Project Cost

Management
Sections of this presentation were adapted
from A Guide to the Project Management
Body of Knowledge 4th Edition, Project
Management Institute Inc., © 2009
 Project Cost Management
“The processes involved in planning,
estimating, budgeting, and controlling
costs so that the budget can be completed
within the approved budget”
 Why Do We Manage Cost?
Part of triple constraint, can’t manage one without
the others (scope, time, and quality)
Plots of cost and scope against plan can help spot
problems early

Today
Actual
Costs (AC) Planned
Value (PV)
Cumulative
Value
Is this project
Earned over/under budget?
Value (EV)
Is it ahead of/behind
schedule?
Time
Cost Management Key Terms
PV - Planned Value, estimated value of the planned work
EV – Earned Value, estimated value of work done
AC – Actual Cost, what you paid
BAC – Budget at Completion, the budget for the total job
EAC –Estimate at Completion, what is the total job
expected to cost?
ETC – Estimate to Complete, forecasted costs to complete
job
VAC – Variance at Completion, how much over/under
budget do we expect to be?
 How Do We Manage Cost?
Three processes
 Estimate Costs
 Determine Budget
 Control Costs

Estimate Determine Control

Budget
Costs Costs
 Estimate Costs
Enterprise Inputs Tools & Techniques Outputs
Environmental
Factors  Analogous estimating

Organizational  Determine resource cost

Process Assets rates Activity Cost
Estimates
 Bottom up estimating
Project Scope
Statement  Parametric estimating Activity Cost
Estimates
Work Breakdown  Project management Supporting Detail
Structure software
 Vendor bid analysis Requested Changes
WBS Dictionary
 Reserve analysis
Project  Cost of quality Cost Management
Management Plan Plan Updates
•Schedule Mgmt Pln
•Staffing Mgmt Pln
•Risk Register

Estimate Determine Control

Budget
Costs Costs
 Estimating Methods
Analogous (Top Down) estimating – Managers use
expert judgment or similar project costs [quick, less
accurate]
Bottom-Up estimating – People doing work estimate
based on WBS, rolled up into project estimate [slow,
most accurate]
Parametric estimating – Use mathematical model (i.e.
cost per sq ft). [accuracy varies] Two types:
Regression analysis – based on analysis of multiple
data points
Learning Curve – The first unit costs more than the
100th, forecasts efficiency gains
 Estimating Methods
Vendor Bid Analysis – Estimating using bids +
allowances for gaps in bid scope [slow, accuracy
depends on gaps]
Reserve Analysis – Adding contingency to each
activity cost estimates as zero duration item [slow,
overstates cost]
 Determine Budget
Tools & Techniques
Outputs
Project Scope Statement  Cost aggregation Cost Baseline
Work Breakdown Structure  Reserve analysis
 Parametric estimating
WBS Dictionary Project Funding
Inputs  Funding limit reconciliation Requirements
Activity Cost Estimates
Activity Cost Estimates Cost Management
Supporting Detail Plan Updates
Project Schedule
Requested Changes
Resource Calendars
Contract
Cost Management Plan

Estimate Determine Control

Budget
Costs Costs
 Determine Budget
Budgeting is allocating costs to work packages
to establish a cost baseline to measure project
performance
Remember Contingency items are for unplanned
but required changes it is not to cover things
such as:
 Price escalation
 Scope & Quality Changes
Funding Limit Reconciliation – Smoothing out
the project spend to meet management
expectations
 Control Costs
Inputs Tools & Techniques Outputs Cost Estimate
Cost Baseline  Cost change control system Updates

Project Funding  Performance measurement Cost Baseline

Requirements analysis Updates
Performance
 Forecasting
Performance Measurements
Reports  Project performance reviews
Forecasted
Work Performance  Project management Completion
Information software
Requested Changes
 Variance management
Approved Change Recommended
Requests Corrective Actions
Organizational
Project
Process Assets
Management Plan
Updates
Project Management
Plan Updates

Estimate Determine Control

Budget
Costs Costs
 Earned Value
Progress is compared against the Planned Value
(PV) – Budgeted
baseline to determine whether Cost
project is ahead of or behind plan Earned Value
(EV) – Actual
Percent complete can be difficult work completed
to measure, some managers use Actual Cost (AC)
rules – Costs incurred
Estimate to
 50/50 Rule – Assumed 50% Complete (ETC) –
complete when task started, final What’s Left
50% at completion Estimate at
 20/80 Rule – 20% at start Completion (EAC)
– What final cost
 0/100 Rule – No credit until complete will be
Earned Variance at

Value
Completion
(VAC)

Graph Target
Cost &
Schedule

Planned
Schedule
Value (PV) Variance
(Time)

Earned
Value (EV)
 Earned Value Formulas
NAME FORMULA NOTES
Cost Variance (CV) EV-AC Negative = Over budget
Positive = Under budget
Schedule Variance EV-PV Negative = Behind Schedule
(SV) Positive = Ahead of Schedule
Cost Performance EV/AC How much are we getting for every
Index (CPI) dollar we spend?
Schedule Perform EV/PV Progress as % against plan
Index (SPI)
Estimate to Complete EAC-AC How much more do we have to
(ETC) spend?
Variance at BAC-EAC At the end of the day, how close will
Completion (VAC) we be to plan?
Estimate at See following slide
Completion (EAC)
 Earned Value Formulas (Cont’d)
NAME FORMULA NOTES
Estimate at
Completion (EAC)
BAC/CPI Use if no variances from
BAC have occurred

AC+ATC Use when original

estimate was bad. Actuals
+ New estimate

AC+BAC-EV Use when current

variances are not expected
to be there in the future
AC+(BAC-EV)/CPI Use when current
variances are expected to
continue
 Tricks for Earned Value
EV is always first
Variance = EV minus something
Index = EV divided by something
If the formula relates to cost use AC
If the formula relates to schedule use PV
Interpreting results: negative is bad and positive is good
Interpreting results: greater than one is good, less than
one is bad

Project Current
Start Status BAC
PV
EAC
AC ETC
 Terms to Remember
Present Value Working Capital
Net Present Value (NPV) Straight Line Depreciation
Internal Rate of Return Accelerated Depreciation
(IRR)  Double Declining Balance
Payback Period  Sum of Years Digits
Benefit Cost Ratio = Value Analysis (Value
BCR>1, Payback is greater Engineering)
than the cost
Opportunity Cost
Sunk Cost

You won’t be calculating most of these numbers on the test,

just remember the concepts for general questions