PROJECT COST MANAGEMENT

Project Management

PROJECT COST MANAGEMENT Introduction Projects cost processes create a reasonable cost baseline for the project and identify project resources (i.e. human and material) as well. This will create a time-phased budget for their involvement in the project. It involves developing monetary value (i.e. resources) needed to complete project activities.

PROJECT COST MANAGEMENT General Considerations

General Considerations
Close connection between cost and time Estimating should be based on WBS for accuracy Estimating should be done by the person doing the work Historical information is key to improving estimates Costs (and time, scope and resources) should be managed to estimates Cost (and time, scope and resource) baseline should be kept and not changed except for approved changes Plans should be revised as necessary, during execution Corrective action should be taken when necessary

PROJECT COST MANAGEMENT General Considerations General Considerations - VERY IMPORTANT

A project manager should not just accept time or cost directives or requirements from management. At the very least he/she should analyze the needs of the project, come up with their own estimate, and then try to reconcile any differences.

PROJECT COST MANAGEMENT Definition

The processes required to determine the cost of resources and to ensure that the project is completed within the approved budget. Major processes are: Estimate Costs Determine Budget Control Costs

PROJECT COST MANAGEMENT Cost Estimates Cost estimates are prediction that is based on known information. It includes identifying and considering alternative cost to initiate and complete a project.

PROJECT COST MANAGEMENT Cost Estimates The cost estimate for various components of the project (i.e. work packages and activities) is developed into a comprehensive project budgeting document that allows for ongoing project tracking and cost control.

PROJECT COST MANAGEMENT Cost Estimates

Cost estimates are expressed in units of monetary currency (e.g. dollars, euro, cedi, etc.) In some instances other units of measures such as staff hour, or staff days are used to facilitate comparisons by eliminating the effect of currency fluctuations.

PROJECT COST MANAGEMENT Cost Estimates

Cost estimation begins at the development stage of the project proposal by identifying all possible costs associated with the project and building them into the initial budget proposal.

PROJECT COST MANAGEMENT Cost Estimates Sources of Project Cost

Labor costs Material costs Travelling cost Equipments and facilities costs

PROJECT COST MANAGEMENT Estimate Techniques A cost estimate is a quantitative assessment of the likely costs for resource required to complete the activity. Estimating project costs is a challenging process that can be described as both art and science.

PROJECT COST MANAGEMENT Estimate Techniques The two important project management principles that can be called laws and at work in cost estimation are A. The more clearly a project cost is defined in various costs at the beginning the less chance there is of making estimating errors.

PROJECT COST MANAGEMENT Estimate Techniques B. The more accurate the initial cost estimations, the greater the likelihood of preparing a project budget that accurately reflects reality for the project and the greater the chances of completing the project within budget estimates.

PROJECT COST MANAGEMENT Estimate Techniques

Accuracy of Estimates Order of magnitude estimates Made during initiation and in the range of 25% to +75% Budget Estimate Made during planning and in the range 5% to +25% Definitive Estimate Also made during planning and in the range 5% to +10%

PROJECT COST MANAGEMENT Definitions

Accounting Standards and Terminology Present Value (PV) = FV/(1+r)n Value today of future cash flow Net Present Value (NPV) Present value of the total benefits less costs Internal Rate of Return (IRR) The rate at which project inflows and outflows are equal Payback Period The number of time periods it takes to recover your investment Benefit Cost Ratio (BCR) Comparison of benefits to costs of different projects

PROJECT COST MANAGEMENT Definitions

Accounting Standards and Terminology
Opportunity Cost Opportunity given up by selecting one project over another Sunk Costs Expended Costs not considered when deciding whether to continue with a troubled project Law of Diminishing Returns The more you put into something, the less you get out of it Working Capital Current assets minus current liabilities

PROJECT COST MANAGEMENT Definitions

Types of Cost
Variable Cost
Costs which change with the amount of production

Fixed Cost
Costs that do not change as production changes Direct Cost Costs directly attributable to work on the project Indirect Cost Overhead costs or costs incurred for the benefit of more than one project

PROJECT COST MANAGEMENT Definitions Straight Line Depreciation

The same amount of depreciation is taken each year

Accelerated Depreciation Double declining balance Sum of Years Digits Accelerated depreciation depreciates faster than straight line

