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Project Cost Management

Waleed El-Naggar, MBA, PMP

Company

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Agenda
1. Definitions 2. Payback / Time Value of Money 3. Estimate Cost 4. Determine Budget

5. Control Cost
6. Earned Value Management
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Project Cost Management
 Cost Management includes the processes involved in estimating, budgeting, and controlling costs so that the project can be completed within the approved budget.  Project managers must make sure their projects are well defined, have accurate time and cost estimates and have a realistic budget that they were involved in approving  Costs are usually measured in monetary units like dollars
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Definitions (1)
 Profit = Revenue – Costs

 Profit Margin = Profit / Revenue
 Cash flow refers to the movement of cash into or out of the project.  Direct costs are costs that can be directly related to producing the deliverable of the project

 Salaries, cost of hardware & software
purchased specifically for the project
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Definitions (2)
 Indirect costs are costs that are not directly

related to the deliverable of the project, but are
indirectly related to performing the project  Cost of electricity, paper towels  Reserves are dollars included in a cost estimate to mitigate cost risk by allowing for future

situations that are difficult to predict

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Definitions (3)  Sunk cost is money that has been spent in the past. when deciding what projects to invest in or continue. you should not include sunk costs  To continue funding a failed project because a great deal of money has already been spent on it is not a valid way to decide on which projects to fund  Sunk costs should be forgotten 5/16/2009 Compiled by: Waleed El-Naggar 6 .

setup costs.  Fixed Costs: do not change with production (rent. It is a standard method for using the time value of money to appraise long-term projects 5/16/2009 Compiled by: Waleed El-Naggar 7 . … etc)  Net present value: the total present value (PV) of a time series of cash flows.Definitions (4)  Variable Costs: change with the amount of production (cost of material).

 Payback Period: The time it takes to recover your investment in the project before you start accumulating profit. 5/16/2009 Compiled by: Waleed El-Naggar 8 .Definitions (5)  Internal Rate of Return: interest rate received for an investment consisting of payments and income that occur at regular periods  Opportunity Cost: The cost given up by selecting one project over another.

Payback Period Year 0 1 2 3 4 Project A Project B -1.000 -1.000 500 100 400 300 300 400 100 600 5/16/2009 Compiled by: Waleed El-Naggar 9 .

Project A 5/16/2009 Compiled by: Waleed El-Naggar 10 .

Project B 5/16/2009 Compiled by: Waleed El-Naggar 11 .

The Time Value of Money  A dollar received today is worth more than a dollar received tomorrow  This is because a dollar received today can be invested to earn interest  The amount of interest earned depends on the rate of return that can be earned on the investment  Time value of money quantifies the value of a dollar through time 5/16/2009 Compiled by: Waleed El-Naggar 12 .

Example of PV Calculation 0 10% 1 2 300 3 300 4 -50 100 90.08 = PV 5/16/2009 Compiled by: Waleed El-Naggar 13 .15 530.39 -34.93 225.91 247.

1 Estimate Costs  The Process of developing an approximation (estimate) for the cost of the resources necessary to complete the project activities  It is also important to develop a cost management plan that describes how cost variances will be managed on the project  Pricing: Assessing how much the organization will charge for the product or service 5/16/2009 Compiled by: Waleed El-Naggar 14 .7.

Estimate Costs: Inputs 1. Scope Baselines    Scope Statement WBS WBS Dictionary 2. Human Resource Plan 5/16/2009 Compiled by: Waleed El-Naggar 15 . Project Schedule 3.

Organizational Process Assets 5/16/2009 Compiled by: Waleed El-Naggar 16 . Risk Register (Risk mitigation costs) 5. Enterprise Environmental Factors 6.Estimate Costs: Inputs 4.

Analogous Estimating (Top down) 3. Bottom-up estimating 5. Expert Judgment 2. Three-point Estimating 5/16/2009 Compiled by: Waleed El-Naggar 17 . Parametric Estimating 4.Estimate Costs: T & T 1.

Reserve Analysis 7. Cost of Quality 8. Vendor Bid analysis 5/16/2009 Compiled by: Waleed El-Naggar 18 .Estimate Costs: T & T 6. Project Management Estimating Software 9.

Estimate Costs: T & T 1.. Project Document Updates 5/16/2009 Compiled by: Waleed El-Naggar 19 . Activity Cost Estimates 2. Basis of Estimates     How it was developed Estimation Assumptions Constraints Range of possible estimates (e. $100±10%)  Confidence Level of the estimate 3.g.

uses bottom-up estimating techniques. is used most frequently during the executing processes of the project C. The answer is: C 5/16/2009 Compiled by: Waleed El-Naggar 20 . D. uses actual detailed historical costs. B. uses top-down estimating techniques.Quiz Analogous estimating: A.

fixed cost. sunk cost. opportunity cost.Quiz The cost of choosing one project and giving up another is called: A. net present value (NPV). B. D. The answer is: D 5/16/2009 Compiled by: Waleed El-Naggar 21 . C.

