Project Cost Management

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 Process Group
Knowledge Area
Initiating Planning Executing Monitoring & Controlling Closing
4.5. Monitor & Control
4.3.Direct & Manage Project 4.7. Close
4. Project Integration 4.1. Develop project 4.2. Develop project management Project Work
Work Project or
Management charter plan 4.6. Perform Integrated
4.4.Manage Project Knowledge Phase
Change Control
5.1. Plan Scope Management
5.Project Scope 5.2. Collect Requirements 5.5. Validate Scope
Management 5.3. Define Scope 5.6. Control Scope
5.4. Create WBS

6.1. Plan Schedule Management.

6.2. Define Activities
6. Project schedule
6.3. Sequence Activities 6.6. Control Schedule
Management
6.4. Estimate Activity Durations
6.5. Develop Schedule

7.1. Plan Cost management

7.Project Cost
7.2. Estimate Costs 7.4. Control Costs
Management
7.3. Determine Budget
8. Project Quality
8.1. Plan Quality management 8.2. Manage Quality 8.3. Control Quality
Management
9.3. Acquire Resources
9. Project Resource 9.1. Plan Resource Management
9.4. Develop team 9.6. Control Resources
Management 9.2. Estimate Activity Resources
9.5. Manage team
10. Project
10.1. Plan Communications 10.3. Monitor
Communication 10.2. Manage Communications
Management Communications
Management
11.1. Plan Risk Management
11.2. Identify Risks
11.3. Perform Qualitative Risk
11. Project Risk 11.6. Implement Risk
Analysis 11.7. Monitor Risks
Management Responses
11.4. Perform Quantitative Risk
Analysis
11.5. Plan Risk Responses
12. Project Procurement
12.1. Plan Procurement Management. 12.2. Conduct Procurements 12.3. Control Procurements
Management
13. Project Stakeholder 13.1. Identify 13.3. Manage Stakeholder 13.4. Monitor Stakeholder
13.2. Plan Stakeholder Engagement
Management Stakeholders Engagement Engagement

2 24 10 12 1
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 7. Cost
Management
Processes
Processes involved in
• Plan Cost Management
1 planning, estimating,
budgeting, financing,
• Estimate Costs managing and
2 controlling costs so
that the project can be
• Determine Budget
3 completed within the
approved budget.
• Control Costs
4

Plan Estimate Determine Control

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 Cost Estimation vs. Pricing
Cost estimating:
Assessing how
much it will cost
the organization
to provide the Cost
product or
service
Price
Profit
Pricing: Assessing
how much the
organization will
charge for the
product or service

IN-4
 Gantt Chart

Cost Jan Feb Mar Apr

Work Plan-Gantt Chart

IN-5
Planned Value (PV)

IN-6
 Example (1)
Budget At Compilation BAC = $100

Planned Value = Budget Cost for Work Schedule = $40

Earned Value = Budget Cost for Work Performed = $30
Actual Cost = Actual Cost for Work Performed = $45

Schedule Variance SV = BCWP – BCWS = 30 – 40 = -$10

Cost Variance CV = BCWP – ACWP = 30 – 45 = -$15

Schedule Performance Index SPI = BCWP / BCWS = 30 / 40 = 0.75

Cost Performance Index CPI = BCWP / ACWP = 30 / 45 = 0.666

IN-7
PV, EV and AC

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Example
Wall Construction
Time = 1 week per wall
Cost = SR 1,000 per
wall, materials and labor
Total Schedule = 4
weeks
Total Cost = SR 4,000
Working days 5 day
per week starting on
Sunday and finish on
Thursday by 5 PM
Assume production is
linear

IN-9
 5 pm Wednesday, Week 2

How much work should

have been completed -
PV?
PLANNED
Wall 1 100% = SR 1,000
Wall 2 80% = SR 800
Wall 3 0% = 0
Wall 4 0% = 0
BCWS = SR 1,800

