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Project Cost Management

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Project Cost Management Process Group

Process Group Cost Management Process

Initiating

Planning Estimate Costs, Determine Budget

Executing

Monitoring & Control Control Costs

Closing

Costs are estimated for all resources that will be charged to the project, including labor, material, equipment, services, facilities,…as well as an inflation allowance or contingency costs…

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6.1 Estimate Costs The process of developing an approximation of the monetary resources

needed to complete project activities. Cost Estimate is made for each activity by a prediction base on the information known at a given point in time, including the identification & consideration of costing alternatives to initiate and complete the project…how to achieve optimal cost for the project.

Inputs • Scope baseline• Project schedule• Human resource plan

• Risk register• Enterprise environmental factor• Organizational process assets

Tools & Techniques

• Expert judgment• Analogous estimating• Parametric estimating• Bottom-up estimating• Three-point estimates

• Reserve analysis• Cost quality• Project Management estimating

software• Vender bid analysis

Outputs • Activity cost estimates• Basis of estimates

• Project document updates

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Inputs

1. Scope Baseline2. Project Schedule3. Human Resource Plan: Information about resource quantities, rates

as well as when they are available

4. Risk Register: should be reviewed to identify risk mitigation costs

5. Enterprise Environment Factors– Market conditions– Published commercial information

6. Organizational Process Assets– Cost estimating policies– Cost estimating templates– Historical information– Team knowledge– Lessons learned

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Tools & Techniques1. Expert Judgment– Use historical information to provide valuable insight about the

environment and information from prior similar project.1. Analogous Estimating ( Top-down )– Use (actual costs) the values of parameters of scope/ cost/ budget/

duration, or measures of scale of size/ weight/ complexity, from similar, completed project as basic for estimating the same parameter/ measure for current project costs.

– Be used most frequently during planning process, when there is a limited amount of detailed information about the project.

– Relies on Expert Judgment ( is a form of Expert Judgment )– Typically:

• Less costly than other estimating techniques• Less accurate: -50% to +50% range

1. Parametric Estimating– Uses a statistical relationship between historical data and other

variable to calculate an estimate for activity parameters, such as cost, budget, duration.

– Higher level of accuracy than Analogous Estimating

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Tools & Techniques1. Bottom-up Estimating– Detailed estimating is done for each activity (if available) or work

package (if activities are not defined), and then rolled up into control accounts and into an overall project estimate.

– To do this estimate well…requires an accurate & detailed WBS– Accuracy is +/- 20%1. Three-point Estimate– Adds estimation of uncertainty and risk to cost estimate to improve

accuracy– Use a weighed average of thee estimates: CE=(CO+4CM+CP)/6

• Most likely (CM) • Optimistic (CO)• Pessimistic (CP)

1. Reserve analysis– Many cost estimator follow the practice of identifying and including a cost

reserve, also call contingency reserve (contingency allowances) to work packages.

– Contingency Reserve are a part of the Funding Requirement– Reserve analysis means putting some cash away just in case.

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Tools & Techniques

1. Cost of Quality (COQ): Cost of making the project’s product work properly and fixing it when it does not

– Cost of Conformance• Preventing defects• Appraisal of product quality

– Cost of Nonconformance• Internal failures• External failures

1. Project management estimating software: - Software applications, spreadsheets, simulation tools, and statistics

packages.

