) used to measure, monitor and controloverall cost performance (S shape curve)

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Cost Budgeting

• Budgeting is allocating costs to work packages to establish a cost baseline to measure project performance

• Remember Contingency items are for unplanned but required changes it is not to cover things such as: Price escalation Scope & Quality Changes

Funding Limit Reconciliation – Smoothing out the project spend to meet management expectations

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Cost AggregationCost Aggregation

Schedule activity cost estimates are aggregated by work packages in accordance with Schedule activity cost estimates are aggregated by work packages in accordance with the WBS. The work package cost estimates are then aggregated for the higher component the WBS. The work package cost estimates are then aggregated for the higher component levels of the WBS, such as control accounts, and ultimately for the entire project. Reserve levels of the WBS, such as control accounts, and ultimately for the entire project. Reserve analysis establishes contingency reserves, such as the management contingency reserve, analysis establishes contingency reserves, such as the management contingency reserve, that are allowances for unplanned, but potentially required, changes. Such changes may that are allowances for unplanned, but potentially required, changes. Such changes may result from risks identified in the risk register result from risks identified in the risk register

Reserve AnalysisReserve Analysis

Management contingency reserves are budgets reserved for unplanned, but potentially Management contingency reserves are budgets reserved for unplanned, but potentially required, changes to project scope and cost. These are “unknown unknowns,” and the required, changes to project scope and cost. These are “unknown unknowns,” and the project manager must obtain approval before obligating or spending this reserve. project manager must obtain approval before obligating or spending this reserve. Management contingency reserves are not a part of the project cost baseline, but are Management contingency reserves are not a part of the project cost baseline, but are included in the budget for the project. They are not distributed as budget and, therefore, are included in the budget for the project. They are not distributed as budget and, therefore, are not a part of the earned value calculationsnot a part of the earned value calculations

Parametric estimatingParametric estimating

The parametric estimating technique involves using project characteristics (parameters) The parametric estimating technique involves using project characteristics (parameters) in a mathematical model to predict total project costs. Models can be simple (e.g., one in a mathematical model to predict total project costs. Models can be simple (e.g., one model of software development costs uses thirteen separate adjustment factors, each of model of software development costs uses thirteen separate adjustment factors, each of which has five to seven points within it).which has five to seven points within it).

).

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COST TYPESCOST TYPES

Sunk CostsSunk Costs:: A historical or expended cost. Since the cost has been expended, A historical or expended cost. Since the cost has been expended,

we no longer have control over the cost. Sunk costs are not included when we no longer have control over the cost. Sunk costs are not included when

considering alternative courses of action.considering alternative courses of action.

CostsCosts: Nonrecurring costs that do not change based on the number of units,: Nonrecurring costs that do not change based on the number of units,

like expenses related to equipment required to complete a project.like expenses related to equipment required to complete a project.

Variable CostsVariable Costs:: Costs that rise directly with the size of the project, like Costs that rise directly with the size of the project, like

expenses related to consumable materials used to accomplish the project.expenses related to consumable materials used to accomplish the project.

Indirect CostsIndirect Costs:: Costs that are part of the overall organization’s cost of doing Costs that are part of the overall organization’s cost of doing

business and are shared among all the current projects. These include salaries of business and are shared among all the current projects. These include salaries of

corporate executives, administrative expenses, any cost that would be considered corporate executives, administrative expenses, any cost that would be considered

part of overhead.part of overhead.

Opportunity CostsOpportunity Costs:: The cost of choosing one alternative and, therefore, giving The cost of choosing one alternative and, therefore, giving

up the potential benefits of another alternative.up the potential benefits of another alternative.

Direct CostsDirect Costs:: Costs incurred directly by a specific project. These include cost Costs incurred directly by a specific project. These include cost

for materials associated with the project, salary of the project staff, expenses for materials associated with the project, salary of the project staff, expenses

associated with subcontractors.associated with subcontractors.

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Cost TypesCost Types

Direct CostsDirect Costs

Related “Directly” to the projectRelated “Directly” to the project

ex. Labor hours, material, equipment, food, travel. . ex. Labor hours, material, equipment, food, travel. . . .

