Project Cost/Budget

10-01
 Cost Management
§ Cost is a resource expended to achieve a specific objective,
in our case, a project.
§ Cost management in projects is the process by which
companies control and plan the costs of implementing
projects.
§ Before a project is started, the anticipated costs should be
identified.
§ These costs should then be evaluated and approved before
any procurement.
§ During the implementation of a project, all costs should be
recorded, tracked and monitored to control the costs and
kept in line with initial expectations.
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 Project Costs
§ Direct costs: Direct material and labor costs used solely for
a project
§ Indirect costs: Any material and labor costs that are not
used in a single project
§ Fixed costs: Remain constant regardless of changes in the
level of project activities
§ Variable costs: Vary in direct proportion to changes in the
level of project activities
§ Overhead costs: Primarily those indirect costs associated
with project implementation
§ General and administrative costs: Costs primarily
associated with general management and administration of
the project Copyright © 2016 Pearson Education, Ltd 9-9
 Project Costs
§ Tangible costs: Quantifiable costs related to an identifiable
resource or asset
§ Intangible costs: Unquantifiable costs relating to an
identifiable source
§ Sunk costs: Incurred costs that cannot be changed by any
decision and that cannot be recovered
§ Opportunity costs: Potential benefit given up when an
alternative activity is selected over another activity

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 Sunk Costs
§ A sunk cost is an expense that cannot be recovered.
§ Sunk costs should not affect your decision making.
• For example, if a piece of machinery was bought five years before a
current project for the current project. If the machinery cannot be
used now, that amount of money has already been spent and cannot
be recovered. In this case, it should also not affect the company's
decision on whether or not to buy a new piece of machinery.
• It is like buying a ticket for a show and finding out that the show was
really unbearable and you had to walk out in the middle of the show.
The cost of the show is a sunk cost.
§ Sunk costs in a project should be forgotten.

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 Profits and Revenues
§ Profit is revenues of an organization minus the costs borne
by the organization including the project costs. To increase
the profit of an organization, its project costs have to
decrease or revenues should increase or both.
§ A profit margin is a ratio of profitability calculated as net
income divided by revenues, or net profits divided by
sales. It measures how much out of every dollar of sales a
company actually keeps in earnings.
§ If in 2010, an organization has a net income of $100 million from
sales of $500 million, Profit Margin: 100M/500M = 20%,
§ In 2011, the organization’s net income rises to $150 million on
sales of $800 million. Profit Margin: 150/800 = 18.75%; profit
margin has decreased.
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 Cost Management Process

§ Costs are estimated using resource planning.

§ The estimated costs are budgeted by an organization, and
the project manager controls the budget.
§ A project that stays within budget is usually an exception,
not the rule.
§ A project manager has to control schedule, performance,
scope, value, and resources in order to control the costs.

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 Construct schedule
§ Resources required to complete the project
§ Timeframes for the consumption of each resource
§ Quantity of each resource required per week
§ Total quantity of resource consumed per week

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 Estimating Project Budgets
— In order to develop a budget, we must:
— Forecast what resources the project will
require
— Determine the required quantity of each
— Decide when they will be needed
— Understand how much they will cost -
including the effects of potential price
inf lation
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 Budget and Schedule Development
— The project’s schedule can be determined based upon
the tasks and time estimates in the WBS
— The schedule will also depend on how these activities
are sequenced
— The project’s budget can be determined based upon
the activities and time estimates from the WBS as well
as the cost of the resources assigned to the WBS tasks
— Iterations may still be necessary
— The objective is to create a realistic project schedule
and budget!

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 Budgeting
§ Baseline budgets must identify direct costs, indirect costs,
and contingency costs to stakeholders.
§ Detailed estimates can be prepared by using WBS.
Detailed estimates are usually done before the start of a
project and after completing WBS.

