Project Cost Management PMBOK 4th Edition. Agenda Broad Understanding of Project Cost Management. ...
Transcript of Project Cost Management PMBOK 4th Edition. Agenda Broad Understanding of Project Cost Management. ...
Project Cost ManagementProject Cost Management
PMBOK 4th EditionPMBOK 4th Edition
AgendaAgenda
Broad Understanding of Project Cost Broad Understanding of Project Cost Management.Management.
Understand how software estimation is Understand how software estimation is different.different.
PROCESS GROUPSPROCESS GROUPS
Estimate Costs
Budget Costs
Control Costs
I
Planning
E
Controlling
C
Estimate CostsEstimate Costs
Cost estimating and Pricing:Cost estimating and Pricing: Cost estimating: how much will it cost the performing Cost estimating: how much will it cost the performing
organization to provide the product or service organization to provide the product or service involved?involved?
Pricing: how much will the performing organization Pricing: how much will the performing organization charge for the product or service? charge for the product or service? Business decisionBusiness decision..
Estimating should be done by the person doing Estimating should be done by the person doing the work.the work.
Estimate CostsEstimate Costs
Based on the WBS to increase the accuracy.Based on the WBS to increase the accuracy. Project managers should analyze the needs of Project managers should analyze the needs of
the project, to compare and reconcile any the project, to compare and reconcile any differences with cost requirements from differences with cost requirements from management.management.
1. WBS2. Resource
requirements3. Resource rates.4. Act. duration est.5. Historical info.6. Chart of accounts7. Risks
1. Analogous est.2. Parametric
modeling3. Bottom-up est.
1. Cost estimates2. Cost
management plan
Inputs Tools Outputs
Estimate CostsEstimate Costs Cost estimates for all resources that will be Cost estimates for all resources that will be
charged to the project.charged to the project. Generally expressed in units of currency to facilitate Generally expressed in units of currency to facilitate
comparisons both within and across projects.comparisons both within and across projects. Generally includes appropriate risk response planning.Generally includes appropriate risk response planning.
Supporting detail must include:Supporting detail must include: Reference to WBS.Reference to WBS. How it was developed?How it was developed? Assumptions made.Assumptions made. Range of possible results.Range of possible results.
Cost management plan how cost variances will Cost management plan how cost variances will be managed.be managed.
Estimate CostsEstimate Costs
View the TemplatesView the Templates Top DownTop Down
Experience Based/AnalogyExperience Based/Analogy ParametricParametric
WBSWBS Roll up the numbersRoll up the numbers
Estimates vs. AccuracyEstimates vs. Accuracy
Most difficult to estimate as very Most difficult to estimate as very little project info is availablelittle project info is available
EstimateEstimate AccuracyAccuracy
Order of Order of Magnitude Magnitude (Early)(Early)
-25%-25%
+75%+75%
Budget Budget EstimateEstimate
-10%-10%
+25+25
Definitive Definitive EstimateEstimate
-5%-5%
10%10%
Used to finalize the Request for Used to finalize the Request for Authorization (RFA), and establish Authorization (RFA), and establish commitmentcommitment
Development stage estimate. Development stage estimate. Needed to predict revised project Needed to predict revised project completion datecompletion date
Tools for Estimating Tools for Estimating
Top Down Top Down EstimatingEstimating
Accuracy depends on experienceAccuracy depends on experienceFast, but estimates are roughFast, but estimates are rough
Bottom Up Bottom Up EstimatingEstimating
Slow, but reliableSlow, but reliableHigh cost (time) / WBS neededHigh cost (time) / WBS neededBuy-in from the teamBuy-in from the team
Parametric Parametric ModelingModeling
Mathematical models to predict costsMathematical models to predict costsTwo types: REGRESSION ANALYSIS, Two types: REGRESSION ANALYSIS,
and LEARNING CURVEand LEARNING CURVE
Delphi Delphi Method Method (analogous)(analogous)
Expert judgmentExpert judgmentTasks need not to be identifiedTasks need not to be identifiedConsiderable experience neededConsiderable experience needed
Influencing FactorsInfluencing FactorsInfluencing FactorsInfluencing Factors
Two sets of factors influence the ultimate Two sets of factors influence the ultimate cost of a systemcost of a system
Size FactorsSize Factors Number, and type of functionsNumber, and type of functions
Project FactorsProject Factors Project parameters that influence Project parameters that influence
project costs. project costs.