Indirect Costs Indirect Costs

Overhead used for more than one projectOverhead used for more than one project

ex. Building rent, taxes, janitorial servicesex. Building rent, taxes, janitorial services

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Cost TypesCost TypesA cost by any other name, really isn’t the A cost by any other name, really isn’t the

same!same!Variable CostVariable Cost – Changes with volume – Changes with volume

Fixed CostFixed Cost – Stays the same, regardless of volume – Stays the same, regardless of volume

TC = VC+FC

COSTCOST vs vs

VOLUMEVOLUME

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Cost TypesCost TypesProject CostsProject Costs

Are incurred while the project is being fulfilled.Are incurred while the project is being fulfilled.

Life Cycle CostsLife Cycle Costs

Includes the costs after project completion.Includes the costs after project completion.

There may be temptation to lower project costs at the There may be temptation to lower project costs at the expense of long term costs. Life Cycle Costing gives expense of long term costs. Life Cycle Costing gives

the PM a way to consider costs outside of the scope of the PM a way to consider costs outside of the scope of project fulfillmentproject fulfillment

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Important ConceptsImportant ConceptsSunk CostsSunk Costs

Forget ‘em, they’re goneForget ‘em, they’re gone

Working CapitalWorking Capital - Current Assets (Cash, Inventories, Accounts - Current Assets (Cash, Inventories, Accounts

Receivable)Receivable)

- Liabilities - Liabilities (Notes, AP, Accruals)(Notes, AP, Accruals)

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Cost and Project SelectionCost and Project SelectionPresent ValuePresent Value

Is $10,000 in your pocket now worth more than the $10,000 in Is $10,000 in your pocket now worth more than the $10,000 in your pocket one year from now?your pocket one year from now?

Yes! You can use the money now to make more money. The Yes! You can use the money now to make more money. The 10,000 in a year from now should be “discounted” to the present, 10,000 in a year from now should be “discounted” to the present,

since it’s not worth as muchsince it’s not worth as much..

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Time Income Present Value

1 10,000 10,000

2 10,000 9,090

3 10,000 8,264

4 10,000 7,513

5 10,000 6,830

TOTAL 50,000 41,697

Present Value of Your PMP Present Value of Your PMP Consulting GigConsulting Gig

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Internal Rate of ReturnInternal Rate of ReturnWhat is the return on the money invested?What is the return on the money invested?

Expressed as percentageExpressed as percentage

Great for comparing between two projects of different valueGreat for comparing between two projects of different value

Project A has an IRR of 21% and Project B has an IRR Project A has an IRR of 21% and Project B has an IRR of 14%. Which would I choose?of 14%. Which would I choose?

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Payback PeriodPayback Period

How long until we get the money back?How long until we get the money back?““Quick and Dirty” method for project selectionQuick and Dirty” method for project selection

Does not take into account the Time Value of MoneyDoes not take into account the Time Value of Money

Your Project costs $50,000, and the cash flow it will Your Project costs $50,000, and the cash flow it will bring is $11,000 a year.bring is $11,000 a year.

The Payback Period is. . . 5 yearsThe Payback Period is. . . 5 years

Discount rate/Interest Rate....10%Discount rate/Interest Rate....10%

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ReturnCumulative Inflow(without discount @10%)

Resulting Value of cash flow(end of year, with discount)

Cumulative Inflow(with discount@10%)

Note:the two (with or without discount do not differ too much in duration

11,000 11,000 10,891 10,891

11,000 22,000 10,783 21,674

11,000 33,000 10,676 32,347

11,000 44,000 10,571 42,914

11,000 55,000 10,476 53,394

Break Even at 50,000

The BE Point is 4yrs 7mths

With Discount Pay- Back is Different

Pay-Back Period is 4yrs 8 mths.

