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Project Cost Management
Tamer George, PMP Senior Technical Office Engineer Orascom Construction Industries
Project Cost Management
Cost management is one of the fundamental and yet most challenging tasks for a project manager. Project Cost Management is primarily concerned with the cost of the resources needed to complete schedule activities. Project Cost Management should also consider the effect of project decisions on the cost of using, maintaining, and supporting the product, service, or result of the project. Project cost management should consider the stakeholder requirements for capturing costs, different stakeholders will measure project costs in different ways and at different times.
v Cost Management Concepts
Life Cycle Costing. Look at manage life cycle costs instead of just project costs.
Project Cost Management
Processes involved in estimating, budgeting, and controlling costs so that the project can be completed within the approved budget.
Ø Estimate Costs Ø Determine Budget Ø Control Costs
Cost Management Process Estimate Costs Determine Budget Control Costs Done During Planning Process Group Planning Process Group Monitoring and Controlling Process Group
Project Cost Management
Cost Management Plan
Level of accuracy. Rounding of the data ( $100, $1000 ) based on the scope of activities and magnitude of the project. Units of measure. For each of the resources ( Staff hours, staff days, lump sum ). Organizational procedures links. Control accounts components of the WBS are assigned a unique codes that links directly to the performing organization’s accounting system. Control thresholds. For monitoring cost performance, Agreed-upon amount of variation to be allowed before some action needs to be taken, ( % deviation from baseline ). Rules of performance measurement. Earned value management (EVM) rules of performance measurements are set.
Define WBS points, Techniques ( fixed formula, percent complete), Equations (EAC).
Reporting formats. Formats and frequency of cost reports.
Process descriptions. For each of the three cost management processes.
Cost management plan is part of the project management plan.
Wages. travel Taxes Description Project costs that remain constant regardless the phase or output. supplies Training. Project costs that vary in relation to the output.Project Cost Management Types of Costs Example Set-up Materials. Costs that are directly attributable to the work of the project Type Fixed Costs Variable Costs Direct Costs Costs that are directly attributable to more than one Indirect Costs project (overhead) Amount of money needed above the estimate to reduce risk of overruns of project Cost reserves .
materials. Cost trade-offs and risks must be considered.Project Cost Management Estimate Costs Ø Developing an approximation of the monetary resources needed to complete project activities. Ø Ø Ø Costs are estimated for all resources that will be charged to the project (labor. as more information is known. and facilities). services. and sharing of resources to achieve optimal costs for the project. buy or lease. Later in the project. In the initiation phase have a rough order of magnitude (ROM) estimate in the range of ±50%. equipment. make or buy. . estimates could narrow to a range of ±10%. The accuracy of project estimates will increase as project progresses through the project life cycle.
Project Cost Management Estimate Costs .
acceptance criteria. Scope statement . key Work Breakdown Structure .Project Cost Management Estimate Costs Ø Inputs v Scope Baseline deliverables.. project boundaries. Product description. organizational policies). . delivery dates. assumptions. Provides the relationships among all components of the project and project deliverables. and constraints (limited budget.. available skilled resources.
v Estimate activity durations. labor regulatory agreements). v Risk Register Risks can be either threats or opportunities. Related rewards/recognition. Determine the availability and quantities required of staff and material needed to perform schedule activities. Where resources are applied per unit of time for the activity duration (financing allowance). . personnel rates. Risk mitigation costs.Project Cost Management Estimate Costs Ø Inputs Project Schedule Estimate activity resources. Time-sensitive costs (materials with seasonal cost variations. v Human Resource Plan Project staffing attributes.
v v Enterprise Environmental Factors Market conditions What products. . Published commercial information Provide standard costs for materials and equipments. Published seller price lists. Cost estimating templates. From whom. Lessons learned. services are available in the market. Historical information. and under what terms and conditions.Project Cost Management Estimate Costs Ø Inputs Organizational Process Assets Cost estimating policies.
Less costly and time consuming. Frequently used to estimate costs when there is a limited amount of detailed information about the project. but also less accurate. v v Analogous Estimating (Top-Down) Using the actual cost of previous. Determine whether to combine methods of estimating. Uses expert judgment. It is a gross value estimating approach. similar projects as the basis for estimating the cost of the current project. sometimes adjusted for known differences. . used in conjunction with other estimating methods.Project Cost Management Estimate Costs Ø Tools and Techniques Expert Judgment Guided by historical information. Applied to a total project or to segments of a project.
