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Project Cost Management

Project Cost Management

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Project Cost Management

PMBOK Chapter 7

PROCESS GROUPS
I

Planning

Cost Estimating

Cost Budgeting
E Controlling C

Cost Control

Cost Estimating 

Cost estimating and Pricing:  

Cost estimating: how much will it cost the performing organization to provide the product or service involved? Pricing: how much will the performing organization charge for the product or service? Business decision. decision. 

Estimating should be done by the person doing the work.

Cost Estimating
Inputs
1. WBS 2. Resource requirements 3. Resource rates. 4. Act. duration est. 5. Historical info. 6. Chart of accounts 7. Risks

Tools
1. Analogous est. 2. Parametric modeling 3. Bottom-up est.

Outputs

1. Cost estimates 2. Cost management plan 



Based on the WBS to increase the accuracy. Project managers should analyze the needs of the project, to compare and reconcile any differences with cost requirements from management.

Generally includes appropriate risk response planning. How it was developed? Assumptions made.Cost Estimating  Cost estimates for all resources that will be charged to the project. . Range of possible results. Reference to WBS.   Generally expressed in units of currency to facilitate comparisons both within and across projects.  Supporting detail must include:      Cost management plan how cost variances will be managed.

4. Cost budgeting tools and techniques 1. Cost estimates WBS Project schedule Cost management plan 1. 3. 2.Cost Budgeting  Allocate the overall cost estimates to individual activities or work packages to establish a cost baseline for measuring project performance. Cost baseline . Inputs Tools Outputs 1.

Expected Cash Flow Cumulative Values Cost Baseline Time .Cost Budgeting  The cost baseline will be used to measure and monitor cost performance of the project.

and establish commitment Development stage estimate. Accuracy Estimate Order of Magnitude (Early) Accuracy -25% +75%  Most difficult to estimate as very little project info is available Used to finalize the Request for Authorization (RFA).Estimates vs. Needed to predict revised project completion date Budget Estimate -10% +25  Definitive Estimate -5% 10%  .

but reliable High cost (time) / WBS needed Buy-in from the team BuyMathematical models to predict costs Two types: REGRESSION ANALYSIS. but estimates are rough Accuracy Slow.Tools for Estimating (and Budgeting) Top Down Estimating Bottom Up Estimating Parametric Modeling depends on experience Fast. and LEARNING CURVE Expert judgment Delphi Tasks need not to be identified Method (analogous) Considerable experience needed .

Cost Control  Monitor Cost Performance  Detect and understand variances from plan  Ensure all changes are recorded and agreed upon  Prevent bogus changes from being included in cost baseline  Inform stakeholders of authorized changes  Bring costs within acceptable limits .

Earned Value Management 4. Additional Planning 5. Cost Management Plan  Understand what is driving variances. Budget Updates 3. Revised Cost Estimates 2.Cost Control Inputs Tools 1. Performance Reports 3. Computerized Tools Outputs 1. and decide what action to take. Cost Change Control System 2. Corrective Action 4. . Lessons learned 1. Change Requests 4. Project Closeout 6. Performance Measurement 3. Estimate at Completion 5. Cost Baseline 2. good and bad.

‡ 50/50 Liberal approach. ‡ 20/80 20% at start of the project. the rest when it is completed. . No work.Cost Control  Work completion methods: ‡ 0/100 Conservative approach. no money.

Used to future performance and project completion dates Key concepts: EV = Earned Value (BCWP) Estimated value of the work actually accomplished  forecast PV = Planned Value (BCWS) Estimated value of the work planned to be done  AC = Actual Cost (ACWP) Actual cost incurred for the work accomplished .Cost Control: Earned Value Management  Earned Value: Integrates cost. time and scope.

Earned Value Management  BAC = Budget At Completion  Estimated total cost of the project when done  EAC = Estimate At Completion  Forecast of most likely total project cost based on project  performance and risk quantification  CPI = Cost Performance Index  Ratio of budgeted costs to actual cost  SPI = Scheduled Performance Index  Estimated total cost of the project when done .