Payback PeriodPayback Period

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Net Present ValueNet Present ValueNPV, like Present Value, discounts future NPV, like Present Value, discounts future

cash flows to the presentcash flows to the present

PV of Revenue – PV of CostsPV of Revenue – PV of Costs

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Net Present Value: Your PMP GigNet Present Value: Your PMP Gig

Time Revenue Present Value

Costs PV of Costs NPV

0 10,000 10,000 12,000 12,000 -2,000

1 10,000 9,090 2,000 1,818 7,272

2 10,000 8,264 2,000 1,653 6,611

3 10,000 7,513 2,000 1,502 6,011

4 10,000 6,830 2,000 1,366 5.464

Total 50,000 41,697 20,000 18,339 23,358

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How long until we get the money back?How long until we get the money back?““Quick and Dirty” method for project selectionQuick and Dirty” method for project selection

Does not take into account the Time Value of MoneyDoes not take into account the Time Value of Money

Your Project costs $50,000, and the cash Your Project costs $50,000, and the cash flow it will bring is $11,000 a year.flow it will bring is $11,000 a year.

The Payback Period is. . . 5 yearsThe Payback Period is. . . 5 years

Payback PeriodPayback Period

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Benefit Cost RatioBenefit Cost Ratio

Compares the revenues to the costsCompares the revenues to the costsRevenue in this is the same as “payback”Revenue in this is the same as “payback”

1 is the magic number where costs = revenue1 is the magic number where costs = revenue

Less than 1, costs are greater than benefitsLess than 1, costs are greater than benefits

Greater than 1, and the benefits are greater than costs.Greater than 1, and the benefits are greater than costs.

If Project A has a BCR of 2.2 and Project B has a If Project A has a BCR of 2.2 and Project B has a BCR of 1.2, pick ABCR of 1.2, pick A..

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Cost ControlCost ControlCost Baseline

Project Funding Requirements

Performance Reports

Cost change control system

Performance measurement analysis

Forecasting

Project performance reviews

Project management software

Variance management

Inputs OutputsTools & Techniques

Work Performance Information

Approved Change Requests

Cost Estimating

Cost Budgeting

Cost Control

Project Management Plan

Cost Estimate Updates

Cost Baseline UpdatesPerformance Measurements

Forecasted Completion

Requested Changes

Recommended Corrective Actions

Organizational Process Assets Updates

Project Management Plan Updates

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Earned Value

• Progress is compared against the baseline to determine whether project is ahead of or behind plan

• Percent complete can be difficult to measure, some managers use rules 50/50 Rule – Assumed 50%

complete when task started, final 50% at completion

20/80 Rule – 20% at start 0/100 Rule – No credit until complete

Planned Value Planned Value (PV) – Budgeted (PV) – Budgeted CostCost

Earned Value Earned Value (EV) – Actual (EV) – Actual work completedwork completed

Actual Cost (AC) Actual Cost (AC) – Costs incurred– Costs incurred

Estimate to Estimate to Complete (ETC) Complete (ETC) – What’s Left– What’s Left

Estimate at Estimate at Completion Completion (EAC) – What (EAC) – What final cost will befinal cost will be

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The earned value Management involves developing these key values for The earned value Management involves developing these key values for each schedule activity, work package, or control account:each schedule activity, work package, or control account:

Planned value (PV)Planned value (PV).. PV is the budgeted cost for the work scheduled to be PV is the budgeted cost for the work scheduled to be completed on an activity or WBS component up to a given point in time. completed on an activity or WBS component up to a given point in time.

Earned value (EV)Earned value (EV).. EV is the budgeted amount for the work actually EV is the budgeted amount for the work actually completed on the schedule activity or WBS component during a given time completed on the schedule activity or WBS component during a given time period. period.

Actual cost (AC)Actual cost (AC).. AC is the total cost incurred in accomplishing work on the AC is the total cost incurred in accomplishing work on the schedule activity or WBS component during a given time period. This AC schedule activity or WBS component during a given time period. This AC must correspond in definition and coverage to whatever was budgeted for must correspond in definition and coverage to whatever was budgeted for the PV and the EV (e.g., direct hours only, direct costs only, or all costs the PV and the EV (e.g., direct hours only, direct costs only, or all costs including indirect costs). including indirect costs).