IN-10
 5 pm Wednesday, Week 2

10 % What is the budgeted

value of actual work -
EV?
EARNED
Wall 1 100% = SR 1,000
Wall 2 50% = SR 500
Wall 3 10% = SR 100
Wall 4 0% = 0
50 % Total = SR 1,600

IN-11
5 pm Wednesday, Week 2

Total Cost to date –

AC = SR 2,250

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5 pm Wednesday, Week 2
Earned Value
PV SR1,800
EV SR1,600
AC SR2,250

Schedule Variance = EV - PV
= SR1,600 - SR1,800
= (SR200)
Cost Variance = EV - AC
= SR1,600 - SR2,250
= (SR650)

IN-13
5 pm Wednesday, Week 2
Performance Indices
PV SR1,800
EV SR1,600
AC SR2,250

SPI = EV / PV
= SR1,600 / SR1,800
= .9
CPI = EV / AC
= SR1,600 / SR2,250
= .7

IN-14
 1
Case 1
Chart Title

2,000
1,800
1,600
1,400
1,200
Axis Title

1,000
800
600
400
200
-
PV EV AC
Series1 1,860 1,860 1,860

This is the ideal situation, where

everything goes according to plan.

IN-15
 2-A
Case 2
1,950

1,900

1,850

1,800

1,750

1,700

1,650

1,900 1,700
1,600
PV AC

In this Case, without Earned Value measurements, it

appears we’re in good shape. Expenditures are less
than planned.
Spending Variance = - $ 200
IN-16
 2-B
Case 2 (cont.)
2,000

1,800

1,600

1,400

1,200

1,000

800

600

400

200
1,900 1,500 1,700
-
PV EV AC

This is the worst kind of scenario, where all performance indicators are
negative.

SV = - $ 400; SPI = 0.79

CV = - $ 200; CPI = 0.88
IN-17
Budget At Completion (BAC) Estimate At Completion (EAC)
§ This is the baseline cost of the total Based on where we are now, how much
project. will it cost when the project is done?

§ How much we planned to spend by the

time we finished. The answer depends on whether your past
performance is a good indicator of expected
future performance.
Example

After 4 months, we have completed

Activity 1 and 50% of Activity 2

The project costs at this point in time are

$29,000.

The total project budget is $100,000.

The Budget At Completion is $100,000.

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 Estimate At Completion Calculation Methods
Method 1 Method 2
Ø If we know that we can finish the Ø If the original estimates were
rest of the work as it was originally flawed, we should build new
planned … estimates for all the remaining

Ø Use actual to-date plus budgeted work …

amount for the rest of the work Ø ETC is the Estimate to Complete

Ø EAC = AC + (BAC – EV) the remaining work.

= $29,000 +($100,000-$24,000) Ø EAC = AC + ETC =

=$105,000 =$29,000 + $120,000

. =$149,000

IN-19
Estimate At Completion Calculation Methods
Method 3 Method 4
Ø If we assume that past
ØWe will consider both CPI and SPI ,
performance is a good indicator of
future performance this method is most useful when the
Ø Use actual to-date plus budgeted project schedule is a factor impacting
amount for the rest of the work, the ETC effort
modified by a performance factor,
such as CPI ØEAC = AC + (BAC –EV)
Ø EAC = AC + (BAC –EV) (CPI x SPI )
(CPI )

Ø EAC = BAC/CPI
= $100,000/0.83
= $120,481 (rounded off)

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 EXAMPLE 1
Given:
BAC = 200
ACc = 120
EVc = 80
CPIc = 0.666
Assuming that current variances are
atypical , the estimate at completion
(EAC) is:
A. 120.
B. 160.
C. 200.
D. 240.

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 EXAMPLE 2

Given:
BAC = 200
ACc = 120
EVc = 80
CPIc = 0.666
Assuming that current variances are
typical of future variances, the
estimate at completion (EAC) is:

A. 220.
B. 260.
C. 300.
D. 320.

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 To-Complete Performance index (TCPI)

• TCPI is a CPI that

must be achieved in
order to meet a certain
management goal for
the project (such as
BAC or EAC).

