Project Cost Management

Prof. Vilas Shah

What is Cost and Project Cost
Management?

 Cost is a resource sacrificed or fore-gone to

achieve a specific objective or something
given up in exchange
 Costs are usually measured in monetary units
like Rs
 This is the process group to ensure the
project is completed within the approved
budget.
– The major output is the cost management plan
– There are 4 processes in Project Cost
Management
Project Cost Management Processes

 Resource planning (planning phase)

– determining what resources and quantities of them should
be used
 Cost estimating (planning phase)
– developing an estimate of the costs and resources needed
to complete a project
 Cost budgeting (planning phase)
– allocating the overall cost estimate to individual work items
to establish a baseline for measuring performance
 Cost control (control phase)
– controlling changes to the project budget
Inputs to Resource Planning
 WBS
– identifies the project elements that require resources.
 Historical information
– identifies required resourced used in similar work on previous project.
 Scope statement
– contains the project justification and the project objectives.
 Resource pool description
– identifies available project resources.
 Organizational policies
– may impact some of the project management decision. These are constraints, such
as staffing, rentals, and purchasing supplies and equipment.
 Activities duration estimates
– the best estimates of the time that it will take to perform the work
– It is the output of Time Management Process: Activity Duration Estimating.
Work Breakdown Structure
 Once the scope and deliverables have been identified
the work of the project can be subdivided into smaller
and smaller work elements.
 The outcome of this hierarchical process is called the
work breakdown structure
 WBS is a map of the project
 Last part of the chart is work package which can be
delivered by identifiable activities
WBS - Work Packages
 Lowest agreed level for management purposes
– Enables delegation of responsibility and authority
– Results in ownership and accountability
 Building block of the Project Baseline Plan
 Provides a common basis for
– Estimation of Scope, Time, Resources, and Risk
– Comparison between plan and actual
Outputs from Resource Planning

 Resources requirement
– describes the types (e.g. skills levels) and number
of resources required by each element of the WBS.
Cost Estimating
 collecting and predicting the costs over the life cycle of
a project or phase of a project
– developing cost estimates for all the resources needed to
complete project activities.
– An important output of project cost management is a cost
estimate
– There are several types of cost estimates and tools and
techniques to help create them
 It is also important to develop a cost management plan
that describes how cost variances will be managed on
the project
Factors Influencing Quality of
Estimates

 Past Experience
 The planning horizon
 Use of new technology
 The people factor
 Project structure
 Padding estimates
 Organization culture
Past Experience

 Good starting point

 Must be refined
 Factors related to uniqueness of project
 External factors may have changed
Planning Horizon

 Current events estimates can be very accurate

 Distant events uncertainty of estimate
increases
 Estimates improve as we move from concept
phase to wbs
New Technology

 Estimates likely to overshoot if new technology

has to be implemented
 Scope definition for new tech projects difficult
 Environmental conditions for new project
involving new tech?
The People Factor

 Skills of people making estimates?

 Matching of skill set of available people to
requirements affects productivity as well as
improvement due to learning curves
 Whether team members have worked together
before on similar projects?
 Staff turnover the unknown factor..!
Project Structure
 What organization structure is being used?
 Speed better if dedicated team
 Personnel costs more for dedicated team
 Matrix environment may reduce personnel cost
but increase cost due to longer time to
complete the project due to divided attention of
team members and higher coordination
demands
Padding Estimates

 Tendency to add a little padding to increase

the probability of being on safe side
 If done at every stage the project duration and
costs can be seriously overstated
 Top management can try to offset this by a
blanket cut of 10-15%
 This can not work in long run as people factor it
Organization culture

 In some organizations padding is tolerated or

indirectly encouraged
 Different organizations attach varying
importance to estimates sample views being
– Takes too much of time and cost
– Impossible to predict the future
Non Project Factors