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 Developing the Project Budget
1. Define what resources will be needed to perform
the work
2. Determine the quantity of resources that are
needed
3. Define the cost of using each resource
4. Calculate the cost of the task or activity
5. Ensure that the resources are leveled, that is,
resources have not been over allocated, assigned
to more than one task scheduled at the same
time

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 Finalizing the Project Schedule and Budget
— The project schedule and budget may require
several iterations before it is acceptable to the
sponsor, the project manager, and the project
team.
— Once the project schedule and project plan are
accepted, the project plan becomes the
baseline plan.
— Once accepted, the project manager and
project team have the authority to execute or
carry out the plan.

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 How to Charge the project?
1. Work is priced out at the department average, and all
work performed is charged to the project at the
department average salary, regardless of who
accomplished the work.
2. Work is priced out at the department average, but all
work performed is billed back to the project at the
actual salary of those employees who perform the
work.
3. The work is priced out at the salary of those
employees who will perform the work, and the cost is
billed back the same way.

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 Category/Activity Budgeting vs. Program
Budgeting
— The traditional organization budget is either category
oriented or activity oriented
— Often based upon historical data accumulated through
an accounting system
— With the advent of project organizations, it became
necessary to organize the budget in ways that conformed
more closely to the actual pattern of fiscal responsibility

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 Developing a Budget for our Course Project
— Time phased expenditure plan for the project
— Aggregate of all project costs-may include profit
— Represents cash f low profile
— WBS is the key
— Costs are identified by source and category

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A Time-Phased Project Budget
Time Period
Activity Cost Monthly Budget (£)
Task I J Estimate 1 2 3 4 5 6 7 8
A 1 2 7000 5600 1400

B 2 3 9000 3857 5143

C 2 4 10000 3750 5000 1250
D 2 5 6000 3600 2400
E 3 7 12000 4800 4800 2400
F 4 7 3000 3000
G 5 6 9000 2571 5143 1286

H 6 7 5000 3750 1250

I 7 8 8000 2667 5333

J 8 9 6000 6000
Total 75000 5600 12607 15114 14192 9836 6317 5333 6000

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 A Resource Loading Chart --Set the Budget
WBS-ID TIME TOTAL
RESOURCE Week1 Week2 WeekN COST
Units Cost/Uni Resource Overh. % Overh.Cos Total
t Cost t Week1
Resource 1
Act.1.1. Resource 2
1
Resource 3
Total Sub- SR SR SR
Cost
Resource 1
Act.1.1. Resource 2
2
Resource 3
Total Sub- SR SR SR
Cost
Resource 1
Act.1.1. Resource 2
3
Resource 3
Total Sub- SR SR SR
Cost
Resource 1
Act.1.1. Resource 2
4
Resource 3
Total Sub- SR SR SR
Cost
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Example of Computing
Different Project Costs
& Price—Building a
House’s Foundation
Feller Buncher Skid Steer
(Forestry) (Construction)

Dozer Excavator
(Construction) (Construction)
 Example—Given the WBS
Level 0
Modular House
(1.0)

Site Modules
Level 1
(1.1) (1.2)

Internal Areas External Areas

Level 2 (1.1.1) (1.1.2)

Foundation Services Landscaping

Level 3
(1.1.1.1) (1.1.1.2) (1.1.1.3)

Level 4
Structure Appearance
(1.1.1.1.1) (1.1.1.1.1)

Remove trees Clean found. terrain Level found. terrain Dig trench Build structure
Level 5 (1.1.1.1.1.2) (1.1.1.1.1.3) (1.1.1.1.1.4)
(1.1.1.1.1.1) (1.1.1.1.1.5)

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 Schedule of Construction of
Foundation’s Structure

2 1 3
Clean Foundation
Terrain

0 2 2 3 1 4 4 1 5 5 7 12
Remove Site Trees Dig Trench Build Structure

0 0 2 4 0 5 5 0 12

2 2 4
Level Foundation
Terrain
2 0 4

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 Lets Assume This
ACTIVITY DURATION RESOURCES