IN-23
1. You are a project manager working on a project that requires 100
widgets to be built in five weeks. You have just begun week
three, with an overall budget of US $10,000. To date you have
spent US $2,000 with 40 widgets successfully built. What does
the cost variance tell you in this circumstance?

A. The project is proceeding at 100% of the expected rate

B. The project is $2000 under budget
C. The project is on budget
D. The project is getting $2 of work for every dollar spent

IN-24
2- You are a project manager for a small construction project.
Your project was budgeted for US $72,000 over a six week
period. As of today, you've spent US $22,000 of your budget to
complete work that you originally expected would cost US
$24,000. According to your schedule, you should have spent
US $21,000 by this point. Based on these circumstances, your
project could be BEST described as:

A. Over budget
B. On budget
C. Under budget
D. Not having enough information provided

IN-25
3- A cost Performance Index (CPI) of 0.89 means:
A. At this time, we expect the total project to cost 89% more than
planned.
B. When the project is completed we will have spent 89% more
than planned.
C. The project is only progressing at 89% of that planned.
D. The project is only getting 89 cents out of every dollar invested.

IN-26
4- A Schedule Performance Index (SPI) of 0.76 means:
A. We are over budget.
B. We are a head of schedule.
C. We are only progressing at 76% of the rate originally planned.
D. We are only progressing at 24% of the rate originally planned.

IN-27
 Types of Cost

• Direct Costs:
Cost that are directly
attributable to the
work on project. Direct
Examples are team Cost
travel, team wages,
recognition and cost
of material used on
the project Total
• Indirect costs Cost
Overhead items or
costs incurred for the
benefit of more than Indirect
one project. Examples Cost
include taxes, fringe
benefits, and janitorial
services.

IN-28
 Types of Cost
Direct Indirect Variable Fixed
Cost Cost Cost Cost

Fringe Cost of
Team travel Benefits Set-up
material

Team Janitorial
wages services Supplies Rental

Recognition Wages etc.

Cost of
material

IN-29
 Depreciation
Straight Line Depreciation Accelerated Depreciation
The same amount of depreciation is There are two forms of accelerated
taken each year, A US $ 1,000 item with depreciation:
a ten year useful life and no salvage
1. Double Declining Balance
value (how much item is worth at the end
2. Sum of the Years Digits.
of its life) would be depreciated at US
They depreciate faster than straight line.
$100 per year calculations.
You do not have to know what these two forms
means or do any

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 Life Cycle Costing

• LIFE CYCLE COSTING

Means to look at
operation and
maintenance Cost and Life Cycle Cost
balance them with the (LCC)
project costs to try to
reduce the cost across
the entire life of the
project.

• The project team should

consider life cycle costs Operation &
rather than limiting their Project Cost Maintenance
responsibility only to COST
project costs.

IN-31
Trends & Emerging Practices In Project Cost
Management
Include the expansion of earned value management (EVM) to include the concept of earned
schedule (ES).
* Schedule Variance (time)= Earned Schedule – Actual Time
=( ES - AT = SV )
* Schedule Performance Index (index) = Earned Schedule / Actual Time
=( ES / AT = SPI )
* Independent Time Estimate at Compete (time) =
= Planned Duration / Schedule Performance Index (time)
$ IEAC = ( PD / SPI )
Time Now

7Months gone by,

PV
but the project
only has “ Earned
schedule” to
EV Month 5
Which SV?
$ behind or 2
months behind
schedule?
1 2 3 4 5 6 7 8 9 10
IN-32
 7. Cost
Management
Processes
Processes involved in
• Plan Cost Management
1 planning, estimating,
budgeting, financing,
• Estimate Costs managing and
2 controlling costs so
that the project can be
• Determine Budget
3 completed within the
approved budget.
• Control Costs
4

