11/3/2014

PROJECT COST
MANAGEMENT

COST ESTIMATION VS.

PRICING
Cost Estimating: Assessing how
much it will cost the organization to
provide the product or service
Cost

Pricing: Assessing how much the Price

organization will charge for the
product or service
Profit

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PROJECT COST
MANAGEMENT
Project cost management includes the processes involved in
estimating, budgeting, and controlling costs so that the
project can be completed within the approved budget
• Plan Cost Management
• Estimate costs
• Determine budget
• Control costs

PROCESSES MAP

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COST MANAGEMENT
PLAN
The planning effort of the processes of the cost management
plan is a part of the develop project management plan.
Cost management plan can establish the following:
• Level of accuracy
• Units of measures
• Organizational procedures links (control account)
• Reporting formats
• Process descriptions
• Rules of performance measurement (EVM)

LEVEL OF ACCURACY
Order of Magnitude
• Range: -50% : + 100%
• Typical method of estimating used: Expert opinion
• An approximate estimate made without detailed data; used
during the initial evaluation of the project (Concept)
Budgetary
• Range: -10% : + 25%
• Typical method of estimating used: Top-down or
Analogous; used to establish the funds required for the
project (Development)

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LEVEL OF ACCURACY
Definitive
• Range: -5% : + 10%
• Typical method of estimating used: Bottom-up (WBS)
• Prepared from well-defined specifications, data, drawings,
and so forth;, bid evaluations, contract changes, extra
work, legal claims, permit and government approvals

EARNED VALUE
MANAGEMENT ANALYSIS
• One technique used is called earned value technique
(EVT) which compares the cumulative value of the
budgeted cost of work performed (earned at the original
allocated budget amount) to both the budgeted cost of
work scheduled (planned) and to the actual cost of work
performed (actual)
• An important part of cost control is to determine the cause
of a variance, the magnitude of the variance, and to decide
if the variance requires corrective action

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EARNED VALUE
MANAGEMENT ANALYSIS
• EVT uses the cost baseline contained in the project
management plan to assess project progress and the
magnitude of any variations that occur
• EVT involves developing these key values for each schedule
activity, work package, or control account
• Earned Value (EV)
• Planned Value (PV), Schedule Variance (SV), Schedule
Performance Index (SPI)
• Actual Cost (AC), Cost Variance (CV), Cost Performance
Index (CPI)
• Estimate to Complete (ETC)
• Estimate at Completion (EAC)

EXAMPLE
We are about to produce 20 tables in 20 days cost is $20 for each.

How much BAC = ???

BAC = $20 * 20 tables = $400

Today is day 4 How much is the PV ?

PV = $20 x 4 tables = $80

At day 4 I earned only 3 tables, how much is the EV ?

EV = $20 x 3 tables = $60

AC = ??? X 3 tables = $90

SV = EV – PV = 60 – 80 = -$20

CV =EV – AC = 60 – 90 = -$30

SPI = EV / PV = 60 / 80 = 0.75

CPI = EV / AC = 60 / 90 = 0.666

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PROJECT PERFORMANCE
MANAGEMENT

FORECASTING
• EAC forecast for ETC at new estimate

EAC = AC+ETC = 90+ 350 = 440

• EAC forecast for ETC work performed at the budgeted rate

EAC = AC+(BAC-EV) = 90+(400-60)=430

• EAC forecast for work performed at the percent CPI

EAC = BAC/ CPI =400 / .66 = 606.6

• EAC forecast for ETC work considering both SPI and CPI factors

EAC =AC+((BAC-EV) /(CPI*SPI)) =90 +((400 – 60 )/ (.495 )) = 868.68

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VARIANCE AT
COMPLETION (VAC)
B AC what the total job is supposed to cost
E AC what the total job is expected to cost

VARIANCE AT COMPLETION is the difference between

what the total job is supposed to cost and what the total
job is now expected to cost.

Formula: VAC = BAC - EAC

Example: VAC = $400 - $430
VAC = - $30 (negative = overrun)

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).

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

WALL CONSTRUCTION
5 pm Wednesday, Week 2 How much work
should have been
completed – PV ?

