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PMP Exam Preparation

Project Cost Management

Sudhakar Reddy Kanchi; 9-Jul-2012

M.Tech (IIT), PMP,ITIL

What is cost management Overview of Cost Management processes Take a look at some sample questions

Agenda

What is Cost Management


Project Cost Management includes the processes involved in i. estimating ii. budgeting iii. and controlling costs

7.1 Estimate Costs The process of developing an approximation of the monetary resources needed to complete project activities. 7.2 Determine Budget The process of aggregating the estimated costs of individual activities or work packages to establish an authorized cost baseline. 7.3 Control Costs The process of monitoring the status of the project to update the project budget and managing changes to the cost baseline.

What is Cost Management


Cost estimating and cost budgeting are so tightly linked that they are viewed as a single process that can be performed by a single person over a relatively short period of time. These processes are presented here as distinct processes because the tools and techniques for each are different. The cost management processes and their associated tools and techniques are usually selected during the project life cycle definition (Section 2.1), and are documented in the cost management plan.

Contents of Cost Management Plan


Cost Management Plan can be formal or informal document, includes the following Level of Accuracy - rounding of the data to a prescribed precision (e.g., $100, $1,000) Units of Measure - Each unit used in measurements such as staff hours, staff days, weeks, or lump sum) is defined for each of the resources. Control thresholds - Thresholds are typically expressed as percentage deviations from the baseline plan. Reporting formats. The formats and frequency for the various cost reports are defined.

Contents of Cost Management Plan


Cost management plan includes the following Organizational procedures links - The work breakdown structure (WBS) (Section 5.3.3.1) provides the framework for the cost management plan, allowing for consistency with the estimates, budgets, and control of costs. The WBS component used for the project cost accounting is called the control account (CA). Each control account is assigned a unique code or account number(s) that links directly to the performing organizations accounting system. Rules of performance measurement. Earned value management (EVM) rules of performance measurement are set.

Cost Management Overview

Costs Process

Project Cost Management Estimate Costs Estimate Costs is the


7. 1 Estimate Costs 7.2 Determine Budget 7.3 Control Costs
process of developing an approximation of the monetary resources needed to complete project activities.

A cost estimate is a quantitative assessment of the likely costs for resources required to complete the activity.

Project Cost Management Estimate Costs

Risk Register (as input) should be reviewed for risk mitigation costs Analogous Estimating
Uses the values of parameters, such as scope, cost, budget, and duration or measures of scale such as size, weight, and complexity This technique relies on the actual cost of previous, similar projects as the basis It is a gross value estimating approach Generally less costly and less time consuming than other techniques, but it is also generally less accurate

Project Cost Management Estimate Costs

Parametric Estimating Uses a statistical relationship between historical data and other variables (e.g., square footage in construction) to calculate an estimate for activity parameters, such as cost, budget, and duration. This technique can produce higher levels of accuracy Bottom-up Estimating is a method of estimating a component of work The detailed cost is then summarized or rolled up to higher levels

Project Cost Management Estimate Costs

Three-Point Estimates The accuracy of single-point activity cost estimates can be improved by considering estimation uncertainty and risk This concept originated with the Program Evaluation and Review Technique (PERT) PERT analysis calculated an expected (CE) activity cost using a weighted average of three estimates, Most Likely, Optimistic, and Pessimistic

Project Cost Management Estimate Costs

Reserve Analysis
Cost estimates may include contingency reserves (sometimes called contingency allowances) to account for cost uncertainty Cost estimating methods may include analysis of what the project should cost, based on the responsive bids from qualified vendors

Vendor Bid Analysis

Project Cost Management Estimate Costs

Accuracy of Estimates
7. 1 Estimate Costs 7.2 Determine Budget 7.3 Control Costs
Rough Order of Magnitude (ROM) +/-50% from actual Budget Estimate -10 % to +25% Definitive Estimate +/- 10%

Project Cost Management Determine Budget


7. 1 Estimate Costs 7.2 Determine Budget 7.3 Control Costs

Project Cost Management Determine Budget Process

Project Cost Management Determine Budget

Determine Budget is the process of aggregating the estimated costs of individual activities or work packages to establish an authorized cost baseline. This baseline includes all authorized budgets, but excludes management reserves. Project cost performance will be measured against the authorized budget

Project Cost Management Determine Budget


Reserve Analysis Budget reserve analysis can establish both the contingency reserves and the management reserves for the project. Contingency reserves are allowances for unplanned but potentially required changes that can result from realized risks identified in the risk register. Management reserves are budgets reserved for unplanned changes to project scope and cost. The project manager may be required to obtain approval before obligating or spending management reserve. Reserves are not a part of the project cost baseline, but may be included in the total budget for the project. They are not included as a part of the earned value measurement (EVM) calculations.