Plan Estimate Determine Control

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 7.1 Plan Cost management

The process of defining how the project costs will be estimated,

budgeted, managed, monitored , and controlled

Plan Estimate Determine Control

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 7.1 Plan Cost management

INPUTS
INPUTS T&T OUTPUTS

1. Project charter 1. Expert Judgment 1. Cost management Plan

2. Project manage. Plan 2. Data analysis
T&T
• Schedule manage. Plan
OUTPUTS
3. Meetings
• Risk manage. Plan
3. Enterprise environmental
factors (EEF)
4. Organizational process
assets (OPA)

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 Cost Management Plan

- Description of strategic funding choices,

- Procedure to account for fluctuations in
Additional details
currency exchange rates, and
- Procedure for project cost recording

IN-36
 7.2 Estimate Costs

The process of developing an approximation of the cost of resources

needed to complete project work

Plan Estimate Determine Control

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 7.2 Estimate Costs

INPUTS
INPUTS T&T OUTPUTS

1. Project manage. Plan 1. Expert Judgment

• Cost manage. Plan 2. Analogous estimating 1. Cost estimates
• Quality manage. Plan 3. Parametric
T & Testimating 2. Basis of estimates
OUTPUTS
• Scope baseline 4. bottom-up estimating 3. Project documents
2. Project documents 5. Three-point estimating updates
• Lessons learned register 6. Data analysis • Assumption log
• Project schedule • Alternative analysis • Lessons learned register
• Resource requirements • Risk register
• Reserve analysis
• Risk register • Cost of quality
3. Enterprise 7. Project management
environmental factors information system
(EEF) 8. Decision making
4. Organizational process • Voting
assets (OPA)

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 Cost Estimation (T & T)

Analogous Parametric Bottom Up

• House A is very similar to • As per latest market • House B will cost the
following:
house B. prices, it costs around
• $60,000 for foundation
• House a cost $300,000 $2000 to build 1m2.
• $70,000 for building,
• House B will cost • House B is 100m2
isolation & roof
$300,000. • House B will cost
• $25,000 for heating/cooling
100*2,000 = $200,000
system
• TTL = $155,000
IN-39
Higher

Most Likely
PERT Weighted Average =
Probability of
Occurrence

Optimistic + 4 X Most Likely + Pessimistic

Lower Optimistic Pessimistic

Less Possible Cost More

Triangula distribution. cE = (cO + cM + cP) / 3

Beta distribution. cE = (cO + 4cM + cP) / 6
IN-40
 Reserve Analysis

• Contingency reserves are estimated

costs to be used at the discretion of the
project manager to deal with
anticipated, but not certain, events.

• These events are “known unknowns”

and are part of the project scope and
cost baselines.

IN-41
 7.3 Determine Budget

The process of aggregating the estimated costs of individual activities

or work package to establish an authorized cost baseline

Plan Estimate Determine Control

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 7.3 Determine Budget

INPUTS
INPUTS T&T OUTPUTS

1. Project manage. Plan 1. Expert Judgment

• Cost manage. Plan 2. Cost aggregation 1. Cost baseline
• Resource manage. plan 3. Data analysis
T&T 2. Project funding
• Scope baseline
OUTPUTS
• Reserve analysis requirements
2. Project documents 4. Historical info. review 3. Project documents
• Basis of estimates updates
5. Funding limit
• Cost estimate • Cost estimates
• Project schedule reconciliation
6. Financing • Project schedule
• Risk register • Risk register
3. Business documents
• Business case
• Benefits manage. Plan
4. Agreements
2. EEF
3. OPA

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Cost Baseline
ØThe cost baseline is the
approved version of the
time-phased project
budget, excluding any
management reserves,
which can only be
changed through formal
change control
procedures

ØIt is used as a basis for

comparison to actual
results.

Ø It is developed as a
summation of the
approved budgets for the
different schedule
activities.

IN-44
 7.4 Control Costs

The process of monitoring the status of the project to update the

project costs and manage changes to the cost baseline.

