PMI - Project Cost Management: People. Processes. Technology. Results

PMI – Project Cost
Management
Vinay, Yogesh, Manoj, Pradeep

Meena
People. Processes. Technology. Results.
www.perotsystems.com Proprietary and confidential. © 2006 Perot Systems. All rights reserved. All registered trademarks are the property of their respective owners.
Agenda
• Cost Management Knowledge Sharing session
– Introductions and Overview 5 mins

– Project Cost Estimating 10 mins
– Project Cost Budgeting 10 mins
– Project Cost Control 20 mins
– Accounting Standards 10 mins
• Sample Questions 20 mins

• Open Discussions 15 mins
Knowledge Areas and Processes - Recap
What are the Drivers of Cost
Management
• Costing is done on the resources required to accomplish a project
• Identification and planning of resources required for the project costing are:
– People
– Equipments
– Materials needed to complete the work
– Quantity of the needed resources
– Schedule when the resources are needed
• Applying Expert judgment to evaluate and analyze the resources that the project needs
• Value Analysis to find more affordable, less costly methods of accomplishing the same work
• The Cost Management plan can establish
• Precision Level
• Units of Measure
• Organizational Procedures Links
• Control Thresholds
• Earned Value Rules
• Reporting formats
• Process Description
Project Cost Management - Overview
Project Cost Management includes the processes involved in planning,

estimating, budgeting and controlling costs so that the project can be
completed within the approved budget.
o Cost Estimating – Developing an approximation of the costs of the resources

needed to complete project activities
o Cost Budgeting – Aggregating the estimated costs of individual activities or

work packages to establish a cost baseline
o Cost Control – Influencing the Factors that create cost variances and controlling
changes to the project budget
These Processes interact with each other and with the processes of other knowledge
areas like Time Management, Procurement Management, Scope Management ,
Communication Management and Integration Management
Project Cost Management - Interactions
with other Processes
Project Cost Management - Overview
Cost Estimating
Cost Estimating - Objectives
Objectives
• Approximation of costs of the resources needed to complete each scheduled
activity
• Includes identifying and considering various costing alternatives – direct
and indirect (e.g. spending additional time in design would save more effort during coding)
• Identify and implement meaningful UOM (e.g. units of currency is normally used
but at times other UOM like Staff Hours/Days can be used to facilitate appropriate
management control)
• Perform subsequent iterations (of cost estimation) at the end of the phases in
the project life cycle – if required by the project – to provide more accurate
cost estimates (e.g. in project initiation phase the cost estimate may have tolerance of –50
to +100% but later in the project as more information is available, this can narrow down to –10
to +15%)
Cost Estimating – Overview
Cost Estimating – Interaction with other
processes
Cost Estimating - Inputs
• Enterprise Environmental Factors

– Marketplace Conditions (what product, services and results are available in
market; from whom and under what T&C – see Section 4.1.1.3)
– Commercial Database (info. on cost of resources, skills and HR costs, std. Cost
of material/equipment)
• Organizational Process Assets
– Cost Estimating policies
– Cost estimating templates
– Historical Information
– Project files
– Project Team Knowledge
– Lessons Learned
• Project Scope Statement
– Project Requirements
– Constraints
– Assumptions
– Project Deliverables
Cost Estimating - Inputs
• Work Breakdown Structure (WBS)

• WBS Dictionary
• Project Management Plan
– Schedule Management Plan

– Staffing Management Plan
– Risk register
Cost Estimating – Tools and Techniques
• Analogous Estimating
– Refers to actual cost of previous similar projects and uses expert judgment
– Used when limited information is available for the project
– Less costly technique but the accuracy is less.
– Most reliable when previous project is similar (not just appear to be similar) and the estimators have
needed expertise.
• Determine Resource Cost Rates
– For each resource schedule activities, the estimator should have the rates of the following Unit rates
 Staff cost per hour
 Bulk Material cost per cubic yard
– For products, services or results under contract it is required to record the escalation factors along with
the standard rates.
– The rates can be obtained by
 ‘Gathering Quotes” through inquiry
 Commercial database
– If actual rates are not available then estimates the rates
• Bottom-up Estimating
– Estimates Individual work packages or individual schedule activities with the lowest level of details
– Roll-up the detailed cost to the higher levels for reporting and tracking.
– Generally, activities with smaller associated effort increase the the accuracy of the schedule activity
cost estimates.
• Parametric Estimating
– Uses statistical relationship between historical data and other variables (e.g. square footage in
construction, lines of code in s/w dev., required labour hours) to calculate a cost estimates for a
schedule activity resource.
– Can produce higher levels of accuracy depending on the the sophistication as well as underlying
resource quantity and cost data built in to the model
– Example: Estimated Cost = Planned quantity of work * Historical cost per unit
• Project Management Software

