Pmp Chapter 7 2004

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Akram Al-Najj ar, PMP

Proj ect Management Consult ant

PMP

Prepara t i on T ra in ing

Your k ey in Successfu l Pro j ec tManagemen t

Akram Al-Najjar, PMP.Project Management Consultant

[email protected]+20105394312

Source: pmbok guide 2004 Slide 2

Chapt er 7

Pr o j ec t Cost

Managemen t

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AGENDA

What is Cost Management?

Cost Management Processes

Some terms to be familiar with!

How does the PMBoK Guide describe

Cost Management?

Discussion




Pro j ect Cos t Managem ent

Cost Est im at i ngCos t Budge t in g

Cost Cont ro l

Processes involved in planning, estimating,

budgeting, and controlling costs so that the project

can be completed within the approved budget.

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Gantt Chart




Planned Value (PV)

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Planned Value (PV)

Previously (and still in many places) called

Budgeted Costs for Work Scheduled (BCWS).

A monetary representation of how much work

was scheduled to be done at a point in time.

Example: After 4 months, we are scheduled to

complete Activity 1 and 75% of Activity 2

which are budgeted for a total of $32,000. The

total project budget is $100,000. The PlannedValue at 4 months is $32,000.




Work Plan Status

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PV and EV




Earned Value (EV)

Previously (and still in many places) calledBudgeted Costs for Work Performed (BCWP).

A monetary representation of how much workhas been completed, using the baseline cost forthat work, at a point in time.

Example: After 4 months, we have completedActivity 1 and 50% of activity 2 . The budgetedcost for this work completed was $24,000. Thetotal project budget is $100,000. The EarnedValue at 4 months is $24,000.

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PV , EV and AC




PV , EV and AC

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Actual Costs (AC)

Previously (and still in many places) calledActual Costs for Work Performed (ACWP).

The monetary representation of the costsincurred at a point in time, regardless of howmuch work has been done.

Example: After 4 months, we have completedActivity 1 and 50% of activity 2. The projectcosts at this point in time are $29,000. The total

project budget is $100,000. The Actual Cost at 4months is $29,000.




Schedule Variance (SV)

New:

SV = EV PV

= $24,000 - $32,000

= ($8,000)

Old:

SV = BCWP - BCWS

The project has

delivered $8,000

less work at this

point in time than

was planned. This

project is behind

schedule. This is a

great way to depictahead or behind on

schedule, even

though it is in

monetary terms!!!

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Cost Variance (CV)

New:

CV = EV AC

= $24,000 - $29,000

= ($5,000)

Old:

CV = BCWP - ACWP

The project has

cost $5,000 more

to deliver the work

done so far than

was planned. This

project is over

budget.




Schedule Performance Index (SPI)

New:

SPI = EV / PV

= $24,000 / $32,000

= 0.75

Old:

SPI = BCWP / BCWS

The project is

delivering work

slower than

planned. The work

is being done at

75% of the

expected rate.

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Cost Performance Index (CPI)

New:

CPI = EV / AC

= $24,000 / $29,000

= 0.83

Old:

CPI = BCWP / ACWP

The project is

spending money

faster than

planned. Only 83%

of work is being

delivered for the

amount of money

being spent.




Case 1

PV = $ 1,860

EV = $ 1,860

AC = $ 1,860

This is the idealsituation, whereeverything goes

according to plan.

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Case 2

PV = $ 1,900

AC = $ 1,700

In this Case, withoutEarned Value

measurements, itappears were in goodshape. Expendituresare less than planned.

Spending Variance =- $ 200




Case 2

PV = $ 1,900

EV = $ 1,500

AC = $ 1,700

But with EV measurements,we see...$400 worth of workis behind schedule in beingcompleted; i.e., we are 21percent behind where we

planned to be.

SV = EV PV =- $ 400SV % = SV / PV x 100 =- 21 %

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Case 2

PV = $ 1,900

EV = $ 1,500

AC = $ 1,700

In addition, we can see...Actuals exceed Value

Earned (EV), i.e., $1,500worth of work wasaccomplished but it cost

$1,700 to do so. We have a$200 cost overrun (i.e., 13%

over budget) .