PROJECT COST MANAGEMENT Definitions

Life Cycle Costing The total cost of the project including development and maintenance Value Analysis or Value Engineering Finding a less costly way to do the same scope of work

PROJECT COST MANAGEMENT Estimate Costs - Definition

Develop an approximation of the (financial) costs of the resources needed to complete the activities. Identify costing alternatives Generally expressed in a currency to assist with comparisons May be refined with progressive elaboration

PROJECT COST MANAGEMENT Estimate Costs - Techniques

Analogous Estimating (heuristics)
Top or middle managers use expert judgment or actual time on previous projects to estimate

Bottom-up Estimating
The people doing the work create the estimates

Parametric Estimating
Uses mathematical model to predict costs (e.g., cost per yard, per line of code, per installation etc.)

Three-Point Estimates Reserve Analysis

PROJECT COST MANAGEMENT Estimate Costs - Techniques

Cost of Quality Computerized Estimating Tools Vendor Bid Analysis

PROJECT COST MANAGEMENT Estimate Costs - Outputs

Activity Cost Estimates Basis of Estimates Project Document Updates

PROJECT COST MANAGEMENT Determine Budget - Definition

A project cost budgeting involves allocating the project cost estimates or task over time, i.e. the process of aggregating the estimated costs of individual activity or work package to establish an authorized cost baseline. A cost baseline is a time-phased budget that project managers use to measure and monitor cost performance. The aggregation and allocation of overall cost estimates to individual activities or work packages to establish a cost baseline Result is the budget and Cost Baseline Provides project funding requirements

PROJECT COST MANAGEMENT Determine Budget

It is the total amount of cash of the project to be calculated in order to determine the amount of funds that the organization needs for the project.

PROJECT COST MANAGEMENT Determine Budget

Work Package Costing The process of developing the actual project budget in the combination of top down and bottom up budgeting. Thus each work package in the WBS is evaluated for it resource requirements, and the cost for each resource isestimated

PROJECT COST MANAGEMENT Determine Budget

Work Package Costing For example, a work package is estimated that it requires 25hours of labour by a technician. If the technician assigned to the task is paid GHC17.50 per hour, overhead charges to the project is 84% of direct labour. What is the total cost of the work package?

PROJECT COST MANAGEMENT Determine Budget

Work Package Costing Calculations 25Hrs *GHC17.50*1.84 = GHC805 NB: (1.84 = 84% * GHC437.50+GHC437.50)

PROJECT COST MANAGEMENT Determine Budget - Techniques

Cost Aggregation Reserve Analysis Expert Judgment Historical Relationships Reconciliation of Funding Limits

Example of Cost Aggregation

PROJECT COST MANAGEMENT Determine Budget - Outputs

Cost Performance Baseline Project Funding Requirements Project Document Updates
Risk Register Cost Estimates Project Schedule

PROJECT COST MANAGEMENT Control Costs - Definition

This is the process of monitoring the status of the project to update the project budget and changes to the cost baseline. Updating the project cost budget involves recording actual cost spend to date.

PROJECT COST MANAGEMENT Control Costs - Definition

Monitoring the expenditure of funds without regard to the value of the work being done for such expenditure has little value to the project other than allow the project team to stay within authorized funding.

`PROJECT COST MANAGEMENT Control Costs - Definition

Much of the effort of cost control involves analyzing the relationship between the consumption of project funds to the physical work done for such expenditure. The key to effective cost control is the management of the approved cost performance baseline and the changes to that baseline.

PROJECT COST MANAGEMENT Control Costs - Definition

Cost control includes Influencing the factors that create change to the cost baseline Monitoring the status of the Cost Baseline to ensure that it is not exceeded Ensure that changes are agreed upon and acted upon in a timely manner Determine that the cost baseline has changed Managing the actual changes when they occur Keeping the cost baseline updated with approved changes

PROJECT COST MANAGEMENT Control Costs - Definition Cost control Involves

Monitoring cost to detect and understand variances from baseline Ensuring that all appropriate changes are recorded in the baseline Preventing incorrect, inappropriate or unauthorized changes from being added to the cost baseline Informing appropriate stakeholders of authorized changes Acting to bring expected costs to within acceptable limits Generally search for the whys of both positive and negative variances

PROJECT COST MANAGEMENT Control Costs - Definition

Control Process Control is the process of comparing actual performance against plan to identify deviations, evaluate possible alternative courses of actions, and take appropriate corrective action.