AC EVNegative is over budget.EV AC + (BAC . Positive is ahead schedule    CPI = Cost Performance Index = EV / AC SPI = Schedule Performance Index = EV / PV EAC = Estimate At Completion =     BAC / CPI Most often used formula AC + ETC AC + BAC .AC VAC = Variance At Completion = BAC .PV EVNegative is behind schedule.Earned Value Management  Key Formulas:  CV = Cost Variance = EV.EAC .EV) / CPI   EAC = Estimate At Completion = EAC . Positive is under budget  SV = Schedule Variance = EV.

1/2 highway was completed and the cost was $2 Billion.Big Dig    Started construction on 1991 and planned completion by 1997 (6 years). Do the EV analysis .5 Billion per highway/year) At the end of the first year. the project included 6 highways ($0. it was to cost $3 Billion.

25 Billion $0.Big Dig: The Numbers  EV  PV  AC = Earned Value = $0.5/2 = Planned Value = $0.5 Billion = Actual Cost = $2 Billion = Budget At Completion = $3 Billion  BAC .

5 = 0.5 = .PV = $0.25 / $0.25 / $2 = 0.75 Billion = EV .$0.25 .$0.25 Billion = EV / AC = $0.$2 = .50 = $ 6 Billion Over Budget by $1.25 .75 Billion Behind of schedule  CPI  SPI Getting 0.12 = EV / PV = $0.50 = BAC / CPI = $3 / 0.AC = $0.12 cents out of every dollar budgeted 50% of progress planned  EAC .$1.Big Dig: Performance  CV  SV = EV .

use PV Negative numbers are bad. positive is good Ref: Rita Mulcahy . the formula is EV ± something If it¶s index.EVM Hints  EV      comes first in every formula If it¶s variance. EV / something If it relates to cost. use Actual Cost If it relates to schedule.

janitorial services  . equipment. Labor hours. material.Cost Types  Direct Costs Related ³Directly´ to the project ex. Building rent. . travel. taxes. Indirect Costs Overhead used for more than one project ex. . food.

really isn¶t the same! ‡ Variable Cost ± Changes with volume ‡ Fixed Cost ± Stay the same.Cost Types A cost by any other name. regardless of volume TC = VC+FC COST VC FC Volume .

There may be temptation to lower project costs at the expense of long term costs.Cost Types Project Costs Are incurred while the project is being fulfilled. Life Cycle Costing gives the PM a way to consider costs outside of the scope of project fulfillment . Life Cycle Costs Includes the costs after project completion.

AP. they¶re gone Working Capital Current Assets (Cash.Important Concepts Sunk Costs Forget µem. Inv. AR) ± Current Liabilities (Notes. Accr) .

The 10.Cost and Project Selection Present Value ‡ Is $10.000 in your pocket now worth more than the $10.000 in your pocket one year from now? ‡ Yes! You can use the money now to make more money. .000 in a year from now should be ³discounted´ to the present. since it¶s not worth as much.

000 10.Present Value of Your PMP Consulting Gig Time 0 1 2 3 4 Total ³ Income 10.090 8.000 9.697 .000 Present Value 10.513 6.830 41.000 10.000 10.000 50.264 7.000 10.

Net Present Value NPV. like Present Value. discounts future cash flows to the present PV of Revenue ± PV of Costs .

513 6.000 10.000 2.000 20.000 50.358 .502 1.366 18.818 1.Net Present Value: Your PMP Gig Time 0 1 2 3 4 Total Revenue 10.000 PV of Costs 12.264 7.011 5.000 2.000 10.830 41.697 Costs 12.000 9.339 NPV -2000 7.611 6.000 2.000 2.090 8.000 1.653 1.464 23.272 6.000 10.000 10.000 Present Value 10.

Which would I choose? .Internal Rate of Return What is the return on the money invested? ‡ Expressed as percentage ‡ Great for comparing between two projects of different value Project A has an IRR of 21% and Project B has an IRR of 14%.

The Payback Period is. 5 years .000. .000 a year. . and the cash flow it will bring is $11.Payback Period How long until we get the money back? ‡ ³Quick and Dirty´ method for project selection ‡ Does not take into account the Time Value of Money Your Project costs $50.