 Equipment downtime
 Vacations
 Legal limits
 Project priority can influence resource
assignment impacting costs and time
Macro Vs Micro Estimations
 Rough order of magnitude is good enough?
 Internal project cost not major factor..!
 Uncertainty so great no point in detailing of
costs
 No response time available to work it out
 Macro approaches group many task in a
common basket with a chance of errors of
omission
Macro Approaches

 Ratio Methods
 Apportion method
 Function point method
Ratio Methods

 Uses ratios to estimate

 Examples
– contractors use number of square feet to estimate
the cost and time to build house
– New plant estimated by capacity size
– Software products estimated by features and
complexity
Apportion method

 Extension of ratio method

 Used when projects closely follow past projects
in features and costs
 Apportion costs to different landmark
completions like foundation, framing, electrical,
plumbing etc in a typical housing project
Function point methods
 Used mostly for software projects
 Weighted macro variables are called function
points
 Examples- no. of inputs, outputs,data
files,interfaces etc
 The variables are adjusted for complexity and
a count is developed which can be translated
into costs
Learning Curves

 When same tasks or group of tasks are

performed repetitively the time to perform them
goes on decreasing.
 The pattern of improvement phenomenon can
be used to predict the reduction in time to
perform the task
Micro Approach

 Template Method
 Parametric Procedures Applied to Specific
Tasks
 Detailed Estimates for wbs work packages
 Hybrid approach – Phase Estimating
Template Method

 Start with a similar project in past

 Note the differences in new project
 Past times and costs are adjusted for these
differences
 The potential schedule, estimate cost,budget
can be developed by this method in very short
time
Parametric Procedures Applied to
Specific Tasks

 Similar to parametric approach in macro

approach like cost/sq.feet this is as applied to
specific tasks
 These task are chosen such that they are
amenable to use of such method
 Example- estimating cost of wall papering
Hybrid approach – Phase
Estimating

 Begins with a macro estimate for the project

and then refines estimates for phases of the
project as they are implemented
 Useful for projects which by nature cannot be
rigorously defined due to uncertainty of design
or final product
Level of Detail

 For Top and Middle Management

– Detail should be no more than is necessary and
sufficient
– Interest typically centers on total project and major
milestone events
– Example- Refinery structural work complete
Level of Detail

 For Project Managers

– General principal is keep the detail to minimum
– But the estimates will be used to control
– Rule of thumb says task duration should be
between 5 to 10 days
– For larger tasks control monitoring check points
should be provided for segments of task so that it
can be identified as percentage of completion
Developing Budget
 Cost estimates are not budgets..!
 It has to be time phased
 Work packages durations and logical
dependencies used to develop project network
 The network schedules when work package
will start and end
 Time phased budgets mirror how actual cash
needs will occur( Cash Out Flow)
Types of Costs

 Direct costs
– Labor
– Materials
– Equipment
– Other
 Project overhead costs
 General administrative overhead costs
Direct costs

 They are clearly chargeable to a specific work

package
 Can be influenced by the project manager,
team, individuals implementing the work
package
 Must be paid as the project progresses
Direct Overhead Costs

 Direct overhead costs more closely pinpoint

which resources of the organization are being
used in the project
 They can be tied to project deliverables
 Example-
– Salary of project manager
– Normally estimated in relation to direct costs(say
20%)
General administrative overhead
costs

 These represent organizational costs not

directly related to the project
 These may be the cost of higher managements
controlling more projects
 Some common costs like
advertisements,accounting etc

NEXT
Guidelines for times costs and
resources..

 Responsibility
– At the work package level estimates should be
made by the persons most familiar with the task
– They may not have some preconceived , imposed
duration for deliverables in mind
– They are more likely to buy in these estimates while
implementing the work package
Guidelines for times costs and
resources..

 Normal conditions
– Estimates should be based on normal conditions,
efficient methods, and a normal level of resources
– Organisations may differ in what is normal
– Examples- 5 days week, normal work day 2 shifts
etc
Guidelines for times costs and
resources..

