iii pmf management solutions · “estimate costs is the process of developing an approximation of...

PMF MANAGEMENT

SOLUTIONS

III

Cost Management

Project Management Framework | A Structure for All Organisations

� Define what is cost management

� Identify different cost estimating techniques.

� Consider the types of estimating.

� Discuss how these different types of estimating techniques are

used in different phases of the project lifecycle.

� Discuss the requirements of cost management strategies and

how they are used throughout the project lifecycle.

� Define the difference between contingency funding and a

financial management reserve.

Session Objectives

2


� Compiling a planned project budget.

� Managing the project’s actual incoming and outgoing

costs against the planned budget.

� Evaluating quality as well as quantity prior to payment

authorisation.

� Ensuring project costs are within the baselined budget

at finalisation.

� PMBOK – “The processes involved in planning,

estimating, budgeting, financing, funding, managing,

and controlling costs so that the project can be

completed within the approved budget” (p 193).

Definition of Budgeting (Cost)

Project Management Institute (PMI), (2013), A guide to the project management body of knowledge (5th ed.), Newtown Square, Pennsylvania, PMI

3


� Planning the costs associated with all actions required to

complete the scope of works.

� The budget should be a true reflection of the costs that will be

incurred to deliver the project product.

� The budget should be planned to deliver the project product

within the cost limitations of the Client Organisation.

� The budget should be planned to deal with the onset of risks so

as activities, tasks and work-packages are not delayed on the

basis that a risk becoming an issue, financial reserves:

• Contingency funding.

• Financial management reserve.

Process of Budgeting

4


� Contingency funding – is the additional budget set aside to

respond to risk that become and issue.

• Responds to the known risks of a project.

� Financial management reserve – is the additional budget set

aside to respond to unexpected circumstances.

• Responds to the unknown risks of a project.

• Generally only required for high risk projects.

� Please Note:

• Regardless of the money set aside for a contingency fund or

financial management reserve, the project must still be delivered

within the Client Organisation’s cost limitations.

Financial Reserves

5


� Identify the cost of what needs to be done to

deliver the project product:

• Product Based Planning.

• Product Breakdown Structure

• Work Breakdown Structure

• Actions (activities, tasks and work packages).

• Project resources, materials and equipment.

• Known constraints.

• Costs and expected increases.

� Knowledge of the complexity of the project

and environment in which it will be delivered.

Budgeting in Practice

6


� Analogous estimating (historic).

� Top-Down estimating (educated guess).

� Bottom-Up estimating (calculated).

� Parametric estimating (PERT):

• Statistical relationship between history and variables.

� Vendor bid analysis (procurement).

� Delphi technique (industry judgement).

� Wide-band Delphi technique (expert judgement).

� Pre determined (set by another).

Cost Estimating Techniques

7


Top Down� Recursively apportions overall project estimate to the next lower level.

� Demonstrated later in this lecture, slide 32.

Project (100%)

10%

15%

15%

40%

20%

Initiation

Planning

Design

Construction

Deployment

14%

13%

13%

Frame

Exterior

Interior

Adapted from Richardson, G. L. (2010). Project management theory and practice. Boca Raton, Florida: CRC Press.

8


Expert Judgement� Widely used i.e.:

• >60% in software industry.

� Often an element of top-down estimating.

� Advantages:

• Little or no further data collection.

• Flexible and adaptive.

• Quick assessment.

� Disadvantages:

• Limited by expert’s objectivity, breath of expertise, and memory

• Difficult to explain and verify because an expert’s knowledge is ‘compiled’.

Richardson, G. L. (2010). Project management theory and practice. Boca Raton, Florida: CRC Press. 9


Analogous Estimation

If a bird looks like a duck,

swims like a duck and

quacks like a duck,

then it probably is a duck.

If a bird looks like a duck,

swims like a duck and

quacks like a duck,

then it probably is a duck.

OR

It could be a Willie Robertson

doing a duck impersonation.