Wall 1 100% = $ 1,000

Wall 2 80% = $ 800
Wall 3 0% = 0
Wall 4 0% = 0
_____________

PV = $ 1,800

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WALL CONSTRUCTION
5 pm Wednesday, Week 2 What is the budgeted
value of actual work –
EV ?

Wall 1 100% = $ 1,000

Wall 2 50% = $ 500
Wall 3 10% = $100
Wall 4 0% = 0
_____________

Total = $1,600

WALL CONSTRUCTION
5 pm Wednesday, Week 2 Total Cost to date – AC

AC = $ 2,250

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WALL CONSTRUCTION
5 pm Wednesday, Week 2 Performance Indices
PV $1,800
EV $1,600
AC $2,250

Schedule Variance = EV - PV
= $1,600 - $1,800
= ($200)

Cost Variance = EV - AC
= $1,600 - $2,250
= ($650)

WALL CONSTRUCTION
5 pm Wednesday, Week 2 Performance Indices
PV $1,800
EV $1,600
AC $2,250

SPI = EV / PV
= $1,600 / $1,800
= .9

CPI = EV / AC
= $1,600 / $2,250
= .7

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EXERCISE
You are the project manager on the case study project:
As a team, using your previously created activity list
resources, Bar chart …
1. Calculate the cost of each activity (work package)
2. Calculate the total project cost
3. Create and Draw the cumulative S-Curve (cost
baseline)

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

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PRESENT VALUE
Budgeting technique that
debates the future value of
money based on inflation, etc.
PV = FV___
(1 + r)t

FV = amount of money t years

from now
r = interest rate (also called
“discount rate”)
t = time period

NET PRESENT VALUE

(NPV)
This means the total benefits (income or revenue) less the
cost. To calculate NPV you need to calculate the present
value of each of the income and revenue figures then add up
the present values.

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PAYBACK PERIOD
The exact length of time needed to recover an initial
investment as calculated from cash inflows.

BENEFIT COST RATION

(BCR)
• Compares the cost to the benefits of different projects.
A BCR of > 1 means the benefits are grater than the costs
A BCR of < 1 means the costs are grater than the benefits.
A BCR =1 means the costs and benefits are the same.

• If the BCR of project A is 2.3 and BCR of project B is 1.7

which project would you select?
The answer is A. the project with the higher BCR

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INTERNAL RATE OF
RETURN (IRR)
• The interest (discount) rate where the present value of the
benefits exactly equals the costs.

• The higher the rate, the better the project.

• An IRR of 0.15 means that you expect the project to return

an average of 15% on your investment over a given time
period (usually a number of years).

EXERCISE:
ACCOUNTING STANDARDS

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LIFE CYCLE COSTING

LIFE CYCLE COSTING: Means that the cost of operation
and maintenance phase to be considered and managed with
the project cost.

PROJECT COST
MANAGEMENT

Planning Monitoring & Controlling

Plan Cost Estimate Determine

Management Costs Budget Control Cost

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PLAN COST
MANAGEMENT
• Plan Schedule Management is the process that establishes the
policies, procedures, and documentation for planning,
managing, expending, and controlling project costs.

PLAN COST
MANAGEMENT
INPUTS

1. Project management plan

2. Project charter
3. Enterprise environmental factors TOOLS & TECHNIQUES
4. Organizational process assets
1. Expert judgment
2. Analytical techniques
3. Meetings

OUTPUTS

1. Cost management plan

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PLAN COST
MANAGEMENT
The cost management plan can establish the following:
• Units of measure.
• Level of precision.
• Level of accuracy.
• Organizational procedures links. (accounting system)
• Control thresholds.
• Rules of performance measurement.

ESTIMATE COSTS
INPUTS
TOOLS & TECHNIQUES
1. Cost management plan
2. Human resource management plan 1. Expert judgment
3. Scope baseline 2. Analogous estimating
4. Project schedule 3. Parametric estimating
5. Risk register 4. Bottom-up estimating
6. Enterprise environmental factors 5. Three-point estimating
7. Organizational process assets 6. Reserve analysis
7. Cost of quality
8. Project management software
9. Vendor bid analysis
10. Group decision-making techniques

OUTPUTS
1. Activity cost estimates
2. Basis of estimates
3. Project documents updates

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ESTIMATE COSTS
Estimates supporting documentation should provide a clear and
complete understanding of how the cost estimate was derived.
• Documentation of the basis of the estimate (i.e., how it was
developed),
• Documentation of all assumptions made,
• Documentation of any known constraints,
• Indication of the range of possible estimates (e.g., $10,000
(±10%) to indicate that the item is expected to cost between a
range of values), and
• Indication of the confidence level of the final estimate.

