PMP Chapter 7 2004

5/2/2006
PMP
Preparation Training
Your key in Successful Project Management
Akram Al-Najjar, PMP Project Management Consultant
Chapter 7
Project Cost Management
Akram Al-Najjar, PMP.

Source: pmbok guide 2004 Slide 2 Project Management Consultant Akram_alnajjar@hotmail.com +20105394312
5/2/2006
AGENDA
What is Cost Management? Cost Management Processes
Some terms to be familiar with!

How does the PMBoK Guide describe Cost Management?
Discussion
Project Cost Management Processes involved in planning, estimating, budgeting, and controlling costs so that the project can be completed within the approved budget. Cost Estimating Cost Budgeting Cost Control
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Gantt Chart

Planned Value (PV)

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Planned Value (PV)

Previously (and still in many places) called Budgeted Costs for Work Scheduled (BCWS). A monetary representation of how much work was scheduled to be done at a point in time. Example: After 4 months, we are scheduled to complete Activity 1 and 75% of Activity 2 which are budgeted for a total of $32,000. The total project budget is $100,000. The Planned Value at 4 months is $32,000.
Work Plan Status

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PV and EV

Earned Value (EV)

Previously (and still in many places) called Budgeted Costs for Work Performed (BCWP). A monetary representation of how much work has been completed, using the baseline cost for that work, at a point in time. Example: After 4 months, we have completed Activity 1 and 50% of activity 2 . The budgeted cost for this work completed was $24,000. The total project budget is $100,000. The Earned Value at 4 months is $24,000.
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PV , EV and AC

PV , EV and AC

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Actual Costs (AC)

Previously (and still in many places) called Actual Costs for Work Performed (ACWP). The monetary representation of the costs incurred at a point in time, regardless of how much work has been done. Example: After 4 months, we have completed Activity 1 and 50% of activity 2. The project costs at this point in time are $29,000. The total project budget is $100,000. The Actual Cost at 4 months is $29,000.
Schedule Variance (SV)
New: SV = EV PV
= $24,000 - $32,000 = ($8,000)
Old: SV = BCWP - BCWS

Source: pmbok guide 2004 Slide 14
The project has delivered $8,000 less work at this point in time than was planned. This project is behind schedule. This is a great way to depict ahead or behind on schedule, even though it is in monetary terms!!!
Project Management Consultant Akram_alnajjar@hotmail.com +20105394312
5/2/2006
Cost Variance (CV)
New: CV = EV AC
= $24,000 - $29,000 = ($5,000)
The project has cost $5,000 more to deliver the work done so far than was planned. This project is over budget.
Old: CV = BCWP - ACWP

Schedule Performance Index (SPI)
New: SPI = EV / PV
= $24,000 / $32,000 = 0.75
The project is delivering work slower than planned. The work is being done at 75% of the expected rate.
Old: SPI = BCWP / BCWS

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Cost Performance Index (CPI)
New: CPI = EV / AC
= $24,000 / $29,000 = 0.83
The project is spending money faster than planned. Only 83% of work is being delivered for the amount of money being spent.
Old: CPI = BCWP / ACWP

Case 1
PV = $ 1,860 EV = $ 1,860 AC = $ 1,860
This is the ideal situation, where everything goes according to plan.

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Case 2
PV = $ 1,900 AC = $ 1,700
In this Case, without Earned Value measurements, it appears were in good shape. Expenditures are less than planned.
Spending Variance =- $ 200

Case 2
PV = $ 1,900 EV = $ 1,500 AC = $ 1,700
But with EV measurements, we see...$400 worth of work is behind schedule in being completed; i.e., we are 21 percent behind where we planned to be.
SV = EV PV =- $ 400 SV % = SV / PV x 100 =- 21 %
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Case 2
PV = $ 1,900 EV = $ 1,500 AC = $ 1,700
In addition, we can see... Actuals exceed Value Earned (EV), i.e., $1,500 worth of work was accomplished but it cost $1,700 to do so. We have a $200 cost overrun (i.e., 13% over budget) .
CV = EV AC =- $ 200 CV % = CV / EV x 100 =- 13 %

Case 2
PV = $ 1,900 EV = $ 1,500 AC = $ 1,700
This means only 79 cents worth of work was done for each $1.00 worth of work planned to be done. And, only 88 cents worth of work was actually done for each $1.00 spent
SPI = EV / PV = $ 0.79 CPI = EV / AC = $ 0.88

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Case 2
PV = $ 1,900 EV = $ 1,500 AC = $ 1,700
This is the worst kind of scenario, where all performance indicators are negative.
SV =- $ 400; SPI = 0.79 CV =- $ 200; CPI = 0.88

Case 3
PV = $ 2,600 EV = $ 2,400 AC = $ 2,200
In this case there is bad news and good news.