OR

It could be a Willie Robertson

doing a duck impersonation.

10


Analogous Cost Estimation� Description:

• Compares the proposed project/activity with a similar or historic project/activity.

• Uses parameters such as scope, cost, budget, and duration or measures of scale such as size, weight, and complexity.

• Primarily used in the earlier phases of the project.

� Advantages:• Similar to expert judgement.

• Requires only limited information.

• Quick and inexpensive compared to other estimation methods.

• Can be applied to total project or segments of projects.

� Disadvantages:• Similar to expert judgement.

• Low accuracy.

• Similarity in appearance may belie dissimilarity in fact.

Project Management Institute. (2013). A guide to the project management body of knowledge (5th ed.). Newtown Square, Pennsylvania: Project Management Institute.

Richardson, G. L. (2010). Project management theory and practice. Boca Raton, Florida: CRC Press.

11


Other Approaches

� Phased:

• Progressively refine estimates of succeeding phases as each phase

is completed.

• I.e. revision of business case at the end of each PRINCE2 stage.

• Related to ‘Rolling Wave’ development and delivery approach.

� Heuristic

• ‘Rules of thumb’ derived from past experience.

• I.e. the support cost of a Defence system is generally 3 times the

acquisition cost.

12


Parametric Estimation� Description

• Uses statistical relationships between historical data and other variables to derive a cost estimating relationship (CER) for parameters such as cost, budget and duration.

• Demonstrated later in this lecture, slide 40 - 43.

� Advantages

• Can produce highly accurate estimates depending upon model sophistication and data reliability

• Requires known, specific and often only limited data

• Quick to obtain an estimate

• Growing availability of data to develop future CERS

� Disadvantages

• Need to collect data from very large number of projects

• Often requires extensive experience in industry

13


Bottom-Up Estimating

http://www.cedarcreekwoodshop.com/duckpull.pdf

14


Bottom-Up Cost Estimation

• Cost of individual work actions, (activities, tasks and work-

packages) are estimated with the greatest level of specified

detail.

• Detailed costs are “rolled up” to higher levels

• Cost and accuracy of bottom-up cost estimating are

influenced by the size and complexity of the individual action

(activity, task or work-package) and the skill set of the

resources required to complete said action.

• Demonstrated later in this lecture, slide 38 - 39.

Project Management Institute. (2013). A guide to the project management body of knowledge (5th ed.). Newtown Square, Pennsylvania: PMI, pp.193-226

15



Determining the Budget

Q1 – What is a Contingency Reserve (Fund)?

Q2 – What is a Management Reserve?

16



Contingency Reserves for ‘Known Unknowns’

Management Reserves for ‘Unknown Unknowns’

Determining the Budget

17


� Few estimates will ever be 100% accurate, so:

• Record how the calculation was determined.

• Record all underlying assumptions.

• Record all impacting constraints.

• Record an optimistic, pessimistic and likely range (PERT) on high

risk actions (activities, tasks or work packages).

• Record all source data.

• Record details of all stakeholders involved.

• Record the provisional / tentative nature.

• Record an acceptable tolerance level (+/- where appropriate).

Estimating Guidelines

18


Budgeting Priorities� Identify the cost for all project work and the cost to manage

this work:

• Every person, what they do, how they get there, what extra costs are or

may be incurred.

• Every method and type of work, material, plant, equipment and any

other resource required.

• Every aspect of work, from design, approval, order, delivery, installation,

use and waste.

� Include the cost of managing the project.

� Where possible, plan for the unexpected.

� Don’t try and fit a cost estimate to the Client Organisation’s

expected budget:

� Negotiations later may require a reduced scope to accomplish this.

19


Budgeting Tools

� Project budgeting can be developed manually or via

specialised software.

� Manual:

• Costing of actions.

• Manually constructed budgets.

� Specialised software:

• Microsoft Project.

• Primavera.

• Microsoft Excel.

20


� 7.1 Plan Cost Management—The process that establishes the policies,

procedures, and documentation for planning, managing, expending, and

controlling project costs.

