Project Cost Management * Neeraj Sharma SPO ery Oia cy ¢ Prasansa Shrestha * Sajeeb ChandWhat is Cost and Project Cost Management? Cost is a resource sacrificed or foregone to achieve a specific objective or something given up in exchange = Costs are usually measured in monetary units like Rupees, Cele Ue) Project cost management includes the processes required to ensure that the project is completed within an approved budget .It is also called life —cycle cost. = 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Project Cost Management preliminary concern with the cost of the resources needed to complete schedule activities. Consider the effect of project decisions on the cost of using, maintaining and supporting the product, service or result of the project. Considers the information requirements of the project stakeholdersOO EVE een » Acost management plan is a document that describes how the organization will manage cost variance on the project = For example, how to respond to proposals from suppliers that are higher or lower than estimates = Alarge percentage of total project costs are often labor costs, so project managers must develop and track estimates for labor = Many organizations estimate the number of people or hours they need by department or skill over the life cycle of a projectCost management plan can be establish as: Precision level Units of measure Organizational procedures links Control thresholds Earned value rules Reporting formats Process descriptionProject Cost Management Processes There are three project cost management processes: = Cost estimating: developing an approximation or estimate of the costs of the resources needed to complete a project = Cost budgeting: allocating the overall cost estimate to individual work items to establish a baseline for measuring performance = Cost control: controlling changes to the project budgeteu DOOD camer s yd Sere eect aggregation cece ? d cost char 18 Project management planCost Estimating Cost estimating: developing an approximation or estimate of the costs of the resources needed to complete a project Estimating schedule activity costs involves developing an approximation of the costs of the resources needed to complete each schedule activity. = Calculate risk = Identifying and considering various costing alternatives. LOT etal oe- Uc} aad Cools eR MUR RC Uo mete} Rupees, Dollars, etc and also can use units of measure such as staff hours or Staff days along with their cost estimates. After developing a good resource requirements list, PMs and their teams must develop several estimates of the costs for these resources.Cost Estimating » The accuracy of a project estimate will increase as the project progresses through the project life cycle. » Arough order of magnitude (ROM) estimate provides an estimate of what a project will cost. » Also referred to as a ballpark estimate, a guesstimate, a swag, ora broad gauge. » Aproject in the initial phase could have a rough order of magnitude (ROM) estimate in the range of -50 to +100 %.Cost Estimating » AROM estimate that actually cost $100,000 would range between $50,000 to $200,000. The accuracy range is often much wider for IT projects. = Often IT project estimates for software development are doubled because of the history of cost overruns. Project managers must take cost estimates seriously if they want to complete projects within budget constraints. The costs for schedule activities are estimated for all resources that will be charged to the project which is not limited to labor, materials, equipment, services, and facilities, as well as special categories such as inflation allowance or a contingency cost.Inputs / Tools & Techniques / Outputs icy Tools & Techniques feet)Cost Estimation Inputs Beer iM eee ele EVA a a -Comerolsco | ola aeatal- Ny Me) RNA kel0l0 (ol oR Le and results are available in the market place, from whom and under what terms and conditions. terol ul co MPIC lel ea ool fe Roe MIU} available from commercial database that tracks skills and TUM ecelU ero coreoe Published seller price listsCost Estimation Inputs » Organizational Process Assets = Cost estimating policies. Some organizations have predefined approaches to cost estimating. Where these exist, the project operates within the boundaries defined by these policies. = Cost estimating templates. Some organizations have developed templates (or a pro forma standard) The organization can continuously improve the template based on its application and usefulness in prior projects.Cost Estimation Inputs Historical information. Information that pertains to the project's product or service, and is obtained from various sources within the organization, can influence the cost of the project. Project files. One or more of the organizations involved in the project will maintain records of previous project performance that are detailed enough to aid in developing cost estimates. Project team knowledge. Members of the project team may recall previous actual costs or cost estimates. While such recollections can be useful, they are generally far less reliable than documented performance.Cost Estimation Inputs Lessons learned: cost estimates obtained from previous projects that are similar in scope and size. » Project Scope Statement Describes the business need, justification, requirements, and current boundaries for the project. The project scope statement includes constraints, assumptions, and requirements. Constraints are specific fovea (eln teers estimating options. Most common constraints for many projects is a limited project budget, required delivery dates, available skilled resources, and organizational policies.Cost Estimation Inputs » Work Breakdown Structure: = The project's