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Lecture 10:

Project Cost Management

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The Importance of Project Cost Management

Construction projects have a poor track record for meeting cost goals;

Average cost overrun is over of 100% of the original estimates (based on a study conducted in late 1990s);

The main objective by a contractor in a construction projects is to make profit;

Cost is the most sensitive project performance parameter.

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Cost is a resource sacrificed or fore-gone to achieve a specific objective or something given up in exchange

Costs are usually measured in monetary units like Tshs, dollars, Euro, etc.

Project cost management includes the processes required to ensure that the project is completed within an approved budget

What is Cost and Project Cost Management?

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Project Cost Management Processes

Resource planning: determining what resources and quantities of them should be used;Cost estimating: developing an estimate of the costs and resources needed to complete a project;

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Cost budgeting: allocating the overall cost estimate to timing of individual work items to establish a baseline for measuring performanceCost control: controlling changes to the project budget

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Resource Planning

The nature of the project and the organization will affect resource planningSome questions to consider:

How difficult will it be to do specific tasks on the project?

Is there anything unique in this projects scope statement that will affect resources?

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What is the organizations history in doing similar tasks?

Does the organization have or can they acquire the human resources, equipment, and materials that are capable and available for performing the work?

At what cost?

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Cost Estimating

An important output of project cost management is a cost estimate.There are several types of cost estimates and tools and techniques to help create them.It is also important to develop a cost management plan that describes how cost variances will be managed on the project.

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Table 10.1 Types of Cost Estimates (for large projects)

Type of Estimate

When Done

Why Done

How Accurate

Rough Order of Magnitude (ROM)

Very early in the project life cycle, often 35 years before project completion

Provides rough figure of cost for selection decisions

25%, +75%

Budgetary

Early, 12 years out

Puts actual figure in the budget plans

10%, +25%

Definitive

Later in the project, < 1 year out

Provides details for tendering, estimate actual costs

5%, +10%

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Cost Estimation Tools and Techniques

Four basic tools and techniques for cost estimates:

analogous or top-down: use the actual cost of a previous, similar project as the basis for the new estimate;

bottom-up: estimate individual work items and sum them to get a total estimate;

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parametric: use project characteristics in a mathematical model to estimate costs; (cost capacity models; cost as function of key parameters; and

computerized tools: use spreadsheets, project management software, or other software to help estimate costs based on designs and resources cost database

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Figure 10.1 Computer Based Cost Estimate Concept

Computerized

design

Cost Estimate

Analysis of

Items & Costs

Cost Data Base

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Typical Challenges with Construction Cost Estimates

Developing an estimate for a large project is a complex task requiring a significant amount of effort. Remember that estimates are done at various stages of the projectMany people doing estimates have little experience doing them. Try to provide training and mentoring

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People have a bias toward underestimation. Review estimates and ask important questions to make sure estimates are not biasedManagement wants a number for a bid, not necessarily a real estimate. Project managers must negotiate with project sponsors to create realistic cost estimates

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Cost Budgeting

Cost budget involves allocating the project cost estimate to individual work items and providing a cost baseline;A project budget provides information on the expected expenditure per project planning period;A typical cumulative cost curve presents the expected cumulative project budget

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Cost Control

Project cost control includesmonitoring cost performanceensuring that only appropriate project changes are included in a revised cost baselineinforming project stakeholders of authorized changes to the project that will affect costsEarned value analysis is an important tool for cost control

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Earned Value Analysis (EVA)

EVA is a project performance measurement technique that integrates scope, time, and cost dataGiven a baseline (original plan plus approved changes), you can determine how well the project is meeting its goalsActual data and information must be entered and analysed periodically to use EVA.