1. Vendor Bid Analysis– Analysis of what an appropriate cost for the project should be, based

on bids from qualified vendors

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Outputs

1. Activity Cost Estimates– Quantitative assessment of resource costs to complete schedule activities

in your activity list– Should:

• Be traceable to WBS work package items• Show all unit costs, pricing factors, and resource quantities• Document all assumptions

2. Basis Cost Estimates– Supporting detail just like the WBS has a WBS Dictionary– Documentation of:

• Basis of the estimate (i.e., how it was developed)• All assumptions• Any known constraints• The range of possible estimates (e.g., $10,000 (±10%)

3. Project Document Updates– Risk register updates

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6.2 Determine Budget

The process of aggregating the estimated cots of individual activities or work packages to establish an authorized cost baseline, which includes all authorized budgets, but excludes Management reserves

Inputs • Activity cost estimates• Basis of estimates• Scope baseline• Project schedule

• Resource calendars• Contracts• Organizational process assets

Tools & Techniques

• Cost aggregation• Reserve analysis• Expert judgment

• Historical relationships• Funding limit reconciliation

Outputs • Cost performance baseline• Project funding

requirements

• Project documents updates

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Inputs

1. Activity Cost Estimates2. Basic of Estimates3. Scope Baseline

1. Project Schedule: Planned start and finish dates for activities, work packages, planning packages, and control accounts. Used to allocate the estimated costs to their calendar periods

1. Resource Calendar: Provides information on which resources are assigned and when. Used to determine resource costs over project

1. Contracts: Provides information about which product, services, or results have been purchased, along with their costs.

1. Organizational Process Assets:– Any formal and informal cost budgeting-related policies, procedures,

and guidelines that exist– Cost budgeting tools

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Tools & Techniques

1. Cost Aggregation:

5. Contingency reserve

4. Project estimates

3. Control account estimates

2. Work package estimates

1. Activity estimates

8. Cost budget

7. Management reserve

6. Cost baseline

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Tools & Techniques1. Reserve Analysis:

Management Reserve Contingency Reserve

"Unknown Unknown" "Known Unknown"

Use to counteract unforeseen changes to scope or cost

Used to plan for risk events

Not part of project cost baseline or Earn Value calculations ( Part of project budget )

Part of project cost baseline. But not use to compensate poor planning( Not part of project budget )

Example: unexpected labor strike Example: resource availability

Authorized by senior management Authorized by PM

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Tools & Techniques

1. Expert Judgment

1. Historical Relationships: Both the cost and accuracy of analogous and parametric models can vary widely. They are most likely to be reliable when:

– Historical information used to develop the model is accurate– Parameters used in the model are readily quantifiable, and– Models are scalable, such that they work for a large project, a small

project, and phases of a project.

1. Funding Limit Reconciliation ( Related to Cash Flow ! ): Reconcile expenditure of funds with any limits on the funds committed to the project:

– Funds are typically disbursed shortly before the start of the fiscal year. They can be used only to pay invoices related to work completed in the same fiscal year

– Unused funds expire at the end of the fiscal year; any overrun must be accomplished through additional fund disbursed in the same fiscal year.

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Outputs

1. Cost Performance Baseline (Cost Baseline = Project Cost (estimated) + Contingency Reserves )

– The cost performance baseline is an authorized time-phased budget at completion (BAC) used to measure, monitor, and control the overall project cost performance on the project.

1. Project Funding Requirements (Cost Budge/ Project Budget = Cost Baseline + Management Reserves )

– Total funding requirements and periodic (quarterly, annual, etc.) funding requirements are derived from the cost performance baseline

– The total funds required always higher than the project cost baseline’s S-Curve, as the total fund include the cost baseline plus the management reserve

1. Project Document Updates– Risk register– Cost estimates– Project schedule

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6.3 Control Costs The process of monitoring the status of the project to update the project

budget and managing changes to the cost baseline. Project cost control seeks out the causes of positive and negative variances and is part of the Perform Integrated Change Control process

Inputs • Project management plan• Project funding requirements

• Work performanceinformation• Organizational process assets

Tools & Techniques

• Earned value management• Forecasting• To complete performance‐index (TCP)

• Performance reviews• Variance analysis• Project managementsoftware

Outputs • Work performance measurements

• Budget forecasts• Organizational process

assets updates

• Change requests• Project management plan• Project document updates

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Inputs

1. Project Management Plan– Cost management plan– Cost performance baseline ( Cost baseline )

2. Project Funding Requirements ( Project Budget )

3. Work Performance Information – Deliverables that have started and their progress, deliverables that

have been completed.– Cost that have authorized and incurred, it tells how are you spending

your budget right now.

