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PROJECT COST MANAGEMENT

By Tanveer Ahmed,PMP University Institute Of Management Sciences PMAS, UAAR

Project Cost Management

Project Cost Management includes the processes involved in planning, estimating budgeting estimating, budgeting, and controlling costs so that the project can be p within the approved pp budget. g completed

Project j Cost Management g Processes


Estimate Cost developing an approximation of the costs of the resources needed to complete project activities. Determine Budget aggregating the estimated costs of individual activities or work packages to establish a cost baseline. Control Cost influencing the factors that create cost variances and controlling changes to the project budget budget.

Project Cost Management Overview

1. Estimate Cost
Estimate Costs is the process of developing an approximation of the monetary resources needed to complete project activities. Cost estimates are a prediction that is based on the information known at a g given p point in time. Sources of input information are derived from the outputs of project processes in other Knowledge Areas Areas. Once received received, all of this information will remain available as inputs to all three of the cost management processes. Costs are estimated for all resources that will be charged to the project. This includes, but is not limited to, labor, materials, equipment, services, and facilities, as well as special categories such as an inflation allowance or contingency costs.

Types of Cost

Estimate Cost..

Estimate Cost..

Enterprise Environmental Factors


The Cost Estimating process considers:
Marketplace conditions. What products, services, and results are available in the marketplace, p from whom, and under what terms and conditions. Commercial databases. Resource cost rate information is often available from commercial databases that track skills and human resource costs, and provide standard costs for material and equipment. Published seller price lists are another source.

Estimate Cost..

Organizational Process Assets


Cost estimating policies Cost estimating templates Historical information Project files P j t team Project t knowledge k l d Lessons learned

Cost of Quality

Estimate Cost..

Cost of quality (COQ) refers to the total cost of all efforts related to quality throughout the product life cycle. Project decisions can impact p operational p costs of q quality y as a result of p product returns, , warranty claims, and recall campaigns. Therefore, due to the temporary nature of a project, the sponsoring organization may choose to invest in product quality improvement, especially defect prevention and appraisal, to reduce the external cost of quality.

Basis of Estimates
The amount and type of additional details supporting the cost estimate vary by application area. Regardless of the level of detail, the supporting documentation should provide a clear and complete understanding of how the cost estimate was derived Supporting detail for activity cost estimates may include: derived.
indicate Documentation of the basis of the estimate (i.e., how it was developed), Documentation of all assumptions made, Documentation of any known constraints, I di i of Indication f the h range of f possible ibl estimates i ( (e.g., $10 $10,000 000 (10%) to that the item is expected to cost between a range of values), and - Indication of the confidence level of the final estimate.

2. Determine Budget g

Determine Budget

A budge is a compilation of the individual cost estimates. Control Account : A control account is a management control point where scope, cost, and schedule are integrated and compared to the earned value for performance measurement. Control accounts are placed at selected management points in the WBS. Each control account may include one or more work packages, but each of the work packages must be associated with only one control account.

Determine Budget

Control Account Example


CA #1 WBS Element: OBS Element: El t CAM: Budget: Schedule: 1.1 Frame F Frame Shop Sh Mr. A. B. Smart $ 125 125,000 000 Jan - Jun 10

Determine Budget

Establishing Control Accounts


Control account Level of the WBS at which a budget is assigned g and a control account manager g ( (CAM) ) is given responsibility for delivering the item Create control accounts at the level that senior management wants to track cost and schedule Use the responsibility assignment matrix (RAM) as a t l tool

Determine Budget

Control Account Managers


Receive R i work k authorization th i ti Develop work and planning packages Assign a budget and schedule for each work and planning package Build a baseline by summing the Planned Value (PV) for each reporting period

How to Determine Budget


1. 2 2. 3. Activity costs are rolled up to Work Package Level. Work Packages are rolled up to control Accounts costs. costs Reserve Analysis: Contingency Reserves Risk remaining after risk response planning. Management Reserves Any extra amount of funds to be set aside to cover unforeseen risks or changes to project. project ________________________________________________________ g y Reserve. Cost Baseline includes Contingency Cost Budget includes Management Reserve.

