Project Cost

Management
Chapter 7 of PMBOK

Project Cost Management

Project Cost Management
Ensure that the project is completed within

budget
Concerned with cost of resources needed to
complete activities; consider effect of project
decisions on cost of using product life-cycle
costing
Most prospective financial impact of using the
product is outside the project scope
Consider information needs of stakeholders,
controllable and uncontrollable costs (budget
separately for reward and recognition systems)

Project Cost Management

Project Cost Management
Estimating should be based on WBS to improve accuracy
Estimating should be done by the person performing the

work
Having historical records is key to improving estimates
Costs (schedule, scope, resources) should be managed to
estimates
A cost (schedule, scope, baseline) should be kept and not
changed
Plans should be revised as necessary during completion
of work
Corrective action should be taken when cost problems
(schedule, scope and resources) occur.

The Importance of Project Cost

Management
IT projects have a poor track record for

meeting budget goals

The CHAOS studies found the average cost
overrun (the additional percentage or dollar
amount by which actual costs exceed
estimates) ranged from 180 percent in 1994
to 43 percent in 2002; other studies found
overruns to be 33-34 percent

Cost Management Plan

How will I go about planning cost for the

project.
How to manage project to the cost baseline
and cost variances.
Part of project management plan.
How the estimate should be stated.
Reporting format.

What is Cost and

Project Cost Management?
Cost is a resource sacrificed or foregone to achieve

a specific objective or something given up in

exchange
Costs are usually measured in monetary units like

dollars

Project cost management includes the processes

required to ensure that the project is completed

within an approved budget
Project managers must make sure their projects are

well defined, have accurate time and cost estimates

and have a realistic budget that they were involved in
approving

Cost Management Plan

How will I go about planning cost for the

project.
How to manage project to the cost baseline
and cost variances.
Part of project management plan.
How the estimate should be stated.
Reporting format.

Project Cost Management Summary

Cost Estimating
Cost Estimating Inputs:
Enterprise Environmental Factors

1) Marketplace Conditions
2) Commercial Database
. Organizational Process Assets.
Policies and Procedures
Cost Estimating Templates
Historical Information
Lessons Learned

Cost Estimating
Cost Estimating Inputs:
Enterprise Environmental Factors

1) Marketplace Conditions
2) Commercial Database
. Organizational Process Assets.
Policies and Procedures
Cost Estimating Templates
Historical Information
Lessons Learned

Basic Principles of Cost

Management
Direct costs are costs that can be directly related to

producing the products and services of the project

Salaries, cost of hardware and software purchased

specifically for the project

Indirect costs are costs that are not directly related to

the products or services of the project, but are indirectly

related to performing the project
Cost of electricity, paper towels

Sunk cost is money that has been spent in the past;

when deciding what projects to invest in or continue,

you should not include sunk costs

To continue funding a failed project because a great deal

of money has already been spent on it is not a valid way

to decide on which projects to fund
Sunk costs should be forgotten

Cost Estimating(Inputs)
Project Scope Statement
WBS
WBS Dictionary
Project Management Plan.

Cost Estimating Tools & Techniques

Analogous

Estimating top down; using actual costs from previous project as

basis for estimate

Reliable when previous projects are similar and individuals have expertise form of expert
judgment

Parametric

Modeling uses project characteristics in mathematical models to

predict costs (e.g.building houses)

Reliable when historical information is accurate, parameters are quantifiable, and model is
scalable

2 types: Regression analysis, Learning Curve

For example, a model might provide an estimate of $50 per line of code for a s/w

development project based on the programming language, level of expertise of the

programmers, size and complexity of the data involved, etc
Some models may be simpler such as a $10,000 ballpark estimate per workstation in a
large office automation project based on history of similar projects during the same time
period
Bottom

Up Estimating rolling up individual activities into project total smaller

work activities have more accuracy Computerized tools spreadsheets, software

Cost Estimating Tools & Techniques

Cost Estimating Tools & Techniques
Pros and Cons
Analogous Estimating
Quick - Less Accurate
Tasks dont need to be identified Estimates prepared
with little detail and understanding of project
Less costly Requires considerable experience to do
well
Gives PM idea of management expectations Infighting
at high levels of organization
Overall project costs are capped Difficult for projects
with uncertainty

Cost Estimating Tools &

Techniques
Cost Estimating Tools & Techniques
Pros and Cons
Bottom Up Estimating
More Accurate Takes time and expense
Gains buy-in from the team Tendency for team to pad
estimates
Based on detailed analysis of project Requires that
project be defined and understood
Provides a basis for monitoring and control.

Determining Resource Cost Rates

Should be determined per unit of use
Salaries should be known at the

1)
2)
3)
4)

individual or group rate.

Components of labor rates may include:
Base Rate
Tax Rate
Benefits
Allocation of Overheads

Surveyor Pro Project Cost Estimate

Cost Estimating Tools &

Techniques
PM Software
Vendor Bid Analysis
Cost of Quality

Cost Estimating Tools &

Techniques
Reserve Analysis(Contingency)
As a recognition of cost of risks(known

unknowns).
Can be aggregated across several activities.
Buffer activity in CCM.