Cost variance (CV)Cost variance (CV). . CV equals earned value (EV) minus actual cost (AC). CV equals earned value (EV) minus actual cost (AC). The cost variance at the end of the project will be the difference between the The cost variance at the end of the project will be the difference between the budget at completion (BAC) and the actual amount spent. Formula: CV= EV budget at completion (BAC) and the actual amount spent. Formula: CV= EV - AC- AC

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The earned value Management involves developing these key values for The earned value Management involves developing these key values for each schedule activity, work package, or control account:each schedule activity, work package, or control account:

Schedule variance (SVSchedule variance (SV). ). SV equals earned value (EV) minus planned value SV equals earned value (EV) minus planned value (PV). Schedule variance will ultimately equal zero when the project is completed (PV). Schedule variance will ultimately equal zero when the project is completed because all of the planned values will have been earned. Formula: SV = EV - PV.because all of the planned values will have been earned. Formula: SV = EV - PV.These two values, the CV and SV, can be converted to efficiency indicators to These two values, the CV and SV, can be converted to efficiency indicators to reflect the cost and schedule performance of any project. reflect the cost and schedule performance of any project.

Cost performance index (CPI)Cost performance index (CPI). . A CPI value less than 1.0 indicates a cost A CPI value less than 1.0 indicates a cost overrun of the estimates. A CPI value greater than 1.0 indicates a cost underrun overrun of the estimates. A CPI value greater than 1.0 indicates a cost underrun of the estimates. CPI equals the ratio of the EV to the AC. The CPI is the most of the estimates. CPI equals the ratio of the EV to the AC. The CPI is the most commonly used cost-efficiency indicator. Formula: CPI = EV/AC commonly used cost-efficiency indicator. Formula: CPI = EV/AC

Schedule performance index (SPI)Schedule performance index (SPI). . The SPI is used, in addition to the The SPI is used, in addition to the schedule status to predict the completion date and is sometimes used in schedule status to predict the completion date and is sometimes used in conjunction with the CPI to forecast the project completion estimates. SPI equals conjunction with the CPI to forecast the project completion estimates. SPI equals the ratio of the EV to the PV. Formula: SPI = EV/PVthe ratio of the EV to the PV. Formula: SPI = EV/PV

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Earned Value Graph

Variance at Completion

(VAC)

Target Cost &

Schedule

Schedule Variance (Time)

Planned Value (PV)

Earned Value (EV)

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NAMENAME FORMULAFORMULA NOTESNOTESCost Variance (CV)Cost Variance (CV) EV-AC Negative = Over budget Negative = Over budget

Positive = Under budgetPositive = Under budget

Schedule VarianceSchedule Variance (SV)(SV)

EV-PV Negative = BehindNegative = BehindSchedule Schedule Positive = Ahead ofPositive = Ahead ofScheduleSchedule

Cost PerformanceCost Performance Index (CPI)Index (CPI)

EV/AC How much are weHow much are wegetting for every dollargetting for every dollarwe spend?we spend?

Schedule PerformSchedule Perform Index (SPI)Index (SPI)

EV/PV Progress as % againstProgress as % againstplanplan

Estimate to CompleteEstimate to Complete (ETC(ETC))

EAC-AC How much more do weHow much more do wehave to spend?have to spend?

Variance atVariance at Completion (VAC)Completion (VAC)

BAC-EAC At the end of the day,At the end of the day,how close will we be tohow close will we be toplan?plan?

Estimate atEstimate at Completion (EAC)Completion (EAC)

See the following page

Earned Value FormulasEarned Value Formulas

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NAME FORMULA NOTES

Estimate at Complrtion (EAC) BAC/CPIBAC/CPI Use if no variancesUse if no variances fromfrom

BAC have occurredBAC have occurred

AC+ETCAC+ETC Use when original Use when original estimateestimatewas bad. Actuals + Newwas bad. Actuals + Newestimateestimate

AC+BACAC+BAC-EV-EV

Use when currentUse when currentvariances are not variances are not expected to be there in expected to be there in thethefuturefuture

AC+(BACAC+(BAC-EV)/CPI-EV)/CPI

Use when currentUse when currentvariances are expected tovariances are expected tocontinuecontinue

Earned Value Formulas Earned Value Formulas (Cont’d)(Cont’d)

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Building A Farm Hut Exercise

• You have a project to build a new farm hut (Barn). The specs for building the hut are to construct 4 sides and then an angled roof. Each side of the hut is to take one day to build as is the roof. The budgeted amount is $2,000 per side and $2000 applied to the roof cost. The sides are to be completed one after the other. Today is the end of day four.