If Project A has a BCR of 2.Benefit Cost Ratio Compares the revenues to the costs ‡ ‡ ‡ ‡ Revenue in this is the same as ³payback´ 1 is the magic number where costs = revenue Less than 1.2. .2 and Project B has a BCR of 1. pick A. and the benefits are greater than costs. costs are greater than benefits Greater than 1.

PMP Exam Questions  If Earned Value (EV) = 300. what is the Cost Variance (CV)? a. Actual Cost (AC) = 450.b. 175 Ref: Rita Mulcahy . 150 d.-150 c. 25 b. Planned Value (PV) = 275.

150 d.PMP Exam Questions  If Earned Value (EV) = 300. 175 CV = EV ± AC Negative is Over Budget Positive is Under Budget Ref: Rita Mulcahy .b. 25 b. Actual Cost (AC) = 450. what is the Cost Variance (CV)? a. Planned Value (PV) = 275.-150 c.

000. Project D is being done over 1 year and has an NPV of $70.PMP Exam Questions  You have 4 projects from which to chose 1.000. Project A is a 5 year project with an NPV of $80. Which Project should you chose? Ref: Rita Mulcahy .000. Project C is a 4 year period and has an NPV of $50. Project B is a 2 year project with an NPV of $40.000.

PMP Exam Questions Project A B C D Time 5 yr 2 yr 4 yr 1 yr NPV $80.000 $40.000 $70.000 $50.000 NPV already takes time into account. so you always pick the project with the highest NPV! Ref: Rita Mulcahy .

Suggest life cycle as a compromise. d. c. the sponsor wants analogous estimating.PMP Exam Questions  Early in the project you and your sponsor are discussing which estimation should be used. Determine why the sponsor wants such an accurate estimate. Agree to analogous ± it¶s a form of expert b. Try to convince the sponsor to allow expert judgment since it is usually more accurate. You want expert judgment. The best option is to a. Ref: Rita Mulcahy .

Determine why the sponsor wants such an accurate estimate. Agree to analogous ± it¶s a form of expert b. c. set for you by the PMP. Suggest life cycle as a compromise.PMP Exam Questions a. A cruel and vicious trap. . Try to convince the sponsor to allow expert judgment since it is usually more accurate. you realize this is a trap. d. Trick Question ± Analogous Estimating is a form of expert judgment. Choice B seems tempting. but if you know that analogous estimation is not accurate.

c. d.PMP Exam Questions  Cost performance measurement is BEST done through: a. Using the 50/50 rule and making sure the life cycle cost is less than the project cost. . Ask for a percent complete from each team member and reporting that. b. Focusing on the amount expended last month and what will be expended the following month. Calculating the earned value and using the indexes and other calculations to report past performance and forecast future performance.

on performance that can on well. d. .PMP Exam Questions a. Calculating the earned value and using the indexes and other c. and the life cycle cost can Objective measurements based since the life cycle goes be never be lower than the project cost. Focusing on the amount expended last month and what will be expended the following month. 50/50 rule isn¶t always in the progress report. Ask for a percent complete from each team member and reporting that. performance. Using the 50/50 rule and making sure the life and forecastless than the project calculations to report past performance cycle cost is future cost. Inaccurate because based on subjective guess. for applied to the future life. b. Rookie Answer ± usually for inexperienced since the past can¶t always be used to tell the future.

2. 2002. PMBOK Guide. 154. Boston University. 133Exam Questions adapted from pps. 153 #24. 2004. Rita Mulcahy PMP.Sources 1. MA. pp 83-95 83PMP Exam Prep. #31. Guide. Vijay Kanabar. 151 #9. 2000. 133-161. PMI. Newton Square. Third Edition. 150 #3. 3. PA. RMC publications. pp. Preparing for PMP Exam. Boston. pp 9898110 .

2005 Version 2: Vijay Kanabar 12/15/2007 .PPT Source  Version   1: Manuel Guzman Carlos Hurtado Matthew Lyberg May 20.

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