Plan Estimate Determine Control

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 7.4 Control Costs

INPUTS
INPUTS T&T OUTPUTS

1. Project manage. Plan 1.Work performance info.

• Cost manage. Plan 1. Expert Judgment 2.Cost forecasts
• Cost baseline 2. Data analysis 3.Change requests
• EarnedT value
& T management OUTPUTS
• Performance 4.Project Management
measurement baseline • Variance analysis
• Trend analysis Plan updates
2. Project documents • Cost manage. Plan
• Reserve analysis
•Lessons learned • Cost baseline
3. To-complete performance
register • Performance measurement
index (TCPI)
3. Project funding baseline
4. Project management info. 5. Project documents
requirements
System updates
4. Work performance data
5. OPA • Assumption log
• Basis of estimates
• Cost estimates
• Lessons learned register
• Risk register

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 Forecasting

Ø As time progresses, PM should be able to forecast a EAC (estimate at

completion) that “may” differ from the original BAC.
Ø This is done based on the work performance information.
Ø Most common method is the manual bottom-up by PM and team.
Ø EAC = AC + bottom up ETC
IN-47
Cost Control

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Earned Value Analysis

IN-49
 Project Management Plan Vs Project Documents
Project Management Plan
1. Scope management plan
2. Requirements management plan
3. Schedule management plan
4. Cost management plan
5. Quality management plan
6. Resource management plan
7. Communication management plan
8. Risk management plan
9. Procurement management plan
10. Stakeholder engagement plan
11. Change management plan
12. Configuration management plan
13. Scope baseline
14. Schedule baseline
15. Cost baseline
16. Performance measurement baseline
17. Project life cycle description
18.Development approach
Project Documents
1. Activity attributes
2. Activity list
3. Assumption log
4. Basis of estimates
5. Change log
6. Cost estimates
7. Cost forecasts
8. Duration estimates
9. Issue log
10. Lessons learned register
11. Milestone list
12. Physical resource assignments
13. Project Calendars
14. Project communications
15. Project schedule
16. Project schedule network diagram
17. Project scope statement
18. Project team assignments
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19. Quality control measurements
20. Quality Metrics
21. Quality report
22. Requirements documentation
23. Requirements traceability matrix
24. Recourse breakdown structure
25. Resource calendars
26. Resource requirements
27. Risk register
28. Risk report
29. Schedule data
30. Schedule forecasts
31. Stakeholder register
32.Team Charter
33.Test and evaluation documents
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QUESTIONS?
51
Q1-One common way to compute estimate at completion
(EAC) is to take the budget at completion (BAC) and:

A. Divide by SPI.
B. Multiply by SPI.
C. Multiply by CPI.
D. Divide by CPI.

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Q2- Estimate at completion (EAC) is a periodic evaluation of:
A. The cost of work completed.
B. The value of work performed.
C. The anticipated total cost at project completion.
D. What it will cost to finish the job.

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 Q3- If earned value (EV) = 350, actual cost (AC) =
400,planned value (PV) = 325, what is cost variance (CV) ?

A. 50
B. -75
C. 400
D. -50

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Q4-Which of the following is NOT needed in order to come
up with a project estimate?

A. A WBS
B. A network diagram
C. Risks
D. A change control system

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Q5- Which of the following is an example of a parametric
estimate?

A. Dollars per module

B. Learning bend
C. Bottom-up
D. CPM

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Q6- Which type of cost is team training?
A. Direct
B. NPV
C. Indirect
D. Fixed

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Q7-Project setup costs are an example of:
A. Variable costs.
B. Fixed costs.
C. Overhead costs.
D. Opportunity costs.

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Q8- Earned value analysis an example of:

A. Performance reporting.
B. Planning control.
C. Ishikawa diagrams.
D. Integrating the project components into a whole.

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Q9-The difference between the cost baseline and the cost
budget can be BEST described as:

A. The Contingency reserve.

B. The Management reserve.
C. The project cost estimate.
D. The cost account

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Q10- Who has the cost risk in a fixed price (FP) contract?

A. The team
B. The buyer
C. The seller
D. Management

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62