– The Project Management Software simplifies the use of some cost estimating techniques
– Examples of such tools are:
 Cost estimating s/w applications
 Spreadsheets
 Simulation
 Statistical tools
• Vendor Bid Analysis

– The candidate vendor submit their bid for cost estimates in order to win a deal.
– Here additional cost estimating work can be required to examine the price of individual deliverables
and derive a cost that supports the final total project cost.
• Reserve Analysis
– Estimated costs to deal with anticipated but not certain events, the “known unknowns”
– Is total at the discretion of the project manager
– Has inherent problem of potentially overstating the cost estimates for the schedule activity. This can
managed by:
 Aggregate each schedule activity’s cost contingency reserve for a group of related activities into a
single contingency reserve and assigned it to a schedule activity.
 This activity may be a zero duration activity that is placed across network path for that group of
schedule activities and is used to hold the contingency reserve
 As the schedule activities progress, the contingency reserve as measured by resource consumption
of the non-zero duration schedule activites can be adjusted.
 Hence the activity cost variance for the related group of schedule activities are more accurate
because they are based on cost estimates that are not pessimistic
 Alternatively, the schedule activity may be a buffer activity in the critical chain method and
intentionally placed directly at the end of the network path for that group of schedule activities .
• Cost of Quality
– Quality Cost : Total cost incurred by investment in

 preventing non-conformance to requirements
 Appraising the product /service for conformance to requirements
– Failure costs or cost of Poor quality can be categorized as into internal/external
– Calculating the quality cost can be used to arrive at the cost estimation for the project
Cost Estimating – Outputs
• Activity Cost Estimates
– Quantitative assessment of the likely costs of the resources required to complete schedule activities.
– Presented in summary and/or detail
– Estimates includes all resources that are applied to the activity cost estimate and limited to:
 Labour, Material, Equipment
 Facilities, information technology and
 Special categories like inflation allowances or cost contingency reserve
• Activity Cost Estimates Supporting Detail

– Provide clear, professional and complete picture by the cost estimates was derived.
– Should include:
 Description Of Schedule activity’s project scope of work
 Documentation of the basis for the estimate (I.e. how it is developed)
 Assumptions and constraints
 Indication of estimate range e.g in form of percentage say –10% to +20%
Cost Estimating – Outputs
• Requested Changes
• Cost Management Plan (updates)
Cost Budgeting
Cost Budgeting - Objectives
Objectives
• Aggregation of the estimated costs of individual schedule activities or

work packages
• Establish total cost baseline for measuring project performance
– Cost baseline depends on:
Project decisions with respect to maintenance of product,
support of product, services offered etc
Cost Budgeting – Interactions with other
processes
Cost Budgeting
INPUTS OUTPUTS
•Project Scope Statement •Cost Baseline

Tools and
•Work Breakdown structure Techniques •Project Funding
Requirements
•WBS Dictionary
•Cost Aggregation •Cost Management Plan
•Activity Cost Estimates
(updates)
•Reserve Analysis
•Activity Cost Estimates –
•Requested Changes
supporting details •Parametric
Estimating
•Project schedule
•Funding Limit
•Resource Calendar
Reconciliation
•Contract
•Cost Management Plan
Cost Budgeting: Inputs
• Project Scope Statement - Funding constraints are reflected in the project scope
statement. These constraints can be because of annual funding authorization
• WBS – Provides the relationship among all components of the project and
project deliverables
• WBS Dictionary – Provide identification of deliverables and description of work
in each WBS component required to produce each deliverable
• Activity cost estimates – Cost estimate of each schedule activity
• Activity cost estimates supporting detail
• Project schedule
• Resource calendars
• Contract – Information related to what products/services have been purchased,
along with their costs, that are used in developing the budget
• Cost Management Plan
Cost Budgeting- Tools and Techniques
Cost Aggregation
Cost estimates
Aggregation
of project
Aggregation Cost estimates at a