� 7.2 Estimate Costs—The process of developing an approximation of the

monetary resources needed to complete project activities.

� 7.3 Determine Budget—The process of aggregating the estimated costs of

individual activities or work packages to establish an authorized cost

baseline.

� 7.4 Control Costs—The process of monitoring the status of the project to

update the project costs and managing changes to the cost baseline (p 193).

PMBOK Cost Processes

21



PMBOK Cost Mgt Overview

22

Project Management Institute (PMI), (2013), A guide to the project management body of knowledge (5th ed.), Newtown Square, Pennsylvania, PMI, p 194


� “Plan Cost Management is the process that establishes the policies, procedures, and documentation for planning, managing, expending, and controlling project costs.

� The key benefit of this process is that it provides guidance and direction on how the project costs will be managed throughout the project” (p 195).

� “The cost management processes and their associated tools and techniques are documented in the cost management plan” (p 196).

� This includes:• Incoming costs; and

• Outgoing costs.

7.1 Plan Cost Management

23



� “Estimate Costs is the process of developing an approximation of the

monetary resources needed to complete project activities.

� The key benefit of this process is that it determines the amount of

cost required to complete project work.

� Cost estimates are a prediction that is based on the information

known at a given point in time. Cost estimates include the

identification and consideration of costing alternatives to initiate and

complete the project.

� Cost trade-offs and risks should be considered, such as make versus

buy, buy versus lease, and the sharing of resources in order to achieve

optimal costs for the project.”

7.2 Estimate Costs

24

Project Management Institute (PMI), (2013), A guide to the project management body of knowledge (5th ed.), Newtown Square, Pennsylvania, PMI, p 200-201


� “Determine Budget is the process of aggregating the estimated

costs of individual activities or work packages to establish an

authorized cost baseline.

� The key benefit of this process is that it determines the cost

baseline against which project performance can be monitored

and controlled.

� A project budget includes all the funds authorized to execute

the project.

� The cost baseline is the approved version of the time-phased

project budget, but excludes management reserves.”

7.3 Determine Budget

25



� “Control Costs is the process of monitoring the status of the project to

update the project costs and managing changes to the cost baseline.

� The key benefit of this process is that it provides the means to recognize

variance from the plan in order to take corrective action and minimize risk.

� Updating the budget requires knowledge of the actual costs spent to date.

Any increase to the authorized budget can only be approved through the

Perform Integrated Change Control process (Section 4.5).

� Monitoring the expenditure of funds without regard to the value of work

being accomplished for such expenditures has little value to the project,

other than to allow the project team to stay within the authorized funding.

� Much of the effort of cost control involves analyzing the relationship

between the consumption of project funds to the physical work being

accomplished for such expenditures.”

7.4 Control Costs

26



PMF Cost Processes

27

Estimate Cost of Product Milestone

Collate Initial Project Budget Estimate

Identify Resource Costs

Cost Activities, Tasks & Work-Packages

Monitor Project Budget

Allocate Administrations & Other Costs

Finalise Project Budget

Planning

Initiation

Execution

FinalisationReview Cost Functional Processes

Control Project Budget

Establish Project Budget

Implement Cost Management Plan


Initiation Phase Cost Processes

28








Planning

Initiation

Execution






Conditions of Approvals

Not Approved

Approved

Potential Suppliers

Supply Rep Advice

Initial Budget Estimate

Project Manager Develops Initial

Budget Estimate for Project Charter

Identify a cost estimate for each

component

Consider additional administration /

licence / permit costs

Record any cost limitations and tentative nature

Consider profit margins and tax

implications

Project Close

(Start)

Business Case / Project Brief

Decision Gate

Historic Lessons Learned Logs

Proceed to Planning

Phase

Project Charter

Project Office(Project

Assurance)

Cost Initiation Actions

29

(Start)

Business Case / Project Brief


Initial Budget Estimate

Project Charter

Decision Gate

Proceed to Planning

Phase


� Industry experts should prepare or assist in the preparation of the cost

estimation for each component of the PBS.

