Project Cost ManagementProject Cost Management

PMBOK 4th EditionPMBOK 4th Edition

AgendaAgenda

Broad Understanding of Project Cost Broad Understanding of Project Cost Management.Management.

Understand how software estimation is Understand how software estimation is different.different.

PROCESS GROUPSPROCESS GROUPS

Estimate Costs

Budget Costs

Control Costs

I

Planning

E

Controlling

C

Estimate CostsEstimate Costs

Cost estimating and Pricing:Cost estimating and Pricing: Cost estimating: how much will it cost the performing Cost estimating: how much will it cost the performing

organization to provide the product or service organization to provide the product or service involved?involved?

Pricing: how much will the performing organization Pricing: how much will the performing organization charge for the product or service? charge for the product or service? Business decisionBusiness decision..

Estimating should be done by the person doing Estimating should be done by the person doing the work.the work.

Estimate CostsEstimate Costs

Based on the WBS to increase the accuracy.Based on the WBS to increase the accuracy. Project managers should analyze the needs of Project managers should analyze the needs of

the project, to compare and reconcile any the project, to compare and reconcile any differences with cost requirements from differences with cost requirements from management.management.

1. WBS2. Resource

requirements3. Resource rates.4. Act. duration est.5. Historical info.6. Chart of accounts7. Risks

1. Analogous est.2. Parametric

modeling3. Bottom-up est.

1. Cost estimates2. Cost

management plan

Inputs Tools Outputs

Estimate CostsEstimate Costs Cost estimates for all resources that will be Cost estimates for all resources that will be

charged to the project.charged to the project. Generally expressed in units of currency to facilitate Generally expressed in units of currency to facilitate

comparisons both within and across projects.comparisons both within and across projects. Generally includes appropriate risk response planning.Generally includes appropriate risk response planning.

Supporting detail must include:Supporting detail must include: Reference to WBS.Reference to WBS. How it was developed?How it was developed? Assumptions made.Assumptions made. Range of possible results.Range of possible results.

Cost management plan how cost variances will Cost management plan how cost variances will be managed.be managed.

Estimate CostsEstimate Costs

View the TemplatesView the Templates Top DownTop Down

Experience Based/AnalogyExperience Based/Analogy ParametricParametric

WBSWBS Roll up the numbersRoll up the numbers

Estimates vs. AccuracyEstimates vs. Accuracy

Most difficult to estimate as very Most difficult to estimate as very little project info is availablelittle project info is available

EstimateEstimate AccuracyAccuracy

Order of Order of Magnitude Magnitude (Early)(Early)

-25%-25%

+75%+75%

Budget Budget EstimateEstimate

-10%-10%

+25+25

Definitive Definitive EstimateEstimate

-5%-5%

10%10%

Used to finalize the Request for Used to finalize the Request for Authorization (RFA), and establish Authorization (RFA), and establish commitmentcommitment

Development stage estimate. Development stage estimate. Needed to predict revised project Needed to predict revised project completion datecompletion date

Tools for Estimating Tools for Estimating

Top Down Top Down EstimatingEstimating

Accuracy depends on experienceAccuracy depends on experienceFast, but estimates are roughFast, but estimates are rough

Bottom Up Bottom Up EstimatingEstimating

Slow, but reliableSlow, but reliableHigh cost (time) / WBS neededHigh cost (time) / WBS neededBuy-in from the teamBuy-in from the team

Parametric Parametric ModelingModeling

Mathematical models to predict costsMathematical models to predict costsTwo types: REGRESSION ANALYSIS, Two types: REGRESSION ANALYSIS,

and LEARNING CURVEand LEARNING CURVE

Delphi Delphi Method Method (analogous)(analogous)

Expert judgmentExpert judgmentTasks need not to be identifiedTasks need not to be identifiedConsiderable experience neededConsiderable experience needed

Influencing FactorsInfluencing FactorsInfluencing FactorsInfluencing Factors

Two sets of factors influence the ultimate Two sets of factors influence the ultimate cost of a systemcost of a system

Size FactorsSize Factors Number, and type of functionsNumber, and type of functions

Project FactorsProject Factors Project parameters that influence Project parameters that influence

project costs. project costs.