higher component
level of WBS
(Control accounts)
Aggregation Cost estimates

of individual
work packets
Cost estimates of
individual (scheduled)
activities in a work
package
Reserve Analysis
• Reserve is required to mitigate the risk arising out of negative impacts on budget of
the project
• This technique establishes the contingency reserve that should be budgeted while
establishing the cost budget of the project. E.g.
– Management contingency reserve
Allowances for unplanned, but potentially required changes
– Unknown unknowns
– Project Manager must obtain approval before obligating or spending this
reserve
– Not part of the project cost baseline, but included in the budget of the project
– These are not distributed as budget and hence are not part of earned value
analysis
Parametric Estimating
• Estimation Technique of using project characteristics (parameters) in a mathematical

model to predict total project cost
• Use regression techniques to build a series of independent variables to predict the
dependent variable
• For a model to be predictable – it should not only work on the historic value with
minimal variance but should remain predictable with new set of data
• Cost of building a parametric model and its accuracy to predict the dependent variable
vary widely. The model is most likely to be reliable if:
– The historical information is accurate
– The parameters used in the model are readily quantifiable
– The model is scalable, such that it works for a large project as well as a small one
Funding Limit Reconciliation
• This technique helps in limiting large variations in periodic expenditure of funds

• Expenditure of funds is reconciled with funding limits
– Helps project manager to adjust the work scheduled for the project to regulate the
expenditure
– Accomplished by imposing date constraints, schedule milestones or WBS
components into project schedule
• If funds are used as a limiting resource during the development of project schedule,
then the process is repeated using the new imposed date constraints
Cost Budgeting: Outputs
• Cost baseline – Time phased budget. Used as a basis against which to measure,
monitor and control the overall cost performance of the project. It is developed by
summing estimated costs by period. It is usually displayed in the form of an S-
curve
Cost Budgeting: Outputs
• Project Funding requirements – Derived from the cost baseline. Funding usually
occurs in incremental amounts that are not continuous and appears as a step
function.
Total funds required are those that are included in the cost baseline
plus the management contingency reserve amount.
• Cost Management Plan (updates) – If approved change requests result from the
cost budgeting process, then cost management plan is updated
• Requested changes – outcome of cost budgeting process. These changes are

processed through Integrated Change Control process.
Cost Control
What is cost control?
• Influence factors that create changes to baseline

• Ensure requested changes are agreed upon
• Managing actual changes when and as they occur
• Assuring that potential cost overruns do not exceed the authorized funding
periodically and in total for the project
• Monitoring cost performance to detect and understand variances from the
cost baseline
• Recording all appropriate changes accurately against the cost baseline
• Preventing incorrect, inappropriate, or unapproved changes from being
included in the reported cost or resource usage
• Informing appropriate stakeholders of approved changes
• Acting to bring expected cost overruns within acceptable limits
Cost Control
(PMBOK, pg 171)
Cost Control - Inputs
• Cost baseline
• Project Funding Requirements
• Performance Reports
– From Project Communication Management
• Work Performance Information
– Deliverables completed and not yet completed
– Costs authorized & incurred
– Estimates to complete scheduled activities
– Percent physically complete of the scheduled activities
• Approved Change Requests
– From Integrated Change Control
• Project Management Plan
Cost Control - Tools & Techniques
• Cost Change Control System
– Documented in cost management plan
– Defines procedures by which cost baseline can be changed
– Includes forms, documentation, tracking systems and approval levels necessary
• Performance Measurement Analysis
– Earned Value Technique (EVT)
– Performed for each scheduled activity, work package or control account
– Concepts
• Planned Value (PV)
 Budgeted cost of work scheduled to be completed on activity or WBS
component up to a given point in time
• Earned Value (EV)
 Budgeted amount of work actually completed on scheduled activity or
WBS component during a given time period
• Actual Cost (AC)
 Total cost incurred in accomplishing work on the scheduled activity or
WBS component during a given time period
• Performance Measurement Analysis
– Concepts
• Cost variance (CV)
 CV = EV - AC
• Schedule variance (SV)
 SV = EV - PV
• Cost performance index (CPI)
 CPI = EV / AC
• Cumulative CPI (CPIC)
 CPIC = EVC / ACC
• Schedule performance index (SPI)
 SPI = EV / PV
Performance Measurement Analysis – Formulas in a nut shell

