MBA Program

Project Management

Lectures Prepared by
Dr. Amr A. Elsharkawy

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Safety Moment

??

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Project Performance
Measurement and
Evaluation
Lecture 6 , Cost Management

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Learning Objectives

 Cost Management definitions

 Cost Estimating

 Cost Budgeting

 Cost Control , Developments of CC

 Earned Value Management , Concept

 Solved Examples

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Objective !

“You cannot manage what you

cannot measure…and what
gets measured gets done.”

--- Bill Hewlett, Hewlett Packard

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Cost Management definitions

“ Set of Processes required to ensure the

project is completed within the approved budget “

 Resource Planning (Planning phase )

 Cost Estimating (Bidding ,Planning phase)

 Cost Budgeting (Planning ,Execution phase )

 Cost Control (Execution & Control Phase)

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Cost Management definitions

 Project Cost Management may address

additional processes and numerous general
financial management techniques such as :
OPEX , return on investment, discounted cash
flow, and investment payback analysis. 7
Cost Estimating
 The process of developing an approximation

of the monetary resources needed to complete

project activities .

 Identification and consideration of costing

alternatives , risks, make versus buy.

 Iterative process, accuracy increases as time

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Cost Estimating
 Sharing the resources Assuming work packages
are defined, detailed cost estimates can be made.
Here are typical kinds of costs found in a project:

 1. Direct costs ( Labor , Equipment , Materials ,

Other )

 2. Direct project overhead costs ( rent a space )

 3. General and administrative (G&A ) overhead

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costs (advertising, sr. management )
Cost Estimating
goes by, Rough Order of Magnitude (ROM)
[±50%] at the beginning, narrow down to ±10%

 Include labor, materials,

equipment, services, facilities,

inflation, contingency costs.

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Cost Budgeting

 The process of aggregating the estimated

costs of individual activities or work packages
to establish an authorized cost baseline

 Project budget constitute the funds authorized

to execute the project .

 Project cost performance is measured against

the authorized budget.
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Cost Control
 The process of monitoring the status of the
project to update the project budget and
managing changes to the cost baselines.
 Involves recording actual cost spent.
 Approval to increase the budget through
Integrated Change Control Process.
 Ensuring change requests are acted in a
timely manner
 Monitoring work performance versus funds
expended
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Why Measuring progress /
Performance

 Overruns are kept to a minimum

 Change orders
 The value of work completed, or the cost to date for
any activity.
 Forecasts are Dynamic .
 Keep your management informed with your GM
profit .
 Manage and update your risk register & action plan
…. . Always !
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Developments of Cost Control

TOTAL BUDGETED
ACTIVITY ACTUAL COST ($) ACTIVITY DIFFERENCE ($)
COST ($)

A 22,000 20,000 2,000

B 30,000 36,000 -6,000

C 26,000 26,000 0
D 48,000 50,000 -2,000
E 56,000 55,000 1,000
F 30,000 31,500 -1,500
G 80,000 76,000 4,000
H 16,000 18,000 -2,000
308,000 312,500 -4,500
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Developments of Cost Control

TOTAL PERCENT OF
VALUE OF WORK ACTIVITY
ACTIVITY BUDGETED COMPLETION ACTUAL COST ($)
COMPLETED ($) DIFFERENCE ($)
COST ($) %

A 22,000 100 22,000 22,000 0

B 30,000 100 30,000 36,000 -6,000
C 26,000 85 22,100 24,000 -1,900
D 48,000 10 4,800 4,000 800
E 56,000 20 11,200 20,000 -8,800
F 30,000 50 15,000 10,000 5,000
G 80,000 0 0 0 0
H 16,000 0 0 0 0
308,000 105,100 116,000 (10,900)
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Cost Control - EVM

 Earned Value Management (EVM) is a systematic

approach to the integration and measurement of
cost, schedule, and technical (scope)
accomplishments on a project or task.

EV is the quantification of the “worth” of the work

done to date.

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EVM Concept
The value of work performed expressed
in terms of approved budget (BCWP)

 InEarned Value Management, unlike in

traditional management, there are three data
sources:
 The budget (or planned) value of work
scheduled
 The actual value of work completed
 The “earned value” of the physical work
completed
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 Metric Abbr. Description Formula/Value
Budget at
Completion BAC Baseline cost for 100% of project. N/A
Actual Cost AC (ACWP) Total costs actually incurred so far. N/A

Amount of budget earned so far based

on physical work accomplished,
Earned Value EV (BCWP) without reference to actual costs. N/A
The budget for the physical work
scheduled to be completed by the end
Planned Value PV (BCWS) of the time period. N/A
Measure of cost overrun. The
difference between the budget for the Earned Value–
work actually done so far and the Actual Cost
Cost Variance CV actual costs so far. EV–AC
A measure of value of work completed
versus the actual cost.
Cost efficiency ratio. A CPI of 1.00
Cost means that the costs so far are exactly Earned Value/
Performance the same as the budget for work Actual Cost 18
Index CPI actually done so far. EV/AC
 Metric Abbr. Description Formula/Value

Measure of schedule slippage.

The difference between the
budget for the work actually done Earned Value–
Schedule so far and the budgeted cost of Planned Value
Variance SV work scheduled. EV–PV

A measure of progress achieved

versus progress planned. Earned
Schedule The schedule efficiency ratio. An Value/Planned
Performan SPI of 1.0 means that the project Value
ce Index SPI is exactly on schedule. EV/PV

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 Metric Abbr. Description Formula/Value

Estimate at Completion
Estimate to The expected additional –Actual Cost
Completion ETC cost to complete. EAC–AC
Expected total cost based Budget at Completion/Cost
Estimate at on the current cost Performance Index
Completion EAC efficiency ratio. BAC/CPI

Budget at Completion–
Variance at Estimated cost overrun at Estimate at Completion
Completion VAC the end of project. BAC–EAC

Status
GREEN = On track >1.0 , 1.0 - 0.9
YELLOW = Slightly behind
schedule or budget 0.89 – 0.75
RED = Needs immediate
attention < 0.75
EVM Concept

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EVM Concept
Three key earned value components.
 Planned Value (PV) is determined by the cost
and schedule baseline
 Actual Cost (AC) is determined by the actual
cost incurred on the project
 Earned Value (EV) tells you, in physical terms,
what the project accomplished.
 Cost and Schedule baseline

 Actual Charges (expenditures)

 Reported accomplishments or
“Earned Value”
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EVM example # 1

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EVM example # 2

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EVM example # 2

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EVM example # 2

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EVM example # 2

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EVM example # 3

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EVM example # 4

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EVM example # 4

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EVM example
For a small manufacturing project consider the following :
- Baseline cost for 100% of project = $80,000
- Planned progress as per schedule baseline = 40%
- Your calculation at 47.5% physical progress .
- Actual expenditure = $48,000
1- Calculate the required fund , assuming the same calculated projection of
cost performance, that must be obtained for the remaining work (ETC)
2- Interpret schedule and cost performance for this contractor, consider
KPIs = 0.90 is the target .

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