3.

2 Project cost management

Cost Estimating
– Cost estimating involves developing an approximation
(estimate) of the costs of the resources needed to
complete project activities.
– Or Cost estimating involves developing an assessment of
the likely quantitative result how much will it cost the
performing organization to provide the product or service
involved.

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 Inputs to Cost Estimating

• Work breakdown structure.

– It is used to organize the cost estimates and to
ensure that all identified work has been
estimated.
• Resource requirements.
– The output of the resource planning process is a
description of what types of resources are
required and in what quantities for each element
at the lowest level of the WBS.

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 Contd…
• Resource rates
– The individual or group preparing the estimates must
know the unit rates (e.g., staff cost per hour, bulk
material cost per cubic yard) for each resource to
calculate project costs.
• Activity duration estimates.
– Activity duration estimates will affect cost estimates
on any project where the project budget includes an
allowance for the cost of financing (i.e., interest
charges).
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 Contd…
• Estimating publications
– Commercially available data on cost estimating.
•  Historical information
– Information on the cost of many categories of
resources is often available from one or more of the
following sources:
• Project files
– one or more of the organizations involved in the project
may maintain records of previous project results that are
detailed enough to aid in developing cost estimates.

5
 Contd…
• Commercial cost-estimating databases:
– historical information is often available commercially.
• Project team knowledge:
– the individual members of the project team may
remember previous actual or estimates.

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 Outputs from Cost Estimating

• Cost estimates
– Cost estimates are quantitative assessments of the likely
costs of the resources required to complete project
activities.
– Costs must be estimated for all resources that will be
charged to the project.
• Supporting detail
Supporting detail for the cost estimates should include:
• A description of the scope of work estimated.
• Documentation of the basis for the estimate;
• Documentation of any assumptions made.

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 Contd..

• Cost management plan:

– The cost management plan describes how cost variances
will be managed (e.g., different responses to major
problems than to minor ones).

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 Cost Budgeting

• Cost budgeting involves allocating the overall cost

estimates to individual activities or work packages to
establish a cost baseline for measuring project
performance.
• For control and monitoring purposes, the original
detailed cost estimate is typically converted to a
project budget, and the project budget is used
subsequently as a guide for management.

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 Cost Control

• Cost control is concerned with ;

– a) Influencing the factors that create changes to
the cost baseline to ensure that changes are
agreed upon,
– b) Determining that the cost baseline has
changed,
– c) Managing the actual changes when and as they
occur.

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Contd…

• Cost control includes:

– Monitoring cost performance to detect and understand
variances from plan.
– Ensuring that all appropriate changes are recorded
accurately in the cost baseline.
– Preventing incorrect, inappropriate, or unauthorized
changes from being included in the cost baseline.
– Informing appropriate stakeholders of authorized
changes.
– Acting to bring expected costs within acceptable limits.

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 Tools & Techniques

• Earned value analysis

– Earned value analysis in its various forms is the
most commonly used method of performance
measurement.
– integrates scope, cost (or resource), and schedule
measures to help the project management team
assess project performance.

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 Contd…
• Earned value (EV) involves calculating three key values for
each activity:
– The Planned Value (PV), which is also called the budgeted
cost of work scheduled (BCWS), is that portion of the
approved cost estimate planned to be spent on the activity
during a given period.
– The Actual Cost (AC), previously called the actual cost of
work performed (ACWP), is the total of costs incurred
in accomplishing work on the activity during a given
period.

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 Contd…
The EV, previously called the budgeted cost of work
performed (BCWP), is the value of the work actually
completed
From these three quantities we can determine our
total program budget as well as make a
determination of schedule and cost performance and
provide an estimated cost of the project at its
completion.

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 Contd…
• Budget At Completion (BAC) – The sum of all the
budgets allocated to a program.
• Schedule Variance (SV) – The difference between the
work actually performed (BCWP) and the work
scheduled (BCWS).
• Cost Variance (CV) – The difference between the
planned cost of work performed (BCWP) and actual cost
incurred for the work (ACWP).

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 Contd…
• Cost Performance Index (CPI) – The ratio of cost of work
performed (BCWP) to actual cost (ACWP). CPI of 1.0
implies that the actual cost matches to the estimated
cost. CPI greater than 1.0 indicates work is
accomplished for less cost than what was planned or
budgeted. CPI less than 1.0 indicates the project is
facing cost overrun.
• Schedule Performance Index (SPI) – The ratio of work
accomplished (BCWP) versus work planned (BCWS), for
a specific time period. SPI indicates the rate at which the
project is progressing.

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 Contd…
• Estimate At Completion (EAC) – It is a forecast of most
likely total project costs based on project performance
and risk quantification. At the start of the project BAC
and EAC will be equal. EAC will vary from BAC only
when actual costs (ACWP) vary from the planned costs
(BCWP).

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 Contd…
• Estimate At Completion (EAC)-
• Most common forecasting techniques:
• 1.EAC = Actual to date plus a new estimate for all
remaining work. This approach is most often used when
past performance shows that the original estimating
assumptions were fundamentally flawed, or they are
longer relevant to a change in conditions.
• 2.EAC = Actual to date plus remaining budget. This
approach is most often used when current variances are
seen as a typical and the project management team
expectations are that similar variances will not occur in the
future.
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 Contd…
• 3.EAC = Actual to date plus the remaining budget
modified by a performance factor, often the cumulative
cost performance index (CPI). This approach is most
often used when current variances are seen as typical of
future variances.

• 4.EAC = Budget At Completion (BAC) modified by a

performance factor, cumulative cost performance index
(CPI).