 Time units
– All task time estimates need consistent time units
– Example -When computer programs allow more
than one options like 5 day work week and the
estimated activity duration is in calendar days, it
should be appropriately converted to the normal
work week
Guidelines for times costs and
resources..

 Independence
– Estimators should treat the task as independent of
other task that might be integrated by the WBS.
– Top managers are prone to aggregate many tasks
into one time estimate and then deductively make
the individual task time estimates add to the total
– This underestimates the uncertainty at the activity
level and generally results in optimistic estimates
Guidelines for times costs and
resources..

 Contingencies
– Work package estimates should not include
allowances for contingencies even though normally
every work package will not materialize as planned
– Top management has an extra fund for
contingencies

– NEXT
Why estimates go wrong

 Interaction costs are hidden in estimates

 Normal conditions do not apply
 Things go wrong on projects
 Project scope and plans change
Why estimates go wrong

 Interaction costs are hidden in estimates

– Work on one task in dependent on prior task
– Hand off between tasks requires time and attention
– Time necessary to coordinate activities typically is
not reflected in independent estimates
– Time and therefore costs devoted to managing
interaction go up exponentially as number of people
and different disciplines involved increase in project
Why estimates go wrong

 Normal Conditions do not apply

– Estimates are based on normal conditions
– Availability of resources may always throw up
surprises
– Outsourcing may require more time for acclimating
outsiders to a particular project and culture of the
organization
Why estimates go wrong

 Things go wrong on Projects

– Design flaws are revealed, extreme weather
conditions occur, accidents happen
– While one cannot plan for these things we have to
anticipate the risks and their impact on project
Why estimates go wrong

 Project scope and plan change

– As a manager progresses with the project he
develops better understanding of what needs to be
done to accomplish the project
– This may lead to changes in project plans and costs
– New demands from customer do come in
Remedies
 Adjusting Estimates
– Should adjust estimates once particulars of the
situation have been more clearly defined
– Adjust estimates to take into account for abnormal
conditions e.g. if soil samples reveal excessive
ground water then revise foundation costs and time
– Adjust estimates to account for specific actions to
reduce chances of errors e.g. to reduce the chances
of design code errors add cost of independent
testers
Remedies

 Contingency funds and Time Buffers

– Created to offset uncertainty
– The less well defined the project the greater the
contingency
– Activity contingency is the amount added by the
estimator to the initial estimate of an activity to
account for known uncertainties
– Contingency provision is guided by past similar
projects
Progress
 Given:
– total budget of Rs 100,000
– 12 month effort
– produce 20 units
 Status:
– spent to date: Rs 70,000
– time elapsed: 6 months
– units produced: 8 complete, 3 partial
 How are you doing, and how do you know how you are
doing?
 How far along are you? (70%, 50%, >40%)
Few questions

 What is the current status of the project in

terms of schedule and cost?
 How much more cost to complete ?
 When will the project be completed?
 Causes for schedule/cost overrun
 Given cost overrun midway can we forecast
overrun at completion?
Measuring and Evaluation steps

 Setting a baseline plan

– Derived primarily from wbs
– By time-phasing all work,resources,budgets
 Measuring progress and performance
– Measuring against time relatively simple
– Measuring against budget difficult
Measuring and Evaluation steps

 Comparing plan against actual

– Helps determine if action is necessary
– Should be frequent enough to allow early detection
of deviations and initiate timely corrections
 Taking action
– Required if deviations are significant
– Change in conditions or scope may require change
in baseline plan
Course corrections are easier early!
Monitoring time performance

 Gantt and control charts serve well

 Tracking gantt are used to compare actual with
baseline
 Project schedule control charts are also useful

Time Periods
Ahead of schedule

Reporting Periods Behind schedule

Earned Value System steps

 Define work using WBS

– Scope
– Work packages
– Deliverables
– Organization units
– Resources
– Budgets for each work package
Earned Value System steps..

 Develop work and resource schedules

– Time-phase work packages into a network
– Schedule resources to activities
 Develop a time phased budget
– Use work packages included in activity
– This can give baseline and BCWS
Earned Value System steps..