� Their estimation will be based on industry knowledge and their

understanding of the scope statement and the necessary resources required

to complete work.

� To ensure the project stakeholder community has a high level understanding

of the performance targets each industry expert should clarify their cost

estimation.

� Clarification of the budget estimate must include provision of the details

used to form their top-down estimate.

• This may include: the number and type of resources required and/or available (including

any essential plant and equipment), any specialised processes, practices or techniques,

and/or any high risk actions.

Estimate Cost of Product Milestones

30


Using the PBS – Painting a House

31

Painting House

Prepare Interior Design

Pack up Belongings

Prepare Ceilings Walls and

Skirting BoardsPaint Ceilings Paint Walls

Paint Skirting Boards

Unpack Belongings


� Once the cost for each component of the PBS have been

determined, the Project Management Team will be able to

collate these costs to calculate the initial budget estimate.

� For example, a top-down estimation.


32

Painting House


Pack up Belongings


Skirting BoardsPaint Ceilings Paint Walls


Unpack Belongings

$1,000 $1,500 $2,000 $1,500 $3,000 $1,000 $1,500

Initial Budget $11,500


Planning Phase Cost Processes

33








Planning

Initiation

Execution







Not Approved

Approved

Engaged Supplier(s)

Supply Rep Advice

Detailed Project Budget

Project Manager Develops Detailed Budget as part of

Project Management Plan

Identify all HR costs

Identify all material and equipment costs

Include all admin, fees charges & insurance

Project Close

(Start)

Approved Project Charter

Decision Gate

Historic Lessons Learned Logs

Proceed to Execution

Phase

Project Management

Plan

Potential Suppliers

Individual Product Delivery Resource

Determine the contingency funding

Consider mark-up, tax and currency rates

Identify all procurement costs

Product Delivery Team Manager

Product Delivery Team Resource


Assurance)

Cost Planning Actions

34

(Start)

Approved Project Charter

Detailed Project Budget


Potential Individual

Product Delivery Resource

Potential Product Delivery Team Manager

Potential Product Delivery Team

Resource

Project Management

Plan

Decision Gate

Proceed to Execution

Phase


� What are the market costs for the human resources?

• What are the additional costs (allowances)?

• What are the on-costs (leave entitlements)?

� What are the market costs for plant and equipment?

� What are the costs of materials and supplies?

� Other potential cost considerations:

• Resource and materials lists (Bill Of Quantities).

• Archived / historical projects.

• Consumer Price Index (CPI) increases.

• Expected movements in price from suppliers.


35


Cost Allocation Over Product Lifecycle

36

Standards Australia/Standards New Zealand. (1999). AS/NZS 4536:1999 Life cycle costing--An application guide. Sydney: Standards Australia, p. 10


� Using the information contained in the PBS and WBS, costs can

be allocated to all actions (activities, tasks and work-packages).

� The Project Management Team must analyse the cost of human

and other resources based on their capabilities (skill set and

experience) and the needs of the project.

� The Project Management Team can then allocate these costs to

the actions and any known cost constraints.

� For example: if the project is utilising project personnel with

extensive experience the cost of the resources is likely to be

higher, although the work should be completed quicker.

Cost Activities, Tasks & Work Packages

37


Using the WBS – Painting a House

38

Painting House


Get Client’s Ideas

Visit Display Homes

Review Design Magazines

Prepare a Colour Board

Pack up Belongings

Pack Small Items in Boxes

Organise Removalist

Store Belongings


Skirting Boards

Wash all Surfaces with

Sugar soap

Plaster Blemishes and

Holes

Sand Plastering

Fill Gaps

Paint Ceilings

Cut in Ceilings (Two Coats)

Roll Ceilings (Two Coats)

Paint Walls

Cut in Walls (Two Coats)

Roll Walls (Two Coats)



(Two Coats)

