Project Cost Management

• Plan cost management

• Estimate costs
• Determine budget
• Control cost
PLAN COST MANAGEMENT
• Plan Cost Management is the process of defining how the
project costs will be estimated, budgeted, managed monitored,
and controlled.
• The key benefit of this process is that it provides guidance and
direction on how the project costs will be managed throughout
the project.
• This process is performed once or at predefined points in the
project.
PLAN COST MANAGEMENT
 Plan cost management – Output
Project management Plan
Level of Accuracy
• Accuracy of estimate is normally refined during the course of project to reflect
additional details as it becomes available.
• Refinements and range of accuracy depends on policies of individual organizations.
ESTIMATE COST
• Estimate Costs is the process of developing an approximation
of the cost of resources needed to complete project work.
• The key benefit of this process is that it determines the
monetary resources required for the project.
• This process is performed periodically throughout the project
as needed
ESTIMATE COST
Estimate Cost
Steps:
• Consider the given assumptions and constraints of resource
requirements
• Applying rates against those resources and activities to create cost
estimates
• Determine the cost risks and estimate contingent reserve.
• Re-evaluate and determine the optimal way to complete the activity
if needed
• Finalize and document the cost estimates
Estimate Cost - Input
• Scope baseline:
◦ Project scope statement: funding constraints by period for the
expenditure of project funds or other financial assumptions and
constraints.
◦ Work breakdown structure: the relationships among all the project
deliverables and their various components.
◦ WBS dictionary: related detailed statements of work provide an
identification of the deliverables and a description of the work in each
WBS component required to produce each deliverable
Estimate Cost – Tools and Techniques
• Experts Judgment
• Analogous Estimating: Top-down
• Parametric Estimating
• Bottom-up Estimating
• Three-points Estimating (Most likely, Optimistic, Pessimistic)
Estimate Cost – Tools and Techniques
• Data analysis techniques
◦ Alternatives analysis: Alternatives analysis is a technique used to
evaluate identified options in order to select which options or
approaches to use to execute and perform the work of the project.
Estimate Cost – Tools and Techniques
• Reserve analysis:
◦ Contingency reserves are the budget within the cost baseline that is
allocated for identified risks.
◦ Contingency reserves are often viewed as the part of the budget
◦ Contingency reserves can be provided at any level from the specific
activity to the entire project.
◦ Contingency reserves can be presented as a percentage of the estimated
cost, a fixed number, or may be developed by using quantitative
analysis methods
◦ Example: rework for some project deliverables could be anticipated,
while the amount of this rework is unknown. Contingency reserves may
be estimated to account for this unknown amount of rework.
Estimate Cost – Tools and Techniques
• Cost of quality:
◦ This includes evaluating the cost impact of additional investment in
conformance versus the cost of nonconformance.
◦ It can also include looking at short-term cost reductions versus the
implication of more frequent problems later on in the product life cycle.
Cost of good quality Cost of poor quality
Estimate Cost – Tools and Techniques
• The project management information system (PMIS)
◦ Include spreadsheets, simulation software, and statistical analysis tools
to assist with cost estimating.
◦ Simplify the use of some cost-estimating techniques (more rapid and
accuracy).
Estimate Cost - Outputs
• Cost estimate
◦ Quantitative assessments of the probable costs required to complete
project work
◦ Contingency amounts to account for identified risks, and management
reserve to cover unplanned work.
◦ Cost estimates can be presented in summary form or in detail
Estimate Cost - Outputs
• Basic of estimates
◦ Documentation of the basis of the estimate (i.e., how it was developed),
◦ Documentation of all assumptions made,
◦ Documentation of any known constraints,
◦ Documentation of identified risks included when estimating costs,
◦ Indication of the range of possible estimates (e.g., US$10,000 (±10%)
to indicate that the item is expected to cost between a range of values)
◦ Indication of the confidence level of the final estimate
DETERMINE BUDGET
• The process of aggregating the estimated costs of individual
activities or work packages to establish an authorized cost
baseline.
• The key benefit of this process is that it determines the cost