Involves multiplying the planned quantity of work to be performed by the historical cost per unit to obtain the estimated cost. Applied to a total project or to segments of a project. Can produce higher levels of accuracy depending upon data built into the model.Project Cost Management Estimate Costs Ø Tools and Techniques Parametric Estimating Uses a statistical relationship between historical data and other variables (square footage in construction). v . used in conjunction with other estimating methods.
v . Influenced by the size and complexity of the individual activity or work package. More accurate. Requires a detailed analysis of the project.Project Cost Management Estimate Costs Ø Tools and Techniques Bottom-Up Estimating Involves estimating the cost of individual work packages or activities with the greatest level of specified details. Estimating a component of work. This detailed cost is then rolled up to higher levels for reporting and tracking purposes. but takes more time and expenses.
Most likely (cM). Optimistic (cO). Pessimistic (cP).Project Cost Management Estimate Costs Ø Tools and Techniques Three-Point Estimate Improving the accuracy of activity cost estimates by considering estimation uncertainty and risk. Program Evaluation and Review Technique (PERT). v cE = cO + 4cM + cP 6 . uses three estimates to define an activity duration. Expected (cE).
Project Cost Management Estimate Costs Ø Tools and Techniques Reserve Analysis Contingency reserves for cost uncertainty. A percentage of estimated cost or a fixed number. reduced. v v . v v Cost of Quality (COQ) Project Management Estimating Software Vendor Bid Analysis The project team examine the price of individual deliverables to drive a cost that supports the final total project cost. May be used. or eliminated as more precise information available.
equipment.000 (±10%)). contingency reserves. Documentation of any known constraints. materials. services.Project Cost Management Estimate Costs Ø Outputs Activity Cost Estimates Quantitative assessments of the probable costs of all resources required to complete project work. labor. Indication of the confidence level of final estimate. v Project Documents Updates Risk register. Documentation of all assumptions made. IT. Indication of the range of possible estimates ($10. v v Basis of Estimate Documentation of the basis of estimate. facilities. .
Project Cost Management Determine Budget Ø Aggregating the estimated costs of individual activities or work packages to establish an authorized cost baseline. but excludes management reserves. Cost baseline includes all authorized budgets. Project cost performance will be measured against the authorized budget. Ø Ø .
Project Cost Management Determine Budget .
.Project Cost Management Determine Budget Ø Inputs v Activity Cost Estimates v Basis of Estimates v Scope Baseline Scope statement. Work Breakdown Structure.
milestones. procedures. and guidelines. v v Resource Calendars Indicate resource costs over the duration of the project. or results that have been purchased.Project Cost Management Determine Budget Ø Inputs Project Schedule Planed start and finish dates for the project’s activities. services. Cost budgeting tools. Reporting methods. v Contracts Costs relating to products. work packages. . v Organizational Process Assets Policies. control accounts.
Work package cost estimates and then aggregated for the higher component levels of the WBS (control accounts) and ultimately for the entire project.. . stakeholders (include customers). Allowances for unplanned but potentially required changes result from realized risks identified in risk register. not part of project cost baseline. Management reserves . Budgets reserved for unplanned changes to project scope or cost.Project Cost Management Determine Budget Ø Tools and Techniques Cost Aggregation Schedule activity cost estimates are aggregated by work packages in accordance with the WBS. Industry groups. professional associations. v v Reserve Analysis Contingency reserves . but included in the total budget. v Expert Judgment Consultants..
Project Cost Management Determine Budget Ø Tools and Techniques Historical Relationships Result in parametric estimates or analogous estimates involve the use of project characteristics (parameters) to develop mathematical models to predict total project costs. v They are most likely to be reliable when: Historical information used to develop the model is accurate. Parameters used in the model are readily quantifiable. Residential home construction is based on a certain cost per square foot of space. Models are scalable. and phases of a project. such as work for large project. . a small project.
A variance between the funding limits and the planned expenditures will necessitate the rescheduling of work to level out the rate of expenditures. v . Rescheduling can impact the allocation of resources.Project Cost Management Determine Budget Ø Tools and Techniques Funding Limit Reconciliation The expenditure of funds should be reconciled with any funding limits on the commitment of funds for the project.
v . When comparing actual to planned.Project Cost Management Determine Budget Ø Outputs Cost Performance Baseline Authorized time-phased budget at completion (BAC) used to measure. monitor and control overall cost performance on the project. the cost baseline serves as the “planned cost”. Developed as a summation of the approved budgets by time period (S-curve).
annually) funding requirements are derived from the cost baseline. usually by a margin. Established to exceed. to allow for either early progress or cost overruns. . Cost estimates.Project Cost Management Determine Budget Ø Outputs Project Document Updates Risk register. Total funding required included in cost baseline. Project schedule. Funding often occurs in incremental amounts. plus management reserves. v v Project Funding Requirements Total and periodic (quarterly.
