TM 420 Lecture 10 Cost Management
-
Upload
gerald-maginga -
Category
Documents
-
view
11 -
download
0
description
Transcript of TM 420 Lecture 10 Cost Management
-
TM 420 Notes
*
Lecture 10:
Project Cost Management
TM 420 Notes
TM 420 notes
*
TM 420 notes
-
TM 420 Notes
*
The Importance of Project Cost Management
Construction projects have a poor track record for meeting cost goals;
Average cost overrun is over of 100% of the original estimates (based on a study conducted in late 1990s);
The main objective by a contractor in a construction projects is to make profit;
Cost is the most sensitive project performance parameter.
TM 420 Notes
TM 420 notes
*
TM 420 notes
-
TM 420 Notes
*
Cost is a resource sacrificed or fore-gone to achieve a specific objective or something given up in exchange
Costs are usually measured in monetary units like Tshs, dollars, Euro, etc.
Project cost management includes the processes required to ensure that the project is completed within an approved budget
What is Cost and Project Cost Management?
TM 420 Notes
-
TM 420 Notes
*
Project Cost Management Processes
Resource planning: determining what resources and quantities of them should be used;Cost estimating: developing an estimate of the costs and resources needed to complete a project;TM 420 Notes
-
TM 420 Notes
*
Cost budgeting: allocating the overall cost estimate to timing of individual work items to establish a baseline for measuring performanceCost control: controlling changes to the project budgetTM 420 Notes
-
TM 420 Notes
*
Resource Planning
The nature of the project and the organization will affect resource planningSome questions to consider:How difficult will it be to do specific tasks on the project?
Is there anything unique in this projects scope statement that will affect resources?
TM 420 Notes
-
TM 420 Notes
*
What is the organizations history in doing similar tasks?
Does the organization have or can they acquire the human resources, equipment, and materials that are capable and available for performing the work?
At what cost?
TM 420 Notes
-
TM 420 Notes
*
Cost Estimating
An important output of project cost management is a cost estimate.There are several types of cost estimates and tools and techniques to help create them.It is also important to develop a cost management plan that describes how cost variances will be managed on the project.TM 420 Notes
-
TM 420 Notes
*
Table 10.1 Types of Cost Estimates (for large projects)
Type of Estimate
When Done
Why Done
How Accurate
Rough Order of Magnitude (ROM)
Very early in the project life cycle, often 35 years before project completion
Provides rough figure of cost for selection decisions
25%, +75%
Budgetary
Early, 12 years out
Puts actual figure in the budget plans
10%, +25%
Definitive
Later in the project, < 1 year out
Provides details for tendering, estimate actual costs
5%, +10%
TM 420 Notes
-
TM 420 Notes
*
Cost Estimation Tools and Techniques
Four basic tools and techniques for cost estimates:analogous or top-down: use the actual cost of a previous, similar project as the basis for the new estimate;
bottom-up: estimate individual work items and sum them to get a total estimate;
TM 420 Notes
-
TM 420 Notes
*
parametric: use project characteristics in a mathematical model to estimate costs; (cost capacity models; cost as function of key parameters; and
computerized tools: use spreadsheets, project management software, or other software to help estimate costs based on designs and resources cost database
TM 420 Notes
-
TM 420 Notes
*
Figure 10.1 Computer Based Cost Estimate Concept
Computerized
design
Cost Estimate
Analysis of
Items & Costs
Cost Data Base
TM 420 Notes
-
TM 420 Notes
*
Typical Challenges with Construction Cost Estimates
Developing an estimate for a large project is a complex task requiring a significant amount of effort. Remember that estimates are done at various stages of the projectMany people doing estimates have little experience doing them. Try to provide training and mentoringTM 420 Notes
-
TM 420 Notes
*
People have a bias toward underestimation. Review estimates and ask important questions to make sure estimates are not biasedManagement wants a number for a bid, not necessarily a real estimate. Project managers must negotiate with project sponsors to create realistic cost estimatesTM 420 Notes
-
TM 420 Notes
*
Cost Budgeting
Cost budget involves allocating the project cost estimate to individual work items and providing a cost baseline;A project budget provides information on the expected expenditure per project planning period;A typical cumulative cost curve presents the expected cumulative project budgetTM 420 Notes
-
TM 420 Notes
*
Cost Control
Project cost control includesmonitoring cost performanceensuring that only appropriate project changes are included in a revised cost baselineinforming project stakeholders of authorized changes to the project that will affect costsEarned value analysis is an important tool for cost controlTM 420 Notes
-
TM 420 Notes
*
Earned Value Analysis (EVA)
EVA is a project performance measurement technique that integrates scope, time, and cost dataGiven a baseline (original plan plus approved changes), you can determine how well the project is meeting its goalsActual data and information must be entered and analysed periodically to use EVA.TM 420 Notes
-
TM 420 Notes
*
Earned Value Analysis Terms
Budgeted cost of work scheduled (BCWS), also called the BUDGET, is that portion of the approved total cost estimate planned to be spent on an activity during a given periodActual cost of work performed (ACWP), also called ACTUAL COST, are the total direct and indirect costs incurred in accomplishing work on an activity during a given periodBudgeted cost of work performed (BCWP), also called EARNED VALUE, is the percentage of work actually completed multiplied by the planned cost (or BCWS)TM 420 Notes
-
TM 420 Notes
*
Table 10-2 Earned Value Calculations for One Activity After Week One
Activity
Week 1
Week 2
Total
% Complete after Week 1
Earned Value after Week 1 (BCWP)
Site Establishment
10,000
0
10,000
75%
7,500
Weekly Plan
10,000
0
10,000
Weekly Actual
15,000
5,000
20,000
Cost Variance
-7,500
Schedule Variance
-2,500
Cost Performance
Index
50%
Schedule Performance Index
75%
TM 420 Notes
-
TM 420 Notes
*
Table 10.3 Earned Value Formulas
To estimate what it will cost to complete a project or how long it will take based on performance to date, divide the budgeted cost or time by the appropriate index.