CV = EV AC =- $ 200

CV % = CV / EV x 100 =- 13 %




Case 2

PV = $ 1,900

EV = $ 1,500

AC = $ 1,700

This means only 79 cents worthof work was done for each $1.00

worth of work planned to bedone.

And, only 88 cents worth ofwork was actually done for each

$1.00 spent

SPI = EV / PV = $ 0.79

CPI = EV / AC = $ 0.88

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Case 2

PV = $ 1,900

EV = $ 1,500

AC = $ 1,700

This is the worst kind of

scenario, where allperformance indicatorsare negative.

SV =- $ 400; SPI = 0.79

CV =

-

$ 200; CPI = 0.88




PV = $ 2,600

EV = $ 2,400

AC = $ 2,200

In this case there isbad news and good

news.

Case 3

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PV = $ 2,600

EV = $ 2,400

AC = $ 2,200

The bad news is that ourwork efficiency is a bit

low; were getting only 92cents of work done on the

dollar. As a result, weare behind schedule.

SPI = 0.92

SV =- $ 200; SV % =- 8 %

Case 3




PV = $ 2,600

EV = $ 2,400

AC = $ 2,200

The good news is thatwere under-running ourbudget. Were getting$1.09 worth of workdone for each $1.00

were spending.

CV = + $ 200; CV % = + 8 %CPI = 1.09

Case 3

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Budget At Completion (BAC)

This is the baseline cost of the total project.

How much we planned to spend by the time we

finished.

Example: After 4 months, we have completed

Activity 1 and 50% of Activity 2 The project

costs at this point in time are $29,000. The total

project budget is $100,000. The Budget At

Completion is $100,000.




Estimate At Completion (EAC)

Based on where we are now, how much will it

cost when the project is done?

The answer depends on whether your past

performance is a good indicator of expected

future performance more

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If we know that we can finish the rest of the

work as it was originally planned

Use actual to-date plus budgeted amount for the

rest of the work

EAC = AC + BAC EV

= $29,000 + $100,000 - $24,000= $105,000

(1st of 3 methods)





If the original estimates were flawed,we should build new estimates for allthe remaining work

ETC is the Estimate to Complete theremaining work.

EAC = AC + ETC= $29,000 + $120,000= $1,49,000

Assume this

was the

total ETC

from a

completely

rebuilt

estimate

(2nd of 3 methods)

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If we assume that past performance is agood indicator of future performance

Use actual to-date plus budgeted amount forthe rest of the work, modified by aperformance factor, such as CPI

EAC = BAC/CPI

= $100,000/0.83

= $120,481 (rounded off)

(3rd of 3 methods)




EVM Performance Measures

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EVM and Basic PM Questions




Present Value

Budgeting technique that debates the futurevalue of money based on inflation, etc.

PV = FV

(1 + r)t

FV = amount of money t years from nowr = interest rate (also called discount rate)

t = time period

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Present Value

Year FV PV

0 $50,000 $50,000

1 $35,000 $31,819

2 $15,000 $12,397

Assume a 10% interest (or discount) rate

PV (Year 1) = FV / (1 + r)t

=$35,000/(1 + 0.1)1= $31,819




(NPV) Net Present value

This Means the total benefits (income or revenue) less the cost. To

calculate NPV you need to calculate the present value of each of

the income and revenue figures then add up the present values.

291353Total

002253003

00831002

9110045501

200200000

Present Value at

10% interest rateCosts

Present Value at

10% interest rate

Income or

revenue

Time

Period

NPV =353-291=62

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Payback Period

The exact length of time needed to recover an initial

investment as calculated from cash inflows.

Month Costs Total Cost Benefits Total Benefits

1 $5000 $5000 $0 $0

2 $5000 $10000 $0 $0

3 $8000 $18000 $0 $0

4 $5000 $23000 $5000 $5000

5 $2000 $25000 $10000 $15000

6 $0 $25000 $10000 $25000

7 $0 $25000 $10000 $35000

PAYBACK PERIOD is 6 MONTHS




Internal Rate Of Return (IRR)

The interest (discount) rate where the present

value of the benefits exactly equals the costs.