7.2 Determine Budget  Allocating the overall cost estimate to individual activities or work packages. in order to establish a cost baseline for measuring project performance  An important goal is to produce a cost baseline  A time-phased budget that project managers use to measure and monitor cost performance  Estimating costs for each major project activity over time provides management with a foundation for project cost control  Providing info for project funding requirements –at what point(s) in time will the money be needed 5/16/2009 Compiled by: Waleed El-Naggar 22 .

Scope Baseline 4. Basis of Estimates 3. Project Schedule 5. Contracts 7. Activity Costs Estimates 2.Determine Budget: Inputs 1. Organizational Process Assets 5/16/2009 Compiled by: Waleed El-Naggar 23 . Resource Calendars 6.

2. Funding Limit Reconcillation 5/16/2009 Compiled by: Waleed El-Naggar 24 . Expert Judgment 4. Cost Aggregation The work package cost estimates are aggregated for the higher component levels of WBS. Historical Relationships 5. Reserve Analysis 3.Determine Budget: T & T 1.

Determine Budget: Outputs 1. Project Document Updates 5/16/2009 Compiled by: Waleed El-Naggar 25 . Project Funding Requirements 3. Cost Performance Baseline 2.

7. or unauthorized changes  Informing the appropriate stakeholders of authorized changes  Analyzing positive and negative variances and how they affect the other control processes 5/16/2009 Compiled by: Waleed El-Naggar 26 .  It includes:  Monitoring cost performance to detect variances from the plan  Ensuring that all appropriate changes are recorded  Preventing incorrect.3 Control Costs  The process of monitoring the status of the project costs and managing the changes to the cost baseline. inappropriate.

Work Performance Indicators 4. Organizational Process Assets 5/16/2009 Compiled by: Waleed El-Naggar 27 . Project Funding Requirements 3.Control Costs: Inputs 1. Project Management Plan: • Cost Performance Baseline • Cost Management Plan 2.

Variance Analysis 6. Project Management Software 5/16/2009 Compiled by: Waleed El-Naggar 28 .Control Costs: T & T 1. Earned Value Management 2. Forecasting 3. To-Complete Performance Index 4. Performance Reviews 5.

Work Performance Measurements 2. Project Document Updates 5/16/2009 Compiled by: Waleed El-Naggar 29 . Change Requests 5. Project Management Plan Updates 6. Organizational Process Assets Updates 4. Budget Forecasts 3.Control Costs: Outputs 1.

Earned Value Management  EVM is a project performance measurement technique that integrates scope. time. 5/16/2009 Compiled by: Waleed El-Naggar 30 . & cost data  Given a baseline. you can determine how well the project is meeting its goals  You must enter actual information periodically to use EVM.

EVM Terms  Planned Value (PV). formerly called the budgeted cost of work scheduled (BCWS). also called the budget. is the total of direct & indirect costs incurred in accomplishing work on an activity during a given period  Earned Value (EV). is that portion of the approved total cost estimate planned to be spent on an activity during a given period  Actual Cost (AC). formerly called actual cost of work performed (ACWP). is the percentage of work actually completed multiplied by the planned value 5/16/2009 Compiled by: Waleed El-Naggar 31 . formerly called the budgeted cost of work performed (BCWP).

EVM Formulas 5/16/2009 Compiled by: Waleed El-Naggar 32 .

EVM Example PV = $42.000 / $38.000 EV = $38.000 .000 = -$10.000 CV = EV – AC = $38.$48.000 AC = $48.000 CV% = CV / EV = -$10.000 = -26% 5/16/2009 Compiled by: Waleed El-Naggar 33 .

5% 5/16/2009 Compiled by: Waleed El-Naggar 34 .000 .000 / $42.000 SV = EV – PV = $38.EVM Example – contd.000 SV% = SV / EV = -$4.000 AC = $48.000 EV = $38.000 = -$4. PV = $42.000 = -9.$42.

79 was actually performed.000 = 0. a work worth $0.000 AC = $48. PV = $42.000 / $48.79 For each $1 spent.000 CPI= EV / AC = $38.EVM Example – contd.000 EV = $38. 5/16/2009 Compiled by: Waleed El-Naggar 35 .

000 / $42.000 = 0.90 $0.000 SPI= EV / PV = $38.90 worth of work was performed for each $1.000 EV = $38..EVM Example – contd. 5/16/2009 Compiled by: Waleed El-Naggar 36 . PV = $42.00 worth of work that planned to be done.000 AC = $48.

79 = 101.265 5/16/2009 Compiled by: Waleed El-Naggar 37 .000 / 0.Estimate at Completion  The management’s assessment of the cost of the project at completion  After variance analysis.000) = $80. the estimated cost at completion is determined  Can use calculated indices or use management judgment. EAC = BAC / CPI (BAC=$80.