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FORECASTINGFORECASTING

Forecasting includes making estimates or predictions of conditions in the project's future based Forecasting includes making estimates or predictions of conditions in the project's future based on information and knowledge available at the time of the forecast.( Forecasts are generated, on information and knowledge available at the time of the forecast.( Forecasts are generated, updated, and reissued based on work performance information provided as the project is updated, and reissued based on work performance information provided as the project is executed and progressed)executed and progressed)..

BACBAC is equal to the total PV at completion for a schedule activity, work package, control is equal to the total PV at completion for a schedule activity, work package, control account, or other WBS component. Formula: BAC = total cumulative PV at completion.account, or other WBS component. Formula: BAC = total cumulative PV at completion.

ETCETC is the estimate for completing the remaining work for a schedule activity, work is the estimate for completing the remaining work for a schedule activity, work package, or control account.package, or control account.

ETC based on new estimateETC based on new estimate.. ETC equals the revised estimate for the work remaining, as ETC equals the revised estimate for the work remaining, as determined by the performing organization. This more accurate and comprehensive determined by the performing organization. This more accurate and comprehensive completion estimate is an independent, non-calculated estimate to complete for all the work completion estimate is an independent, non-calculated estimate to complete for all the work remaining, and considers the performance or production of the resource(s) to date. remaining, and considers the performance or production of the resource(s) to date.

Alternatively, to calculate ETC using earned value data, one of two formulas is typically Alternatively, to calculate ETC using earned value data, one of two formulas is typically used: used:

ETC based on atypical variancesETC based on atypical variances. . This approach is most often used when current This approach is most often used when current variances are seen as atypical and the project management team expectations are that variances are seen as atypical and the project management team expectations are that similar variances will not occur in the future. ETC equals the BAC minus the cumulative similar variances will not occur in the future. ETC equals the BAC minus the cumulative earned value to date (EVearned value to date (EVCC). Formula: ETC ). Formula: ETC = = (BAC(BAC - EV - EVCC))

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FORECASTINGFORECASTING

ETC based on typical variances.ETC based on typical variances. This approach is most often used when current variances are This approach is most often used when current variances are seen as typical of future variances. ETC equals the BAC minus the cumulative EVseen as typical of future variances. ETC equals the BAC minus the cumulative EV CC (the (the remaining PV) divided by the cumulative cost performance index (CPIremaining PV) divided by the cumulative cost performance index (CPI CC). Formula: ETC = (BAC - ). Formula: ETC = (BAC - EVEVCC) / CPI) / CPICC

EACEAC is the projected or anticipated total final value for a schedule activity, WBS component, or is the projected or anticipated total final value for a schedule activity, WBS component, or project when the defined work of the project is completed. One EAC forecasting technique is project when the defined work of the project is completed. One EAC forecasting technique is based upon the performing organization providing an estimate at completion: based upon the performing organization providing an estimate at completion:

EAC using a new estimateEAC using a new estimate. . EAC equals the actual costs to date (ACEAC equals the actual costs to date (ACCC) plus a new ETC that is ) plus a new ETC that is provided by the performing organization. This approach is most often used when past provided by the performing organization. This approach is most often used when past performance shows that the original estimating assumptions were fundamentally flawed or that performance shows that the original estimating assumptions were fundamentally flawed or that they are no longer relevant due to a change in conditions. Formula: EAC = ACthey are no longer relevant due to a change in conditions. Formula: EAC = ACCC + ETC + ETC

The two most common forecasting techniques for calculating EAC using earned value data are The two most common forecasting techniques for calculating EAC using earned value data are some variation of: some variation of:

EAC using remaining budget.EAC using remaining budget. EAC equals ACEAC equals ACCC plus the budget required to complete the plus the budget required to complete the remaining work, which is the budget at completion (BAC) minus the earned value (EV). This remaining work, which is the budget at completion (BAC) minus the earned value (EV). This approach is most often used when current variances are seen as atypical and the project approach is most often used when current variances are seen as atypical and the project management team expectations are that similar variances will not occur in the future. Formula: management team expectations are that similar variances will not occur in the future. Formula: EAC = ACEAC = ACCC + BAC - EV + BAC - EV