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Case 3
PV = $ 2,600 EV = $ 2,400 AC = $ 2,200
The bad news is that our work efficiency is a bit low; were getting only 92 cents of work done on the dollar. As a result, we are behind schedule.
SPI = 0.92 SV =- $ 200; SV % =- 8 %

Case 3
PV = $ 2,600 EV = $ 2,400 AC = $ 2,200
The good news is that were under-running our budget. Were getting $1.09 worth of work done for each $1.00 were spending.
CV = + $ 200; CV % = + 8 % CPI = 1.09

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Budget At Completion (BAC)

This is the baseline cost of the total project. How much we planned to spend by the time we finished. Example: After 4 months, we have completed Activity 1 and 50% of Activity 2 The project costs at this point in time are $29,000. The total project budget is $100,000. The Budget At Completion is $100,000.
Estimate At Completion (EAC)

Based on where we are now, how much will it cost when the project is done? The answer depends on whether your past performance is a good indicator of expected future performance more

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(1st of 3 methods)
If we know that we can finish the rest of the work as it was originally planned Use actual to-date plus budgeted amount for the rest of the work EAC = AC + BAC EV = $29,000 + $100,000 - $24,000 = $105,000

(2nd of 3 methods)
If the original estimates were flawed, we should build new estimates for all the remaining work Assume this ETC is the Estimate to Complete the was the total ETC remaining work. from a completely EAC = AC + ETC rebuilt = $29,000 + $120,000 estimate = $1,49,000
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(3rd of 3 methods)
If we assume that past performance is a good indicator of future performance Use actual to-date plus budgeted amount for the rest of the work, modified by a performance factor, such as CPI EAC = BAC/CPI = $100,000/0.83 = $120,481 (rounded off)
EVM Performance Measures

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EVM and Basic PM Questions

Present Value
Budgeting technique that debates the future value of money based on inflation, etc. PV = FV (1 + r)t FV = amount of money t years from now r = interest rate (also called discount rate) t = time period
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Present Value
Year FV PV 0 $50,000 $50,000 1 $35,000 $31,819 2 $15,000 $12,397 Assume a 10% interest (or discount) rate PV (Year 1) = FV / (1 + r)t =$35,000/(1 + 0.1)1 = $31,819
(NPV) Net Present value

This Means the total benefits (income or revenue) less the cost. To calculate NPV you need to calculate the present value of each of the income and revenue figures then add up the present values.
Time Period Income or revenue Present Value at 10% interest rate Costs Present Value at 10% interest rate
0 1 2 3 Total
0 50 100 300
0 45 83 225 353
200 100 0 0
200 91 0 0 291
NPV =353-291=62
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Payback Period
The exact length of time needed to recover an initial investment as calculated from cash inflows.
Month 1 2 3 4 5 6 7 Costs $5000 $5000 $8000 $5000 $2000 $0 $0 Total Cost $5000 $10000 $18000 $23000 $25000 $25000 $25000 Benefits $0 $0 $0 $5000 $10000 $10000 $10000 Total Benefits $0 $0 $0 $5000 $15000 $25000 $35000
PAYBACK PERIOD is 6 MONTHS
Internal Rate Of Return (IRR)

The interest (discount) rate where the present value of the benefits exactly equals the costs. The higher the rate, the better the project. An IRR of .15 means that you expect the project to return an average of 15% on your investment over a given time period (usually a number of years).
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Benefit Cost Ratio (BCR)

Compares the cost to the benefits of different projects. A BCR of > 1 means the benefits are grater than the costs. A BCR of < 1 means the costs are grater than the benefits. A BCR =1 means the costs and benefits are the same. If the BCR of project A is 2.3 and BCR of project B is 1.7 which project would you select? The answer is A. the project with the higher BCR

Exercise Accounting Standards

Project A Net present V IRR Payback Period Benefit Cost Ratio $95.00 13% 16 Month 2.79 Project B Which you Pick? $75.00 A 17% 21 Month 1.3 B A A

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Types Of Costs
Direct Costs- Cost that are directly attributable to the work on project. Examples are team travel, team wages, recognition and cost of material used on the project
Indirect costs Overhead items or costs incurred for the benefit of more than one project. Examples include taxes, fringe benefits, and janitorial services.