Control CostsControl Costs
Understand what is driving variances, good and Understand what is driving variances, good and bad, and decide what action to take.bad, and decide what action to take.
1. Cost Baseline2. Performance
Reports3. Change Requests4. Cost
Management Plan
1. Cost Change Control System
2. Performance Measurement
3. Earned Value Management
4. Additional Planning
5. Computerized Tools
1. Revised Cost Estimates
2. Budget Updates3. Corrective Action4. Estimate at
Completion5. Project Closeout6. Lessons learned
Inputs Tools Outputs
Case StudyCase Study
Simple Case study requires you to master Simple Case study requires you to master the following:the following:
EV = Earned ValueEV = Earned Value PV = Planned ValuePV = Planned Value AC = Actual CostAC = Actual Cost
Budget CostsBudget Costs
The cost baseline will be used to measure and The cost baseline will be used to measure and monitor cost performance of the project.monitor cost performance of the project.
Expected Cash Flow
Cost Baseline
Cumulative Values
Time
Control CostsControl Costs
To Control / Report CostsTo Control / Report Costs And to Revise Costs and provide a new And to Revise Costs and provide a new
Estimate At CompletionEstimate At Completion Use Earned Value MethodUse Earned Value Method
ExampleExample
Painting your four walls.Painting your four walls. Each wall $1000.Each wall $1000. Total Budget At Completion (BAC) = Total Budget At Completion (BAC) =
$1000+$1000+$1000+$1000$1000+$1000+$1000+$1000 Half way through you audit the work.Half way through you audit the work. Let us consider two scenarios.Let us consider two scenarios.
Scenario 1Scenario 1
One Wall is paintedOne Wall is painted Amount Spent is $500Amount Spent is $500
Scenario 2Scenario 2
Two Walls paintedTwo Walls painted Amount Spent is $4000Amount Spent is $4000
What is the Revised EACWhat is the Revised EAC
For Scenario 2.For Scenario 2.
TCPITCPI
What if CPI is consistently low.What if CPI is consistently low. Can you catch up somehow?Can you catch up somehow? How will you know if it is not possible?How will you know if it is not possible? Read 18.6.1 about TCPI.Read 18.6.1 about TCPI.
Case Study:Case Study: Project “Book Contract” Project “Book Contract”
The “Book Contract” Project:The “Book Contract” Project:10 work packages10 work packages
• 10 chapters 10 chapters Negotiated to be delivered 1 Negotiated to be delivered 1
per monthper monthEstimated cost of $100 eachEstimated cost of $100 each
Time to Complete Performance Time to Complete Performance IndexIndex
This is equal to:
(BAC)
Why pick TCPI? Why pick TCPI?
The TCPI focuses on the remaining The TCPI focuses on the remaining project activities. project activities.
It reflects what it will take in It reflects what it will take in future future performance performance to recover from a to recover from a negative actual cost position.negative actual cost position.
Note: It is effectively the mirror Note: It is effectively the mirror opposite of the cumulative CPI.opposite of the cumulative CPI.
We’ve all been there. We’ve all been there.
You’re a few months into a project and You’re a few months into a project and the first few deliverables have been the first few deliverables have been completed. completed.
You diligently calculate the CPI = 0.9. You diligently calculate the CPI = 0.9. Your customer asks you about your Your customer asks you about your
plans for the cost overrun plans for the cost overrun ““No problem, we’ll make it up”No problem, we’ll make it up” BUT CAN YOU?BUT CAN YOU?
Back to the Case Study..Back to the Case Study..Month 1 2 3
Planned Value $100 $100 $100
Earned Value $100 $100 $100
Actual Cost $110 $110 $110
Cumulative Earned Value (EV) $100 $200 $300
Cumulative Actual Cost (AC) $110 $220 $330
CPI = EV/AC 0.89 0.89 0.89
TCPI calculation: Work TCPI calculation: Work RemainingRemaining
The work remaining is The work remaining is BAC – EV = $1,000 - $300 = $700 BAC – EV = $1,000 - $300 = $700
This is an estimate of the earned This is an estimate of the earned value remaining:value remaining: The total earned value for the project is The total earned value for the project is
$1,000$1,000 We have completed 3 deliverables.We have completed 3 deliverables. Work remaining = $700.Work remaining = $700.