Unpack Belongings

Retrieve Items from Storage

Place all Large Items

Unpack all Small Items


Example Budget – Painting a House

39

Painting House


Get Client’s Ideas

Visit Display Homes

Review Design Magazines

Prepare a Colour Board

Pack up Belongings

Pack Small Items in Boxes

Organise Removalist

Store Belongings


Skirting Boards

Wash all Surfaces with

Sugar soap

Plaster Blemishes and

Holes

Sand Plastering

Fill Gaps

Paint Ceilings

Cut in Ceilings (Two Coats)

Roll Ceilings (Two Coats)

Paint Walls

Cut in Walls (Two Coats)

Roll Walls (Two Coats)



(Two Coats)

Unpack Belongings

Retrieve Items from Storage

Place all Large Items

Unpack all Small Items

$150

$900

$350

$600

$250

$100

$1,200

$500

$300

$300

$300

$1,200

$500

$2,500

$1,000

$1,200 $200

$800

$800

$2,000 $1,550 $1,400 $1,700 $3,500 $1,200 $1,800

Budget $13,150

Bottom-Up Estimation


Bottom-Up Costing

Frame, J. D. (2002). The New Project Management: Tools for an Age of Rapid Change, Complexity, and other Business Realities (2nd ed.): Jossey-Bass, Chap 10

Sum

min

g U

pw

ard

s

40


PERT Analysis

� A Program, Evaluation, and Review Technique (PERT)

analysis is a probabilistic process.

� The intent is to evaluate a probable outcome based on

three scenarios:

• Best-case (optimistic);

• Expected-case (most likely); and

• Worst-case (pessimistic).

� This is useful for activities, tasks or work packages that

contain a high level of risk.

� A PERT is a Weighted Average Estimation Technique.

41


Values can change as long as the number used to divide the calculation is the

same as the combined totals above the line, for example:

PERT Calculation

T /C = Optimistic + (4 x Most likely) + Pessimistic

6

Duration Estimation (T /C)

T /C = Optimistic + (4 x Most likely) + (2 x Pessimistic)

7

Duration Estimation (T /C)

42


(c) ML

$3.50

(c) p

$5

(c) o

$3

Budget PERT Calculation

43


Parametric Costing Example

Frame, J. D. (2002). The New Project Management: Tools for an Age of Rapid Change, Complexity, and other Business Realities (2nd ed.): Jossey-Bass, Chap 10

Simple Labour Example

Approximate Construction Cost

Size of House Quality Price Per M² Estimated Cost

160M² Low $800 $128,000

232M² Medium $1,200 $278,400

385M² High $2,500 $962,500

44


� Administration costs:• Facilities, office and site.

• Power, phone and internet.

• Insurance and accounting.

� Other costs:• Currency exchange rates.

• Tax implications including GST.

� Review and consider all project functional areas, particularly:

� Scope, Procurement, Quality & Risk Management.

� PMBOK – Consider “health, safety, security, performance, environmental, insurance, intellectual property, rights, licenses, permits” (p 203).

Allocate Administration and Other Costs

45



� The budget should record details of how the project costs were

established:

• Which stakeholders were involved.

• Any assumptions that have been made.

• Any high risk actions that are associated with the project.

� Developing a budget is not a once-off activity used to get

approval of the Project Management Plan.

� Develop a comprehensive budget to suit the project and project

resources.

� Identify any contingency funding and/ or financial management

reserve separately.