Type Units per day Cost/Unit Overhead %

1.1.1.1.1.1. 2 days Supervisor 10 hrs 45$/hr 25%
Remove Worker A 10 hrs 10 $/hr 25%
Site Operator 8 hrs 40$/hr 25%
Trees Feller Buncher 8 hrs $300 $/hr 25%
1.1.1.1.1.2. 1 days Supervisor 10 hrs 45$/hr 25%
Clean Worker B 10 hrs 8 $/hr 25%
Found. Operator 8 hrs 40 $/hr 25%
Terrain Dozer 8 hrs $500 $/hr 25%
1.1.1.1.1.3. 2 days Supervisor 8 hrs 45$/hr 25%
Level Operator 8 hrs 40 $/hr 25%
Found. Terr. Dozer 8 hrs $500 $/hr 25%
1.1.1.1.1.4 1 day Supervisor 8 hrs 45$/hr 25%
Dig Operator 8 hrs 40 $/hr 25%
Trench Excavator 8 hrs $200 $/hr 25%
1.1.1.1.1.5 7 days Supervisor 12 hrs 45$/hr 25%
Build Worker A 12 hrs 10 $/hr 25%
Structure Worker B 12 hrs 8 $/hr 25%
Skid Steer 12 hrs $150 $/hr 25%

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 Time Phased Project Budget

WBS Cost per Day (Thousands $) Activity

-ID Cost
(Thousa
nds $)
Day Day Day Day Day Day Day Day Day Day Day Day
1 2 3 4 5 6 7 8 9 10 11 12
1.1.1. 408 408 8175
1.1.1. 8 8
1.1.1. 606 6063
1.1.2. 3
1.1.1. 585 585 1170
1.1.3. 0 0 0
1.1.1. 285 2850
1.1.4 0
1.1.1. 319 319 319 319 319 319 319 2236
1.1.5 5 5 5 5 5 5 5 5
Co 408 408 119 585 285 319 319 319 319 319 319 319 5115 Total
st 8
Copyright 8
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Education 0 0 5 5 5 5 5 5 5 3 Cost
 Course Project’s Budget Expectations
— The 25 activities or work packages of the schedule of
the project must be in the first column of the time
phased project budget table
— At least 3 key resources must be used to calculate the
cost of each activity
— Overhead assumption %.., costs per unit, and units per
day (week, etc) if needed.

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 EVA
§ To monitor and manage costs, project managers use an
Earned Value Analysis (EVA).
§ EVA is primarily used to measure and track costs and
schedules in a project.
§ The analysis uses “work in progress” to indicate the future of
a project.

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 EVA
§ Planned Value (PV): Budgeted amount of cost for work
scheduled to be accomplished on a given activity for a given
period of time
§ Earned Value (EV): Budgeted amount of cost for competed
work of a given activity for a given period of time
§ Actual Cost (AC): Actual amount spent in completing the
work accomplished within a given time period
§ Cost Variance (CV): The cost variance compares deviations
only from the budget and does not include schedule into
account
§ Schedule Variance (SV): The schedule variance compares
deviations only from the schedule and does not include cost
into account Copyright © 2016 Pearson Education, Ltd 9-49
 EVA
§ Cost Performance Index (CPI): Ratio of earned value to actual
cost; if CPI>1 , project under budget
§ Schedule Performance Index (SPI): Ratio of earned value to
planned value; if SPI >1, then project behind schedule

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 EV Equations
Earned Value Earned Value Equation
PV: Planned Value Planned completion % * Budget at
completion
EV: Earned Value Actual completion % * Budget at
Completion
AC: Actual Value Actual costs
CV: Cost Variance EV – AC
SV: Schedule Variance EV – PV
CPI: Cost Performance Index EV / AC
SPI: Schedule Performance EV / PV
Index
EAC: Estimate at Completion (AC/EV) * Budget at completion
ETC: Estimate to Complete EAC – AC
VAC: Variance at Completion Budget at Completion – EAC