The higher the rate, the better the project.

An IRR of .15 means that you expect theproject to return an average of 15% on your

investment over a given time period (usually a

number of years).

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Benefit Cost Ratio (BCR)

Compares the cost to the benefits of different projects. A

BCR of > 1 means the benefits are grater than the costs. A BCR

of < 1 means the costs are grater than the benefits. A BCR =1

means the costs and benefits are the same.

If the BCR of project A is 2.3 and BCR of project B is 1.7

which project would you select?

The answer is A. the project with the higher BCR




Exercise Accounting Standards

Net p resen t V

I RR

Payback Per iod

Benef i t Cost Rat io

$95 . 00

1 3 %

1 6 M o n t h

2 . 79

Pr o j ect A Pr o j ect B

$75 . 00

17 %

2 1 M o n t h

1 .3

Wh i ch you P ick?

B

A

A

A

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Types Of Costs

Di rect Cos t s - Cos t t ha t a re d i rect l y a t t r i bu t ab l e t o t he w o rk on p ro j ec t . Exam p les a re t eam t r ave l , t eam w ages,recogn i t i on and cost o f m a t e r i a l used on t he p r o j ec t

I n d i r e ct c o s t s Ov e r h e ad i t e m s o r c os t s i n cu r r e d f o r t h e bene f i t o f m o re t han on e p ro j ec t . Exam p les inc l ude t axes ,f r i nge bene f i t s , and j an i t o r i a l se rv i ces .




DEPRECIATION

ST RAI GHT LI NE DEPRECI ATI ON : t he same amoun t o f dep rec ia t i on i s t aken each yea r , A US $ 1 , 000 i t em w i t h a t en yea r use f u l l i f e and no sa l vage va l ue (how m uch i t emi s wo r t h a t t h e end o f i t s l if e ) w ou ld be dep reci a t ed a t US$100 pe r yea r .

ACCELERATED DEPRECI ATION you on ly need t o k now : T here a re t w o f o rm s o f acce le ra t ed dep reci a t i on Doub le Dec l in i ng Ba lance and Sum o f t he Yea rs D ig i t s .T hey dep rec i a t e f as t e r t h an s t ra i gh t l i ne .Y ou d o n o t h a v e t o k n o w w h a t t h e s e t w o f o r m s m e a n s o r do any ca lcu la t io ns .

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LI FE CYCLE COSTI NG : Means t ha t th e cost o f opera t ion and ma in t enance phase t o be cons i de r and manage w i t h t he p ro j ec t cost

PROJECT OPERATIONS ANDMAINTENANCE PHASE

costs costs

LI FE CYCLE COSTI NG




PMBOK Chapt er 7

There are 3 major processes:

1. Cost Estimating

2. Cost Budgeting

3. Cost Control

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Cost Managem ent

Planning

7.3

Cost

Budgeting

7.4

Cost

Control

Controlling

7.2

Cost

Estimating




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Cost Est im at i ng

Difference between cost estimating andpricing: Cost es t im a t ing : Assessing how much it will cost the

organization to provide the product or service

Pr ic ing: Assessing how much the organization willcharge for the product or service

Process of developing an approximation (or estimate)

for the cost of the resources necessary to complete

the project activities




Cost Est im at i ng

Inputs Enterprise Environmental Factors

Organizational Process Assets Project Scope Statement

Work Breakdown Structure

WBS Dictionary

Project Management Plan

Schedule management plan.

Staffing management plan.

Risk register.

Tools & Techniques Analogous estimating

Determine Resource Cost Rates

Bottom-up estimating

Parametric estimating

Project Management Software

Vendor Bid Analysis

Reserve Analysis

Cost of Quality

Outputs Activity Cost estimates

Supporting detail

Requested Changes

Cost management plan

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I n p u t s

Ente r p r i se Env i ron m enta l Facto rs , considers:

Marke tp lace cond i t i ons.

Com m erc ia l da tabases.

Organizat iona l Process Assets

Cost es t im a t ing po l i c ies .