Project Cost Management Determine Budget


Reserve Analysis

Project Cost Management Determine Budget


Cost Performance Baseline is an authorized time-phased budget at completion (BAC) used to measure, monitor, and control overall cost performance on the project It is developed as a summation of the approved budgets by time period and is typically displayed in the form of an S-curve

Project Cost Management Control Costs


7. 1 Estimate Costs 7.2 Determine Budget 7.3 Control Costs

Project Cost Management Control Costs Process

Project Cost Management Control Costs


Control Costs Control Costs is the process of monitoring the status of the project to update the project budget and managing changes to the cost baseline. Updating the budget involves recording actual costs spent to date. Any increase to the authorized budget can only be approved through the Perform Integrated Change Control process (Section 4.5).

Project Cost Management Control Costs


Earned Value Management (EVM) EVM integrates project scope, cost, and schedule measures to help the project management team assess and measure project performance and progress. It is a project management technique that requires the formation of an integrated baseline against which performance can be measured for the duration of the project. The principles of EVM can be applied to all projects, in any industry.

Project Cost Management Control Costs


Three key dimensions of (EVM) are Planned Value (PV) is authorized budget for work package Earned Value (EV) Is value of work performed expressed in terms of approved budgets Actual Cost (AC) Cost actually incurred

Earned Value Management (EVM) Note that EV comes first in all formulae Formulaeformula is EV minus some thing Variances If it is a variance, the
1. 2. SV = EV PV CV = EV AC
If it is an index, the formula is EV divided by some thing If the formula is related to cost use AC

Performance Index
3. 4. SPI = EV/PV CPI = EV/AC

If the formula is related to schedule use PV

Interpretations
Negative variances are bad

Indices less than one is bad

1.

EVM & Forecasting At beginning of project


EAC = BAC EAC = AC + (BAC EV)

2. EAC forecast for ETC work performed at the budgeted rate 3. If past is not reflection of future costs
EAC = AC + Bottom-up ETC

4. EAC forecast for ETC work performed at the present CPI


EAC = BAC/CPI

5. EAC forecast for ETC work considering both SPI and CPI factors
EAC = AC + [ (BAC EV) /(CPI * SPI) ]

6. To-Complete Performance Index (TCPI)


Is projection of CPI that must be achieved on remaining work to meet the specified goal such as BAC TCPI = [ Work Remaining ] / [Funds Remaining] TCPI = (BAC EV)/(BAC AC)

1.

EVM & Forecasting % Completed Planned


% Completed Planned = PV / BAC % Completed Actual = AC / EAC

2. % Completed Actual

Exercise (about 15 mins)


Calculate CPI, SPI, BAC, EAC, ETC, SV, CV, VAC, TCPI based on EAC
Budgeted Man hours % complete 120 200 100 75 80 50 Actual Man hours 103 190 60

Activity A B C

Earned Value =90 (120*75 /100 ) =160 (200*80 /100 ) =50 (100*50 /100 )

D SUM

300 720

90

260

=270 (300*90 /100 )


570

613

CPI = EV/AC = 570/613 = 0.93

ETC = EAC AC = 774.32-613 =161.32

SPI = EV/PV = 570/720 = 0.79


BAC = 720 EAC = BAC/CPI = 720/ 0.93= 774.32

SV = EV-PV = 570 720 = -150


CV = EV-AC = 570 613 = -43 VAC = BAC-EAC = -54.32

TCPI based on EAC = Work remaining (BAC-EV)/Funds remaining (EAC-AC) = (720-570)/(774.32-613) = 0.93

You have a project to build a new fence. The fence is four sided, 10 meter long each side. Each side to take 1 day, and budgeted for Rs 1000 per side. At the end of Day-3, 25 meters of fencing is done and spent Rs 2800. Calculate below EVM measures

EVM Exercise

PV EV AC BAC

CPI SPI EAC ETC

CV

VAC

Lifecycle costing Looking at the cost of whole lifecycle of product, not jus the cost of the project Value analysis involves finding a less costly way to do the same work. Also known as value engineering. Types of costs i. Variable costs change with the amount of production ii. Fixed costs do not change as production changes iii. Direct costs these costs are directly attributable to the work on the project iv. Indirect costs costs incurred for the benefit of more than one project

Few definitions