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Earned Value Analysis Terms

Budgeted cost of work scheduled (BCWS), also called the BUDGET, is that portion of the approved total cost estimate planned to be spent on an activity during a given periodActual cost of work performed (ACWP), also called ACTUAL COST, are the total direct and indirect costs incurred in accomplishing work on an activity during a given periodBudgeted cost of work performed (BCWP), also called EARNED VALUE, is the percentage of work actually completed multiplied by the planned cost (or BCWS)

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Table 10-2 Earned Value Calculations for One Activity After Week One

Activity

Week 1

Week 2

Total

% Complete after Week 1

Earned Value after Week 1 (BCWP)

Site Establishment

10,000

0

10,000

75%

7,500

Weekly Plan

10,000

0

10,000

Weekly Actual

15,000

5,000

20,000

Cost Variance

-7,500

Schedule Variance

-2,500

Cost Performance

Index

50%

Schedule Performance Index

75%

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Table 10.3 Earned Value Formulas

To estimate what it will cost to complete a project or how long it will take based on performance to date, divide the budgeted cost or time by the appropriate index.

Term

Formula

Earned Value

Budgeted Cost of Work Performed (BCWP) =

budgeted cost to date X % complete

Cost Variance

CV=BCWP-ACWP (actual cost of work performed)

Schedule Variance

SV=BCWP-BCWS (budgeted cost of work scheduled)

Cost Performance Index

CPI=BCWP/ACWP

Schedule Performance Index

SPI = BCWP/BCWS

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Rules of Thumb for EVA Numbers

Negative numbers for cost and schedule variance indicate problems in those areas. The project is costing more than planned or taking longer than plannedCPI and SPI less than 100% indicate problems

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Figure 10.2 Earned Value Calculations for a One-Year Project After Five Months

Excel file

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Figure 10-3. Earned Value Chart for Project After Five Months

Excel file

EAC

If BCWP line is below others, things could be better!

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Chart1400040004000140001500014000240002600024000340003800034000460005300044000620007200078000860009000095000100000BCWSACWPBCWPBACBCWS or Cumulative PlanACWP or Cumulative ActualBCWP or Cumulative EVMonth$Chart4343888191819322931474141.5635648.645918373.045145206233246254BCWS or Cumulative PlanACWP or Cumulative ActualBCWP or Cumulative EVMonth$Sheet1ActivityJanFebMarAprMayJunJulAugSepOctNovDecPlan% CompleteEVPlan and staff project4,0004,0008,0001008,000Analyze requirements6,0006,00012,00010012,000Develop ERDs4,0004,0008,0001008,000Design database tables6,0004,00010,00010010,000Design forms, reports, and queries8,0004,00012,000506,000Construct working prototype10,00010,000- 0- 0Test/evaluate prototype2,0006,0008,000- 0- 0Incorporate user feedback4,0006,0004,00014,000- 0- 0Test system4,0004,0002,00010,000- 0- 0Document system3,0001,0004,000- 0- 0Train users4,0004,000- 0- 0Monthly Plan4,00010,00010,00010,00012,00016,00010,0006,0008,0004,0005,0005,000100,00044,000BCWS or Cumulative Plan4,00014,00024,00034,00046,00062,00072,00078,00086,00090,00095,000100,000Monthly Actual4,00011,00011,00012,00015,000ACWP or Cumulative Actual4,00015,00026,00038,00053,000Monthly EV4,00010,00010,00010,00010,000BCWP or Cumulative EV4,00014,00024,00034,00044,000Project BCWP as of May 3144,000Project BCWS as of May 3146,000Project ACWP as of May 31$ 53,000CV=BCWP-ACWP$ (9,000)SV=BCWP-BCWS$ (2,000)CPI=BCWP/ACWP83%SVI=BCWP/BCWS96%Estimated cost at completion$ 120,455(original plan of $100,000 divided by CPI of 83%)Estimated time to complete12.55(original plan of 12 months divided by SVI of 96%)Above for Figure 6-2Chart below for Figure 6-3Sheet100000000000000000000000000BCWSACWPBWCPBACBCWS or Cumulative PlanACWP or Cumulative ActualBCWP or Cumulative EVMonth$Sheet2Sheet3

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Using Software to Assist in Cost Management

Spreadsheets are a common tool for resource planning, cost estimating, cost budgeting, and cost controlMany companies use more sophisticated and centralized financial applications software for cost informationProject management software has many cost-related features

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10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

123456789101112

Month

$

BCWS or Cumulative Plan ACWP or Cumulative Actual BCWP or Cumulative EV

BCWS

ACWP

BCWP

BAC