EAC using CPICEAC using CPIC.. EAC equals actual costs to date (AC EAC equals actual costs to date (ACCC) plus the budget required to complete ) plus the budget required to complete the remaining project work, which is the BAC minus the EV, modified by a performance factor the remaining project work, which is the BAC minus the EV, modified by a performance factor (often the CPI(often the CPICC). This approach is most often used when current variances are seen as typical of ). This approach is most often used when current variances are seen as typical of future variances. Formula: EAC = ACfuture variances. Formula: EAC = ACCC + ((BAC - EV) / + ((BAC - EV) / CPICPICC))

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Tricks for Earned Value

• EV is always first• Variance = EV minus something• Index = EV divided by something• If the formula relates to cost use AC• If the formula relates to schedule use PV• Interpreting results: negative is bad and positive is good• Interpreting results: greater than one is good, less than one is

bad

PV

AC ETCEAC

BACProject Start

Current Status

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Terms to Remember

• Present Value• Net Present Value (NPV)• Internal Rate of Return (IRR)• Payback Period• Benefit Cost Ratio = BCR>1,

Payback is greater than the cost

• Opportunity Cost• Sunk Cost

Working CapitalWorking CapitalStraight Line DepreciationStraight Line DepreciationAccelerated Depreciation Accelerated Depreciation

Double Declining BalanceDouble Declining Balance Sum of Years DigitsSum of Years Digits

Value Analysis (Value Value Analysis (Value Engineering)Engineering)

You won’t be calculating most of these numbers on the test, just remember the concepts for general questions

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QuestionsQ1-project cost management includes all the following functions, except;

a. resource planning

b. cost estimating

c. resource leveling

d. cost budgeting

d. cost control

Q2-The output from resource planning includes;

a. job descriptions

b. Salary descriptions

c. The types of resources required

d. All of the above

e. None of the above

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QuestionsQ3- Cost estimates may be expressed in;

a. labour

b. materials

c. supplies

d. inflation allowances

e. none of the above

Q4- resource planning must include consideration of the use of;

a. contractors, equipment, materials

b. people, computers, equipment

c. people, equipment, materials

d. contractors, computers, raw materials

E. none of the above.

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QuestionsQ5- In the erarned value system, cost variance is computed as;

a. BCWP less BCWS

b. BCWP less ACWP

c. ACWP less BCWP

d. ACWP less BCWS

e. BCWS less BCWP

Q6- Earned value is;

a. percent complete

b. budgeted cost of work performed

c. completed work value

d. all of the above

e. b and c only

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QuestionsQ7- if BCWS=100, BCWP=98, and ACWP=104, the project is,

a. ahead of schedule

b. headed for a cost overrun

c. doing the business

d. a and b only

e. a and c only

Q8- inputs to resource planning are;

a. the WBS

b. the scope statement

c. a resource pool description

d. organisational policies

e. all of the above

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QuestionsQ9- Which of the following choices would indicate that your project was 10

percent under budget?

a. BCWS=100, BCWP=110

b. ACWP=100, BCWP=110

c. BCWS=100, ACWP=110

d. ACWP=110, BCWP=100

e. BCWP=100, BCWS=110

Q10- Parametric cost estimating involves;

a. using the WBS as the basis of estimating

b. defining the parameters of the project life cycle

c. calculating individual cost estimates for each work package

d. using rates and factors based on historical experience to estimate costs

e. b and c only

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1 – a

– 2 – b

– 3 – a

– 4 – c

– 5 – a

Answers to Questions

6 – e 7 - d 8 - a 9 - b 10 - a

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EVA QuestionGiven a lawn to be cleaned up within four days at an estimated budget

Of Rm2,000, and today after three days the status of the project being;

EV=Rm1250, AC-Rm1750 with a daily planned expenditure=Rm500,

calculate the following:

PV EV CV

BAC CV CPI

SV SPI VAC(BAC-EAC)

