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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 2 .

the estimator considers the possible causes of variation of the cost estimates. because of less •lack of originality people/experts involved 3 . including risks analogous estimating Advantages Disadvantages •excludes mistakes •can lead to mistakes repeating •wrong assumptions •easier orientation •cannot take into •presence of a prototype consideration new/different •presence of experience risks •minimizes risk •the existing experience is •less time needed not improved •known components •don’t try to have a third opinion •we have an indication •subjective •less cost consuming.1 cost estimaiton • developing an approximation of the costs of the resources needed to complete project activities • in approximating costs.7.

similar projects as the basis for estimating the cost of the current project. 4 . and not just in appearance. Analogous cost estimating is frequently used to estimate costs when there is a limited amount of detailed information about the project (e. but it is also generally less accurate. Generally. • Bottom-up Estimating • This technique involves estimating the cost of individual work packages or individual schedule activities with the lowest level of detail. activities with smaller associated effort increase the accuracy of the schedule activity cost estimates.g. • 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. This detailed cost is then summarized or “rolled up” to higher levels for reporting and tracking purposes.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. and the persons or groups preparing the estimates have the needed expertise. It is most reliable when previous projects are similar in fact. • Analogous cost estimating is generally less costly than other techniques. in the early phases). Analogous cost estimating uses expert judgment..

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 5 .

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. inappropriate.7.3 cost control • searches out the causes of positive and negative variances and is part of Integrated Change Control 6 .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.

direct hours only. direct costs only. • This AC must correspond in definition and coverage to whatever was budgeted for the PV and the EV (e. • Formula: SV = EV – PV 7 . EV is the budgeted amount for the work actually completed on the schedule activity or WBS component during a given time period. • Earned value (EV).performance analysis • Planned value (PV).. AC is the total cost incurred in accomplishing work on the schedule activity or WBS component during a given time period. performance analysis • Cost variance (CV). or all costs including indirect costs). • Formula: CV= EV – AC • Schedule variance (SV). • Actual cost (AC). 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. 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. 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.g.

efficiency analysis • Cost performance index (CPI).1). SPI equals the ratio of the EV to the PV. in addition to the schedule status (Section 6. The cumulative CPI is widely used to forecast project costs at completion. • Formula: CPI = EV/AC • Cumulative CPI (CPIC).0 indicates a cost overrun of the estimates. The SPI is used.0 indicates a cost underrun of the estimates. A CPI value less than 1. to predict the completion date and is sometimes used in conjunction with the CPI to forecast the project completion estimates. The CPI is the most commonly used cost-efficiency indicator.6. CPI equals the ratio of the EV to the AC.2. • Formula: CPIC = EVC/ACC • Schedule performance index (SPI). CPIC equals the sum of the periodic earned values (EVC) divided by the sum of the individual actual costs (ACC). • Formula: SPI = EV/PV performance report 8 . A CPI value greater than 1.

modified by a performance factor (often the CPIC). EAC equals ACC plus the budget required to complete the remaining work. 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. 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 based on atypical variances. which is the budget at completion (BAC) minus the earned value (EV). This approach is most often usedwhen current variances are seen as typical of future variances. EAC equals the actual costs to date (ACC) plus a new ETC that is provided by the performing organization.estimate to complete forecasting • ETC based on new estimate. • Formula: ETC = (BAC . This more accurate and comprehensive completion estimate is an independent. ETC equals the revised estimate for the work remaining. ETC equals the BAC minus the cumulative EVC (the remaining PV) divided by the cumulative cost performance index (CPIC).EVC) • ETC based on typical variances. • Formula: EAC = ACC + ETC • EAC using remaining budget. 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.EVC) / CPIC estimate at completion • EAC using a new estimate. • Formula: EAC = ACC + ((BAC – EV) / CPIC) 9 . as determined by the performing organization. ETC equals the BAC minus the cumulative earned value to date (EVC). and considers the performance or production of the resource(s) to date. which is the BAC minus the EV. • Formula: ETC = (BAC . EAC equals actual costs to date (ACC) plus the budget required to complete the remaining project work. This approach is most often used when current variances are seen as typical of future variances. non-calculated estimate to complete for all the work remaining.

$3.500 • Actual Cost (AC) – $2.-$494 10 .494 • Estimate To Complete (ETC) .89 • Schedule Variance (SV) .$500 • Schedule Performance Index (SPI) – o.-$300 • Cost Performance Index (CPI) – o..694 • Variance At Completion (VAC) .800 • Budget At Completion (BAC) .$2.83 • Estimate At Completion (EAC) – $4.$4.performance indicators integration solution to the “fence” construction plan • Planned Value (PV) .$1.000 • Earned Value (EV) .000 • Cost Variance (CV) .