PROJECT COST MANAGEMENT Control Costs - Definition

The project control steps for measuring and evaluating project performance are;
Setting a baseline plan Measuring progress and performance Comparing plan against actual Taking action

PROJECT COST MANAGEMENT Control Costs - Techniques

\Earned Value Management (EVM) The EVM recognizes that it is necessary to jointly consider the impact of cost, time and project performance on any analysis of current project status. EVM reintroduces and stress the importance of analyzing the time element in the project status updates.

PROJECT COST MANAGEMENT Control Costs - Techniques

Earned Value Management (EVM) Time is important as it provides the basis for determining how much work to be completed at certain milestone point. EVM also allows project team to make future projections of project status based on its current state.

PROJECT COST MANAGEMENT Control Costs - Techniques Earned Value Cost/Schedule System

An integrated project management system based on the earned value concept that uses a time-phased budget baseline to compare actual and planned schedule and costs.

PROJECT COST MANAGEMENT Control Costs - Techniques

Earned Value Management (EVM) A time-phased budget allows the project team to identify the correct sequencing of activity, and also enables the team to determine in the project when the budget is likely to be spent in pursuit of those activities.

PROJECT COST MANAGEMENT Control Costs - Techniques

Earned Value Management A method to measure scope, time and project performance Integrates cost, time and scope Can be used to forecast future performance and completion dates More accurate than simply comparing planned to actual results

PROJECT COST MANAGEMENT Control Costs - Techniques

Earned Value Management (EVM)
PV (Planned Value) (BCWS) Estimated value of work planned to be done EV (Earned Value) (BCWP) Estimated value of work actually done AC (Actual Cost) (ACWP) Actual cost incurred BAC Budget At Completion) Total Budget for the Project EAC (Estimate At Completion) Currently, how much is the project expected to cost? ETC (Estimate To Complete) From this point on, how much MORE do we expect it to cost to complete the project? VAC (Variance At completion) How much over or under budget do we expect to be at the end of the project?

PROJECT COST MANAGEMENT Control Costs Techniques Earned Value Management

Cost Variance (CV) Measure of cost performance on a project . Equation: CV= EV-AC. A negative CV is non-recoverable. Schedule Variance (SV) - Measure of schedule performance on a project . Equation: SV= EV-PV Cost Performance Index (CPI) - Measure of value of work accomplished compared with actual costs/progress. Considered the most critical EVM metric. Equation: CPI=EV/AC Schedule Performance Index (SPI) - Measure of progress achieved compared with progress planned on a project . Equation: SPI = EV/PV

PROJECT COST MANAGEMENT Control Costs Techniques Forecasting As the project progresses, the project team can develop a forecast fro the estimate at complete (EAC) that may differ from budget at complete (BAC). Forecasting the EAC involves making estimates or predictions of conditions and events in the projects future based on information and knowledge available at the time of the forecast.

PROJECT COST MANAGEMENT Control Costs Techniques

Forecasting Forecast are generated, updated, and reissued based on work performance information provided as the project is executed. The work performance information covers the projects past performance and any information that could impact on the project

Forecasting
Forecasting EAC are based on actual cost incurred for work completed plus an estimate to complete (ETC) the remaining work, i.e. EAC =AC+ETC

PROJECT COST MANAGEMENT Control Costs Techniques Forecasting

Estimate At Completion (EAC) = BAC/CPI or AC+BAC-EV Estimate To Complete (ETC) = EAC-AC Variance At Completion (VAC) = BAC-EAC How efficiently must we use our remaining resources? To Complete Performance Index (TCPI) TCPI = (BAC-EV)/[(BAC-AC or (EAC - AC)] (i.e. Work Remaining / Funds Remaining)

PROJECT COST MANAGEMENT Control Costs Techniques Performance Reviews Reviews to compare cost, available funds and schedule over time.
Variance Analysis compare actual to planned/expected results Trend Analysis examine performance over time i.e. improving or deteriorating Earned Value Performance comparing the baseline to actual performance

Project Management Software

PROJECT COST MANAGEMENT Control Costs Outputs Work Performance Measurements Budget Forecasts Change Requests Project Plan Updates Project Document Updates