DEPRECIATION
STRAIGHT LINE DEPRECIATION : the same amount of depreciation is taken each year, A US $ 1,000 item with a ten year useful life and no salvage value (how much item is worth at the end of its life) would be depreciated at US $100 per year. ACCELERATED DEPRECIATION you only need to know: There are two forms of accelerated depreciation Double Declining Balance and Sum of the Years Digits. They depreciate faster than straight line. You do not have to know what these two forms means or do any calculations.

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LIFE CYCLE COSTING

LIFE CYCLE COSTING : Means that the cost of operation and maintenance phase to be consider and manage with the project cost
PROJECT
OPERATIONS AND MAINTENANCE PHASE
costs
costs
Source: pmbok guide 2004
Slide
43
PMBOK Chapter 7
There are 3 major processes:
1. 2. 3.
Cost Estimating Cost Budgeting Cost Control

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Cost Management
Planning Controlling
7.2 Cost Estimating
7.3 Cost Budgeting
7.4 Cost Control


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Cost Estimating
Process of developing an approximation (or estimate) for the cost of the resources necessary to complete the project activities Difference between cost estimating and pricing:
Cost estimating: Assessing how much it will cost the organization to provide the product or service Pricing: Assessing how much the organization will charge for the product or service
Cost Estimating
Tools & Techniques
Analogous estimating Determine Resource Cost Rates Bottom-up estimating Parametric estimating Project Management Software Vendor Bid Analysis Reserve Analysis Cost of Quality
Inputs
Enterprise Environmental Factors Organizational Process Assets Project Scope Statement Work Breakdown Structure WBS Dictionary Project Management Plan Schedule management plan. Staffing management plan. Risk register.
Outputs
Activity Cost estimates Supporting detail Requested Changes Cost management plan
Slide 48 Project Management Consultant Akram_alnajjar@hotmail.com +20105394312
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Inputs
Enterprise Environmental Factors , considers: Marketplace conditions. Commercial databases. Organizational Process Assets Cost estimating policies. Cost estimating templates. Historical information. Project files. Project team knowledge. Lessons learned.
Inputs (cont.)
Project Scope Statement describes the business need, justification, requirements, and current boundaries for the project. Work Breakdown Structure WBS provides the relationship among all the components of the project and the project deliverables WBS Dictionary provide an identification of the deliverables and a description of the work in each WBS component required to produce each deliverable.
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Inputs (cont.)
Project Management Plan Schedule management plan: The type and quantity of resources and the amount of time those resources are applied to complete the work of the project is a major part of determining the project cost. Staffing management plan. Project staffing attributes and personnel rates (Section 9.1.3.3) are necessary components for developing the schedule cost estimates. Risk register. The cost estimator considers information on risk responses (Section 11.2.3.1) when producing cost estimates.
Tools & Techniques

Analogous estimating (Expert judgment) Used to estimate total project costs if there is a limited amount of detailed information Determine Resource Cost Rates Bottom-up estimating Estimating the cost of individual work items and then rolling up the costs to arrive at a project total Parametric estimating Using project characteristics (or parameters) in a mathematical model to predict costs (e.g., price per square foot) Project Management Software - PM software and spreadsheets
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Tools & Techniques

Vendor Bid Analysis Reserve Analysis : Contingency reserves are estimated costs to be used at the discretion of the project manager to deal with anticipated, but not certain, events. These events are known unknowns and are part of the project scope and cost baselines. Cost of Quality :Cost of quality (Section 8.1.2.4) can also be used to prepare the schedule activity cost estimate.

Outputs
Activity Cost estimates Quantitative assessments of the cost of resources (e.g., units of currency or staff hours) Types of estimates Order of magnitude (-25% / +75%) Budget estimate (-10% / +25%) Definitive estimate (-5% / +10%) Supporting detail
Description of estimated scope of work Documentation of the basis for the estimate Documentation of any assumptions made Range of possible results
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Cost Estimating
Outputs (cont.)
Requested Changes The Cost Estimating process may generate requested changes that may affect the cost management plan, activity resource requirements and other components of the project management plan. Requested changes are processed for review and disposition through the Integrated Change Cost management plan
Describes how cost variances will be managed

Part of the overall project plan
Cost Budgeting
Aggregating the estimated costs of individual activities or work packages to establish a cost baseline.

