Project Cost Management

Project Cost Management
2012 Project Management Institute. All Rights Reserved.
Learning Objectives
In this session, you will learn how to
Estimate costs
Determine budget
Control costs
Project Cost Management

Includes processes involved in estimating, budgeting, and
controlling costs so that the project can be completed
within the approved budget.
Processes of Cost Management:
Estimate Costs
Determine Budget
Control Costs
Estimate Costs
Process of developing an approximation of the costs of the
resources needed to complete project activities
Includes
identification
and
consideration
of
costing
alternatives
Cost tradeoffs and risks are considered as well
Generally expressed in units of some currency, can be
expressed in other units of measure such as staff hours or
staff days
Scope baseline
Project schedule
Human resource plan
Risk register
Enterprise environmental factors
Organizational process assets
Outputs
Outputs
Inputs
Inputs
Estimate Costs
Activity cost estimates

Basis of estimates
Project document updates
Expert judgment
Analogous estimating
Parametric estimating
Bottom-up estimating
Three-point estimates
Reserve analysis
Cost of quality
Project management estimating software
Vendor bid analysis
Tools
Tools&&Techniques
Techniques
Estimate Costs - Inputs

Scope Baseline
The Scope Statement provides the product description,
acceptance criteria, key deliverables, project boundaries,
assumptions, and constraints about the project.
One of the most common constraints is a limited project
budget.
The project WBS and WBS dictionary also provide details
used to estimate project costs.
Project Schedule
The type and quantity of resources and the amount of time
which those resources are applied to complete the work of
the project are major factors in determining the project cost.
Estimate Costs - Tools and Techniques

Analogous Estimating
Uses the values of parameters, such as scope, cost, budget,
and duration or measures of scale such as size, weight, and
complexity, from previous, similar project as the basis for
estimating the same parameter or measure for a current
project
Is generally used to estimate a parameter when there is
limited amount of detailed information about the project
Parametric Estimating
Uses a statistical relationship between historical data and
other variables (square footage in construction) to calculate
an estimate activity parameters, such as cost, budget, and
duration
2012

Bottom-up Estimating
Involves estimating the cost of individual work packages or
individual schedule activities with the greatest level of
specified detail
Three-Point Estimates
PERT uses three estimates to determine an approximate
range for an activitys cost:
Cm- Most likely
Co - Optimistic
Cp Pessimistic
Expected activity cost: Ce = Co + 4Cm + Cp
8 Project Management Institute.6 All Rights Reserved.
2012

Reserve Analysis
Contingency reserves are cost estimates to account for cost
uncertainty
Project Management Estimating Software

Cost
estimating
software
applications,
computerized
spreadsheets, simulation and statistical tools, are widely used

to assist cost estimating

2012
Estimate Costs - Outputs

Activity Cost Estimates
A quantitative assessment of the likely costs of the resources
required to complete the scheduled activities
Basis of Estimates
Supporting detail for activity cost estimates may include:
Documentation of the basis of the estimate (i.e. how it was
developed)
Documentation of all assumptions made and any known
constraints
Indication of the range of possible estimates (e.g. INR 1,00,000
(10%) to indicate that the item is expected to cost between a
range of values), and
Indication of the confidence level of the final estimate.

2012
Determine Budget
The process of aggregating the estimated costs to individual
work packages to establish cost base line
The baseline includes all authorized budgets, excluding
reserve budgets
Project budgets constitute funds authorized to execute the
project
Project cost performance is measured against authorized
budget
11
Activity cost estimates

Basis of estimates
Scope baseline
Project schedule
Resource calendars
Contracts
Outputs
Outputs
Inputs
Inputs
Determine Budget
Cost performance baseline

Project funding requirements
Cost aggregation
Reserve analysis
Expert Judgment
Historical relationships
Funding limit reconciliation
Tools
Tools&&Techniques
Techniques
12
Determine Budget - Inputs

Activity Cost Estimates
Cost estimates for each activity within a work package are
aggregated to a cost estimate for each work package.
Organizational Process Assets

Organizational process assets that influence the Determine
Budget process include, but are not limited to:
Existing formal and informal cost budgeting-related policies,
procedures, and guidelines,
Cost budgeting tools, and
Reporting methods.
13
Determine Budget Tools and Techniques