Term
Formula
Earned Value
Budgeted Cost of Work Performed (BCWP) =
budgeted cost to date X % complete
Cost Variance
CV=BCWP-ACWP (actual cost of work performed)
Schedule Variance
SV=BCWP-BCWS (budgeted cost of work scheduled)
Cost Performance Index
CPI=BCWP/ACWP
Schedule Performance Index
SPI = BCWP/BCWS
TM 420 Notes
-
TM 420 Notes
*
Rules of Thumb for EVA Numbers
Negative numbers for cost and schedule variance indicate problems in those areas. The project is costing more than planned or taking longer than plannedCPI and SPI less than 100% indicate problemsTM 420 Notes
-
TM 420 Notes
*
Figure 10.2 Earned Value Calculations for a One-Year Project After Five Months
Excel file
TM 420 Notes
-
TM 420 Notes
*
Figure 10-3. Earned Value Chart for Project After Five Months
Excel file
EAC
If BCWP line is below others, things could be better!
TM 420 Notes
Chart1400040004000140001500014000240002600024000340003800034000460005300044000620007200078000860009000095000100000BCWSACWPBCWPBACBCWS or Cumulative PlanACWP or Cumulative ActualBCWP or Cumulative EVMonth$Chart4343888191819322931474141.5635648.645918373.045145206233246254BCWS or Cumulative PlanACWP or Cumulative ActualBCWP or Cumulative EVMonth$Sheet1ActivityJanFebMarAprMayJunJulAugSepOctNovDecPlan% CompleteEVPlan and staff project4,0004,0008,0001008,000Analyze requirements6,0006,00012,00010012,000Develop ERDs4,0004,0008,0001008,000Design database tables6,0004,00010,00010010,000Design forms, reports, and queries8,0004,00012,000506,000Construct working prototype10,00010,000- 0- 0Test/evaluate prototype2,0006,0008,000- 0- 0Incorporate user feedback4,0006,0004,00014,000- 0- 0Test system4,0004,0002,00010,000- 0- 0Document system3,0001,0004,000- 0- 0Train users4,0004,000- 0- 0Monthly Plan4,00010,00010,00010,00012,00016,00010,0006,0008,0004,0005,0005,000100,00044,000BCWS or Cumulative Plan4,00014,00024,00034,00046,00062,00072,00078,00086,00090,00095,000100,000Monthly Actual4,00011,00011,00012,00015,000ACWP or Cumulative Actual4,00015,00026,00038,00053,000Monthly EV4,00010,00010,00010,00010,000BCWP or Cumulative EV4,00014,00024,00034,00044,000Project BCWP as of May 3144,000Project BCWS as of May 3146,000Project ACWP as of May 31$ 53,000CV=BCWP-ACWP$ (9,000)SV=BCWP-BCWS$ (2,000)CPI=BCWP/ACWP83%SVI=BCWP/BCWS96%Estimated cost at completion$ 120,455(original plan of $100,000 divided by CPI of 83%)Estimated time to complete12.55(original plan of 12 months divided by SVI of 96%)Above for Figure 6-2Chart below for Figure 6-3Sheet100000000000000000000000000BCWSACWPBWCPBACBCWS or Cumulative PlanACWP or Cumulative ActualBCWP or Cumulative EVMonth$Sheet2Sheet3 -
TM 420 Notes
*
Using Software to Assist in Cost Management
Spreadsheets are a common tool for resource planning, cost estimating, cost budgeting, and cost controlMany companies use more sophisticated and centralized financial applications software for cost informationProject management software has many cost-related featuresTM 420 Notes
-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
100,000
123456789101112
Month
$
BCWS or Cumulative Plan ACWP or Cumulative Actual BCWP or Cumulative EV
BCWS
ACWP
BCWP
BAC