Project Cost Management Control Costs Ø Monitoring the status of the project to update the project budget and managing changes to the cost baseline. Updating the budget involves recording actual costs spent to date. Analyzing the relationship between the consumption of project funds to the physical work being accomplished for such expenditures. Ø Ø .
Informing appropriate stockholders of all approved changes and associated costs.Project Cost Management Control Costs Influencing the factors that create changes to the cost baseline. Managing the actual changes when and as they occur. Ensuring requested changes are acted on in a timely manner. by period and in total for the project. Preventing unapproved changes from being included in the reported cost or resource usage. Ensuring that cost expenditures do not exceed the authorized funding. . Monitoring work performance against funds expended. Acting to bring expected cost overruns within acceptable limits. Monitoring cost performance to isolate and understand variances from the approved cost baseline.
Project Cost Management Control Costs .
corrective or preventive action is necessary. Describes how the project costs will be managed and controlled. .Project Cost Management Control Costs Ø Inputs v Project Management Plan Cost Performance Baseline. Compared with the actual results to determine if a change. Cost Management Plan.
Deliverables that have been completed and those not yet completed. Monitoring and reporting methods. Cost control tools.Project Cost Management Control Costs Ø Inputs Work Performance Information Provide information about project progress. procedures. Estimates for completing project work. . and guidelines. Costs authorized and incurred. v v Organizational Process Assets Policies.
EV is the budgeted amount for the work actually completed on the schedule activity or WBS component during a given time period. and schedule measures to assess and measure project performance and progress. Used to forecast future performance and project completion dates and costs. total PV for the project known as Budget At Completion (BAC).. Actual cost .. v Planned value . Earned value . AC have no upper limit. cost. EV cannot be greater than PV.Project Cost Management Control Costs Ø Tools and Techniques Earned Value Management Integrates project scope.. AC is the total cost incurred in accomplishing work on the schedule activity or WBS component during a given time period. PV is the budgeted cost for the work scheduled to be completed on an activity or WBS component. describe the percentage completion of a project. .
CV = EV – AC. CV is a measure of cost performance on a project. SV is a measure of schedule performance on a project. Cost performance index . SPI is a measure of progress achieved compared to progress planned. SPI = EV/PV. SV = EV – PV. v Cost variance .. CPI = EV/AC..Project Cost Management Control Costs Ø Tools and Techniques Earned Value Management Schedule variance . Schedule performance index . .. CPI is a measure of the value of work completed to the actual cost..
Project Cost Management Control Costs Ø Tools and Techniques Earned Value Management v .
The work performance information covers the project’s past performance and any information that could impact the project in the future.Project Cost Management Control Costs Ø Tools and Techniques Forecasting Forecasting includes making estimates or predictions of conditions and events in the project’s future based on information and knowledge available at the time of the forecast. and reissued based on work performance information provided as the project is executed. updated. Forecasts are generated. v .
future performance of the project can be forecasted by deriving: Estimate at completion (EAC) Represents the amount that the entire project is now expected to cost. .Project Cost Management Control Costs Ø Tools and Techniques Forecasting From the variances and indexes. based on performance so far. v Estimate to complete (ETC) Represents how much more is expected to be spent in order to completes the projects. Budget at completion (BAC) Represents the amount originally budgeted for the entire project.
AC Estimate to Complete .AC SPI = EV / PV CPI = EV / AC Term Schedule Variance Cost Variance Schedule Performance Index Cost Performance Index EAC = AC + BAC – EV EAC = BAC / CPI Estimate at Completion EAC = AC + ((BAC – EV)/(CPI * SPI)) ETC = EAC . SPI How much more spent Equation SV = EV .Project Cost Management Control Costs Ø Tools and Techniques Forecasting v Indication Good if ≥0 Good if ≥0 Good if ≥ 1 Good if ≥ 1 Budgeted rate Actual cost CPI .PV CV = EV .
What rate must we meet for the remaining work?” Consider risks. v Ø TCPI = Work Remaining (BAC-EV) Funds Remaining (BAC-AC) or (EAC-AC) Ø It answers the question of : “ In order to stay within budget. and technical performance.Project Cost Management Control Costs Ø Tools and Techniques To-Complete Performance Index Calculated projection of cost performance that must be achieved on the remaining work to meet a specified management goal. such as BAC or EAC. schedule. Ø .
Compares the baseline plan to actual schedule and cost performance. (graphical analysis technique).Project Cost Management Control Costs Ø Tools and Techniques Performance Reviews Compare cost performance over time. v Earned value performance . Examines project performance over time to determine if performance is improving or deteriorating. Trend analysis . Variance analysis . Estimated funds needed to complete work in progress. Compares actual project performance to planned or expected performance. ... Schedule activities or work packages overrunning and under running the budget..