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 Contd…
• Estimate To Complete (ETC) – The difference between
Estimate At Completion (EAC) and the Actual Cost (AC).
This is the estimated additional cost to complete the
project from any given time.

• Variance At Completion (VAC) – The difference between

Budget At Completion and Estimate At Completion
(EAC). This is the dollar value by which the project will
be over or under budget.

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 Earned Value Formulas
NAME FORMULA NOTES
Cost Variance (CV) EV-AC Negative = Over budget
Positive = Under budget
Schedule Variance EV-PV Negative = Behind Schedule
(SV) Positive = Ahead of Schedule
Cost Performance EV/AC How much are we getting for every
Index (CPI) dollar we spend?
Schedule Perform EV/PV Progress as % against plan
Index (SPI)
Estimate to EAC-AC How much more do we have to
Complete (ETC) spend?
Variance at BAC-EAC At the end of the day, how close will
Completion (VAC) we be to plan?
Estimate at See following
Completion (EAC) slide
 Earned Value Formulas (Cont’d)
NAME FORMULA NOTES
Estimate at
Completion
AC+(BAC-EV)/CPI Use when current
variances are expected to
(EAC) BAC/CPI continue
AC+ETC Use when original
estimate was bad. Actual +
New estimate
AC+BAC-EV Use when current
variances are not expected
to be there in the future
AC+(BAC-EV)/CPI*SPI Use when the project is
over budget and behind
schedule
The Comparison between planned and earned values provides
work accomplishment or project performance in terms of cost
and time variances

• Schedule • Cost Performance • R

Performance Index Index • A

• T

• I

• O
• BCWS • BCWP • ACWP
• V

• A

• R

• Schedul • Cost • I
e Variance
• A
Variance
• N

• C

• E
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The expression used for computations based on EV Analysis can
also be shown clearly using three S-Curves

Status date Planned comp. Actual

date comp.date
EAC

Over budget VAC

cash flow
BAC ACWP=AC ETC
Cost

BCWS=PV

CV SV=EV-PV
CV=EV-AV
Forecast time CPI=EV/AV
overrun
BCWP=EV SPI=EV/PV

SV Time
 Examples on EVA technique

Example 1
The excavation of one building scheduled for 10 days on
100birr. Currently the excavation work on 3rd day the work
completed 20% in 30 birr. Then find
a) CV
b) SV
c) SPI
d) CPI
Of excavation work and write status of work?

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 Example 2
Given a project with the following characteristics, answer the
following questions:
• You are the project manager of a project to build fancy birdhouses.
• You are to build two birdhouses a month for 12 months.
• Each birdhouse is planned to cost $100.
• Your project is scheduled to last for 12 months.
• It is the beginning of month 10.
• You have built 20 birdhouses and your CPI is 0.8.
Then find
a. EV, PV,AC,CV, SV and SPI
b. States of project

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 Example 3

Given project
 5km road project
 5month contract time of completion
 Budgeted cost of Br. 500M
Scheduled(time and cost)
 1km1month100M.Br
Physical progress
 At the end of 2nd month 1.5 km
 Actual cost 180M.Br
Question
 Under spending?/ over spending?
 Behind schedule?/ ahead schedule?
Solution
Cost over run=180-150= 30M
 BCWS=200M here the schedule is measured by Br.
 BCWP=150M
 ACWP=180M(Earned Value) from cost statement of the project(Report)
Variance
 SV=BCWP-BCWS=-50M
(schedule variance in terms of money, it could be in MH or equipment, labor..)
CV=BCWP-ACWP=-30M(negative variance as of monitoring day )
Conclusion
As the SV & CV indicates the project is Overspending and as well lagging
behind the schedule.
SPI=BCWP/BCWS=150/200=0.75 behind schedule
CPI=BCWP/ACWP=150/180=0.83 cost overrun
Budget at completion BAC=500M
Estimate at completion
 EAC= ACWP+ETC=180+350=520M
 EAC=(ACWP/BCWP)x BAC=(180/150)x500=600
Estimate to completion
(EAC=BAC/CPI=500/0.83=600) 3.5km each with 100
 EAC=AC+BAC-EV=180+500-150=530
 EAC=AC+ (BAC-EV)/CPI=180+(500-150)/0.83=601.69
 Which one is the exact estimate????
Variance at competition
VAC=BAC-EAC=500-???=???
 Example 4
consider a simple project in which five activates described as a bar chart
each activity requires time. To complete associated cost also indicated
below estimated project duration five month.
activity cost M1 M2 M3 M4 M5
A 20000
B 10000
C 100000
D 40000
E 60000

at third month and 15 day the following has been accomplished

-B,C,D are 100%
-A 30% completed
incurred to date cost :150000

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compute
A estimated value of work actually accomplished
B estimated value of work planned to be done
C determine the project status(over budget, under budget ,on budget)
D determine the project ahead , behind or on schedule
E determine the revised estimation cost of the project(by 4 methods

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•THANK YOU
FOR YOUR
ATTENTION
 Q1
• You are working as an intern and have 10 m 3 mixing of
concrete. It is estimated that it will take you 5 hours per
m3 and you are scheduled to work 5 hours a day. You
are paid birr10 per hour. After 6 work days you have
spent 15 hours and completed 5 m3 concrete.
Compute
A actual value of work accomplished
B estimated value of work actually accomplished
C estimated value of work planned to be done
D determine the project status(over budget, under budget ,on
budget)
E determine the project ahead , behind or on schedule
F determine the revised estimation cost of the project( use 3 cases

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