Cost est im a t ing tem p la tes .

H is to r i ca l i n fo rmat ion .

Pro jec t f i l es.

Pro j e c t t e a m k n o w l e d g e.Lessons learned .




I n p u t s ( co n t .)

Pro jec t Scope Sta tem ent

descr ibes t he bus iness need , j us t i f i ca t ion ,re q u i re me n ts , a n d cu r re n t b o u n d a r i e s f o r t h epro jec t .

Wo rk B re a kd o wn St ru c tu r e

WBS prov ides the re la t ionsh ip among a l l theco mp o n e n ts o f t h e p ro j e c t a n d t h e p ro j e c t

de l i ve rab les WBS Dict ionar y

prov ide an iden t i f i cat ion o f t he de l i ve rab lesand a descr ip t ion o f the w ork in each WBScompon en t requ i r ed to p roduce eachde l i ve rab le .

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I n p u t s ( co n t .)

Pro j ec t Managemen t P lan

Schedu l e managemen t p l an : The t ype and qu an t i t y o fresou rces and t he amou n t o f t i m e t hose resou rcesa re app l i ed t o comp l e t e t h e wo r k o f t he p ro j ec t i s am a j o r p a r t o f d e t e r m i n i n g t h e p r o j e c t c o st .

St a f f i ng m anagemen t p l an .

P ro j ec t s t a f f i ng a t t r i bu t es and pe rsonne l r a t es

(Sect i on 9 . 1 .3 . 3 ) a re necessa ry com ponen t s f o r

deve l op i ng t he schedu l e cos t es t i ma t es .

Risk reg is te r .

T he cos t es t i ma t o r cons ide rs i n f o rm a t i on on r i sk

responses (Sect i on 1 1 . 2 .3 . 1 ) w hen p rodu c i ng costes t i ma t es .




Too ls & Techn iq ues

A n al og o u s es t im a t i n g ( Ex p e r t j u d g m e n t ) U se d t oes t i ma t e t o t a l p ro j ec t cost s i f t he re i s a l i m i t ed am oun to f de t a i l ed i n f o rm a t i on

Determ ine Resour ce Cost Rates

B o t t o m - u p e st i m a t i n g Es t i ma t i ng t he cos t o fi nd i v i dua l wo r k i t em s and t hen ro l l i ng up t he cos t s t oa r r i ve a t a p ro j ec t t o t a l

Param e t r i c est i m a t i ng Us ing p ro j ec t cha ract e r i s t i cs( o r p a r a m e t e r s) i n a m a t h e m a t i ca l m o d e l t o p r e d i c tcos ts (e .g . , p r i ce per squar e foo t )

P r oj e c t M an a g em e n t So f t w a r e - PM s of t w a r e an dspreadsheets

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Vendor B id Ana lys is

Reserve Ana ly s is : Cont ingency r eserves a re es t im atedcost s t o be u sed a t t he d i sc re t i on o f t h e p ro j ec tm anage r t o deal w i t h an t i c i pa t ed , bu t no t ce r t a i n ,e v en t s . Th e se e v en t s a r e k n o w n u n k n o w n s a n d a r epa r t o f t he p ro j ec t scope and cos t base l ines .

Cost o f Qua l i t y :Cost o f qu a l i t y ( Sect ion 8 .1 .2 .4 ) can a lsobe used t o p repa re t h e schedu l e ac t i v i t y cos t es t i ma t e .




O u t p u t s

Act i v i t y Cost es t im a tes Qu a n t i t a t i veassessm ents o f th e cost o f r esources (e .g .,u n i t s o f cu r re n cy o r s t a f f h o u rs )

Types o f es t im a tes

Or d er o f m ag ni t ud e ( - 2 5% / + 7 5 % )

Bu d get est im a t e ( - 1 0% / + 2 5 % )

Def in it iv e est i m at e ( - 5 % / + 1 0 % )

Suppor t ing de ta i l Desc r i p t i on o f es t i ma t ed scope o f w o rk

Docum en t a t i on o f t he bas i s f o r t he es t i ma t e

Docum en t a t i on o f any assum p t i ons made

Range o f poss ib le resu l t s

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Out pu t s ( con t .)