Project Cost Management

Project Cost Management

Outputs from Cost Estimating

Cost estimates quantitative assessments of likely costs of

resources required to complete tasks

For all resources of the project (labor, materials, supplies, inflation

allowance, reserve)
Expressed in units of currency

Supporting Detail
Description of scope (reference to the WBS)
Documentation how estimate was developed
Indication of range of possible results
Assumptions
Cost Management Plan how cost variances will be managed
Cost Risk: associated to seller for Fixed Price; associated to

buyer for Time and Materials budget

Project Cost Management

Outputs from Cost Estimating

Cost estimates quantitative assessments of likely costs of

resources required to complete tasks

For all resources of the project (labor, materials, supplies, inflation

allowance, reserve)
Expressed in units of currency

Supporting Detail
Description of scope (reference to the WBS)
Documentation how estimate was developed
Indication of range of possible results
Assumptions
Cost Management Plan how cost variances will be managed
Cost Risk: associated to seller for Fixed Price; associated to

buyer for Time and Materials budget

Project Cost Management

Cost Budgeting
Involves allocation of total estimate to

individual work to establish a cost baseline to

measure performance

Cost Budgeting Inputs

Cost Estimate
Work Breakdown Structure
Project Schedule includes planned start and

finish dates for items costs are allocated to

Needed to assign costs during the time period when

the actual cost will be incurred

Project Cost Management

Cost Budgeting Tools & Techniques
same as Cost Estimating Tools and Techniques

Outputs from Cost Budgeting

Cost Baseline time phased budget to measure

and monitor cost performance

Developed by summing estimated costs by period (S
curve of values vs. time)
Larger projects have multiple baselines to measure
different aspects of cost performance

Project Cost Management

Surveyor Pro Project Cost Baseline

Project Cost Management

Cost Control
Concerned with influencing factors that create changes to

the cost baseline that are beneficial

Determining that the cost baseline has changed
Managing actual changes as they occur

Monitor cost performance to detect variances

Record all appropriate changes accurately in the cost
baseline
Preventing incorrect, unauthorized changes being included in
the cost baseline
Informing stakeholders of authorized changes

Determine the whys of positive and negative variances

Integrated will all other control processes (scope, change,
schedule, quality)

Project Cost Management

Project Cost Management

Performance Reports:
Organize and summarizes information on

project status and progress.

May have different reports for different
stakeholders.
Includes cost, schedule and scope
accomplishments and variance information.

Project Cost Management

Inputs to Cost Control

Cost Baseline
Performance Reports meet, exceed budget
50/50 Rule task is considered 50% complete when it begins and gets credit
for remainder 50% only when completed
20/80 Rule - task is considered 20% complete when it begins and gets credit
for remainder 80% only when completed
0/100 Rule task only credited when fully completed
Change Requests
Cost Management Plan

Tools & Techniques of Cost Control

Cost Change Control System defines the procedures by which the cost

baseline may be changed

Performance Measurement assess magnitude of cost variations
(Earned Value Analysis) and what is causing the variance
Additional Planning examine alternatives
Computerized Tools forecast planned costs, track actual costs, forecast
effect of cost changes

Rate of Performance
Rate of performance (RP) is the ratio of actual work

completed to the percentage of work planned to have

been completed at any given time during the life of the
project or activity
Brenda Taylor, Senior Project Manager in South Africa,
suggests this term and approach for estimating earned
value
For

example, suppose the server installation was halfway

completed by the end of week 1; the rate of performance
would be 50% because by the end of week 1, the planned
schedule reflects that the task should be 100% complete
and only 50% of that work has been completed
The EV would thus be $5,000 after week 1 ($10,000*50%)

Earned Value Technique

Earned Value Technique

Earned Value Technique

Earned Value Technique

EVM

Project Cost Management

Accuracy of Estimates
Order of Magnitude Estimate: -25% - 75%;
usually made during Initiation Phase
Budget Estimate: -10% - 25%; usually made
during the Planning phase
Definitive Estimate: -5% - 10%; usually made
during the Planning phase

Project Cost Management

Accounting Standards
Not usually part of the exam
Present Value (value today of future cash
flows):

PV = FV
(1 + r) N
FV = Future Value
R = Interest Rate
N = Number of time periods

Project Cost Management

Accounting Standards

Net Present Value: total benefits (income or revenue) less

the costs. NPV is the sum of each present value of each

income/revenue item
Internal Rate of Return (IRR): company may select project
based on highest IRR
Payback Period: number of time periods it takes to
recover the investment in the project before generating
revenues
Benefit Cost Ratio (BCR): compares costs to the benefits
of different projects

Greater than 1 means benefits are greater than costs

Less than 1 means costs are greater than benefits

Opportunity Cost: opportunity given up by selecting one

project over another