ITPM

ASSIGNMENT

ON

COST MANAGEMENT

Submitted To-
Dr. Teena Bagga
Submitted By-

Swati Singh (E-09)

Mohit Sachdev(E-64)
Dharna Bhat(E-12)
 COST MANAGEMENT

Cost Management includes processes required to complete the project within the approved
budget. With its processes, this knowledge area aims to determine the required budget to
complete the project and then aims to monitor and control the project costs to meet the
determined budget.
The major output of this knowledge area is Project Budget. After the project scope is clear and
project activities are determined, each project deliverable and each project activity will have
an associated cost. Because, project resources will perform activities, and they have some costs
to projects such as expenses, salary etc. And there will be tools, materials or equipment that
need to be used during the project as well. These will require a budget as well.
Cost management knowledge area primarily concerns with the cost of resources needed to
complete the project activities. After the budget is determined, cost management will keep on
measuring and monitoring the cost performance of the project to meet the agreed budget.
Cost Management has 4 processes, three of these processes belong to planning process group,
and on of them belongs to monitoring and controlling process group. These processes are:

1. Plan cost management

2. Estimate costs
3. Determine budget
4. Control costs.

The Importance of Cost Management

Cost management knowledge area plans how to manage expenses and budget of a project,
monitor and control the status of the project and measures budget performance.

Cost Management in Project Management: 4 Main Processes

A) Plan Cost Management Process

The first process of this knowledge area is plan cost management process. In this process, how
to determine budget, estimate costs and manage the expenses throughout the project are
planned. Cost Management plan is the primary output of the plan cost management process. It
describes how to manage the project costs and budget.
Two Important Terms in Plan Cost Management Process

1. Life cycle costing is an important term in project management. Everything that is

produced has a lifetime. Do you still use your first cell phone? Most probably no.
Because in today’s world, most of the technological products have at most 2 years of a
life cycle.
2. Value engineering is performing same work with a less costly way. For instance, if
you need a bulldozer for your construction project only for 2 months, most probably,
leasing the bulldozer will be less costly than buying a bulldozer if you won’t use it in
your future project works.
 B) Estimate costs process
Estimate costs process is the second process of cost management knowledge area. Cost
estimation for each project activity and tools, materials, equipment are done in this process.
Then, based on these estimations, overall project budget is estimated.
Different types of costs in the project:

 For instance, office rent for a project is a fixed cost. Regardless of how many project
resources will work, you need an office, and this cost will be in your project budget.
 On the other hand, material costs, expenses for project personnel etc. will be variable
depending on the number of people or materials.

Inputs for Estimating Costs & The Accuracy of Estimates:

Inputs for estimating costs are important. Because all cost estimation is based on the inputs.
The Accuracy of Estimates is another important concept. If you need a crispy clear estimation,
you will need to work more on planning to reach a more accurate estimation. Depending on
the accuracy necessity, estimation is must be planned accordingly.

C) Determine Budget Process

Determine Budget Process is the third process of cost management knowledge area. After
estimations are done, all cost estimations are combined during this process and overall
project budget is determined.
Project Budget will have components. After activity cost estimates are complete, there will be
contingency reserves on top of these estimates such as activity contingency, management
reserve etc. to accommodate any risks if they occur during the project.

D) Control costs process

Control costs is the fourth and last process of the cost management knowledge area. This
process mainly aims to control the project expenses and complete the project on determined
budget.

What is Progress Reporting?

Progress reporting for cost management is crucial as well. Because, based on the previous
expenses and track, whether the remaining activities will be completed with the remaining
budget must be assessed frequently. And these must be reported to relevant stakeholders.

What is Earned Value Management?

Earned Value Management is a critical part of cost management knowledge area. Earned Value
calculations show whether you are ahead of budget or under budget. These calculations are
critical for evaluating whether the project will meet the schedule and cost targets.

Earned Value Analysis (EVA) is one of the key tools and techniques used in Project
management , to have an understanding of how the project is progressing. EVA implies
gauging the progress based on earnings or money. Both, schedule and cost are calculated on
the basis of EVA.
Features of EVA

• Earned Value Analysis is an objective method to measure project performance in

terms of scope, time and cost.
• EVA metrics are used to measure project health and project performance.
• Earned Value Analysis is a quantitative technique for assessing progress as the
software project team moves through the work tasks, allocated to the Project
Schedule.
• Total hours to complete the project are estimated and every task is given an Earned
Value, based on its estimated (%) of the total.
• Earned Value is a measure of ‘Progress’ to assess ‘Percentage of Completeness’

Key Elements of EVA

• Planned Value (PV) – The approved cost baseline for the work package. It was earlier
known as Budgeted Cost of Work Scheduled (BCWS).

Planned Value = (Planned % Complete) X (BAC)

• Earned Value (EV) – The budgeted value of the completed work packages. It used
to be known as Budgeted Cost of Work Performance at a specified point (BCWP).

Earned Value = % of completed work X BAC (Budget at Completion).

• Actual Cost (AC) – The actual cost incurred during the execution of work packages
up to a specified point in time. It was previously called Actual Cost of Work Performed
(ACWP).
• Cost Performance Index (CPI) = EV / AC
• Schedule Performance Index (SPI) = EV / PV

EXAMPLE

Suppose you are managing a software development project. The project is expected to be
completed in 8 months at a cost of Rs 10,000 per month. After 2 months, you realize that the
project is 30 percent completed at a cost of Rs40,000. You need to determine whether the
project is on-time and on-budget after 2 months.

• Step 1: Calculate the Planned Value (PV) and Earned Value (EV)

From the scenario,

• Budget at Completion (BAC) = Rs10,000 * 8 = Rs 80,000

• Actual Cost (AC) = Rs 40,000
• Planned Completion = 2/8 = 25%
• Actual Completion = 30%

Therefore,

• Planned Value = Planned Completion (%) * BAC = 25% * Rs 80,000 = Rs 20,000

• Earned Value = Actual Completion (%) * BAC = 30% * Rs 80,000 = Rs 24,000
Step 2: Compute the Cost Performance Index (CPI) and Schedule Performance Index (SPI)

• Cost Performance Index (CPI) = EV / AC = Rs24,000 / Rs40,000 = 0.6

• Schedule Performance Index (SPI) = EV / PV = Rs24,000 / Rs20,000 = 1.2

Interpretation: Since Cost Performance Index (CPI) is less than one, this means the project is
over budget. For every Rupee spent we are getting 60 paisa worth of performance. Since
Schedule Performance Index (SPI) is more than one, the project is ahead of schedule. However,
this has come at a cost of going over budget. If work is continued at this rate, the project will
be delivered ahead of schedule and over budget. Therefore, corrective action should be taken.

Need for EVA

EVA provides different measures of progress for different types of tasks. It is the single way
for measuring everything in a project.

Provides an ‘Early Warning’ signal for prompt corrective action. The types of signals can be
the following:

a) Bad news does not age well – Holding on to the bad news does not help. The project
manager needs to take an immediate action.

b) Still time to recover – In case, the project is not going as per schedule and may get
delayed, the situation is needed to be taken care of by finding out the reasons that are causing
delay and taking the required corrective action.

c)Timely request for additional funds – While there is time to recover, the need for
additional resources or funds can be escalated with an early warning.