EAC (BAC=$80.265 Based on past performance.AC (BAC=$80.$101.000 .000) = $80.Variance at Completion VAC = BAC .265 – $48.000) = $101.000 = $53.265 = -$21.265 ETC= EAC . project will exceed planned budget by $21.265 5/16/2009 Compiled by: Waleed El-Naggar 38 .

5/16/2009 Compiled by: Waleed El-Naggar 39 .To-Complete Performance Index  How well do we have to perform to get back on track  The calculated project of cost performance that must be achieved on the remaining work to meat a specified goal (BAC or EAC).

Case 1 • PV = $ 1. where everything goes according to plan. 5/16/2009 Compiled by: Waleed El-Naggar 40 .860 • EV = $ 1.860 • AC = $ 1.860 This is the ideal situation.

Expenditures are less than planned.900 • EV = $ 1.500 • AC = $ 1.$ 200 5/16/2009 Compiled by: Waleed El-Naggar 41 . Spending Variance = EV – AC = .Case 2 • PV = $ 1. it appears we’re in good shape. without Earned Value measurements.700 In this Case.

.500 • AC = $ 1. we are 21 percent behind where we planned to be.Case 2 • PV = $ 1. we see... SV = EV – PV = .21 % 5/16/2009 Compiled by: Waleed El-Naggar 42 .$400 worth of work is behind schedule in being completed.900 • EV = $ 1.700 But with EV measurements.e. i.$ 400 SV % = SV / PV x 100 = .

. $1.500 worth of work was accomplished but it cost $1.700 In addition.500 • AC = $ 1.700 to do so..$ 200 CV % = CV / EV x 100 = -13 % 5/16/2009 Compiled by: Waleed El-Naggar 43 .Case 2 • PV = $ 1.e.e. i.900 • EV = $ 1... 13% over budget) . We have a $200 cost overrun (i. CV = EV – AC = . we can see. “Actuals” exceed “Value Earned” (EV).

00 worth of work planned to be done. only 88 cents worth of work was actually done for each $1.79 CPI = EV / AC = $ 0.900 • EV = $ 1.Case 2 • PV = $ 1. And.500 • AC = $ 1.700 This means only 79 cents worth of work was done for each $1.00 spent SPI = EV / PV = $ 0.88 5/16/2009 Compiled by: Waleed El-Naggar 44 .

$ 400.Case 2 • PV = $ 1.79 CV = .88 5/16/2009 Compiled by: Waleed El-Naggar 45 .700 This is the worst kind of scenario. CPI = 0. SPI = 0.900 • EV = $ 1.500 • AC = $ 1. where all performance indicators are negative.$ 200. SV = .

5/16/2009 Compiled by: Waleed El-Naggar 46 .Case 3  PV = $ 2.200 In this case there is bad news and good news.400  AC = $ 2.600  EV = $ 2.

8 % The bad news is that our work efficiency is a bit low.400  AC = $ 2.200 SPI = 0.Case 3  PV = $ 2. SV % = . we are behind schedule.$ 200. we’re getting only 92 cents of work done on the dollar. As a result.92 SV = . 5/16/2009 Compiled by: Waleed El-Naggar 47 .600  EV = $ 2.

We’re getting $1.200 The good news is that we’re under-running our budget.Case 3  PV = $ 2.400  AC = $ 2.600  EV = $ 2.00 we’re spending.09 worth of work done for each $1.09 5/16/2009 Compiled by: Waleed El-Naggar 48 . CV % = 8 % CPI = 1. CV = $ 200.

500 In this case...12 % SPI = 0.88 5/16/2009 Compiled by: Waleed El-Naggar 49 .Case 4  PV = $ 1. the work is not being accomplished on schedule.$ 200.500  AC = $ 1.700  EV = $ 1. SV = . SV % = .

Case 4  PV = $ 1.00 5/16/2009 Compiled by: Waleed El-Naggar 50 .700  EV = $ 1.but the cost of the work accomplished is just as we budgeted.500  AC = $ 1.00 CPI = 1.. CV = $ 0.500 ..

Case 5  PV = $ 1.600  AC = $ 1. right? But is it because we are out-performing our learning-curve standards or because we planned too pessimistically? 5/16/2009 Compiled by: Waleed El-Naggar 51 .400  EV = $ 1.400 A positive scenario.

Case 5  PV = $ 1.400  EV = $ 1. SPI = 1.14 5/16/2009 Compiled by: Waleed El-Naggar 52 .14 CPI = 1..600  AC = $ 1. we are getting work done at 114 percent efficiency..400 Here in this case.

600  AC = $ 1. SV = $ 200.400  EV = $ 1..work is ahead of schedule by 14 percent and under-running cost by 12.5 % 5/16/2009 Compiled by: Waleed El-Naggar 53 .5%.400 . CV % = 12.Case 5  PV = $ 1.. SV % = 14 % CV = $ 200.

edu Text Text 5/16/2009 Compiled by: Waleed El-Naggar 54 .Thank You Text Text waleed_k@aucegypt.