Cost Aggregation
Cost estimates are aggregated by work packages in accordance
with the WBS.
The work package cost estimates are then aggregated for the
higher component levels of the WBS (such as control accounts)
and ultimately for the entire project.
Reserve Analysis
Budget reserve analysis can establish both the contingency
reserves and the management reserves for the project.
14
Example of Cost Aggregation

8. Cost budget
137000
7. Management
reserve
7000
6. Cost baseline
130000
5. Contingency
reserve
10000
4. Project
120000
3. Control account
50000
* Cost in INR
2. Work package
30000
70000
20000

1. Activities
15
Determine Budget - Outputs

Cost Performance Baseline
Is an authorized time-phased budget at completion (BAC) used
to measure, monitor, and control overall cost performance on
the project.
Is developed as a summation of the approved budgets by time
period and is typically displayed in the form of an S-curve.
Project Funding Requirements

Total funding requirements and periodic funding requirements
(e.g., quarterly, annually) are derived from the cost baseline.
The cost baseline will include projected expenditures plus
anticipated liabilities.
16
Control Costs
Project management plan

Project funding requirements
Work performance information
Outputs
Outputs
Inputs
Inputs
The process of monitoring the status of the project to update the

project budget and managing changes to the cost baseline
Work performance measurements

Budget forecasts
Organizational process assets updates
Change requests
Project management plan updates
Earned value management

Forecasting
To-complete performance index
(TCPI)
Performance reviews
Variance analysis
Project management software
Tools
Tools&&Techniques
Techniques
17
Control Costs Inputs

Project Management Plan
The Project Management Plan contains the following

information that is used to control cost:
Cost Performance Baseline.
Cost Management Plan.
Work Performance Information
Work Performance Information includes costs that have

been
authorized
and
incurred,
and
estimates
completing project work.

18
for
Control Costs Tools and Techniques

Earned Value Management
Earned Value Management is used to measure the project

performance against the project baseline.
It integrates project scope, cost and schedule measures to

help project management team assess and measure
project performance and progress.
It compares the cumulative earned value at the original

allocated budget amount to both the planned value and to
the actual cost of work performed.
19
Cumulative Values
Terms involved:
1. Planned Value (PV): Estimated
value of the work planned to be
PV
done
2. Earned Value (EV): Estimated
value of the work actually
accomplished
3. Actual Cost (AC): Actual money
AC
CV
spent for the work

accomplished.
SV
4. Budget at Completion (BAC):
Progress Review
Budget for the total project work
EV
Time
20

Cost Variance (CV)
Formula: CV= EV AC
CV
-ve indicates over-budget

+ve indicates under-budget
Schedule Variance (SV)

Formula: SV = EV PV
SV
-ve indicates behind schedule

+ve indicates ahead of
schedule
Cost Performance Index (CPI)

Formula: CPI = EV/AC
CPI
Schedule Performance Index (SPI)

Formula: SPI = EV/PV
Indicates INR_ worth of work

has been done for each
Rupee spent.
SPI
Indicates that the project is

progressing at _% of the rate
originally planned.

2012
Control Costs Tools and Techniques

Forecasting
Includes making estimates or predictions of conditions in the projects
future based on information and knowledge available at the time of the
forecast
Are generated, updated, and reissued based on the work performance
information as the project is executed and progressed
Estimate at Completion (EAC): How much at present we expect total
project to cost.
Estimate to Complete (ETC): How much more, at present, we expect
it to cost to finish the project.
Variance at Completion (VAC): How much over or under budget, do
we expect to be at the end of project.
Budget at Completion (BAC): The total budget for the project.
22
Control Costs Outputs

Work Performance Measurements
The calculated CV, SV, CPI and SPI values for WBS
components, in particular the work packages and control
accounts,
are
documented
and
communicated
to
stakeholders.
Change Requests
Analysis of project performance can result in a change

request to the cost performance baseline or other
components of the project management plan.
23
Cost Management Formulae