Control CostsControl Costs

Understand what is driving variances, good and Understand what is driving variances, good and bad, and decide what action to take.bad, and decide what action to take.

1. Cost Baseline2. Performance

Reports3. Change Requests4. Cost

Management Plan

1. Cost Change Control System

2. Performance Measurement

3. Earned Value Management

4. Additional Planning

5. Computerized Tools

1. Revised Cost Estimates

2. Budget Updates3. Corrective Action4. Estimate at

Completion5. Project Closeout6. Lessons learned

Inputs Tools Outputs

Case StudyCase Study

Simple Case study requires you to master Simple Case study requires you to master the following:the following:

EV = Earned ValueEV = Earned Value PV = Planned ValuePV = Planned Value AC = Actual CostAC = Actual Cost

Budget CostsBudget Costs

The cost baseline will be used to measure and The cost baseline will be used to measure and monitor cost performance of the project.monitor cost performance of the project.

Expected Cash Flow

Cost Baseline

Cumulative Values

Time

Control CostsControl Costs

To Control / Report CostsTo Control / Report Costs And to Revise Costs and provide a new And to Revise Costs and provide a new

Estimate At CompletionEstimate At Completion Use Earned Value MethodUse Earned Value Method

ExampleExample

Painting your four walls.Painting your four walls. Each wall $1000.Each wall $1000. Total Budget At Completion (BAC) = Total Budget At Completion (BAC) =

$1000+$1000+$1000+$1000$1000+$1000+$1000+$1000 Half way through you audit the work.Half way through you audit the work. Let us consider two scenarios.Let us consider two scenarios.

Scenario 1Scenario 1

One Wall is paintedOne Wall is painted Amount Spent is $500Amount Spent is $500

Scenario 2Scenario 2

Two Walls paintedTwo Walls painted Amount Spent is $4000Amount Spent is $4000

What is the Revised EACWhat is the Revised EAC

For Scenario 2.For Scenario 2.

TCPITCPI

What if CPI is consistently low.What if CPI is consistently low. Can you catch up somehow?Can you catch up somehow? How will you know if it is not possible?How will you know if it is not possible? Read 18.6.1 about TCPI.Read 18.6.1 about TCPI.

Case Study:Case Study: Project “Book Contract” Project “Book Contract”

The “Book Contract” Project:The “Book Contract” Project:10 work packages10 work packages

• 10 chapters 10 chapters Negotiated to be delivered 1 Negotiated to be delivered 1

per monthper monthEstimated cost of $100 eachEstimated cost of $100 each

Time to Complete Performance Time to Complete Performance IndexIndex

This is equal to:

(BAC)

Why pick TCPI? Why pick TCPI?

The TCPI focuses on the remaining The TCPI focuses on the remaining project activities. project activities.

It reflects what it will take in It reflects what it will take in future future performance performance to recover from a to recover from a negative actual cost position.negative actual cost position.

Note: It is effectively the mirror Note: It is effectively the mirror opposite of the cumulative CPI.opposite of the cumulative CPI.

We’ve all been there. We’ve all been there.

You’re a few months into a project and You’re a few months into a project and the first few deliverables have been the first few deliverables have been completed. completed.

You diligently calculate the CPI = 0.9. You diligently calculate the CPI = 0.9. Your customer asks you about your Your customer asks you about your

plans for the cost overrun plans for the cost overrun ““No problem, we’ll make it up”No problem, we’ll make it up” BUT CAN YOU?BUT CAN YOU?

Back to the Case Study..Back to the Case Study..Month 1 2 3

Planned Value $100 $100 $100

Earned Value $100 $100 $100

Actual Cost $110 $110 $110

Cumulative Earned Value (EV) $100 $200 $300

Cumulative Actual Cost (AC) $110 $220 $330

CPI = EV/AC 0.89 0.89 0.89

TCPI calculation: Work TCPI calculation: Work RemainingRemaining

The work remaining is The work remaining is BAC – EV = $1,000 - $300 = $700 BAC – EV = $1,000 - $300 = $700

This is an estimate of the earned This is an estimate of the earned value remaining:value remaining: The total earned value for the project is The total earned value for the project is

$1,000$1,000 We have completed 3 deliverables.We have completed 3 deliverables. Work remaining = $700.Work remaining = $700.