work breakdown structure (WBS) defines the total scope of the project. = WBS is often used to develop or confirm a common understanding of project scope. WBS Dictionary The WBS dictionary (Section Shean and related detailed statements of work provide an identification of the deliverables and a description of the work in each WBS component required to produce each deliverable. dey eMC i eo) The project management plan (Section 4.3) provides the overall plan for executing, monitoring, and controlling the project, and includes subsidiary plans that provide guidance and direction for n anninCost Estimation Inputs emer M Uitte (Ut 1 = Schedule activity resources and their respective duration. = Activity Resource Estimating involves determining the availability and quantities required of staff, equipment, and materiel needed to perform schedule activities. = Activity Duration Estimating involves determining the total Ele AUR AMMO R- Ura mees as tCoeCost Estimation Inputs » Staffing management plan = when and how human resource requirements will be brought and taken off the project team. ae 19 |) em Reed) ors) aL eTo EMAL OO responses when producing cost estimates. Risks, which can be either threats or opportunities, typically have an impact on both schedule activity and project costs. As a general rule, when the project experiences a negative risk event, the cost of the project will nearly always increase, and there will be a delay in the project schedule.Cost Estimation Tools and Techniques Analogous or top-down estimates: use the actual cost of a previous, similar project as the basis for estimating the cost of the current project = How similar the current and previous project are determines the accuracy of the estimate. Bottom-up estimates or Activity Based Costing : involve estimating individual work items or activities and summing them to get a project total cost. = The smaller the work items, the better the estimate but these estimates are usually time intensive and expensive to develop.Cost Estimation Tools and Techniques Bee UUme ie 9 = Atechnique that uses a statistical relationship between historical data and other variables e.g. square footage in construction, required labor hours. = Higher lever of accuracy » Project Management Software = PM software, such as cost estimating software applications, computerized spreadsheets, and simulation and statistical tools, are used to assist with cost estimating. = Such tools can simplify the use of some cost estimating = Provides various cost estimate alternatives.Cost Estimation Tools and Techniques » Vendor Bid Analysis = methods include vendor bid analysis and an analysis of what the project should cost. = Incases where projects are won under competitive processes, additional cost estimating work can be required of the project team to examine the price of individual deliverables, and derive a cost that supports the final total project cost.Cost Estimation Tools and Techniques » Reserve Analysis = Many cost estimators include reserves, also called contingency Eells = Contingency reserves-costs to be used at the discretion of the project manager to deal with anticipated, but not certain, events (o-1| (To alo aM La cule) Cost of Quality = Total costs incurred by investment in preventing non standard to requirements, Appraising the product or requirements, and failing to meet requirements (rework). Failure costs are often categorized into internal and external. Failure costs are also called cost of poor quality. service for conformance toCost Estimating: Outputs » Activity Cost Estimates = An activity cost estimate is a quantitative assessment of the likely costs of the resources required to complete schedule activities. Costs are estimated for all resources like labor, materials, equipment, services, facilities, information technology, and special categories such as an inflation allowance or cost contingency reserve. » Activity Cost Estimate Supporting Detail includes * Description of the schedule activity’s project scope of work CoB yeler annie ela Re lm om erm Om Rl e (R-e ged developed) CMB ole lan nc ole melm-laN meron lira) + Indication of the range of possible estimatesCost Estimating: Outputs » Requested Changes The Cost Estimating process may generate requested changes (Section 4.4.3.2) that may affect the cost management plan (Chapter 7 introductory material), activity resource requirements (Section 6.3.3.1), and other components of the project management plan. Requested changes are processed for review and disposition through the Integrated Change Control process (Section 4.6). Cost Management Plan (Updates) If approved change requests (Section 4.4.1.4) result from the Cost Estimating process, then the cost management plan component of the project management plan (Chapter 7 introductory material) is updated if those approved changes impact the management of olehCost Budgeting Cost budgeting involves allocating the project cost estimate to individual work items over time » The WBS is a required input to the cost budgeting process since it defines the work items » An important goal is to produce a cost baseline = Atime-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 = Cost budgeting also provides info for project funding requirements a= V Var Leal MMA AML UA MOA) LMI 10 <1Inputs / Tools & Techniques / Outputs ey | Tools & Techniques ) cette}Cost Budgeting: Inputs Drege ee cuca Formal periodic limitations of the expenditure of project funds can be given in the OUR Cm meen oem -Ced Mile teks Ce Rel ret RLEUTN el toe eet Cuan Keane Men ea alee rez Un os Piecing kegel uae Seale keane ucae eT) eeu at The project work breakdown structure (WBS) provides the relationship among all the components of the project