AMITY BUSINESS SCHOOL

ITPM PROJECT ON
COST MANAGEMENT

Submitted To- Submitted By-

Dr. Teena Bagga Swati Singh (E-09)
Mohit Sachdev(E-64)
Dharna Bhat(E-12)
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What is Cost Management?

• Cost management is the process of estimating , allocating , and controlling
the costs in a project.

• It allows a business to predict coming expenses in order to reduce the

chances of it going over budget.

• Projected costs are calculated during the planning phase of a project and
must be approved before work begins.

• As the project plan is executed, expenses are documented and tracked so

things stay within the cost management plan.

• Once the project is completed, predicted costs vs. actual costs are
compared, providing benchmarks for future cost management plans and
project budgets.
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Cost Management Plan:

Cost Management Plan focuses on:

• Planning cost for the project

• Managing project to the cost
• Control cost
• Manage cost variances Cost management plan forms a part of a project
management plan.
• Like other project management plans, even cost management plans requires
proactive thinking.
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Steps involved in cost management plan :

1) Plan Cost Management
The Cost Management Plan establishes things like the methodologies with
which the project budget will be established, the criteria for changes, and
control procedures.
2) Project Cost Estimation
Project cost estimating is the process of approximating how much it will
cost to complete the project activities. Usually the cost is measured in currency
such as the dollar, euro, or yen. But in some situations it could be measure
using other units, such as staff hours.
When developing a cost estimate, you need to consider all of the resources that
will be used by the project. For example...
• Labor
• Materials
• Equipment
• Services
• Facilities
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3) PROJECT COST BUDGETING

Once you've estimated the costs for all of the project activities, you will have the
information you need to create your project's cost baseline. The approved cost baseline
forms the budget for your project.
The cost baseline for your project is made by combining the cost estimates of the
individual activities over the life of the project. Your project's expenditures will be
measured against this baseline.

In addition to using the cost baseline as a performance measure, for longer

duration projects, it can also be used to determine and justify project funding.
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4) PROJECT COST CONTROL

Once you have an approved budget and cost baseline, your project is ready to move
into the execution phase.
During the execution phase of your project, you will need to monitor the status of
the activities. Any deviation to schedule, quality, or scope for an activity will most
likely have a cost impact. For this reason, project cost control requires you to check
the overall status of each activity.
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Earned Value Analysis

Earned Value Analysis (EVA) is one of the key tools and techniques used
in Project management , to have an understanding of how the project is
progressing. EVA implies gauging the progress based on earnings or money.
Both, schedule and cost are calculated on the basis of EVA.

Features of EVA
• Earned Value Analysis is an objective method to measure project performance
in terms of scope, time and cost.
• EVA metrics are used to measure project health and project performance.
• Earned Value Analysis is a quantitative technique for assessing progress as the
software project team moves through the work tasks, allocated to the Project
Schedule.
• Total hours to complete the project are estimated and every task is given an
Earned Value, based on its estimated (%) of the total.
• Earned Value is a measure of ‘Progress’ to assess ‘Percentage of Completeness’
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Key Elements of EVA

• Planned Value (PV) – The approved cost baseline for the work package. It was
earlier known as Budgeted Cost of Work Scheduled (BCWS).
Planned Value = (Planned % Complete) X (BAC)
• Earned Value (EV) – The budgeted value of the completed work packages.
It used to be known as Budgeted Cost of Work Performance at a specified
point (BCWP).
Earned Value = % of completed work X BAC (Budget at Completion).
• Actual Cost (AC) – The actual cost incurred during the execution of work
packages up to a specified point in time. It was previously called Actual Cost of
Work Performed (ACWP).
• Cost Performance Index (CPI) = EV / AC
• Schedule Performance Index (SPI) = EV / PV
 Example AMITY BUSINESS SCHOOL

Suppose you are managing a software development project. The project is expected to be
completed in 8 months at a cost of Rs 10,000 per month. After 2 months, you realize that the
project is 30 percent completed at a cost of Rs40,000. You need to determine whether the project
is on-time and on-budget after 2 months.
• Step 1: Calculate the Planned Value (PV) and Earned Value (EV)
From the scenario,
• Budget at Completion (BAC) = Rs10,000 * 8 = Rs 80,000
• Actual Cost (AC) = Rs 40,000
• Planned Completion = 2/8 = 25%
• Actual Completion = 30%
Therefore,
• Planned Value = Planned Completion (%) * BAC = 25% * Rs 80,000 = Rs 20,000
• Earned Value = Actual Completion (%) * BAC = 30% * Rs 80,000 = Rs 24,000
Step 2: Compute the Cost Performance Index (CPI) and Schedule Performance Index (SPI)
• Cost Performance Index (CPI) = EV / AC = Rs24,000 / Rs40,000 = 0.6
• Schedule Performance Index (SPI) = EV / PV = Rs24,000 / Rs20,000 = 1.2
Interpretation: Since Cost Performance Index (CPI) is less than one, this means the project is
over budget. For every Rupee spent we are getting 60 paisa worth of performance. Since
Schedule Performance Index (SPI) is more than one, the project is ahead of schedule. However,
this has come at a cost of going over budget. If work is continued at this rate, the project will be
delivered ahead of schedule and over budget. Therefore, corrective action should be taken.
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Need for EVA

EVA provides different measures of progress for different types of tasks. It is the
single way for measuring everything in a project.
Provides an ‘Early Warning’ signal for prompt corrective action. The types of signals
can be the following:
a) Bad news does not age well – Holding on to the bad news does not help. The
project manager needs to take an immediate action.

b) Still time to recover – In case, the project is not going as per schedule and may
get delayed, the situation is needed to be taken care of by finding out the reasons that
are causing delay and taking the required corrective action.

c)Timely request for additional funds – While there is time to recover, the need for
additional resources or funds can be escalated with an early warning.
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THANK YOU