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7 - Project Cost ManagementProject Management TrainingCreated by ejlp12@gmail.com, June 20101Project Cost ManagementKnowledge AreaProcessInitiatingPlanningExecutingMonitoring & ControlClosingCostCost EstimatingCost BudgetingCost ControlEnter phase/Start projectExit phase/End projectInitiatingProcessesClosingProcessesPlanningProcessesExecutingProcessesMonitoring &Controlling Processes2Project Cost ManagementThe process involved in estimating, budgeting, and controlling cost so that the project can be completed within approved budgetLife cycle costingLooking at the cost of whole life of the product (include maintenance)Value analysis (value engineering)Looking at less costly way to do the same work within the same scopeLaw of Diminishing ReturnsE.g. adding twice resource to task may not get the task done in half cost/timeTime value of money (depreciation)Cost will also affect the scheduleCost risk vs. Type of contract

37.1 Estimate CostThe process of developing approximation of the monetary resources needed to complete project activitiesCost trade-offs & risk must be consideredCost estimates should be refinedInputsScope baselineProject scheduleHuman resource planRisk registerEnterprise environmental factorsOrganizational process assetsTools & TechniquesExpert judgmentAnalogous estimatingParametric estimatingBottom-up estimatingThree-point estimatesReserve analysisCost of qualityProject management estimating softwareVendor bid analysisOutputsActivity cost estimatesBasis of estimatesProject document updates4Types of CostVariable CostsChange with the amount of production/work e.g. material, supplies, wagesFixed CostsDo not change as production changee.g. set-up, rental

Direct Costs Directly attributable to the work of projecte.g. team travel, recognition, team wagesIndirect Costsoverhead or cost incurred for benefit of more than one projecte.g. taxes, fringe benefit, janitorial services

5Most difficult to estimate as very little project info is available, made during initiating processEstimateAccuracyRough Order of Magnitude(ROM)+/- 50%Budget Estimate-10%+25%Definitive Estimate-5%10%Used to finalize the Request for Authorization (RFA), and establish commitment, made during planning phaseDuring the project and refinedQuality/Accuracy of Cost Estimation67.2 Determine BudgetProcess of aggregating the estimated cost of individual activities or work packages to establish an authorized cost baseline.InputsActivity cost estimatesBasis of estimatesScope baselinesProject scheduleResource calendarsContractsOrganizational process assetsTools & TechniquesCost aggregationReserve analysisExpert judgmentHistorical relationshipFunding limit reconciliationOutputsCost performance baselineProject funding requirementsProject document updates7Cost AggregationReserves & risk management are important while estimating!Contingency reserves: Cost Baseline the cost impacts of the remaining risk

Management reserves: Cost Budgetextra fund to cover unforeseen risk or changes to the project

Activity estimatesWork package estimatesControl account estimatesProject estimatesContingency reservesManagement reservesCost baselineCost Budget8Determines Budget: Other considerationsHigh level parametric estimate as a rule of thumbE.g. testing cost 50% of development cost

Funding limit reconciliation = checking cash flowWhen the money will be available?

Reconciliation needed before proposed cost baseline and cost budget become finalSuch reconciliation is part of integration management

97.3 Control CostThe process of monitoring the status of the project to update the project budget and managing changes to the cost baselineInputsProject management planProject funding requirementWork performance informationOrganizational process assetsTools & TechniquesEarned value managementForecastingTo-complete performance indexPerformance reviewsVariance analysisProject management softwareOutputsWork performance measurementBudget forecastOrganizational process updatesChange requestsProject management plan updatesProject document updates10How to control cost?Follow the cost management plan

Look at any organizational process asset that are available

Manage changeRecording all appropriate changePreventing incorrect changeEnsuring requested changes are agreed uponManaging the actual changes when and as they occur

Measure and measure and measure (monitoring)11Progress ReportProgress/performance report (output from communication area)Where work cannot be measured, estimate could be done by a guess

Percent complete:50/50 Rule20/80 Rule0/100 RuleActivity is considered X percent complete when it begins and get credit for the last Y percent only when it is complete12Earned Value ManagementMethod to measure project performance against scope, schedule and cost baseline (performance measurement baseline)

Interpretation of basic EVM performance measuresCost Performance Index (CPI)Schedule Performance Index (SPI)

Image captured from Practice Standard for Earned Value Management, PMI 200513Earned Value TechniqueTerms and FormulasDefinitionEarned Value (EV)As of today, what is the estimated value of the work actually accomplished?Actual Cost (AC)As of today, what is the actual cost incurred for the work accomplished?Planned Value (PV)As of today, what is the estimated value of work planned to be done?Cost Variance (CV)= EV - ACNegative is over budgetPositive is under budgetSchedule Variance (SV)= EV - PVNegative is behind schedulePositive is ahead scheduleCost Performance Index (CPI) = EV/ACWe are getting $__ worth of work out of every $1 spent. Are funds being used efficiently?Schedule Performance Index (SPI) = EV/PVWe are (only) progressing at __ percent of the rate originally planedExample$100K$200K$300K$100K $200K = ($100K)$100K - $300K= ($200K)$100K/$200K= 0.5 i.e. 50% $100K/$300K= 0.33 i.e 33%Example:Project Budget: $400KProject Schedule: 4 months