 Collect Exact costs for work performed at

package level
– These will be called Actual Cost of Work
Performed(ACWP)
– Collect the Budgeted Costs for Work actually
Performed(BCWP) This is the value of work earned.
– Collect Budgeted Cost of Work Scheduled(BCWS)
Earned Value System steps..

1. Compute the schedule variance

1. SV= BCWP-BCWS
2. Compute cost variance
1. CV= BCWP-ACWP
The Baseline

 The baseline (BCWS) serves as anchor point

for measuring the performance
 It helps controlling cost by deliverables as well
as by organization break down structure

 NEXT
Placing Costs using percentage
complete

 Percent complete is the work horse for

developing the baseline and monitoring project
progress
 Someone familiar with task will break the task
into distinct segments that can be used for
monitoring
Methods of variance analysis

 Comparing earned value with expected

schedule value
– Schedule variance
 Comparing earned value with the actual costs
– Cost variance
Variances

 A positive variance indicates a desirable

condition while a negative variance suggest
problems
 Cost variance tells us if the work accomplished
costs are more or less than was planned
 Schedule variance tells us the overall
assessment of all work packages in project
schedule till date
Schedule Variance

 Schedule variance measures the progress in

money terms rather than time units
 It contains no critical path information
 For actual schedule one has to go to tracking
gantt chart
Project Status Report

 A status report is analogous to a snapshot of a

project at a specific point in time
 It uses earned value to measure the schedule
and cost performance
 In process activities require the observed
percent complete to be collected to compute
earned value
Estimated cost at completion

 Revised estimate of unfinished activities is

gathered and built into status report to
Estimate cost At Completion (EAC)
 BAC is Budgeted cost At Completion
 Variance At Completion (VAC) = BAC-EAC
Other Earned Value Rules

 0/100 percent rule

– This rule assumes credit is earned for having
performed the work once it is completed
– Used for work packages with very short durations
– Example- task requires purchase and installation of
the equipment where equipment is major cost
Other Earned Value Rules

 50/50 Rule
– This approach allows 50 percent of the value of the
work package budget to be earned when it is started
and 50 percent to be earned when the package is
completed
– Popular for short duration and small cost packages
Performance Indexes

 Cost Performance Index (CPI)

– It is BCWP/ACWP
– It is most accepted and used index for cost
efficiency
 Scheduling Performance Index(SPI)
– It is BCWP/BCWS
– It is a measure of scheduling efficiency
Performance Indexes..

 Percent Complete Index(A)

– It is BCWP/BAC
– It compares to-date progress to the end of the
project
 Percent Complete Index(B)
– It is ACWP/EAC
– It uses actual expenses data rather than budgeted
data
Performance Indexes..

 Underlying assumption
– Conditions will not change
– The information in the database is accurate
Final project cost Forecast

 Remaining forecasted cost is calculated by

formula
– ETC = (BAC-BCWP)/(BCWP/ACWP)
 Forecasted total cost at completion is
– FAC = ETC+ACWP
Case Study

 50 timber sale projects taking place

concurrently
 New ones were started as earlier completed
 Consultant suggested earned value method for
monitoring
 After 9 months review revealed following
Case Study..

 The earned value system provided good

information for monitoring and forecasting
 Costs and problems of collecting timely percent
complete data were unacceptable as no funds
available to collect data
Case Study..

 Level of detail dilemma discussed but no

solution in sight
 Too little data fail to offer good control
 Excessive reporting required paperwork and
people which was costly
Case Study..

 A pseudo-version of percent complete was

proposed
 Very large work packages were broken down
into smaller work packages for closer control
and identification of problem sooner
 Work package of one week duration decided
Case Study..

 A telephone call and yes/no answers to

following questions designed to assign percent
complete
 Work on work package started?
– No= 0 percent
– Working on package- Yes = 50 percent
– Is the work package completed? Yes=100 percent
 System worked well
Thanks