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Cost Management
3
(M5)
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Cost Management
1. 2. 3. 4.
Introduction Monitoring and control costs Performance monitoring 3 Earned Value Technique
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Introduction
Once the project is started there are some more question for the PM:
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Introduction
Control is not intended for the mere detection of the actual data. Actual data, while important, does not allow itself to make a critical judgment on the actual status of the project Control means determining if things are going as planned and, if not, take timely and appropriate actions.
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Performance measurement analysis (Earned Value Management or other techniques ) Forecasts: Forecasting includes making estimates
or predictions of conditions in the projects future based 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 executed and progressed.
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Choice of rules of monitoring: monitoring interval and methods for monitoring the progress (in the PM Plan); Monitoring of progress in terms of time, cost and resources, with any new estimates for the activities in progress or to be started: Consolidation (approval and input into the PM system) of actual time, money and resources for the executed part of the project. Monitoring the performance of the project through variance analysis in terms of time, cost and performance of the entire project and its parts; Replanning (adjustments and realignments) in terms of time, cost and resources; Formalization and logging of the situation of the project to date (consolidated + replanning ) with production of the progress report; Possible redefinition of the official Baseline (only in extreme cases).
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Performance monitoring
Performance measurement techniques help to assess the magnitude of any variances that will invariably occur; To determine the performance of a project, it is essential to measure the actual "physical progress" (how much work has been done); It is good to keep the measure of the physical progress (earned value) disjoint from other types of feed: time, cost / income and resources; A physical progress "inferred" in an indirect way by other metrics (e.g.: dd actual / dd planned) would lead to considerable errors in the assessment of the real progress of work and in the determination of estimates to complete.
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ON/OFF (0/100): 0 at the beginning of the activity 100 at the end. Useful for short time activities or low budget; 50/50 (or 20/80): 50 (20) when the activity starts and 100 at the end. Useful for short time activities or low budget; Weighted events: important events are identified within the activity to which it is given a weight, the achievement of an event determine the progress of the activity. Applicable to activities in which the subparts can be demonstrated;
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Earned Value - EV (or BCWP - Budgeted Cost of Work Performed): represents the budgeted value of the work actually produced (deliverable) at the date of measurement.
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Earned Value
The Earned Value represents the progress of the project (deliverable or portion of deliverable produced); EV provides guidance on project progress in terms of time and productivity; EV is calculated by multiplying the Total Planned Budget (BAC) for the percentage of physical progress: EV = BAC * %physical completion at the date; EV can be calculated at the level of activity, work package or entire project;
EV allows to measure the actual variances between planned and actual value, also highlighting the performance of the project;
EV is used to calculate forecasts (EAC); EV is a great instruments to feed synthetic managerial "dashboards.
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M5_Cost Management
ACT.
JAN
FEB
MAR
APR
MAY
JUN
TOTAL BUDGET
A B C D
150
PLANED =150 ACTUAL =100
150 200
PLANNED =100 ACTUAL =150 PLANNED =0 ACTUAL =0
100
Total at Timenow
Variance : - 30
600
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ACT.
JAN
100%
PLANNED =150 ACTUAL =120
FEB
MAR
APR
MAY
TIMENOW
JUN
TOTAL BUDGET
A B C D
Total at timenow
EARNED=150
150
33%
PLANNED =150 ACTUAL =100 EARNED= 50
150
75%
200
PLANNED =0 EARNED =0 EARNED= 0
EARNED= 150
100
600
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SPI = EV / PV
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(BAC-EV)
(BAC-PV)
TSPI gives the efficiency at which the project team should utilize the remaining time allocated for the project. TSPI < 1 indicates project team can be lenient in utilizing the remaining time allocated to the project. TSPI > 1 indicates project team needs to work harder in utilizing the remaining time allocated to the project
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The actual cost at TimeNow is greater Earned Value: we are spending more than you would have had to spend on what has been achieved: we are above budget The planned value at TimeNow is greater than the Earned Value: The value of what is actually achieved in terms of budget is less than what had been planned, we are behind schedule
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The index of cost efficiency is less than 1: we are getting 94% of value for every euro spent, we are inefficient with the costs; The efficiency index of the schedule is less than 1: We are making 87% of what was planned, we are inefficient with the schedule; The efficiency to finish (TCPI) is > 1: the use of resources until the end of the project must be stringent.
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Timenow
600
DB=Delta Budget
Total Budget
TF
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Time
EV AC AC PV EV PV AC EV PV
AC EV PV AC EV PV PV EV AC
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AC
PV
1
TOP-DOWN
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Positive Positive PV AV
EV
1.1
EV
1.2
EV
PV AV
1.3
AC
PV EV
Negative On sched
EV
PV EV AC PV
Negative On costs
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EAC = AC + ETC
Represents the estimated cost at the end of the project, taking into account what is actually spent (sunk costs = AC) and how much further you have to achieve;
Estimate At Completion (EAC) is the estimated cost of the project at the end of the project.