46


Execution Phase Cost Processes

47








Planning

Initiation

Execution






Non Conformance

Conformance

Control Action Plan

Product Delivery Resource Advises Work Completed

Project Close

(Start)

Approved PMP

CostPerformance

Proceed to Finalisation

Phase

Project Reports



Individual Product Delivery

Resource

Project Manager Implements PMP

through Allocation of Work Plans

Undertake Required Work

Actions According to Work Plan

Work Plans

Contracted Product Delivery

Resource(s)

Monitor Cost of Work

Control Cost of Work

Decision Gate

Mothball / Terminate

Continue

Assurance Report

Project Office(Project/ Quality

Assurance)

Cost Execution Actions

48

(Start)

Approved PMP

Work Plans

Product Delivery Team

Resource

Product Delivery Team

Manager

Individual Product Delivery Resource


Resource(s)

Monitor Cost of Work

Control Cost of Work

X Iterations to Complete

WBS

Decision Gate

Proceed to Finalisation

Phase

Project Office(Project/ Quality

Assurance)


� Implementing budgetary actions is generally undertaken in collaboration

with the other functional areas of project management.

� It is simply the process of undertaking WBS actions in strict accordance with

the information contained within the PMP.

� The cost management plan is one of the ancillary plan that collaboratively

forms the PMP.

� The cost of actions within the work breakdown structure (WBS) will impact

the organising and implementation of future actions within the WBS.

� Implementing actions will require the Product Delivery Resources to be

advised of the planned expenditure for their work actions and process to

advise of possible overruns in their budget.

Implementation

49


� Routinely monitor the costs associated with undertaking project

management actions deliver the product being produced.

• Monitoring the costs associated with performing the project’s delivery

processes will inform the Project Management Team of actions that may

need to be taken to keep budget on track and aligned with the planned

cost of actions within the PMP.

• Monitoring the costs incurred for the Product Delivery Resources to

complete assigned actions will inform the Project Management Team of

actions that may need to be taken to keep work on budget and within

the agreed parameters.

Monitoring

50


Cost Monitoring

� Must be routinely undertaken to ensure actual

expenditure is inline with planned expenditure.

� Must ensure effective processes are implemented to

monitor project performance to ensure it is delivered

in accordance with planned performance.

� Must ensure work and materials are used as planned.

� Must ensure work and materials are delivered in full

and on time (DIFOT).

� Must report non-conformance immediately.

51


Earned Value Analysis

� An Earned Value Analysis (EVA) is an

effective tool for the monitoring the

project’s progress.

� An EVA consists of:

� A review of the projects:

� Planned Value (PV);

� Earned Value (EV); and

� Actual Cost (AC).

� May also be referred to as Earned

Value Management.

52


Planned Value (PV)

� Planned Value (PV) is the approved

project budget.

� Otherwise known as the budget

baseline for which expenditure will be

measured.

� It should include:

� A contingency fund for the whole project;

� A financial management reserve for the

project; and

� These should be depicted as a percentage

of the budget.

What It is

Planned

to Cost

53


Earned Value (EV)

� Earned Value (EV) is the percentage of the approved

project budget that has been earned as of a specific date

(the date measured).

� It is determined by calculating the amount of expenditure

that has been earned by all resources for the scheduled

work on that specified date.

� For example: if the overall cost is $10,000 and 30% of work

is complete, $3,000 has been earned.

54


Actual Cost (AC)

� Actual Cost is the amount of the approved project

budget that has been spent for the actual work

completed on a specified date.

� It is determined by calculating the costs actually

incurred (paid and committed) for the work that has

been completed.

� For example: if the 30% of work that is complete and

the amount paid is $3,000 ($1,000 paid and $1,000

committed to be paid), the actual cost is $2,000.

55


EVA Analysis

� The status of the project’s expenditure can be quickly

determined via an EVA.

� If the percentage of work completed and the earned value

is the same as the planned schedule and budget, then the

project is on track.

� If not, the project is either over / under budget or ahead /

behind schedule.

56


Example Earned Value Management

� Planned Value (PV):

• The budgeted cost assigned to work that was scheduled to be completed by a particular date.

• Also known as ‘Budgeted Cost of Work Scheduled’ (BCWS)

• Example:

� All tasks scheduled to be completed by the end of month 8 have a budgeted cost of $717K

� PV at the end of month 8 is $717K

� Supports forecasting of Budget at Completion (BAC):

• Enables comparison of original budget or cost estimate.