and the project deliverables WBS Dictionary The WBS dictionary and related detailed statements of work provide an identtication ofthe deliverables and a description of the work in each Eten enue Nicer ones tect eine NeesCost Budgeting: Inputs ee g cry Desa ae usage eC ARs sce reir) octet echoes ects Pee eee et rT Rue Uh, Roe Onur eee oun Roe on gen Se COR ae Ree ORI Rec iaani! Peete eae Cmca Ku eter sae Ree sheen Cuan)Cost Budgeting: Inputs Deer Bi io een Tae tuners U Me Maun the project's schedule activities, schedule milestones, work packages, planning OCC MMe use cco CMON IC uneMeee eit kee oCN UI calendar periods when the costs are planned to be incurred. eee eee Le eee Rei mun eee etna eR Ve Te CCAR Coun amet cline UAW ocleLe AOL L-com Cea eae oeCost Budgeting: Inputs (eerie Cen aOR RES ccee eso et Ol ee coun tise ce eee ake eee nee Rane eaten Piers era Cur ago) SERS TU USUI a euReu u Cem uel aC eauCueC Cucne eueU Rue Btctc lena use iReousie eek Mute Reca teersCost Budgeting: Tools and Techniques Bee ec Soret eget clu Cc creel er cc mUanes rc aie erected Prank SMR ne tee Reece cine Corian ane ieee crema ie Ce eu nun eee icra centaur Mam Sree ge fee ae Uy Beene usc ar amc RUC management contingency reserve, that are allowances for unplanned, but POCRn AC i Rencue eect te cue ee meet me st ee nUry Fi core Colm Ur LU MLO LAT? Lie CoN eRe mo) Cee (ol Roo ROMA) OL ULLaI ore PMie acinar Meru Seen Ie) eacec a arKocitCost Budgeting: Tools and Techniques Parametric Estimating BO ee Senge MA a ares Case Cac ey (eae CS REA Cemuee Rl ate [ea Cit ere tees cm ee Rene simple (e.g., residential home construction will cost a certain amount per square eae moos ak es Re uae eee teaser Cr eae eee aCe Okano PROMS unu keen Reels ecieutteauee ek SAT Nanny most likely to be reliable when: See eae euch OR Res ee eee nue Ime Reta cise anc ae eerie Oct koe rnr | eeCost Budgeting: Tools and Techniques » Funding Limit Reconciliation Large variations in the periodic expenditure of funds are usually undesirable for organizational operations. Therefore, the expenditure of funds is reconciled with the funding limits set by the customer or performing organization on the disbursement of funds for the project. Reconciliation will necessitate the scheduling of work to be adjusted to smooth or regulate those expenditures.Rescheduling can impact the allocation of resources.Cost Budgeting: Output aT The cost baseline is a time-phased budget that is used as a basis against which to TUUTcroTOCCPMLUL ACARI MOCO COR) URL SS18 110M US ROL Se Ce) oe OC ele baseline is a component of the project management plan Pres atar at Ba tee Funding requirements, total and periodic (e.g.. annual or quarterly), are derived from koa eo rurkcur esc ica knoe mitc ae Murer a Cg Cae aad lil eee eR era RRL eu EU eMule Mae meela vel oMe- Ue REC ele seer EPR nine (emmy ERMC Umum CRIs Eesinn tea mueurecacutg Cen ie USa Sat atCost Budgeting: Output bea CTT uae) If approved change requests result from the Cost Budgeting process, then the cost RUEeCna una ear Koma CMa a eunee- Cen anc EEC Rcue Cone Cmur neue ecm RmS Peete Rural ey Ske ae te eiued yee eet Wie inet cee Ren ueeCRUr ee Ceaaeteces UCU UReIR UUme CoC R RUN UO Come eM cre crt) changes are processed for review and disposition through the Integrated Change Control process.Cost Control : Change is inevitable, success is ya CU eT » Project cost control includes: Monitoring cost performance Ensuring that only appropriate project changes are included ina revised cost baseline Recording all appropriate changes accurately against the cost eet Preventing incorrect, inappropriate, or unapproved changes from eing included in the reported cost or resource usage Informing project stakeholders of authorized changes to the project that will affect costs Acting to bring expected cost overruns within acceptable limitsCost Control ALSO » Performance review meetings can be a powerful tool to help control project costs = Knowing you have to report on your progress is an incentive for people to perform better » Performance measurement is another important tool for cost control = There are many general accounting approaches for measuring cost performance but earned value ie eam M ae Roe ied (MUL ltCost Control Project cost control searches out the causes of positive and negative variances. For example, inappropriate responses to cost variances can cause quality or schedule problems or produce an unacceptable level of risk later in the project.Cost Control BOC. Mr rd Outputs 4 Cost change 4 Cost estimate (updates) stem :2 Cost baseline (updates 2 Performance measurement 3 Performance 4 Fo completion 5 Requested changes roved change re ‘6 Recommended 5 Project management corrective actions ganizational process 2 Project funding requirements 3 Performance information 4 Project performance que 66 Project manage oftware plan’ 5 Variance management assets (updat 8 Project management plan (updates)Earned Value Management (EVM) EVM is a project performance measurement technique that integrates scope, time, and cost data Given a baseline (original plan plus approved changes), you can determine how well the project is meeting its goals You must enter actual information periodically to use EVM = Was a WBS item completed or approximately how much of the work was completed = Actual start and end dates Peeve 19 More and more organizations around the world are using EVM to help control project costsBest Practice » The most successful organizations are taking a holistic view of focusing, managing and measuring their organizational efforts with an integrated combination of best practice processes, training and technology = Unfortunately, most organizations today are not taking that approachTHANK YOU