There are three methods to calculate EAC
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370+(600-350) = 620
Variances are Atypical - This method is used when the variances at the current stage are atypical and are not expected to occur in the future;
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Variances are Typical - Variances will be present in the future - This method is used when the assumption is that the current variances will continue to be present in the future
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DB
DB*CPI
AC CV SV PV EV
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Delay
Time
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EAC = AC + ETC
Estimate To Complete (ETC) Estimate To Complete (ETC) is the estimated cost required to complete the remainder of the project. Estimate To Complete (ETC) is calculated and applied when the past estimating assumptions become invalid and a need for fresh estimates arises. ETC is used to compute the Estimation at Completion (EAC).
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Consolidation
A B C D
Schedule
Resources
5 sett
6 sett
7 sett
8 sett
9 sett
10 sett
11 sett
12 sett
Costs
1 2 3
1 - PV 2 - AC
Costs and
Performance
Time
3 - EV
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M5_Cost Management
Timenow
Earned Value
Example
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Earned Value
a) Draw the Gantt (after defining the network of dependencies)
You are a PM and you have this sequence of activities with its dependencies: Activity 1 can start immediately and has an expected duration of 4 weeks Activity 2 should end together with Activity 1, and has an estimated duration of 2 weeks Activity 3 begins after Task 1 is finished and has an estimated duration of 6 weeks Activity 4 starts two weeks after the Activity 2 is over and it has an expected duration of 8 weeks Activity 5 begins after that activity 3 is over and ends together with Activity 4 and has a duration of 3 weeks Activity 6 starts after the Activity 4 is over and it has a duration of 5 weeks
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Earned Value
a) Draw the Gantt (after defining the network of dependencies)
You are a PM and you have this sequence of activities with its dependencies: Activity 1 can start immediately and has an expected duration of 4 weeks Activity 2 should end together with Activity 1, and has an estimated duration of 2 weeks Activity 3 begins after Task 1 is finished and has an estimated duration of 6 weeks Activity 4 starts two weeks after the Activity 2 is over and it has an expected duration of 8 weeks Activity 5 begins after that activity 3 is over and ends together with Activity 4 and has a duration of 3 weeks Activity 6 starts after the Activity 4 is over and it has a duration of 5 weeks
5
3 5 End 4
+ 2Ws
Start
1 2 6
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19
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Earned Value
b) Allocate costs
All activities use a mix of resources whose cost is equal to 1000 per week. The Activity 2 instead uses a mix of resources whose cost is equal to 3000 per week. What is the trend of costs weekly and cumulative?
1 2
3 4
5 6
1
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Earned Value
b) Allocate costs
All activities use a mix of resources whose cost is equal to 1000 per week. The Activity 2 instead uses a mix of resources whose cost is equal to 3000 per week. What is the trend of costs weekly and cumulative?
1 2
3 4
5 6
1.000
1.000
1.000
2.000
4.000
6.000
4.000
1.000
1.000
2.000
2.000
2.000
2.000
1.000
2.000
2.000
2.000
1.000
1.000
1.000
1.000
1.000
10.000 11.000 12.000 14.000 16.000 18.000 20.000 21.000 23.000 25.000 27.000 28.000 29.000 30.000
31.000 32.000
1
33
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Earned Value
c) Check the costs
We are at the end of the 10th week.
PV = 20.000 AC = 18.000
now
PV=4000
PV=6000
100%
1
AC=4000
AC=5000 PV=4000
100% 70%
60%
5 4 6
PV=6000
2
AC=6000
AC=3000
1.000
1.000
1.000
2.000
4.000
6.000
4.000
1.000
1.000
2.000
2.000
2.000
2.000
1.000
2.000
2.000
2.000
1.000
1.000
1.000
1.000
1.000
10.000 11.000 12.000 14.000 16.000 18.000 20.000 21.000 23.000 25.000 27.000 28.000 29.000 30.000
31.000 32.000
1
34
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Earned Value
c) Check the costs
Get the Earned Value, the variances and indexes of the project at the end of the tenth week.
EV = CV = SV =
CPI =
now
PV=4000 PV=6000
100%
SPI =
1
AC=4000
AC=5000 PV=4000
100% 70%
60%
5 4 6
PV=6000
2
AC=6000
AC=3000
1.000
1.000
1.000
2.000
4.000
6.000
4.000
1.000
1.000
2.000
2.000
2.000
2.000
1.000
2.000
2.000
2.000
1.000
1.000
1.000
1.000
1.000
10.000 11.000 12.000 14.000 16.000 18.000 20.000 21.000 23.000 25.000 27.000 28.000 29.000 30.000
31.000 32.000
1
35
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Earned Value
c) Check the costs
Get the Earned Value, the variances and indexes of the project at the end of the tenth week.
EV = 19.200 CV = 1200 SV = - 800
CPI = 1,07
now
PV=4000 PV=6000
100%
SPI = 0,96
1
AC=4000
AC=5000 PV=4000
100% 70%
60%
5 4
PV
EV
PV=6000
2
AC=6000
AC=3000
1.000
1.000
1.000
2.000
4.000
6.000
4.000
1.000
1.000
2.000
2.000
2.000
2.000
1.000
2.000
2.000
2.000
1.000
1.000
1.000 AC 1.000
1.000
10.000 11.000 12.000 14.000 16.000 18.000 20.000 21.000 23.000 25.000 27.000 28.000 29.000 30.000
31.000 32.000
1
36
10
11
12
13
14
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M5_Cost Management
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