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 Steps in Earned Value Management
1. Clearly define each activity including its
resource needs and budget

2. Create usage schedules for activities and

resources
3. Develop a time-phased budget (PV)

4. Total the actual costs of doing each task (AC)

5. Calculate both the budget variance (CV) and

schedule variance (SV)
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 Project Baseline, Using Earned Value

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 Earned Value Milestones

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 Value
Earned Value Example 8=80%(10)
Activity Jan Feb Mar April Plan %C Value
Staffing 8 7 15 100 15
Blueprint 4 6 10 80 8
Prototype 2 8 10 60 6
Design 3 3 33 1
Mon Plan 8 7 6 17 38 ∑ 30
Cmltv 8 15 21 38
Mon Act 8 11 8 13 Earned Value
30=15+8+6+1
Cmltv Act 8 19 27 40
Cumulative Planned Value
40=8+11+8+13 38=15+10+10+3
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 Earned Value Example
Schedule Variances
Planned Value (PV) = 38 = 15+10+10+3
Earned Value (EV) = 30 = 15+8+6+1
Schedule Performance Index = .79 = 30/38 = EV/PV
Estimated Time to Completion = (1/.79)x4=5

Cost Variances
Actual Cost of Work Performed (AC) = 40 = 8+11+8+13
Cost Performance Index = .75 = 30/40 = EV/AC
Estimated Cost to Completion = 50.7 = (1/.75)x38

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 Earned Value Performance Metrics

Source: Lipke (2003)

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 Completion Values in EVM
Accurate and up-to-date information is critical in the
use of EVM
Ø 0/100 Rule

Ø 50/50 Rule

Ø Percentage Complete Rule

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 Human Factors in
Project Evaluation & Control
vOptimistic progress reports

vLevel of detail

vProcess evaluation

vNon-technical performance measurement

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 Critical Success Factors in the
Project Implementation Profile
1. Project mission
2. Top management support
3. Project plans & schedules
4. Client consultation
5. Personnel
6. Technical tasks
7. Client acceptance
8. Monitoring & feedback
9. Communication channels
10. Troubleshooting

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 EVA
§ Hidalgo, Inc., a cloud computing company is interested in
purchasing and installing a new server. They estimate this
activity of a major project for scalability of their company
offerings to last a week and cost $20,000 including
hardware, software, and installation. Let us discuss these
variables with this example. This $20,000 is the baseline
budgeted cost of the project. The Budget at Completion
(BAC) is also $20,000. Hidalgo, Inc. wants to monitor the
progress. They find that at the end of the second day of the
five-day week, they have completed 25% of the work and
they have spent $9,000. The planned activity had 30%
completion at the end of the second day.

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 EV Equations
PV: Planned Value $ 6,000
EV: Earned Value $ 4,000
AC: Actual Value $ 9,000
CV: Cost Variance ($ 5,000)
SV: Schedule Variance ($ 2,000)
CPI: Cost Performance Index 0.44
SPI: Schedule Performance 0.66
Index
EAC: Estimate at Completion $ 45,000
ETC: Estimate to Complete $ 36,000
VAC: Variance at Completion ($25,000)

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 Variances
Question on project What should be
used?
How much work is planned? PV
How much work is done already? EV
How much have we spent so far? AC
What is the total cost of the project? BAC
What do we expect project cost to be now? EAC
What is the estimate to complete the project? ETC
What is the future of this project? VAC

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 Class Discussions
§ All projects overrun cost estimations and therefore we do
not need cost estimations.
§ Cost monitoring is good for only big projects.
§ There is no value in cost estimation and monitoring.
§ Project managers should remain firm when handling
resource commitments during projects.
§ There are no good ways to level resources.
§ Project managers should always use detailed estimates.
§ Project managers should not be allowed to buffer
estimates.
§ Is project team morale critical to project success?

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