Project Management

Chapter VII – COST MANAGEMENT

knowledge areas
• Chapter 4 Project Integration Management

• Chapter 5 Project Scope Management

• Chapter 6 Project Time Management

• Chapter 7 Project Cost Management

• Chapter 8 Project Quality Management

• Chapter 9 Project Human Resource Management

• Chapter 10 Project Communications Management

• Chapter 11 Project Risk Management

• Chapter 12 Project Procurement Management

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cost management
 Objective: the project
is executed within the
approved budget.

processes interactions

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7.1 cost estimaiton
• developing an approximation of the costs of the resources
needed to complete project activities

• in approximating costs, the estimator considers the possible

causes of variation of the cost estimates, including risks

analogous estimating
Advantages
•excludes mistakes
repeating
•easier orientation
•presence of a prototype
•presence of experience
•minimizes risk
•less time needed
•known components
•we have an indication
•less cost consuming,
because of less
people/experts involved
Disadvantages
•can lead to mistakes
•wrong assumptions
•cannot take into
consideration new/different
risks
•the existing experience is
not improved
•don’t try to have a third
opinion
•subjective
•lack of originality

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bottom-up estimating
Advantages Disadvantages
•minimizes variations •involves more resources
•increases possibility for •more time
control •more padding
•ensure commitment of
team members to the
estimates
•includes the specifics of
THIS project
•more accurate estimates
•new experience
•more understanding of the
project content

tools for estimating

• Analogous Estimating
• Analogous cost estimating means using the actual cost of
previous, similar projects as the basis for estimating the cost of
the current project. Analogous cost estimating is frequently used
to estimate costs when there is a limited amount of detailed
information about the project (e.g., in the early phases).
Analogous cost estimating uses expert judgment.
• Analogous cost estimating is generally less costly than other
techniques, but it is also generally less accurate. It is most reliable
when previous projects are similar in fact, and not just in
appearance, and the persons or groups preparing the estimates
have the needed expertise.

• Bottom-up Estimating
• This technique involves estimating the cost of individual work
packages or individual schedule activities with the lowest level of
detail. This detailed cost is then summarized or “rolled up” to
higher levels for reporting and tracking purposes.
• The cost and accuracy of bottom-up cost estimating is typically
motivated by the size and complexity of the individual schedule
activity or work package. Generally, activities with smaller
associated effort increase the accuracy of the schedule activity
cost estimates.

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7.2 cost budgeting
• aggregating the estimated costs of individual schedule
activities or work packages to establish a total cost
baseline for measuring project performance

funding requirements

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7.3 cost control
• Influencing the factors that create changes to the cost
baseline
• Ensuring requested changes are agreed upon
• Managing the actual changes when and as they occur
• Assuring that potential cost overruns do not exceed the
authorized funding periodically and in total for the project
• Monitoring cost performance to detect and understand
variances from the cost baseline
• Recording all appropriate changes accurately against
the cost baseline
• Preventing incorrect, inappropriate, or unapproved
changes from being included in the reported cost or
resource usage
• Informing appropriate stakeholders of approved changes
• Acting to bring expected cost overruns within acceptable
limits

7.3 cost control

• searches out the causes of positive and negative
variances and is part of Integrated Change Control

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performance analysis
• Planned value (PV). PV is the budgeted cost for the
work scheduled to be completed on an activity or
WBS component up to a given point in time.

• Earned value (EV). EV is the budgeted amount for

the work actually completed on the schedule activity
or WBS component during a given time period.

• Actual cost (AC). AC is the total cost incurred in

accomplishing work on the schedule activity or WBS
component during a given time period.
• This AC must correspond in definition and coverage
to whatever was budgeted for the PV and the EV
(e.g., direct hours only, direct costs only, or all costs
including indirect costs).

performance analysis

• Cost variance (CV). CV equals earned value (EV)

minus actual cost (AC).
• The cost variance at the end of the project will be the
difference between the budget at completion (BAC)
and the actual amount spent.
• Formula: CV= EV – AC

• Schedule variance (SV). SV equals earned value

(EV) minus planned value (PV).
• Schedule variance will ultimately equal zero when the
project is completed because all of the planned
values will have been earned.
• Formula: SV = EV – PV

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efficiency analysis
• Cost performance index (CPI). A CPI value less than 1.0
indicates a cost overrun of the estimates. A CPI value greater than
1.0 indicates a cost underrun of the estimates. CPI equals the
ratio of the EV to the AC. The CPI is the most commonly used
cost-efficiency indicator.
• Formula: CPI = EV/AC

• Cumulative CPI (CPIC). The cumulative CPI is widely used to

forecast project costs at completion. CPIC equals the sum of the
periodic earned values (EVC) divided by the sum of the individual
actual costs (ACC).
• Formula: CPIC = EVC/ACC

• Schedule performance index (SPI). The SPI is used, in addition

to the schedule status (Section 6.6.2.1), to predict the completion
date and is sometimes used in conjunction with the CPI to
forecast the project completion estimates. SPI equals the ratio of
the EV to the PV.
• Formula: SPI = EV/PV

performance report

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estimate to complete forecasting
• ETC based on new estimate. ETC equals the revised estimate
for the work remaining, as determined by the performing
organization. This more accurate and comprehensive completion
estimate is an independent, non-calculated estimate to complete
for all the work remaining, and considers the performance or
production of the resource(s) to date.

• ETC based on atypical variances. This approach is most often

used when current variances are seen as atypical and the project
management team expectations are that similar variances will not
occur in the future. ETC equals the BAC minus the cumulative
earned value to date (EVC).
• Formula: ETC = (BAC - EVC)

• ETC based on typical variances. This approach is most often

usedwhen current variances are seen as typical of future
variances. ETC equals the BAC minus the cumulative EVC (the
remaining PV) divided by the cumulative cost performance index
(CPIC).
• Formula: ETC = (BAC - EVC) / CPIC

estimate at completion
• EAC using a new estimate. EAC equals the actual costs to date
(ACC) plus a new ETC that is provided by the performing
organization. This approach is most often used when past
performance shows that the original estimating assumptions were
fundamentally flawed or that they are no longer relevant due to a
change in conditions.
• Formula: EAC = ACC + ETC

• EAC using remaining budget. EAC equals ACC plus the budget
required to complete the remaining work, which is the budget at
completion (BAC) minus the earned value (EV). This approach is
most often used when current variances are seen as atypical and
the project management team expectations are that similar
variances will not occur in the future. Formula: EAC = ACC + BAC
– EV

• EAC using CPIC. EAC equals actual costs to date (ACC) plus the
budget required to complete the remaining project work, which is
the BAC minus the EV, modified by a performance factor (often
the CPIC). This approach is most often used when current
variances are seen as typical of future variances.
• Formula: EAC = ACC + ((BAC – EV) / CPIC)

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performance indicators integration

solution to the “fence” construction plan

• Planned Value (PV) - $3,000
• Earned Value (EV) - $2,500
• Actual Cost (AC) – $2,800
• Budget At Completion (BAC) - $4,000
• Cost Variance (CV) - -$300
• Cost Performance Index (CPI) – o.89
• Schedule Variance (SV) - - $500
• Schedule Performance Index (SPI) – o.83
• Estimate At Completion (EAC) – $4,494
• Estimate To Complete (ETC) - $1,694
• Variance At Completion (VAC) - -$494

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