EAC(EAC/CPI) ETC(EAC-AC)

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Answers to Questions (Cont’d)What is: Calculation: Answer: Interpretation of Answer:

PV $500+$500+$500 $1,500 We should have completed $1500

EV $500+$500+$250 $1,250 We actually completed $1,250 worth of work

AC $500+$1000+$250 $1,750 We have actually spent $1,750

BAC $500+$500+$500+$500 $2,000 Our project budget is $2000

CV $1,250 - $1,750 -$500 We are over budget by $500

CPI $1,250/$1,750 0.714 We are only getting $0.71 out of every dollar that we are spending on the project

SV $1,250 - $1,500 -$250 We are behind schedule

SPI $1,250/$1,500 0.833 We are progressing at 83% of the planned rate

EAC $2,000/0.714 $2,801 We currently estimate the project will cost $2,801

ETC $2,801-$1,750 $1,051 We need to spend $1,051 to finish the project

VAC $2,000 - $2,801 -$801 We currently expect to be $801 over budget when the project is completed

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Big DigBig Dig

Started construction on 1991 and planned Started construction on 1991 and planned completion by 1997 (6 years), it was to cost $3 completion by 1997 (6 years), it was to cost $3

Billion, the project included 6 highways Billion, the project included 6 highways

($0.5 Billion per highway/year)($0.5 Billion per highway/year)

At the end of the first year, 1/2 highway was At the end of the first year, 1/2 highway was completed and the cost was $2 Billion.completed and the cost was $2 Billion.

Do the EV analysisDo the EV analysis

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Big Dig: The NumbersBig Dig: The Numbers

EV = Earned Value = $0.25 Billion (EV = Earned Value = $0.25 Billion ($0.5/2)$0.5/2)

PV = Planned Value = $0.5 BillionPV = Planned Value = $0.5 Billion

AC = Actual Cost = $2 BillionAC = Actual Cost = $2 Billion

BAC = Budget At Completion = $3 BillionBAC = Budget At Completion = $3 Billion

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Big Dig: PerformanceBig Dig: Performance

CV = EV - AC = $0.25 - $2 = - $1.75 BillionCV = EV - AC = $0.25 - $2 = - $1.75 BillionOver Budget by $1.75 BillionOver Budget by $1.75 Billion

SV = EV - PV = $0.25 - $0.5 = - $0.25 BillionSV = EV - PV = $0.25 - $0.5 = - $0.25 BillionBehind of scheduleBehind of schedule

CPI =EV / AC = $0.25 / $2 = 0.12CPI =EV / AC = $0.25 / $2 = 0.12Getting 0.12 cents out of every dollar budgetedGetting 0.12 cents out of every dollar budgeted

SPI = EV / PV = $0.25 / $0.5 = 0.50SPI = EV / PV = $0.25 / $0.5 = 0.5050% of progress planned50% of progress planned

EAC = BAC / CPI = $3 / 0.50 = $ 6 BillionEAC = BAC / CPI = $3 / 0.50 = $ 6 Billion

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Big Dig: PerformanceBig Dig: Performance

CV = EV - AC = $0.25 - $2 = - $1.75 BillionCV = EV - AC = $0.25 - $2 = - $1.75 BillionOver Budget by $1.75 BillionOver Budget by $1.75 Billion

SV = EV - PV = $0.25 - $0.5 = - $0.25 BillionSV = EV - PV = $0.25 - $0.5 = - $0.25 BillionBehind of scheduleBehind of schedule

CPI =EV / AC = $0.25 / $2 = 0.12CPI =EV / AC = $0.25 / $2 = 0.12Getting 0.12 cents out of every dollar budgetedGetting 0.12 cents out of every dollar budgeted

SPI = EV / PV = $0.25 / $0.5 = 0.50SPI = EV / PV = $0.25 / $0.5 = 0.5050% of progress planned50% of progress planned

EAC = BAC / CPI = $3 / 0.50 = $ 6 BillionEAC = BAC / CPI = $3 / 0.50 = $ 6 Billion

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Big DigBig Dig

Megabina Sdn Bhd Started construction of sky-Megabina Sdn Bhd Started construction of sky-bridges in 2001 and planned completion by 2008 (8 bridges in 2001 and planned completion by 2008 (8 years).They were to cost $12 Billion, the project years).They were to cost $12 Billion, the project included 8 sky-bridges ($1.5 Billion per bridge/year)included 8 sky-bridges ($1.5 Billion per bridge/year)

At the end of the year 4 three were completed and At the end of the year 4 three were completed and the cost was $2.5Billion.the cost was $2.5Billion.