57


PV = $717K at end of month 8

58


Earned Value Management

� Actual Cost (AC):

• The actual cost of the work performed by a particular date regardless of the schedule or the budget.

• Sometimes called ‘Actual Cost of Work Performed (ACWP)’

• Example:

� By the end of month 8, the actual cost of all tasks performed was $385K.

� AC = $385K.

� Supports forecasting of Budget at Completion (BAC):

• Enables comparison of actual costs at completion.

59


Earned Value Illustration

0

200

400

600

800

1,000

1,200

0 1 2 3 4 5 6 7 8 9 10 11 12

Months

Exp

end

itu

re (

$000

) Planned Value (PV)

Actual Cost (AC)

AC = $385K at end of month 8

Under-Budget,Behind Schedule

OrBoth?

60



0

200

400

600

800

1,000

1,200

0 1 2 3 4 5 6 7 8 9 10 11 12

Months

Exp

end

itu

re (

$000


Actual Cost (AC)

Possibilities:• Project manager has performed brilliantly and will

bringing project in well under budget beyond all

expectations.

• Project manager has performed abysmally—the

project is irreversibly behind schedule and getting

worse by the day.

61


Earned Value Management

� Earned Value (EV)

• The budgeted (NOT actual) cost of work actually performed (NOT scheduled)

• Sometimes called ‘Budgeted Cost of Work Performed’

• Example:

� At the end of month 8, the worked actually performed had a budgeted cost of $536K

� i.e. EV = $536K

� Percentage Complete (PC): the percentage of actual work completed

� EV = PC * BAC

62



0

200

400

600

800

1,000

1,200

0 1 2 3 4 5 6 7 8 9 10 11 12

Months

Exp

end

itu

re (

$000

)

Earned Value (EV)

Actual Cost (AC)

Cost or ScheduleVariance?

Common Basis for Earned Value and Actual Cost is Work Performed

63



0

200

400

600

800

1,000

1,200

0 1 2 3 4 5 6 7 8 9 10 11 12

Months

Exp

end

itu

re (

$000

)

Earned Value (EV)

Actual Cost (AC)

Cost Variance

Under or over budget?

As the earned value is

greater than the actual

cost, the project is under

budget.

64



0

200

400

600

800

1,000

1,200

0 1 2 3 4 5 6 7 8 9 10 11 12

Months

Exp

end

itu

re (

$000


Earned Value (EV)

Cost or ScheduleVariance?

Common Basis of Earned Value and Planned Value is Budgeted Cost

65



0

200

400

600

800

1,000

1,200

0 1 2 3 4 5 6 7 8 9 10 11 12

Months

Exp

end

itu

re (

$000


Earned Value (EV)

Schedule VarianceSV

Ahead or behind schedule?

As the earned value is

less than the planned

value, the project is

behind schedule.

66



0

200

400

600

800

1,000

1,200

0 1 2 3 4 5 6 7 8 9 10 11 12

Months

Exp

end

itu

re (

$000


Earned Value (EV)

Actual Cost (AC)+ Cost Variance

(CV)

- Schedule Variance (SV)

67



0

200

400

600

800

1,000

1,200

0 1 2 3 4 5 6 7 8 9 10 11 12

Months

Exp

end

itu

re (

$000


Earned Value (EV)

Actual Cost (AC)

- Cost Variance (CV)

+ Schedule Variance (SV)

What if ?

Actual Cost (AC)

Planned Value (PV)

