COST MANAGEMENT

Cost Management
is “ the completion of the project management triple constraint of
cost, schedule, and scope.”

Why we need Cost Management ?

If the project team does not properly control cost, the project will invariably
go out of control and more money will be spent than anticipated.
It is the purpose of cost management to prevent this.

Project Life Cycle and Project Cost

• Lately it has become important to consider the cost of the project for the FULL
LIFE OF THE SERVICE that is created
• With regard to project life cycle, Cost decisions are made with a clearer picture of
the future commitments that the project will require .
Cost Management processes

Project cost management includes the processes required to ensure that the project
is completed within the approved budget.

 Resource planning ( determining what resources and what quantities of each

should be used to perform project activities )
 Cost Estimating ( developing an approximation –estimate- of the costs of the
resources needed to complete project activities )
 Cost Budgeting ( allocating the overall cost estimate to individual work items )
 Cost Control ( controlling changes to the project budget )
 PROJECT COST MANAGEMENT

RESOURCE PLANNING COST ESTIMATING COST BUDGETING COST CONTROL

1. Inputs 1. Inputs 1. Inputs

1. Inputs
Work breakdown structure Work breakdown structure COST BASELINE
Work breakdown structure
Historical information Cost estimates Performance reports
Historical information
Activity duration estimates Project schedule Change requests
Scope statement
Resource requirements 2. Tools and Techniques Cost management plan
Resource pool description
Resource rates Cost estimating tools 2. Tools and Techniques
Organizational policies
Chart of accounts and techniques Cost change control system
2. Tools and Techniques
2. Tools and Techniques 3. Outputs Performance measurement
Expert judgment
Analogous estimating Cost baseline Additional planning
Alternatives identification
Parametric modeling Computerized tools
3. Outputs
Bottom up estimating 3. Outputs
Resource requirements Figure 2
Computerized tools Revised cost estimates
3. Outputs Budget updates
Cost estimates Corrective action
Supporting detail Estimate at completion
Cost management plan Lessons learned

Project Cost Management Overview

Figure 1
Illustrative Cost Baseline Display

Expected
Cash flow
Cost Baseline is a time-phased
CUMMULATIVE VALUES

budget that will be used to measure

and monitor cost performance on the project

It is developed by summing
estimated costs by period and is
usually displayed in the form of
Cost Performance S- curve
Baseline

TIME

Many projects , especially larger ones, may have multiple cost baselines to measure different
aspects of cost performance . Ex. A spending plan or cash flow forecast is a cost baseline for
measuring disbursements
Cost Estimating
• A Cost Estimate is “ a prediction o the likely cost of the resources that will be
required to complete all of the work of the project”.
• Cost estimating is done throughout the project.
• Types of Estimates: depending on the accuracy required for the estimate and the cost and
effort that can be expended.

- Top Down Estimates

- Bottom Up Estimates
- Analogous Estimates
- Parametric Estimates
- Definitive Estimates
Top Down Estimates
 Are used early in the project when info. About the project is very limited.
 “Top Down” comes from the idea that the estimate is made at the top level of the project.
That is the project itself is estimated with one single estimate.
 Advantage : requires little effort and time .
 Disadvantage : not as good accuracy as it would be if in more detailed estimate.

Bottom Up Estimates
 Are used when the project baselines are required or a definitive type of estimate is needed
 “ Bottom Up” cause they begin by estimating the details of the project and then
summarizing the details into summary level. WBS can be used for this roll up.
 Advantage : produce accurate results .Accuracy depends on the level of detail.
 Disadvantage : higher cost for detailed estimating. Longer time to produce
Analogous Estimates
 Are a form of Top Down estimates.
 Uses the actual cost of previously completed projects
to predict the cost of the project, thus there is an analogy between one project and the other
 Advantage : If the project being used in the analogy and the project being estimated are
very similar, then the estimates could be quite accurate
 Disadvantage : If projects are not similar, then the estimates will not be accurate at all.

Parametric Estimates
 Are also Top Down estimates.
 Their inherent accuracy is no beter or worse than analogous estimates.
 Accomplished by finding a parameter of the project that changes proportionately with
project cost. A model is built mathematically based on one or more parameter . When the
values of the parameters are entered into the model the cost of the project results.
Accuracy can be improved if there is a closed relationship between the parameters and cost
and parameters are easy to quantify.
Definitive Estimates
 Are a form of Bottom Up estimates.
 Used to establish a project baseline or any other important estimate.
 WBS can be used as the level of detail for the estimate.
 Advantage : Accuracy quite high
 Disadvantage : Cost of development of the estimate can be quite high and lengthy
Cost Budgeting

“Is the process of allocating cost to the individual work items in the project”

• The result of the cost budgeting will be to produce the cost

baseline of the project.
• The cost baseline of the project is the expected actual cost of the
project.
• On most projects the expected value for risks is budgeted.
Cost Control

“Is the process of controlling the project and taking correction action when
the control indicates that corrective action is necessary”

• The Earned Value Reporting: This is the most commonly used

method of performance measurement and cost control.
• Cumulative Reporting :Earned value reports are cumulative reports .
• The value colleted for the current reporting period are added to the values from
the last reporting period and the total is plotted.
• One difficulty in showing the cumulative cost curve for a large project is that the
scale required to show the entire cost of the project may be so compact that
relatively large variations are not visible . Ex. A 400 $ million project plotted on
an A4 page would have a million $ variation shown by only one fifth of an inch.
• A plot of the variance can then be used as in ( Figure 3)
OVER

Plan
0

UNDER Actuals

TIME

Cumulative Variance reports

Figure 3
Earned Value Parameters: The earned value reporting system
depends on the tracking of 3 measurements of the project:
Budgeted cost of work scheduled ( BCWS) or planned value (PV)
Actual cost of work performed (ACWP) or actual cost (AC)
Budgeted cost of work performed ( BCWP) or earned value (EV)

If the project follows the project plan, each of these three parameters
are exactly the same . Significant deviations between the values of the
three parameters PV,AC, EV are cause of concern
Glossary of Terms

BCWS Budgeted cost of the work scheduled. A cost estimate of the

resources scheduled in a time-phased cumulative baseline.
BCWP Budgeted cost of the work performed. The earned value or
original budgeted cost for work actually completed.
ACWP Actual cost of the work completed. The sum of the costs
incurred in accomplishing work.
SV Schedule variance (BCWP - BCWS).
CV Cost variance (BCWP - ACWP).
BAC Budgeted cost at completion. The total budgeted cost of the
baseline or project cost accounts.
EAC Estimated costs at completion. Includes cost to-date plus
revised estimated costs for the work remaining.
FAC Computed forecasted costs at completion.
VAC Variance at completion (BAC - EAC or BAC - FAC).
Indicates expected actual over or underun at completion.
Cost/Schedule Graph

$500 125%
EAC
ACWP Actual Cost

$400 100% Baseline

BAC
BCWS
$340 85%

$300 75%

BCWP
$200 50% Earned Value

CV
$100 25%

SV

10 20 30 40

Today Scheduled End

Project Duration
Project Cost Summary Report

Work performed to date Total cost at completion

Earned Original
Actual Cost Latest Cost
budget cost
Activity cost over/under revised over/under
value budget
(ACWP run cost run
(BCWP) (BCWS)

1 6 8 (-2) 6 8 (-2)

2 10 4 6 20 18 2

3 15 6 9 30 35 (-5)

4 16 12 4 24 30 (-6)

5 0 2 (-2) 16 18 (-2)

6 16 20 (-4)

7 10 10 0

8 15 15 0

Total 47 32 +15 137 154 (-17)