Do the EV analysisDo the EV analysis

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Big Dig: The NumbersBig Dig: The Numbers

EV = Earned Value = $3.5 Billion(EV = Earned Value = $3.5 Billion($1.5m*3)$1.5m*3)

PV = Planned Value = $6.0 Billion($1.5*4)PV = Planned Value = $6.0 Billion($1.5*4)

AC = Actual Cost = $2.5 BillionAC = Actual Cost = $2.5 Billion

BAC = Budget At Completion = $12 BillionBAC = Budget At Completion = $12 Billion

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Big Dig: PerformanceBig Dig: Performance

CV = EV - AC = $3.5 - $2.5 = $1.00 BillionCV = EV - AC = $3.5 - $2.5 = $1.00 BillionUnder Budget by $1.00 BillionUnder Budget by $1.00 Billion

SV = EV - PV = $3.5 - $6.5 = - $3.00 BillionSV = EV - PV = $3.5 - $6.5 = - $3.00 BillionBehind of scheduleBehind of schedule

CPI =EV / AC = $3.5 / $2.5 = 1.4CPI =EV / AC = $3.5 / $2.5 = 1.4Getting 1.14 cents out of every dollar budgetedGetting 1.14 cents out of every dollar budgeted

SPI = EV / PV = $3.5 / $6.5 = 0.50SPI = EV / PV = $3.5 / $6.5 = 0.5050% of progress planned50% of progress planned

EAC = BAC / CPI = $12 / 0.50 = $ 24 BillionEAC = BAC / CPI = $12 / 0.50 = $ 24 Billion

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Tools and Techniques• Performance reviews– Compare cost performance over time, scheduleactivities or work packages overrunning and underrunning the budget, and the estimated funds neededto complete work in progress– In EVM:• Variance analysis: compares actual project (cost or schedule)performance to planned or expected performance• Trend analysis: examines project performance over time todetermine if performance is improving or deteriorating.Graphical comparison of BAC versus EAC and completiondates• Earned value performance: compares the baseline plan toactual schedule and cost performance

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Tools and Techniques• Variance analysis– Cost performance measurements (CV, CPI) are used toassess the magnitude of variation to the original costbaseline– Cause and degree of variance WRT the costperformance baseline? >corrective/preventive‐‐action?– High acceptable variance range at start, lower as theproject gets closer to complete• Project Management software– Monitoring PV, EV, and AC

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Outputs• Work performance measurements– Calculated CV, SV, CPI, and SPI values for WBS components, work packagesand control accounts are documented and communicated to stakeholders• Budget forecasts– Calculated EAC value or bottom up EAC value is documented and‐communicated to stakeholders• Organizational Process Assets updates– Cause of variance– Corrective actions chosen and the reasons– Other types of lessons learned from project cost control• Change requests (through the Perform Integrated Change Control Process)• Project management plan updates– Cost performance baseline (scope, activity resources, cost estimates.Sometimes new cost baseline should be prepared as cost variance is severe)– Cost management plan• Project document plan– Cost estimates– Basis of estimates

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References

1. Sections of this presentation were adapted from1. Sections of this presentation were adapted from

A Guide to the Project Management Body of KnowledgeA Guide to the Project Management Body of Knowledge , , Third & partly Fourth Editions,Third & partly Fourth Editions,

Project Management Institute Inc., © 2004/9Project Management Institute Inc., © 2004/9

2. it is also drawn from various other presentations, publicly 2. it is also drawn from various other presentations, publicly uploadeduploaded

3. The presenter's expertise and Ingenuity were also employed 3. The presenter's expertise and Ingenuity were also employed to upgrade the original presentationto upgrade the original presentation

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