68


Earned Value Performance Measures

SV > 0, ahead-of-scheduleSV = 0, on-scheduleSV < 0, behind-schedule

SPI> 1, ahead-of-scheduleSPI = 1, on-scheduleSPI < 1, behind-schedule

CV> 0, under-budgetCV = 0, on-budgetCV < 0, over-budget

CPI> 1, under-budgetCPI = 1, on-budgetCPI < 1, over-budget

69

AC

EVCPI

ACEVCV

PV

EVSPI

PVEVSV

=

−=

=

−=

(CPI)Index rmanceCost Perfo

(CV) VarianceCost

(SPI)Index ce PerformanSchedule

(SV) Variance Schedule


Sch

ed

ule

Pe

rfo

rma

nce

In

dic

ato

r

0.25 1.50.75 1.00.5 1.25 1.75

0.25

0.75

0.5

1.25

1.75

0

0

2.0

2.0

Ahead-of-ScheduleAhead-of-Schedule

Behind-ScheduleBehind-Schedule

Under-BudgetUnder-Budget

Over-budgetOver-budget Over-budgetOver-budget

Ahead-of-ScheduleAhead-of-Schedule

Behind-ScheduleBehind-Schedule

Under-BudgetUnder-Budget

1.5

Cost Performance Indicator

70


Approved

Monthly

CostsApproved

Project

Costs

Actual

Monthly

CostsActual

Project

Costs

71

S Curve Analysis

71


� Cost forecasts are conducted as part of progress and status

reporting to ensure expected future costs align will project

funding.

� Forecasting includes:

• Future known payments.

• Future commitments.

• Project funding reserves.

� Enables the Project Manager to ensure any shortfall can be

identified and reported early.

Forecasting

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� Taking control action is done in order to address any non-

conformance that has been identified as part of the monitoring

process.

� Non-conformance is recognised as any variance of the budget that is

outside of agreed tolerance levels.

� Control actions are those actions planned, approved if necessary, and

implemented to bring the project and/ or project product back on

track as outline within the cost management plan, and any approved

amendments.

� Control actions that require an amendment of the cost management

plan must be requested via the integrated change control process.

Controlling

73


Instigation of Control

74

Establish

baseline

Measure

performance

Compare actual against baseline

Variation = Actual - Planned

Take ‘Corrective Action’

Either Realign performance to baseline

Or

Formally modify baseline using

change management system


Finalisation Phase Cost Processes

75








Planning

Initiation

Execution






Not Approved

Approved

Project Close

(Start)

Client Acceptance Agreement

Post Project Report



Individual Product Delivery

Resource

Project Manager Finalise Budget


Resource(s)

Decision Gate

Not Approved

Approved

Post Project Assurance

Report

Project Budget

Product Development Documents

Post Project Cost Functional

Review

Project Manager Conducts Post Project Review

Decision Gate

Archive Project Documents

Project Management Documents


Assurance)

Cost Finalisation Actions

76

(Start)

Client Acceptance Agreement

Post Project Report

Post Project Cost

Functional Review

Product Development

Documents

Decision Gate

Project Close


� As part of finalising the budget it is essential to check and

confirm:

• All work has been finalised in full.

• No additional expenditure is expected.

• No warranty claim and refunds are still outstanding.

• That all final invoices have been received, paid and receipted.

� Once the budget has been finalised the Project Manager can

determine:

• The profit margin of the project (if relevant).

• The project’s financial performance.


77


� Reviewing the processes involved in cost management must, as a

minimum, investigate the following:

• Was the budget sufficient to deliver the project product within the Client

Organisation’s cost limitations?

• Were there movements in the budget due to a variation in the cost of plant,

equipment, materials and/or supplies due to unknown price increases?

• Were there movements in the budget due to a variation caused by the knock-on effect

of contracted resources having their schedule impacted by other contracts?

• Where there movements in the budget due to a variation caused by risks becoming

issues and the management process involved in their resolution?

• Where all variation that created increases in costs that exceeded the original project

budget approved via the integrated change control process?

• Could any of the cost overruns be avoided through better planning of the original

project budget?

Review Cost Functional Processes

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� Defined the term cost management

� Identified different cost estimating techniques.

� Considered the different types of estimating.

� Discussed how these different types of estimating

techniques are used across the project lifecycle.

� Discussed the requirements of cost management

strategies and there use across the project lifecycle.

� Defined the difference between contingency funding

and a financial management reserve.

In Summary

79


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All rights reserved:Should any person, organisation or entity require the written permission to use this

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Copyright

80