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Cost Budgeting
Tools & Techniques
Cost Aggregation Reserve Analysis Parametric Estimating Funding Limit Reconciliation
Inputs
Project Scope Statement Work Breakdown Structure WBS Dictionary Cost estimates Supporting Detail Project schedule Resource Calendars Contract Cost management plan
Outputs
Cost baseline Project Funding Requirements Cost Management Plan (Updates) Requested Changes

Inputs
Project Scope Statement : WBS Identifies the project elements to which the costs will be allocated WBS Dictionary Cost Estimates Cost Estimate Supporting Detail Project schedule Used to assign costs to project elements for the time period when costs will be incurred Resource Calendars
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Inputs
Contract (Section 12.4.3.2) information related to what products, services, or results have been purchased and their costs are used in developing the budget. Cost Management Plan The cost management plan component of the project management plan and other subsidiary plans are considered during cost budgeting.

Tools & Techniques

Cost Aggregation Reserve Analysis : Management contingency reserves are budgets reserved for unplanned, but potentially required, changes to project scope and cost. Parametric Estimating Funding Limit Reconciliation

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Outputs
Cost baseline Time phased budget that will be used to measure and monitor the cost performance of the project
140 120 BCWS ($K) 100 80 60 40 20 0 Jan Feb Mar Apr May Jun
Reporting Period

Outputs
Project Funding Requirements Cost Management Plan (Updates) Requested Changes

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Cost Control
Influencing the factors that create changes to the cost baseline to ensure that changes are agreed upon Determining that the cost baseline has changed Managing the actual changes when and as they occur
Includes:
Monitoring cost performance to detect variances from the plan Ensuring that all appropriate changes are recorded Preventing incorrect, inappropriate, or unauthorized changes Informing the appropriate stakeholders of authorized changes Analyzing positive and negative variances and how they affect the other control processes
Cost Control
Tools & Techniques
Cost change control system Performance measurement Analysis Forecasting Project Performance Reviews Project Management Software Variance Management
Outputs

Inputs
Cost baseline Project Funding Requirements Performance reports Work Performance Information Approved change requests Project management plan
Cost Estimates (Update) Cost Baseline (Updates) Performance Measurements Forecasted Completion Requested Changes Recommended Corrective action Organizational Process Assets (Updates) Project ManagementAkram Al-Najjar, PMP. Plan (Updates)
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Cost Control

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Project Cost Management

Akram Al-Najjar, PMP.

Some terms to be familiar with!

Akram Al-Najjar, PMP.

Planned Value (PV)

Akram Al-Najjar, PMP.

Planned Value (PV)

Work Plan Status

Akram Al-Najjar, PMP.

Akram Al-Najjar, PMP.

Earned Value (EV)

Akram Al-Najjar, PMP.

Akram Al-Najjar, PMP.

Actual Costs (AC)

Schedule Variance (SV)

Old: SV = BCWP - BCWS

Cost Variance (CV)

Old: CV = BCWP - ACWP

Schedule Performance Index (SPI)

Old: SPI = BCWP / BCWS

Cost Performance Index (CPI)

Old: CPI = BCWP / ACWP

Akram Al-Najjar, PMP.

Spending Variance =- $ 200

Akram Al-Najjar, PMP.

Akram Al-Najjar, PMP.

SPI = EV / PV = $ 0.79 CPI = EV / AC = $ 0.88

Akram Al-Najjar, PMP.

SV =- $ 400; SPI = 0.79 CV =- $ 200; CPI = 0.88

Akram Al-Najjar, PMP.

Akram Al-Najjar, PMP.

SPI = 0.92 SV =- $ 200; SV % =- 8 %

CV = + $ 200; CV % = + 8 % CPI = 1.09

Akram Al-Najjar, PMP.

Budget At Completion (BAC)

Estimate At Completion (EAC)

Akram Al-Najjar, PMP.

Estimate At Completion (EAC)

Estimate At Completion (EAC)

Estimate At Completion (EAC)

EVM Performance Measures

Akram Al-Najjar, PMP.

EVM and Basic PM Questions

Akram Al-Najjar, PMP.

(NPV) Net Present value

Project Management Consultant Akram_alnajjar@hotmail.com +20105394312

PAYBACK PERIOD is 6 MONTHS

Internal Rate Of Return (IRR)

Benefit Cost Ratio (BCR)

Akram Al-Najjar, PMP.

Exercise Accounting Standards

Akram Al-Najjar, PMP.

Akram Al-Najjar, PMP.

Akram Al-Najjar, PMP.

LIFE CYCLE COSTING

OPERATIONS AND MAINTENANCE PHASE

Source: pmbok guide 2004

Project Management Consultant Akram_alnajjar@hotmail.com +20105394312

Cost Estimating Cost Budgeting Cost Control

Akram Al-Najjar, PMP.

7.2 Cost Estimating