4. Organizational Process Assets– Existing cost control-related policies, procedures, and guidelines– Tools for controlling costs– Methods used for monitoring and reporting

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Tools & Techniques1. Earned Value Management (EVM): is the most common tool which

help project managers measure project performance and determine where the project stands in relation to the budget and the schedule at a point in time

BAC- Budget At Completion ( Project budget )– How much money you’ll spend on the project– Total amount of budget that you have for your project

PV—Planned Value ( Value of work schedule )– Is the authorized budget assigned to the work to be accomplished for an

activity or WBS component.– The total planned value for project is also known as Budget At Completion

( BAC ) when planned complete 100%.

EV—Earned Value ( Value of work performed )– EV is the value of work performed expressed in terms of the approved budget

assigned to that work for an activity or WBS component….– EV is often used to describe the % completion of a project

AC—Actual Cost ( Spent cost )– Is the total cost actually incurred and recorded in accomplishing work

performed for an activity or WBS component.

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SPI—Schedule Performance Index– Whether you’re behind or ahead of schedule– If SPI > 1, you’re ahead of schedule– If SPI < 1, you’re behind schedule SV—Schedule Variance– How much ahead or behind schedule you are– If SV > 0, it tells you how many dollars you’re ahead– If SV < 0, it tells you how many dollars you’re behind CPI—Cost Performance Index– Whether you’re within your budget or not– If CPI > 1, you’re under budget– If CPI < 1, you’re over budget CV—Cost Variance– How much above or below your budget you are– If CV > 0, it tells you how many dollars you’re above– If CV < 0, it tells you how many dollars you’re below

Tools & Techniques (Cont.)

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Tools and Techniques (Cont.)

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Tools & Techniques1. Forecasting: A technique for extrapolating current performance data

to create an estimate of future project performance– Estimate to Complete (ETC), which tells you how much more money

you’ll probably spend on your project– Estimate at Completion (EAC) is used to predict what your project will

actually cost when it’s complete

ETC = EAC-AC

– EAC using manual Bottom-up summation

EAC = AC + bottom-up ETC

– EAC forecast for ETC Work Performance at the Budgeted Rate

EAC = AC + BAC-EV

– EAC forecast for ETC Work Performance at the Present CPI Rate

EAC = BAC/ cumulative CPI

– EAC forecast for ETC Work Performance considering both SPI and CPI Factors

EAC = AC + [(BAC-EV)/ (cumulative CPI * cumulative SPI)]

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Tools & Techniques

1. To-Complete Performance Index (TCPI)– Answers the question, “How efficiently are you using your

remaining resources?”– How well your project must perform to stay on budget

– Two methods:

• Base on the BAC:

• Base on the EAC:

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Tools & Techniques1. Performance Review– Compare cost performance over time, schedule activities or work packages

over-running and under-running the budget, and estimated funds needed to complete work in progress.

– If EVM is used, the following is determined:

Variance analysis. compares actual project performance to planned or expected performance

Trend analysis. examines project performance over time to determine if performance is improving or deteriorating ( EAC vs. BAC )

Earned value performance. compares the baseline plan to actual schedule and cost performance ( CPI & SPI )

1. Variance analysis– Identify differences between the work results and the project management

plan: CV, SV– Determine what caused the variances (root cause) and plan a corrective

actions

1. Project management software: Project management software is often used to monitor the 3 EVM dimensions (PV, EV, AC) to display graphical trends, and to forecast a range of possible final project results.