Item
Formula
Remark
Cost Variance (CV)
EV AC
Negative value indicates over budget and positive value

indicates under budget
Schedule Variance (SV)
EV PV
Negative value indicates behind schedule and positive

value indicates ahead of schedule
Cost Performance Index (CPI)
EV / AC
Lesser than one indicates over budget and greater than

one indicates under budget
Schedule Performance Index (SPI)
EV / PV
Lesser than one indicates behind schedule and greater

than one indicates ahead of schedule
BAC / CPI
Considering that the rate of spending remains the same
AC + ETC
Considering that the current estimate is fundamentally

flawed
Estimate at Completion (EAC)
Estimate to Complete (ETC)
Variance at Completion (VAC)
AC + (BAC EV)
Considering atypical variances
AC + [(BAC EV) /
CPI]
Considering typical variances
EAC AC
Considering that the current estimate is fundamentally

flawed
BAC EV
Considering atypical variances
(BAC EV) / CPI
Considering typical variances
BAC EAC
Considering the status of the budget expected at the end

of the project

2012
Important Terms
Financial Term
Definition
Benefit Cost Ratio

(BCR)
Compares the benefits (revenues) to the costs of different options
Chart of Accounts
Any numbering system used to monitor project costs by category (for example, labor, supplies,
and materials)
Depreciation
Reduced price of an asset over time attributable to deterioration, obsolescence, and impending
retirement
Applies particularly to physical assets such as equipment and structures
Straight Line depreciation: Standard amount depreciating every year
Accelerated depreciation: Value depreciating at a faster rate, for example, Double Declining
method and Sum of the Years Digits
Internal Rate of Return

(IRR)
Rate at which the project inflows and project outflows are equal
Project with greatest IRR is generally selected
Net Present Value (NPV)
Present value of the total benefits minus costs over many time periods
Investment is profitable for positive NPV
Project with greatest NPV is selected
Opportunity Cost
Opportunity given up by selecting one project over another
Payback Period
Time period it takes to recover the investment made in the project before the profits start
accumulating
Present Value
The current value of future cash flows.
Sunk Cost
Expended costs, to be avoided when deciding whether to continue with a troubled project

2012
Exercise
Problem 48, Page 179 of Project Management Core

Textbook by Samuel J. Mantel, Jr; Margaret M. Sutton; with
M.R. Gopalan
26
Exercise
A project manager is using the earned value reporting method to manage his
project. The following table shows the data collected till date. The estimated
time for the project to be completed is around eight months. The earned value
report shows data collected for the first four months of the project. The figures
shown in the table are cumulative.
Month
1
2
3
4
5
PV(INR)
1,00,000
3,00,000
5,00,000
6,00,000
13,00,000
17,00,000
19,00,000
20,00,000
AC (INR)
1,00,000
3,00,000
6,00,000
10,00,000
EV (INR)
1,00,000
2,50,000
6,00,000
7,00,000
a. What is the cost performance index for the second month?

b. What is the schedule performance index for the fourth month?
c. What is the BAC for the project during the fourth month?
2012
Exercise
You are working on a construction project. The Project will have four buildings.
Each building takes one quarter to complete and is budgeted for INR 20,00,000
per building. At the end of the third quarter, the status is as follows:
Building 1 is complete and the amount spent is INR 20,00,000.

Building 2 is complete and the amount spent is INR 22,00,000.
Building 3 is 60% complete and the amount spent is INR 18,00,000.
Building 4 is not yet started.
Calculate the following: PV, EV, AC, BAC, CV, CPI, SV, SPI, EAC, ETC, VAC

2012
Quiz

2012
Quiz
Estimate at completion (EAC) is a periodic evaluation of:
A.
B.
C.
D.
Cost of work completed

Value of work performed
Anticipated total cost at project completion
What it will cost to finish the job

2012
Quiz
An activity cost estimate includes all of the following resource
categories, except:
A. Labor
B. Materials
C. Equipment
D. Time shortages

2012
Quiz
Which of the following represents processes concerned with
establishing and controlling the cost baseline?
A. Plan resources and Control costs

B. Estimate Costs, Develop Budget, and Adhere to Baseline
C. Determine Budget and Control Costs
D. Resource Planning, Cost Estimating, and Cost Control

2012
Quiz
Earned value (EV) involves all of the following, except:
A. Value of work performed expressed in terms of the

approved budget assigned to that work for an activity
or work breakdown structure component
B. Actual cost for an activity or work breakdown
structure component
C. Budgeted cost of work performed
D. Budgeted amount for the work actually completed

2012
Questions?
34

Project Cost Management

Загружено:

Сведения о документе

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

Project Cost Management

Загружено:

Авторское право:

Доступные форматы

Project Cost Management

2012 Project Management Institute. All Rights Reserved.

2012 Project Management Institute. All Rights Reserved.