TCPI Calculation: Funds TCPI Calculation: Funds RemainingRemaining
The funds remaining are BAC – AC = The funds remaining are BAC – AC = $1,000 – $330 = $670.$1,000 – $330 = $670.
This is the remaining budget if we are This is the remaining budget if we are to deliver as promised.to deliver as promised.
Project Moves onProject Moves on
1.04 doesn’t look too bad!1.04 doesn’t look too bad!We have to achieve a CPI rate of We have to achieve a CPI rate of
1.04 times of what we were 1.04 times of what we were working on.working on.
Yes, We Can!Yes, We Can!Yes, We Can!Yes, We Can!Yes, We Can!Yes, We Can!
So Three More Months & So Three More Months & Three more ChaptersThree more Chapters
Month 1 2 3 4 5 6Planned Value $100 $100 $100 $100 $100 $100
Earned Value $100 $100 $100 $100 $100 $100
Actual Cost $110 $110 $110 $110 $110 $110
Cumulative Earned Value (EV)
$100 $200 $300 $400 $500 $600
Cumulative Actual Cost (AC)
$110 $220 $330 $440 $550 $660
CPI = EV/AC 0.89 0.89 0.89 0.89 0.89 0.89
Three More Chapters …Three More Chapters …
Uphill…Uphill…
To complete the project within To complete the project within budget, we now have to work at a rate budget, we now have to work at a rate 18% greater than we proposed. 18% greater than we proposed.
In fact, we need a 29% improvement In fact, we need a 29% improvement in our expenditure rate from 89% to in our expenditure rate from 89% to 118%!118%!
TCPI Goes to ∞ in month 8!TCPI Goes to ∞ in month 8!
Estimates of Cost to Estimates of Cost to CompleteComplete
The estimate of The estimate of the final cost the final cost at completionat completion is called the is called the estimate at completion (estimate at completion (EACEAC).).
Next: The PM should calculate the new EAC.
AnalysisAnalysis
The TCPI has the remarkable The TCPI has the remarkable property that if we own up to the cost property that if we own up to the cost overrun and use the TCPI with the overrun and use the TCPI with the EAC in the denominator, then we can EAC in the denominator, then we can proceed at our current efficiency proceed at our current efficiency (defined by our current CPI) and hit (defined by our current CPI) and hit the new cost target.the new cost target.
ConclusionConclusion
When BAC is no longer attainable, When BAC is no longer attainable, the project manager should calculate the project manager should calculate a new EAC.a new EAC.
This new estimate becomes the goal This new estimate becomes the goal we will work towards we will work towards if approved by if approved by stakeholders.stakeholders.
TCPI = (BAC –EV) / (TCPI = (BAC –EV) / (EACEAC –AC) –AC)
Conclusion Conclusion
TCPI gives us a reality check TCPI gives us a reality check analysis.analysis.
PM: Our CPI is 0.9. We will deliver PM: Our CPI is 0.9. We will deliver on budget, don’t worry. on budget, don’t worry.
Auditor: I have TCPI = 1.2, implies Auditor: I have TCPI = 1.2, implies 30% increase in productivity. 30% increase in productivity.
Auditor: Are you Sure?Auditor: Are you Sure?
ReferencesReferences
Provides a good overview and general guide to Provides a good overview and general guide to the principles of EVM.the principles of EVM.
Shows the EVM role in facilitating effective Shows the EVM role in facilitating effective project management , project management , Project Management Project Management Institute, 2005Institute, 2005
The Two Most Useful Earned Value Metrics: the The Two Most Useful Earned Value Metrics: the CPI and the TCPI By Quentin W. Fleming and CPI and the TCPI By Quentin W. Fleming and Joel M. KoppelmanJoel M. Koppelman
Also Warburton and Kanabar – Several PMI Also Warburton and Kanabar – Several PMI papers and Bookpapers and Book