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Outputs

1. Work Performance Measurements– Calculated CV, SV, CPI, and SPI values for WBS components, in particular

the work packages and control accounts, are documented and communicated to stakeholders

2. Budget Forecasts– ETC, EAC

3. Organizational Process Assets Updates– Causes of variances, corrective action and rationale

4. Change Requests– To adjust the cost performance baseline, project management plan,

corrective, or preventive action5. Project Management Plan Updates

– Cost performance baseline– Cost management plan

6. Project Document Updates– Cost Estimates– Basic of Estimates

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EVM Example

• Project: 400 meters fence.

• Objectives– To build a fence surrounding Sponsor’s &

PM’s garden

– The scope consists of 4 legs each 100 meters long. Gates are included.

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Exercise• Resources

– Contract signed with Contractor with fixed material price & installation incl. necessary civil work at cost plus.

– Contractor have planned the work with a workforce of five skilled labor working fulltime for 4 consecutive weeks

• Budget– Material: $10,000– Installation: $16,000 (800 man hours at $20/hour normal working

hours)– Total: $26,000

• Schedule– The work to be completed within 4 weeks. Lasted delivery is

Friday week 4.

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Explain

– Material: $10,000 for 400 m

=> $25/m for material– Installation: $16,000 ⇒$20/hour normal working hours– Total: $26,000

=> $65/m for earned value

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Week1• Status: leg 1 of the fence is 100% completed (100 meters)• Task: fill in appropriate numbers in the column for wk1:

Budget:

Actual:

Forecast:

AC

EV BAC*actual % complete

CPI EV/AC

SPI EV/PV

BAC

PV BAC*planned % complete

EAC BAC/CPI

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Week1

Budget:

Actual:

Forecast:

AC 100*25 + 5*8*5*20 6 500

EV 100*65 6 500

CPI 1

SPI 1

BAC 26 000 26 000

PV 26 000 * 25% 6 500

EAC 26 000/1 26 000

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Week2• Status: leg 2 of the fence is 50% completed (50 meters)• Reason: the soil was harder than expected, no soil investigation took place before

contract was signed• Task: fill in appropriate numbers in the column for wk2, suggest corrective action to

get the project back on track

Budget:

Actual:

Forecast:

AC

EV BAC*actual % complete

CPI EV/AC

SPI EV/PV

BAC

PV BAC*planned % complete

EAC BAC/CPI

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Week2Budget:

Actual:

Forecast:

AC 6500+50*25+5*8*5*20

11750

EV 6500+50*65 9750

CPI 0.83

SPI 0.75

BAC 26 000 26 000

PV 6500+ 26 000 * 25%

13 000

EAC 26 000/0.83 31 325

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Week3• Status: leg 2 is completed/ Leg 3 is 25% completed (75 meters)• Previous corrective action: overtime 2 hours/day for the whole workforce at a

cost of $30 per man-hour• Task: fill in appropriate numbers in the column for wk3, and suggest

corrective action to get project back on track

Budget:

Actual:

Forecast:

AC

EV BAC*actual % complete

CPI EV/AC

SPI EV/PV

BAC

PV BAC*planned % complete

EAC BAC/CPI

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Week3Budget:

Actual:

Forecast:

AC 11750+75*25+5*8*5*20+5*2*5*30

19125

EV 9750+75*65 14625

CPI 0.76

SPI 0.75

BAC 26 000 26 000

PV 13 000 + 26 000 * 25%

19 500

EAC 26 000/0.76 34211

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Week4• Status: leg 3 and 4 completed (175 meters)• Previous corrective actions: 2 additional men, overtime 2 hours/day for the

whole workforce• Task: fill in appropriate numbers in the column for wk4:Budget:

Actual:

Forecast:

AC

EV BAC*actual % complete

CPI EV/AC

SPI EV/PV

BAC

PV BAC*planned % complete

EAC BAC/CPI

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Week4

Budget:

Actual:

Forecast:

AC 19125+175*25+7*8*5*20+7*2*5*30

31200

EV 14625+175*65 26000

CPI 0.83

SPI 1

BAC 26 000

PV 26 000

EAC 312000