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Project Cost Management

PMBOK Chapter 7



Cost Estimating

Cost Budgeting
E Controlling

Cost Control

Cost Estimating

Cost estimating and Pricing:

Cost estimating: how much will it cost the performing organization to provide the product or service involved? Pricing: how much will the performing organization charge for the product or service? Business decision.

Estimating should be done by the person doing the work.

Cost Estimating
1. WBS 2. Resource requirements 3. Resource rates. 4. Act. duration est. 5. Historical info. 6. Chart of accounts 7. Risks

1. Analogous est. 2. Parametric modeling 3. Bottom-up est.


1. Cost estimates 2. Cost management plan

Based on the WBS to increase the accuracy. Project managers should analyze the needs of the project, to compare and reconcile any differences with cost requirements from management.

Cost Estimating

Cost estimates for all resources that will be charged to the project.

Generally expressed in units of currency to facilitate comparisons both within and across projects. Generally includes appropriate risk response planning.
Reference to WBS. How it was developed? Assumptions made. Range of possible results.

Supporting detail must include:

Cost management plan how cost variances will be managed.

Cost Budgeting

Allocate the overall cost estimates to individual activities or work packages to establish a cost baseline for measuring project performance.
Inputs Tools Outputs

1. 2. 3. 4.

Cost estimates WBS Project schedule Cost management plan

1. Cost budgeting tools and techniques

1. Cost baseline

Cost Budgeting

The cost baseline will be used to measure and monitor cost performance of the project.

Expected Cash Flow Cumulative Values Cost Baseline


Estimates vs. Accuracy

Order of Magnitude (Early)

-25% +75%

Most difficult to estimate as very little project info is available

Used to finalize the Request for Authorization (RFA), and establish commitment Development stage estimate. Needed to predict revised project completion date

Budget Estimate

-10% +25

Definitive Estimate

-5% 10%

Tools for Estimating (and Budgeting)

Top Down Estimating Bottom Up Estimating

depends on experience Fast, but estimates are rough


but reliable High cost (time) / WBS needed Buy-in from the team

models to predict costs Parametric Two types: REGRESSION ANALYSIS, Modeling and LEARNING CURVE Expert judgment Delphi Method Tasks need not to be identified (analogous) Considerable experience needed

Cost Control

Cost Performance Detect and understand variances from plan Ensure all changes are recorded and agreed upon Prevent bogus changes from being included in cost baseline Inform stakeholders of authorized changes Bring costs within acceptable limits

Cost Control
Inputs Tools
1. Cost Change Control System 2. Performance Measurement 3. Earned Value Management 4. Additional Planning 5. Computerized Tools

1. Revised Cost Estimates 2. Budget Updates 3. Corrective Action 4. Estimate at Completion 5. Project Closeout 6. Lessons learned

1. Cost Baseline 2. Performance Reports 3. Change Requests 4. Cost Management Plan

Understand what is driving variances, good and bad, and decide what action to take.

Cost Control

completion methods:

0/100 Conservative approach. No work, no money. 20/80 20% at start of the project, the rest when it is completed. 50/50 Liberal approach.

Cost Control: Earned Value Management

Earned Value:

Integrates cost, time and scope. Used to future performance and project completion dates Key concepts: EV = Earned Value (BCWP)
Estimated value of the work actually accomplished


PV = Planned Value (BCWS)

Estimated value of the work planned to be done

AC = Actual Cost (ACWP)

Actual cost incurred for the work accomplished

Earned Value Management

BAC = Budget At Completion

Estimated total cost of the project when done

EAC = Estimate At Completion

Forecast of most likely total project cost based on project performance and risk quantification

CPI = Cost Performance Index

Ratio of budgeted costs to actual cost

SPI = Scheduled Performance Index

Estimated total cost of the project when done

Earned Value Management

Key Formulas:

CV = Cost Variance = EV- AC

Negative is over budget, Positive is under budget

SV = Schedule Variance = EV- PV

Negative is behind schedule, Positive is ahead schedule

CPI = Cost Performance Index = EV / AC SPI = Schedule Performance Index = EV / PV EAC = Estimate At Completion =

BAC / CPI Most often used formula AC + ETC AC + BAC - EV AC + (BAC - EV) / CPI

EAC = Estimate At Completion = EAC - AC VAC = Variance At Completion = BAC - EAC

Cost Types

Direct Costs Related Directly to the project ex. Labor hours, material, equipment, food, travel. . . Indirect Costs Overhead used for more than one project ex. Building rent, taxes, janitorial services

Cost Types
A cost by any other name, really isnt the same!
Variable Cost Changes with volume Fixed Cost Stay the same, regardless of volume





Cost Types
Project Costs Are incurred while the project is being fulfilled. Life Cycle Costs Includes the costs after project completion. There may be temptation to lower project costs at the expense of long term costs. Life Cycle Costing gives the PM a way to consider costs outside of the scope of project fulfillment