TCPI Calculation: Funds TCPI Calculation: Funds RemainingRemaining

The funds remaining are BAC – AC = The funds remaining are BAC – AC = $1,000 – $330 = $670.$1,000 – $330 = $670.

This is the remaining budget if we are This is the remaining budget if we are to deliver as promised.to deliver as promised.

Project Moves onProject Moves on

1.04 doesn’t look too bad!1.04 doesn’t look too bad!We have to achieve a CPI rate of We have to achieve a CPI rate of

1.04 times of what we were 1.04 times of what we were working on.working on.

Yes, We Can!Yes, We Can!Yes, We Can!Yes, We Can!Yes, We Can!Yes, We Can!

So Three More Months & So Three More Months & Three more ChaptersThree more Chapters

Month 1 2 3 4 5 6Planned Value $100 $100 $100 $100 $100 $100

Earned Value $100 $100 $100 $100 $100 $100

Actual Cost $110 $110 $110 $110 $110 $110

Cumulative Earned Value (EV)

$100 $200 $300 $400 $500 $600

Cumulative Actual Cost (AC)

$110 $220 $330 $440 $550 $660

CPI = EV/AC 0.89 0.89 0.89 0.89 0.89 0.89

Three More Chapters …Three More Chapters …

Uphill…Uphill…

To complete the project within To complete the project within budget, we now have to work at a rate budget, we now have to work at a rate 18% greater than we proposed. 18% greater than we proposed.

In fact, we need a 29% improvement In fact, we need a 29% improvement in our expenditure rate from 89% to in our expenditure rate from 89% to 118%!118%!

TCPI Goes to ∞ in month 8!TCPI Goes to ∞ in month 8!

Estimates of Cost to Estimates of Cost to CompleteComplete

The estimate of The estimate of the final cost the final cost at completionat completion is called the is called the estimate at completion (estimate at completion (EACEAC).).

Next: The PM should calculate the new EAC.

AnalysisAnalysis

The TCPI has the remarkable The TCPI has the remarkable property that if we own up to the cost property that if we own up to the cost overrun and use the TCPI with the overrun and use the TCPI with the EAC in the denominator, then we can EAC in the denominator, then we can proceed at our current efficiency proceed at our current efficiency (defined by our current CPI) and hit (defined by our current CPI) and hit the new cost target.the new cost target.

ConclusionConclusion

When BAC is no longer attainable, When BAC is no longer attainable, the project manager should calculate the project manager should calculate a new EAC.a new EAC.

This new estimate becomes the goal This new estimate becomes the goal we will work towards we will work towards if approved by if approved by stakeholders.stakeholders.

TCPI = (BAC –EV) / (TCPI = (BAC –EV) / (EACEAC –AC) –AC)

Conclusion Conclusion

TCPI gives us a reality check TCPI gives us a reality check analysis.analysis.

PM: Our CPI is 0.9. We will deliver PM: Our CPI is 0.9. We will deliver on budget, don’t worry. on budget, don’t worry.

Auditor: I have TCPI = 1.2, implies Auditor: I have TCPI = 1.2, implies 30% increase in productivity. 30% increase in productivity.

Auditor: Are you Sure?Auditor: Are you Sure?

ReferencesReferences

Provides a good overview and general guide to Provides a good overview and general guide to the principles of EVM.the principles of EVM.

Shows the EVM role in facilitating effective Shows the EVM role in facilitating effective project management , project management , Project Management Project Management Institute, 2005Institute, 2005

The Two Most Useful Earned Value Metrics: the The Two Most Useful Earned Value Metrics: the CPI and the TCPI By Quentin W. Fleming and CPI and the TCPI By Quentin W. Fleming and Joel M. KoppelmanJoel M. Koppelman

Also Warburton and Kanabar – Several PMI Also Warburton and Kanabar – Several PMI papers and Bookpapers and Book