• BAC Budget at completion No Formula
• AC Actual Cost No Formula
• PV Planned Value No Formula
• EV Earned Value No Formula
• CV Cost Variance EV-AC
• SV Schedule Variance EV-PV
• CPI Cost Performing Index EV/AC
• SPI Schedule Performing Index EV/PV
• EAC Estimate at completion BAC/CPI
• ETC Estimate to complete EAC-AC
• VAC Variance at completion BAC-EAC
(PMBOK, pg 170)
Cheat Grid:
AC EV PV
CPI / / SPI
CV - - SV
• Forecasting
– Making estimates, predictions of conditions in project’s future based on information
and knowledge available at the time of forecast
– Based on Work Performance Information
– Concepts
• Budget at Completion (BAC)
 BAC = Total cumulative PV at completion
• Estimate to Complete (ETC)
 Three different calculation technique
1. Based on new estimate – Revised estimate for the work remaining
2. Based on atypical variances – ETC = (BAC – EVC)
3. Based on typical variances – ETC = (BAC – EVC) / CPIC
• Estimate at Completion (EAC)
 Three different calculation technique
1. Based on new estimate – EAC = ACC + ETC
2. Based on atypical variances – EAC = ACC + BAC – EV
3. Based on typical variances – EAC = ACC + ((BAC – EV) / CPIC)
• Project Performance Reviews
– Variance analysis
• Compares actual performance to planned or expected performance
• Cost & schedule variances most commonly used
• Project scope, resource, quality, risk are other areas of importance
– Trend analysis
• Performance over time to determine improvement / deterioration
– Earned value technique
• Compare planned performance to actual performance
• Project Management Software
• Variance Management
– Responses to major or minor problems
Cost Control - Output
• Cost Estimates (Updates)

– Revised schedule activity cost estimates
• Cost Baseline (Updates)
• Performance Measurements
– Calculated CV, SV, CPI, SPI for WBS components in particular work
packages and control accounts
• Forecasted Completion
– EAC & ETC values
• Requested Changes
• Recommended Corrective Actions
– To bring expected future performance in line with PMP
• Organizational Process Assets (Updates)
– Lessons learned including root cause of variance, reasons behind corrective
action chosen and other types of lessons learned from cost, resource or
resource production control
• Project Management Plan (Updates)
Cost Control - Example
Exercise from Rita Mulcahy, Page 210.
You have a project to build a new fence. The fence is four sided.
Each side is to take one day to build and is budgeted for $1,000 per
side. The sides are planned to be completed one after the other.
Today is the end of day three.
Using the project status chart on the next slide, calculate EV, etc.
Make sure you can interpret what each answer means.
Task Day 1 Day 2 Day 3 Day 4 Status at the end

of Day 3
Side 1 S------F Complete, spent

$1,000
Side 2 S-----PF ----F Complete, spent

$1,200
Side 3 SP—S—PF Half Done,

spent $600
Side 4 PS----PF Not yet started
Key: S – Actual Start, F – Actual Finish, PS – Planned Start, and PF – Planned Finish
What Is: Calculation Answer

PV 1,000+1,000+1,000 3,000
EV 1,000+1,000+500 2,500
AC 1,000+1,200+600 2,800
BAC 1,000+1,000+1,000+1,000 4,000
CV 2,500-2,800 -300
CPI 2,500/2,800 .893
SV 2,500-3,000 -500
SPI 2,500/3,000 .833
EAC 4,000/8.98 4,479
ETC 4,479-2,800 1,679
VAC 4,000-4,479 -479
Accounting Standards
The PMBOK does not go into any detail about these standards, but they
are covered in PMP Exam Prep, By Rita Mulcahy.
Project Selection Methods
• Present Value
• Net Present Value
• Internal Rate of Return (IRR)
• Payback Periods
• Benefit Cost Ratio
• Opportunity Cost
Accounting Standards –
Present Value
Present Value is only mentioned a couple of times on the exam and
you will not need to calculate it, just understand what it means.
PV=FV/(1+r)n
FV=Future Value
r=Interest rate
n=number of time periods
This will tell you what the present value of money/revenue received from the project that is not
payable until the future. (i.e. $300,000 or revenue 3 years from now at an interest rate of 10% has
a present value of $225,394
Net Present Value
The PV of the total benefits (income or revenue) less the costs. you
will not need to calculate it, just understand what it means.
Total PV of Revenue-Total PV of Costs = NPV
If you have two projects and the NPV of one is higher than the other, you would want to choose the
project with the higher NPV.
Internal Rate of Return
The rate of return a company can expect for their investment in the project.
Calculating IRR is complex and requires the use of a computer. You
will not need to calculate it for the exam, just understand what it means.
You want to choose the project with the higher IRR
Payback Period
The number of time periods it takes to recover your investment before
you start accumulating profit.
You want to choose the project with quicker payback period
Benefits Cost Ratio
Compares the benefits to the costs of different projects where benefits are the
same as revenue, or sometimes referred to as “payback”. A BCR >1 means
the benefits are greater than the costs. A BCR of <1 means the costs are
greater than the benefits. A BCR of 1 means the costs and benefits are the
same
You want to choose the project with a higher BCR
Opportunity Costs
The opportunity given up by selecting one project over another.
You have two projects to pick from. Project A has a NPV of $45,000 and Project B has a
NPV of $85,000. The opportunity cost of selecting Project B is $45,000
Project Selection
Project A Project B Which project would

