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Management
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Agenda
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Knowledge Areas and Processes - Recap
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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
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Project Cost Management - Overview
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
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Project Cost Management - Interactions
with other Processes
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Project Cost Management - Overview
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Cost Estimating
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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%)
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Cost Estimating – Overview
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Cost Estimating – Interaction with other
processes
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Cost Estimating - Inputs
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Cost Estimating - Inputs
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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.
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Cost Estimating – Tools and Techniques
• 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
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Cost Estimating – Tools and Techniques
• 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
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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
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Cost Estimating – Outputs
• Requested Changes
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Cost Budgeting
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Cost Budgeting - Objectives
Objectives
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Cost Budgeting – Interactions with other
processes
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Cost Budgeting
INPUTS OUTPUTS
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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
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Cost Budgeting- Tools and Techniques
Cost Aggregation
Cost estimates
Aggregation
of project
Cost estimates of
individual (scheduled)
activities in a work
package
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Cost Budgeting- Tools and Techniques
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
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Cost Budgeting- Tools and Techniques
Parametric Estimating
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Cost Budgeting- Tools and Techniques
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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
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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
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Cost Control
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What is cost control?
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Cost Control
(PMBOK, pg 171)
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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
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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
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Cost Control - Tools & Techniques
• 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
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Cost Control - Tools & Techniques
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Cost Control - Tools & Techniques
(PMBOK, pg 170)
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Cost Control - Tools & Techniques
Cheat Grid:
AC EV PV
CPI / / SPI
CV - - SV
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Cost Control - Tools & Techniques
• 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)
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Cost Control - Tools & Techniques
• 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
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Cost Control - Output
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Cost Control - Example
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.
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Cost Control - Example
Key: S – Actual Start, F – Actual Finish, PS – Planned Start, and PF – Planned Finish
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Cost Control - Example
EV 1,000+1,000+500 2,500
AC 1,000+1,200+600 2,800
CV 2,500-2,800 -300
SV 2,500-3,000 -500
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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
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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
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Accounting Standards –
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.
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Accounting Standards –
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.
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Accounting Standards –
Payback Period
The number of time periods it takes to recover your investment before
you start accumulating profit.
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Accounting Standards –
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
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Accounting Standards –
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
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Project Selection
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Project Selection
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Other Definitions Needed for the Exam
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Q&A and Discussions
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Thank you
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