baseline against which project performance can be monitored
and controlled.
• This process is performed once or at predefined points in the
project
DETERMINE BUDGET
 Determine Budget
Steps
• Aggregate project cost by time period to see the
scheduled spending per time period
• Analyse and determine project reserves
• Compare and reconcile the fund limitation
• Acquire funding, ensure financial resources based on
projected cash flow
• Get approval of cost baseline and the financial resources
Determine Budget – Tools and Techniques
• Cost aggregation
◦ Activity cost -> work package cost -> control account cost -> whole
project
Determine Budget – Tools and Techniques
• Management reserve
◦ are intended to address the unknown risks that can affect a project
◦ The management reserve is not included in the cost baseline but is
part of the overall project budget and funding requirements.
◦ When an amount of management reserves is used to fund unforeseen
work, the amount of management reserve used is added to the cost
baseline, thus requiring an approved change to the cost baseline
◦
Organizati
on’ Project
authority manager
Have the
authority
to utilize
Determine Budget – Tools and Techniques
• Funding limit reconciliation
◦ The expenditure of funds should be reconciled with any funding limits
on the commitment of funds for the project
◦ A variance between the funding limits and the planned expenditures
will sometimes necessitate the rescheduling of work
• Financing
◦ The method to find the fund for project from external or internal
sources
◦ If a project is funded externally, the funding entity may have certain
requirements that are required to be met.
CONTROL COST
• Monitoring the status of the project to update the project costs
and managing changes to the cost baseline.
• The key benefit of this process is that the cost baseline is
maintained throughout the project.
• This process is performed throughout the project
Control Cost – Tools and Techniques
Earned value analysis (EVA):
• Purpose: compare the performance measurement baseline to
the actual schedule and cost performance.
• Actual cost (AC):
◦ the total cost incurred in accomplishing the work that the EV measured.
◦ The AC will have no upper limit
Control Cost – Tools and Techniques
• Earned value: a measure of work performed expressed in
terms of the budget authorized for that work.
EV = % complete (actual)* Budget
Example:
The actual percent complete is 30% and the task budget is
$10,000. Calculate the earned value of the project.
Control Cost – Tools and Techniques
• Planned value:
◦ the authorized budget assigned to scheduled work (not including
management reserve)
◦ The total planned value for the project is also known as budget at
completion (BAC).
PV = % complete (planned) * budget
Example:
The budget is $ 1,000 for a project that must last 5 days. Calculate the
Planned value on the 4th day.
• Variance analysis the explanation (cause, impact, and
corrective actions) for variance of:
◦ cost (CV = EV – AC),
◦ schedule (SV = EV – PV),
◦ variance at completion (VAC = BAC – EAC)
• Performance indexes
◦ Cost performance index: CPI = EV/AC
◦ Schedule performance index: SPI = EV/PV
• Example:
We have a budget of $1,000 to complete a project in 5 days. On
day 4, there is $ 750 of actual expenses incurred, 50% tasks
completed. Calculate CV, SV, CPI, SPI of the project.
Cost forecast
• Trend analysis examines project performance over time to
determine if performance is improving or deteriorating
◦ Chart
◦ Forecasting
◦ EAC: estimate at completion
◦ ETC: estimate to completion
◦ EAC forecast for ETC work performed at the budgeted rate: EAC = AC + (BAC-EV)
◦ EAC forecast for ETC work performed at the present CPI
• Scenario 1. The changes project • Scenario 3. Original estimate is no longer
experience valid
will continue to occur for remaining work. • ETC = New estimate for remaining work
• ETC = EAC – AC • EAC = AC + ETC
• EAC = BAC/CPI
Current CPI is normal (when current
variances are thought to be typical )

• Scenario 2. There will be no variation for • Scenario 4. Project is over budget but has
remaining work and will progress as to meet a deadline
planned before • ETC = (BAC-EV)/(CPI x SPI)
• ETC = BAC – EV • EAC = AC + (BAC-EV)/(CPI x SPI)
• EAC = AC + ETC Here team considers that remaining work
Current CPI is abnormal (when current will be completed at the same efficiency
variances are thought to be atypical ) rate considering cost and schedule
performance
• To Complete Performance Index
TCPI = Work remaining/Funds remaining
TCPIBAC= (BAC-EV)/(BAC-AC)
TCPIEAC= (BAC-EV)/(EAC-AC)
◦ TCPI >1: harder to complete
◦ TCPI <1: easier to complete