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DETERMINE BUDGET
INPUTS
1. Cost management plan
2. Scope baseline
3. Activity cost estimates
4. Basis of estimates TOOLS & TECHNIQUES
5. Project schedule
6. Resource Calendar
1. Cost aggregation
7. Risk register
2. Reserve analysis
8. Agreements
3. Expert judgment
9. Organizational process assets
4. Historical relationships
5. Funding limit reconciliation

OUTPUTS
1. Cost baseline
2. Project Funding Requirements
3. Project documents updates

DETERMINE BUDGET

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CONTROL COSTS
INPUTS

1. Project management plan

2. Project funding requirements
3. Work performance data
4. Organizational process assets

TOOLS & TECHNIQUES

1. Earned value management
2. Forecasting OUTPUTS
3. To-complete performance index (TCPI)
4. Performance reviews 1. Work performance information
5. Project management software 2. Cost forecasts
6. Reserve analysis 3. Change requests
4. Project management plan update
5. Project documents updates
6. Organizational process assets
updates

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QUESTIONS

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1- Half way through the executing processes of your project,

a team member alerts you to a potential cost overrun for a
specific deliverable. What do you do first?
A ) Determine the projected actual cost.
B ) Implement a change control process to track the change
C ) Inform the customer.
D ) Determine the cause of the overage

2 - Which type of costs is team training?

A ) Direct
B)EV
C ) Indirect
D ) fixed

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3- A project manager has completed a detailed WBS and cost

estimates for each work package. To create a cost baseline
from this data, the project manager would:
A ) Use the highest level of the WBS to estimate analogously
B ) Sum up the work package and risk contingency reserve
estimates.
C ) Roll up work package estimates into a project total and
add managements reserves.
D ) Gain expert opinions of the project costs.

4- You are having difficulty estimating the cost of your

project. Which of the following BEST describes the most
probable cause of your difficulty?
A ) Inadequate scope definition
B ) Unavailability of desired resources
C ) Lack of historical records from previous projects
D ) Lack of company processes

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5- Which of the following represents the value of work we

have actually completed?
A ) Earned value
B ) Planned value
C ) Actual cost
D ) Estimate to complete

6- While completing your project, you realized that you need to

decrease the project costs. After researching your options, you
came up with the following choices. Which choice would
DECREASE project costs?
A ) Change to component A from component B. component A
costs more to purchase, but has a lower life cycle cost than B.
B ) Change activity A to be completed by resource B instead of
resource C. Resource B is more experienced worker.
C ) Move activities B and H to occur concurrently, and accept a
30 percent increase in the risk that five more resources will be
needed later.
D ) Remove a test from the project management plan.

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7- If earned value (EV) is U.S.$300,000, actual cost (AC) is

U.S.$350,000, and planned value (PV) is U.S. $375,000, what
does the schedule performance index (SPI) indicate?
A ) You are progressing at 86% of the rate originally planned.
B ) You are progressing at 125% of the rate originally
planned.
C ) You are progressing at 116% of the rate originally
planned.
D ) You are progressing at 80% of the rate originally planned.

8- The formula, EAC = BAC/CPI, assumes that:

A ) All subsequent work will be completed at the planned
expenditures.
B ) All subsequent work will be completed at the planned
expenditures, excluding the work packages currently under
way
C ) All subsequent work will be completed based upon the
cost performance to-date
D ) The cost performance cannot change during the project

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9- Feasibility study answers the question “can we do it?”

cost benefit analysis answer the question ---------
A ) Should we do it?
B ) Are the safety risks acceptable?
C ) Is it beneficial to have a high level sponsor?
D ) Does the technology exist?

10- What tool must project managers rely upon to accurately

identify the costs associated with the project?
A ) A bill of materials
B ) A Gantt chart
C ) A precedence diagram network
D ) A work breakdown structure

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