At the 3 month checkpoint:Spent: $200KWork completed: $100KRevised Total Duration Baseline Duration/Schedule Performance Index4/0.33= 12 monthsSlide adapted from the original which taken from www.alphaPM.com14Earned Value TechniqueTerms and FormulasDefinitionBudget at completion (BAC)How much did we BUDGET for the TOTAL project effort?Estimate at Completion (EAC)= BAC / CPIWhat do we currently expect the TOTAL project cost (a forecast)?Estimate to Complete (ETC)= EAC - ACFrom this point on, how much MORE do we expect it to cost to finish the project (a forecast)?Variance at Completion (VAC)= BAC EACAs of today, how much over or under budget do we expect to be at the end of the project?EAC is an important forecasting value.15Earned Value: Graphical RepresentationTIMECOSTScheduleVariance (SV)CostVariance(CV)ACTUALPLANEARNVALUEEstimate at Completion(EAC)Budget at Completion(BAC)Projection of schedule delay at completionProjection of cost variance at completion(VAC) TODAY(Reporting day)BACEACACEVPVProject is over budget & behind schedule

16Earned Value ManagementImage captured from Practice Standard for Earned Value Management, PMI 2005

EV can be calculated by (%progress) x (planned man-days)

17ExerciseTaskProgressCost spentSide 1||||||||||||||||||||||||||||||||||||||||100%$1,200 Side 2||||||||||||||||||||||||||||||||||||||||100%$1,000 Side 3||||||||||||||||||||||||||||||75%$750 Side 4||||||||||||||||||||50%$500 Side 50%$0 Side 60%$0 You have a project to build a box. The box is six sided. Each side is to take one day to build and is budgeted for $1000 per side. The sides are planned to be completed one after the other. Today is the end of day three.

Using the following project status chart, calculate PV, EV, AC, BAC, CV, CPI, SV, SPI, EAC, ETC, VAC.Describe your interpretation based on the calculation!18Exercise SolutionParameterCalculationResultPVEVACBACCVCPISVSPIEACETCVACProject is below/over budget?Project is late/ahead schedule?How much more money we need?

19Exercise SolutionParameterCalculationResultPV1000 + 1000 + 10003000EV(100% x 1000) + (100% x 1000) + (75% x 1000) + (50% x 1000) 3025AC1200 + 1000 + 750 + 5003450BAC6 x 10006000CV3025 - 3450-425CPI3025 / 34500.88SV3025 - 300025SPI3025 / 30001.01EAC6000 / 0.886818.18ETC6818.18 - 34503368.18VAC6000 - 6818.18-818.18 over budget, getting 0.88 dollar for every dollar we spent, ahead schedule, progressing 101% of the rate planned, probably will spend $6818 at the end (estimation), need $3368 to complete, over budget at the end for about $818 (estimation)

20Forecasting EACThere are many ways to calculate EAC, depending on the assumption made.Simple EAC calculation (EAC = BAC/CPI) assume that the cumulative CPI adequately reflects past performance that will continue to the end of the project.

AC+(BAC-EV)Used when current variances are thought to be atypical of the future

AC+[(BAC-EV)/(Cumulative CPI + Cumulative SPI)]It assumes poor cost performance and need to hit a firm completion date.21To-Complete Performance Index (TCPI)Helps the team determine the efficiency that must be achieved on the remaining work for a project to meet a specified endpoint, such as BAC or the teams revised EAC

TCPI

22BaCKUP SLIDES23Forecasting EACCommon alternative way to calculate EAC

Table captured from Practice Standard for Earned Value Management, PMI 200524Earned Schedule - An emerging EVM practiceSPI($) At project start SPI is reliableAt some point SPI accuracy diminishesToward the project end it is useless (SPI = 1 at project end)Doest not show weeks/months of schedule varianceSPI(t)Time based schedule measuresCreate a SPI that is accurate to the of the projectSV(t) = ES ATSPI(t) = ES / AT

ES = Earned Schedule (Planned time)AT = Actual timeSee more resources about earned schedule at http://www.earnedschedule.com

25EVM Hints to rememberEV comes first in every formulaIf its variance, the formula is EV somethingIf its index, EV / somethingIf it relates to cost, use Actual CostIf it relates to schedule, use PVNegative numbers are bad, positive is goodCopied from Ritas book26Thank You

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