. and AC). Forecast a range of possible final project results.Project Cost Management Control Costs Ø Tools and Techniques v Variance Analysis Cost performance measurements (CV. to display graphical trends. CPI) are used to assess the magnitude of variation to the original cost baseline. Determine the cause and degree of variance relative to the cost performance baseline. EV. v Project Management Software Monitor the three EVM dimensions (PV. Deciding whether corrective or preventive action is required.
v Organizational Process Assets Updates Causes of variances. CPI. Lessons learned from project cost control. . and SPI values for WBS components. are documented and communicated to stakeholders. SV.Project Cost Management Control Costs Ø Outputs Budget Forecasts The calculated EAC value is documented and communicated to stakeholders. v v Work Performance Measurements The calculated CV. Corrective action chosen and reasons.
Processed for review and disposition through the Perform Integrated Change Control process. .Project Cost Management Control Costs Ø Outputs Change Requests Preventive or corrective action. v Project Documents Updates Cost estimates. v v Project Management Plan Updates Cost performance baseline. Basis of estimates. Cost management plan.
D. we expect the total project to cost 89 percent more than planned. At this time. When the project is completed we will have spent 89 percent more than planned.Question A cost performance index (CPI) of 0.89 means: A. The project is only progressing at 89 percent of the rate planned. The project is only getting 89 cents out of every dollar invested. C. B. Answer: D .
Question You provide a project cost estimate for the project to the project sponsor. What should you do? A. Tell all the team members to cut 15 percent from their estimates. Start the project and constantly look for cost savings. Add additional resources with low hourly rates. D. Inform the sponsor of the activities to be cut. B. He is unhappy with the estimate. He asks you to cut 15 percent off the project estimate. because he thinks the price should be lower. C. Answer: C .
Eliminate risks in estimates and re-estimate. C. B. Decrease scope. Meet with the sponsor to find out what work can be done sooner.Question Your cost forecast shows that you will have a cost overrun at the end of the project. Which of the following should you do? A. D. Answer: A . Cut quality.
B. Generally what is the BEST explanation for why this occurred? A. A critical path activity took longer and needed more labor hours to complete. A supplier went out of business and a new one needed to be found.89 and a cost performance index (CPI) of 0. D.Question A manufacturing project has a schedule performance index (SPI) of 0. C. Additional equipment needed to be purchased. The scope was changed. Answer: D .91.
Question Although the stakeholders thought there was enough money in the budget. Estimated costs should be used to measure CPI. not CPI. Past history was not taken into account. D. several stakeholders audit the project and discover the project cost budget was estimated analogously.7. Answer: C . B. C. Although the activity estimates add up to the project estimate. halfway through the project the cost performance index (CPI) is 0. SPI should be used. To determine the root cause. Which of the following describes what was missing? A. Bottom-up estimating should have been used. the stakeholders think something was missing in how the estimates was completed.
Float. Activity Z is a difficult activity. Cost.Question You are about to take over a project from another project manager and find out the following information about the project. Schedule. Answer: A . Based on this information. B. The number of available resources.8.1. The cost performance index (CPI) is 1. C. which of the following would you be the MOST concerned about? A. There are 11 stakeholders on the project. D. Activity Z has an early start (ES) of day 15 and a late start (LS) of day 20. The schedule performance index (SPI) is 0.
B.Question The difference between the cost baseline and the cost budget can be BEST described as: A. D. C. The contingency reserve. The cost account. The project cost estimate. Answer: A . The management reserve.
Answer: C . It would be BEST if the project manager looks at: A.Question A project manager needs to analyze the project costs to find ways to decrease costs. Indirect costs and direct costs. Fixed costs and indirect costs. D. Variable costs and fixed costs. B. C. Direct costs and variable costs.
The value of work performed. B. The cast of work completed. Answer: C . The anticipated total cost at project completion.Question Estimate at completion (EAC) is a periodic evaluation of: A. C. What it will cost to finish the job. D.
350. Answer: D . actual cost (AC) = 400. -75. C. 400. D. planned value (PV)= 350. B. what is cost variance (CV)? A.Question If earned value (EV) = 350. -50.
C. The prevention of inappropriate changes from being included in the cost baseline. An understanding of the cost risk in the work that has been estimated. D. An indication of the range of possible costs for the project.Question All the following are outputs of the Estimate Costs process EXCEPT: A. Answer: B . B. Documentation of any assumptions made during the Estimate Costs process.
Maintained by management to cover cost overruns. Answer: D . D. Added to the base costs of the project to account for risks. B.Question The cost contingency reserve should be: A. Hidden to prevent management from disallowing the reserve. C. Added to each activity to provide the customer with a shorter critical path.
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