Project Cost Project Cost ManagementManagement
Sections of this presentation were adapted Sections of this presentation were adapted from from A Guide to the Project Management A Guide to the Project Management
Body of KnowledgeBody of Knowledge 4 4thth Edition, Project Edition, Project Management Institute Inc., © 2009Management Institute Inc., © 2009
Project Cost ManagementProject Cost Management
““The processes involved in planning, The processes involved in planning, estimating, budgeting, and controlling estimating, budgeting, and controlling costs so that the budget can be completed costs so that the budget can be completed within the approved budget”within the approved budget”
Why Do We Manage Cost?Why Do We Manage Cost?
Part of triple constraint, can’t manage one without Part of triple constraint, can’t manage one without the others (scope, time, and quality) the others (scope, time, and quality)
Plots of cost and scope against plan can help spot Plots of cost and scope against plan can help spot problems earlyproblems early
Cumulative Value
Time
Planned Value (PV)
Actual Costs (AC)
Earned Value (EV)
Today
Is this project over/under budget?
Is it ahead of/behind schedule?
Cost Management Key TermsCost Management Key Terms
PV - Planned Value, PV - Planned Value, estimatedestimated value of the planned work value of the planned work
EV – Earned Value, EV – Earned Value, estimatedestimated value of work done value of work done
AC – Actual Cost, what you paidAC – Actual Cost, what you paid
BAC – Budget at Completion, the budget for the total jobBAC – Budget at Completion, the budget for the total job
EAC –Estimate at Completion, what is the total job EAC –Estimate at Completion, what is the total job expected to cost?expected to cost?
ETC – Estimate to Complete, forecasted costs to complete ETC – Estimate to Complete, forecasted costs to complete jobjob
VAC – Variance at Completion, how much over/under VAC – Variance at Completion, how much over/under budget do we expect to be?budget do we expect to be?
How Do We Manage Cost?How Do We Manage Cost?
Three processesThree processes Estimate CostsEstimate Costs Determine BudgetDetermine Budget Control CostsControl Costs
Estimate
Costs
Determine Budget
Control
Costs
Estimate CostsEstimate CostsEnterprise Environmental Factors
Organizational Process Assets
Project Scope Statement
Analogous estimating
Determine resource cost rates
Bottom up estimating
Parametric estimating
Project management software
Vendor bid analysis
Reserve analysis
Cost of quality
Inputs OutputsTools & Techniques
Work Breakdown Structure
WBS Dictionary
Project Management Plan
•Schedule Mgmt Pln
•Staffing Mgmt Pln
•Risk Register
Activity Cost Estimates
Activity Cost Estimates Supporting Detail
Requested Changes
Cost Management Plan Updates
Estimate
Costs
Determine Budget
Control
Costs
Estimating MethodsEstimating Methods
Analogous (Top Down) estimatingAnalogous (Top Down) estimating – Managers use – Managers use expert judgment or similar project costs [quick, less expert judgment or similar project costs [quick, less accurate]accurate]Bottom-Up estimatingBottom-Up estimating – People doing work – People doing work estimate based on WBS, rolled up into project estimate based on WBS, rolled up into project estimate [slow, most accurate]estimate [slow, most accurate]Parametric estimatingParametric estimating – Use mathematical model – Use mathematical model (i.e. cost per sq ft). [accuracy varies] (i.e. cost per sq ft). [accuracy varies] Two types:Two types:
Regression analysis – based on analysis of multiple Regression analysis – based on analysis of multiple data pointsdata pointsLearning Curve – The first unit costs more than the Learning Curve – The first unit costs more than the 100100thth, forecasts efficiency gains, forecasts efficiency gains
Estimating MethodsEstimating Methods
Vendor Bid AnalysisVendor Bid Analysis – Estimating using bids + – Estimating using bids + allowances for gaps in bid scope [slow, accuracy allowances for gaps in bid scope [slow, accuracy depends on gaps]depends on gaps]Reserve AnalysisReserve Analysis – Adding contingency to each – Adding contingency to each activity cost estimates as zero duration item [slow, activity cost estimates as zero duration item [slow, overstates cost]overstates cost]
Determine BudgetDetermine Budget
Project Scope StatementCost aggregation
Reserve analysis
Parametric estimating
Funding limit reconciliationInputs
OutputsTools & Techniques
Cost Baseline
Project Funding Requirements
Cost Management Plan Updates
Requested Changes
Work Breakdown Structure
WBS Dictionary
Activity Cost Estimates
Activity Cost Estimates Supporting Detail
Project Schedule
Resource Calendars
Contract
Cost Management Plan
Estimate
Costs
Determine Budget
Control
Costs
Determine BudgetDetermine Budget
Budgeting is allocating costs to work packages Budgeting is allocating costs to work packages to establish a cost baseline to measure project to establish a cost baseline to measure project performanceperformanceRemember Contingency items are for unplanned Remember Contingency items are for unplanned but required changes it is not to cover things but required changes it is not to cover things such as:such as: Price escalationPrice escalation Scope & Quality ChangesScope & Quality Changes