How to Determine Budget

4.

5.

How to Determine Budget

How to Determine Budget

Historical Relations
Any historical relationships that result in parametric estimates or analogous estimates involve the use of project characteristics (parameters) to develop mathematical models to predict total project costs. costs Such models can be simple : e.g., e g residential home construction is based on a certain cost per square foot of space) complex l : e.g., one model d l of f software ft development d l t costing uses multiple separate adjustment factors, each of which has numerous points within it). it)

3. Control Cost
Control Costs is the p process of monitoring g the status of the p project j to update the project budget and managing changes to the cost baseline. The key to effective cost control is the management of the approved cost performance f baseline b li and d th the changes h t to th that tb baseline. li Project cost control includes: Influencing the factors that create changes to the authorized cost baseline baseline,
Ensuring that all change requests are acted on in a timely manner, Managing the actual changes when and as they occur, g that cost expenditures p do not exceed the authorized funding, g, by yp period Ensuring and in total for the project, Monitoring cost performance to isolate and understand variances from the approved cost baseline, Monitoring work performance against funds expended expended, Preventing unapproved changes from being included in the reported cost or resource usage, Informing appropriate stakeholders of all approved changes and associated cost, and Acting to bring expected cost overruns within acceptable limits.

Control Cost

Control Cost

Earned Value Management


A method of measuring project performance by comparing the amount of work p planned with that actually y accomplished, p in order to determine if cost and schedule performance are as planned Earned value management (EVM) in its various forms is a commonly used method of performance measurement against the project baseline. baseline Compare Planned to Actual results. Integrate Cost, Time and Work done (Scope) Used to compare and forecast the future performance and project completion time frames and costs. The principles of EVM can be applied to all projects, in any industry.

Control Cost

Terms to Know

Formulas and Interpretations

Control Cost

Control Cost

Planned Value (PV)


Work schedule to be accomplished
Performance Measurement Baseline 80000 70000 CURRE ENT 60000 50000 40000 30000 20000 10000 0
JANUARY FEBRUARY MARCH APRIL MAY JUNE JULY

BAC

PV JANUARY FEBRUARY MARCH APRIL MAY JUNE JULY 0 2500 8000 13000 42000 62000 70700

PV

Control Cost

Earned E d Value V l (EV)


Budgeted value of completed or in-process in process work
Performance Measurement Baseline 80000

70000

60000

PV
PV

EV 0 2500 8000 13000 42000 62000 70700 0 3600 8000 10000 38000

50000

40000

EV

30000

20000

JANUARY FEBRUARY MARCH APRIL MAY JUNE JULY

10000

0 JANUARY

FEBRUARY

MARCH

APRIL

MAY

JUNE

JULY

Control Cost

Actual Cost (AC)


Actual value of completed or in-process work
Performance Measurement Baseline 80000

70000

60000

50000

AC
PV

PV JANUARY FEBRUARY MARCH APRIL MAY JUNE JULY 0 2500 8000 13000 42000 62000 70700

EV 0 3600 8000 10000 38000

AC 0 6000 8000 8000 48000

40000

30000

20000

10000

0 JANUARY

FEBRUARY

MARCH

APRIL

MAY

JUNE

JULY

Control Cost

To-Complete To Complete Performance Index (TCPI)


Indicator of Future Cost Performance Calculated projection of cost performance that must be achieved on the remaining work k to t meet t a specified ifi d management t goal l (BAC or EAC) Projection of anticipated Cost performance required to achieve either BAC or EAC.

Control Cost

Two TCPI Formulas


To calculate the future cost performance index required to meet the budget, g if BAC is viable planned To calculate the future cost performance index required to meet the estimated out turn costs, if BAC is not viable

>1 = Good Projected Performance <1 = Poor P Projected P j t d Performance