you pick?
NPV $95,000 $75,000
IRR 13% 17%
Payback 16 Months 21 Months

Period
Benefits Cost 2.97 1.3
Ratio
Project Selection
Project A Project B Which project would

you pick?
NPV $95,000 $75,000 A
IRR 13% 17% B
Payback 16 Months 21 Months A

Period
Benefits Cost 2.97 1.3 A
Ratio
You would pick Project A
Other Definitions Needed for the Exam
• Sunk Costs: According to accounting standards, the amount of

money you are over budget should not be considered when
deciding whether to continue with a troubled project.
• Law of diminishing returns: The more you put into something,
the less you get out of it. For example, adding twice as many
resources to a task may not get the task done any faster.
Q&A and Discussions
Thank you

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PMI – Project Cost

Vinay, Yogesh, Manoj, Pradeep

People. Processes. Technology. Results.

• Cost Management Knowledge Sharing session

– Introductions and Overview 5 mins

• Sample Questions 20 mins

Project Cost Management includes the processes involved in planning,

o Cost Estimating – Developing an approximation of the costs of the resources

o Cost Budgeting – Aggregating the estimated costs of individual activities or

People. Processes. Technology. Results.

• Enterprise Environmental Factors

• Work Breakdown Structure (WBS)

– Schedule Management Plan

• Project Management Software

• Vendor Bid Analysis

– Quality Cost : Total cost incurred by investment in

• Activity Cost Estimates Supporting Detail

• Cost Management Plan (updates)

People. Processes. Technology. Results.

• Aggregation of the estimated costs of individual schedule activities or

•Project Scope Statement •Cost Baseline

Aggregation Cost estimates at a

Aggregation Cost estimates

• Estimation Technique of using project characteristics (parameters) in a mathematical

Funding Limit Reconciliation

• This technique helps in limiting large variations in periodic expenditure of funds

• Requested changes – outcome of cost budgeting process. These changes are

People. Processes. Technology. Results.

• Influence factors that create changes to baseline

Performance Measurement Analysis – Formulas in a nut shell

• Cost Estimates (Updates)

Exercise from Rita Mulcahy, Page 210.

Exercise from Rita Mulcahy, Page 210.

Task Day 1 Day 2 Day 3 Day 4 Status at the end

Side 1 S------F Complete, spent

Side 2 S-----PF ----F Complete, spent

Side 3 SP—S—PF Half Done,

Side 4 PS----PF Not yet started

What Is: Calculation Answer

BAC 1,000+1,000+1,000+1,000 4,000

CPI 2,500/2,800 .893

SPI 2,500/3,000 .833

EAC 4,000/8.98 4,479

ETC 4,479-2,800 1,679

VAC 4,000-4,479 -479

You want to choose the project with the higher IRR

You want to choose the project with quicker payback period

You want to choose the project with a higher BCR

Exercise from Rita Mulcahy, Page 214.

Project A Project B Which project would

NPV $95,000 $75,000

IRR 13% 17%

Payback 16 Months 21 Months

Exercise from Rita Mulcahy, Page 214.

Project A Project B Which project would

NPV $95,000 $75,000 A

IRR 13% 17% B

Payback 16 Months 21 Months A

• Sunk Costs: According to accounting standards, the amount of

People. Processes. Technology. Results.

People. Processes. Technology. Results.

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