Funding Limit Reconciliation – Smoothing out Funding Limit Reconciliation – Smoothing out the project spend to meet management the project spend to meet management expectationsexpectations
Control CostsControl CostsCost Baseline
Project Funding Requirements
Performance Reports
Cost change control system
Performance measurement analysis
Forecasting
Project performance reviews
Project management software
Variance management
Inputs OutputsTools & Techniques
Work Performance Information
Approved Change Requests
Project Management Plan
Cost Estimate Updates
Cost Baseline UpdatesPerformance Measurements
Forecasted Completion
Requested Changes
Recommended Corrective Actions
Organizational Process Assets Updates
Project Management Plan Updates
Estimate
Costs
Determine Budget
Control
Costs
Earned ValueEarned Value
Progress is compared against the Progress is compared against the baseline to determine whether baseline to determine whether project is ahead of or behind planproject is ahead of or behind planPercent complete can be difficult Percent complete can be difficult to measure, some managers use to measure, some managers use rules rules 50/50 Rule – Assumed 50% 50/50 Rule – Assumed 50%
complete when task started, final complete when task started, final 50% at completion50% at completion
20/80 Rule – 20% at start20/80 Rule – 20% at start 0/100 Rule – No credit until complete 0/100 Rule – No credit until complete
Planned Value Planned Value (PV) – Budgeted (PV) – Budgeted CostCost
Earned Value Earned Value (EV) – Actual (EV) – Actual work completedwork completed
Actual Cost (AC) Actual Cost (AC) – Costs incurred– Costs incurred
Estimate to Estimate to Complete (ETC) Complete (ETC) – What’s Left– What’s Left
Estimate at Estimate at Completion (EAC) Completion (EAC) – What final cost – What final cost will bewill be
Earned Earned Value Value GraphGraph
Variance at Completion
(VAC)
Target Cost &
Schedule
Schedule Variance (Time)
Planned Value (PV)
Earned Value (EV)
Earned Value FormulasEarned Value Formulas
NAMENAME FORMULAFORMULA NOTESNOTESCost Variance (CV)Cost Variance (CV) EV-ACEV-AC Negative = Over budget Negative = Over budget
Positive = Under budgetPositive = Under budget
Schedule Variance Schedule Variance (SV)(SV)
EV-PVEV-PV Negative = Behind Schedule Negative = Behind Schedule
Positive = Ahead of SchedulePositive = Ahead of Schedule
Cost Performance Cost Performance Index (CPI)Index (CPI)
EV/ACEV/AC How much are we getting for every How much are we getting for every dollar we spend?dollar we spend?
Schedule Perform Schedule Perform Index (SPI)Index (SPI)
EV/PVEV/PV Progress as % against planProgress as % against plan
Estimate to Complete Estimate to Complete (ETC)(ETC)
EAC-ACEAC-AC How much more do we have to How much more do we have to spend?spend?
Variance at Variance at Completion (VAC)Completion (VAC)
BAC-EACBAC-EAC At the end of the day, how close will At the end of the day, how close will we be to plan?we be to plan?
Estimate at Estimate at Completion (EAC)Completion (EAC)
See following slideSee following slide
Earned Value Formulas (Cont’d)Earned Value Formulas (Cont’d)
NAMENAME FORMULAFORMULA NOTESNOTESEstimate at Estimate at Completion (EAC)Completion (EAC)
BAC/CPIBAC/CPI Use if no variancesUse if no variances from from BAC have occurredBAC have occurred
AC+ATCAC+ATC Use when original Use when original estimate was bad. Actuals estimate was bad. Actuals + New estimate+ New estimate
AC+BAC-EVAC+BAC-EV Use when current Use when current variances are not expected variances are not expected to be there in the futureto be there in the future
AC+(BAC-EV)/CPIAC+(BAC-EV)/CPI Use when current Use when current variances are expected to variances are expected to continuecontinue
Tricks for Earned ValueTricks for Earned Value
EV is always firstEV is always firstVariance = EV minus somethingVariance = EV minus somethingIndex = EV divided by somethingIndex = EV divided by somethingIf the formula relates to cost use ACIf the formula relates to cost use ACIf the formula relates to schedule use PVIf the formula relates to schedule use PVInterpreting results: negative is bad and positive is goodInterpreting results: negative is bad and positive is goodInterpreting results: greater than one is good, less than Interpreting results: greater than one is good, less than one is badone is bad
PV
AC ETCEAC
BACProject Start
Current Status
Terms to RememberTerms to Remember
Present ValuePresent ValueNet Present Value (NPV)Net Present Value (NPV)Internal Rate of Return Internal Rate of Return (IRR)(IRR)Payback PeriodPayback PeriodBenefit Cost Ratio = Benefit Cost Ratio = BCR>1, Payback is greater BCR>1, Payback is greater than the costthan the costOpportunity CostOpportunity CostSunk CostSunk Cost
Working CapitalWorking CapitalStraight Line DepreciationStraight Line DepreciationAccelerated Depreciation Accelerated Depreciation
Double Declining BalanceDouble Declining Balance Sum of Years DigitsSum of Years Digits
Value Analysis (Value Value Analysis (Value Engineering)Engineering)
You won’t be calculating most of these numbers on the test, just remember the concepts for general questions