Project Cost Project Cost ManagementManagement

Sections of this presentation were adapted Sections of this presentation were adapted from from A Guide to the Project Management A Guide to the Project Management

Body of KnowledgeBody of Knowledge 4 4thth Edition, Project Edition, Project Management Institute Inc., © 2009Management Institute Inc., © 2009

Project Cost ManagementProject Cost Management

““The processes involved in planning, The processes involved in planning, estimating, budgeting, and controlling estimating, budgeting, and controlling costs so that the budget can be completed costs so that the budget can be completed within the approved budget”within the approved budget”

Why Do We Manage Cost?Why Do We Manage Cost?

Part of triple constraint, can’t manage one without Part of triple constraint, can’t manage one without the others (scope, time, and quality) the others (scope, time, and quality)

Plots of cost and scope against plan can help spot Plots of cost and scope against plan can help spot problems earlyproblems 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?

Cost Management Key TermsCost Management Key Terms

PV - Planned Value, PV - Planned Value, estimatedestimated value of the planned work value of the planned work

EV – Earned Value, EV – Earned Value, estimatedestimated value of work done value of work done

AC – Actual Cost, what you paidAC – Actual Cost, what you paid

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

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

ETC – Estimate to Complete, forecasted costs to complete ETC – Estimate to Complete, forecasted costs to complete jobjob

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

How Do We Manage Cost?How Do We Manage Cost?

Three processesThree processes Estimate CostsEstimate Costs Determine BudgetDetermine Budget Control CostsControl Costs

Estimate

Costs

Determine Budget

Control

Costs

Estimate CostsEstimate CostsEnterprise 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

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

Estimate

Costs

Determine Budget

Control

Costs

Estimating MethodsEstimating Methods

Analogous (Top Down) estimatingAnalogous (Top Down) estimating – Managers use – Managers use expert judgment or similar project costs [quick, less expert judgment or similar project costs [quick, less accurate]accurate]Bottom-Up estimatingBottom-Up estimating – People doing work – People doing work estimate based on WBS, rolled up into project estimate based on WBS, rolled up into project estimate [slow, most accurate]estimate [slow, most accurate]Parametric estimatingParametric estimating – Use mathematical model – Use mathematical model (i.e. cost per sq ft). [accuracy varies] (i.e. cost per sq ft). [accuracy varies] Two types:Two types:

Regression analysis – based on analysis of multiple Regression analysis – based on analysis of multiple data pointsdata pointsLearning Curve – The first unit costs more than the Learning Curve – The first unit costs more than the 100100thth, forecasts efficiency gains, forecasts efficiency gains

Estimating MethodsEstimating Methods

Vendor Bid AnalysisVendor Bid Analysis – Estimating using bids + – Estimating using bids + allowances for gaps in bid scope [slow, accuracy allowances for gaps in bid scope [slow, accuracy depends on gaps]depends on gaps]Reserve AnalysisReserve Analysis – Adding contingency to each – Adding contingency to each activity cost estimates as zero duration item [slow, activity cost estimates as zero duration item [slow, overstates cost]overstates cost]

Determine BudgetDetermine Budget

Project Scope StatementCost aggregation

Reserve analysis

Parametric estimating

Funding limit reconciliationInputs

OutputsTools & Techniques

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

Estimate

Costs

Determine Budget

Control

Costs

Determine BudgetDetermine Budget

Budgeting is allocating costs to work packages Budgeting is allocating costs to work packages to establish a cost baseline to measure project to establish a cost baseline to measure project performanceperformanceRemember Contingency items are for unplanned Remember Contingency items are for unplanned but required changes it is not to cover things but required changes it is not to cover things such as:such as: Price escalationPrice escalation Scope & Quality ChangesScope & Quality Changes

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

Control CostsControl CostsCost 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

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

Estimate

Costs

Determine Budget

Control

Costs

Earned ValueEarned Value

Progress is compared against the Progress is compared against the baseline to determine whether baseline to determine whether project is ahead of or behind planproject is ahead of or behind planPercent complete can be difficult Percent complete can be difficult to measure, some managers use to measure, some managers use rules rules 50/50 Rule – Assumed 50% 50/50 Rule – Assumed 50%

complete when task started, final complete when task started, final 50% at completion50% at completion

20/80 Rule – 20% at start20/80 Rule – 20% at start 0/100 Rule – No credit until complete 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 (EAC) Completion (EAC) – What final cost – What final cost will bewill be

Earned Earned Value Value GraphGraph

Variance at Completion

(VAC)

Target Cost &

Schedule

Schedule Variance (Time)

Planned Value (PV)

Earned Value (EV)

Earned Value FormulasEarned Value Formulas

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

Positive = Under budgetPositive = Under budget

Schedule Variance Schedule Variance (SV)(SV)

EV-PVEV-PV Negative = Behind Schedule Negative = Behind Schedule

Positive = Ahead of SchedulePositive = Ahead of Schedule

Cost Performance Cost Performance Index (CPI)Index (CPI)

EV/ACEV/AC How much are we getting for every How much are we getting for every dollar we spend?dollar we spend?

Schedule Perform Schedule Perform Index (SPI)Index (SPI)

EV/PVEV/PV Progress as % against planProgress as % against plan

Estimate to Complete Estimate to Complete (ETC)(ETC)

EAC-ACEAC-AC How much more do we have to How much more do we have to spend?spend?

Variance at Variance at Completion (VAC)Completion (VAC)

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

Estimate at Estimate at Completion (EAC)Completion (EAC)

See following slideSee following slide

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

NAMENAME FORMULAFORMULA NOTESNOTESEstimate at Estimate at Completion (EAC)Completion (EAC)

BAC/CPIBAC/CPI Use if no variancesUse if no variances from from BAC have occurredBAC have occurred

AC+ATCAC+ATC Use when original Use when original estimate was bad. Actuals estimate was bad. Actuals + New estimate+ New estimate

AC+BAC-EVAC+BAC-EV Use when current Use when current variances are not expected variances are not expected to be there in the futureto be there in the future

AC+(BAC-EV)/CPIAC+(BAC-EV)/CPI Use when current Use when current variances are expected to variances are expected to continuecontinue

Tricks for Earned ValueTricks for Earned Value

EV is always firstEV is always firstVariance = EV minus somethingVariance = EV minus somethingIndex = EV divided by somethingIndex = EV divided by somethingIf the formula relates to cost use ACIf the formula relates to cost use ACIf the formula relates to schedule use PVIf the formula relates to schedule use PVInterpreting results: negative is bad and positive is goodInterpreting results: negative is bad and positive is goodInterpreting results: greater than one is good, less than Interpreting results: greater than one is good, less than one is badone is bad

PV

AC ETCEAC

BACProject Start

Current Status

Terms to RememberTerms to Remember

Present ValuePresent ValueNet Present Value (NPV)Net Present Value (NPV)Internal Rate of Return Internal Rate of Return (IRR)(IRR)Payback PeriodPayback PeriodBenefit Cost Ratio = Benefit Cost Ratio = BCR>1, Payback is greater BCR>1, Payback is greater than the costthan the costOpportunity CostOpportunity CostSunk CostSunk 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