Request ed Changes

The Cost Est im a t ing p rocess may g enera terequested changes tha t m ay a f fec t the costm a n a ge me n t p l a n , ac t i v i t y r e so u rce re q u i rem e n tsa n d o th e r co mp o n e n ts o f t h e p ro j e c t ma n a g e me n tp lan. Requested chan ges are processed for r eviewa n d d i sp os it i o n t h ro u g h t h e I n te g ra te d Ch a n g e

Cost m anagement p lan

Descr ibes how cost v a r iances w i l l bemanaged

Par t o f the overa l l p ro j ec t p lan

Cost Estimating




Cost Budge t in g

Aggregating the estimated costs ofindividual activities or work packagesto establish a cost baseline.

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Cost Budge t in g

Inputs Project Scope Statement

Work Breakdown Structure

WBS Dictionary

Cost estimates

Supporting Detail

Project schedule Resource Calendars

Contract

Cost management plan

Tools & Techniques Cost Aggregation

Reserve Analysis

Parametric Estimating

Funding Limit Reconciliation

Outputs Cost baseline

Project Funding Requirements

Cost Management Plan (Updates)

Requested Changes




I n p u t s

Pro jec t Scope Sta tem ent :

W BS I d e n t i f i es t h e p ro j e c t e le me n ts t o w h i chth e costs w i l l be a l loca ted

WBS Dict ionar y

Cost Est im ates

Cost Est im a te Suppor t in g De ta i l

Pro jec t schedu le Used t o ass ign costs t op ro j e c t e le me n ts f o r t h e t i m e p er i o d w h e ncosts w i l l be incur red

Resour ce Calendars

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I n p u t s

Contract

(Se ct i o n 1 2 .4 .3 .2 ) i n f o rma t i o n r e l ate d t o w h a tp roduct s , serv i ces, o r resu l ts have b eenp u rch a se d a n d t h e i r co st s a re u se d i ndeve lop ing the budge t .

Cost Management Plan

Th e co s t m a n a ge me n t p l a n co mp o n e n t o f t h ep ro j e c t m a n a ge me n t p l a n a n d o th e r su b s i d ia r yp lans a re cons ide red dur ing cost bu dge t ing .





Cost Aggrega t ion

Reserv e Analysis :

Management con t ingency reserves a re budge tsreserved fo r unp lanned , bu t po ten t ia l l yrequ i red , changes to p ro j ec t scope and cost .

Param et r i c Est im a t ing

Fund ing L imi t Reconc i li a t i on

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O u t p u t s

Cost base l ine Ti me p h a se d b u d g et t h a t w i l lbe used to m easure and m on i to r t he costp e r f o rma n ce o f t h e p ro j e ct

0

20

40

60

80

100

120

140

Jan Feb Mar Apr May Jun

Reporting Period

BCWS($K)




O u t p u t s

Pro j ec t Fund i ng Requ i rem en t s

Cost Managem ent P lan (Updates)

Requested Changes

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Cost Con t r o l

Includes:

Monitoring cost performance to detect variances from theplan

Ensuring that all appropriate changes are recorded

Preventing incorrect, inappropriate, or unauthorizedchanges

Informing the appropriate stakeholders of authorizedchanges

Analyzing positive and negative variances and how theyaffect the other control processes

Influencing the factors that create changes

to the cost baseline to ensure that changes are agreed upon

Determining that the cost baseline has changed

Managing the actual changes when and as they occur




Cost Cont ro l

Inputs Cost baseline

Project Funding Requirements

Performance reports

Work Performance Information

Approved change requests

Project management plan

Tools & Techniques Cost change control system

Performance measurement Analysis

Forecasting

Project Performance Reviews

Project Management Software

Variance ManagementOutputs Cost Estimates (Update)

Cost Baseline (Updates)

Performance Measurements

Forecasted Completion

Requested Changes

Recommended Corrective action

Organizational Process Assets (Updates)

Project Management Plan (Updates)

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Cost Cont ro l

Documents

Pmp Chapter 7 2004