PROJECT COST

MANAGEMENT
Ilija Stojanović, Ph.D., PMP
WBS -example
Cost estimation tools and techniques

• Basic tools and techniques for cost estimates:

• Analogous estimates: use the actual cost of a previous, similar project as the basis for estimating
the cost of the current project

• Bottom-up estimates: involve estimating individual work items or activities and summing them
to get a project total

• Parametric modeling uses project characteristics (parameters) in a mathematical model to

estimate project costs
• Most likely (cM). The cost of the activity, based on realistic effort assessment for the
required work and any predicted expenses.
• Optimistic (cO). The activity cost based on analysis of the best-case scenario for the activity.
• Pessimistic (cP). The activity cost based on analysis of the worst-case scenario for the
activity.
 Triangular Distribution. cE = (cO + cM + cP) / 3
 Beta Distribution (from a traditional PERT analysis). cE = (cO + 4cM + cP) / 6

9
   Activity Optimistic Pessimistic Most likely Three point estimation

A Excavate

B Lay the foundation

C Put up the rough wall

D Put up the roof

E Install the exterior plumbing

F Install the interior plumbing

G Put up the exterior siding

H Do the exterior painting

I Do the electrical work

J Put up the wallboard

K Install the flooring

L Do the interior painting

M Install the exterior fixtures

N. Install the interior fixtures

Excercize:
• Try at home: Beta Distribution (from the traditional PERT technique).
Triangular Distribution
tE = (tO + 4tM + tP) /6
tE = (tO + tM + tP) / 3
 • Tangible costs or benefits are those costs or benefits
that an organization can easily measure in dollars or
otgher currency

• Intangible costs or benefits are costs or benefits that

are difficult to measure in monetary terms

Types of costs • Direct costs are costs that can be directly related to
and benefits producing the products and services of the project

• Indirect costs are costs that are not directly related to

the products or services of the project, but are
indirectly related to performing the project

• Sunk cost is money that has been spent in the past;

when deciding what projects to invest in or continue,
you should not include sunk costs
Budget reserves

• Reserves are used in a cost estimate to mitigate cost risk by

allowing for future situations that are difficult to predict

• Contingency reserves allow for future situations that may be

partially planned for (sometimes called known unknowns)
and are included in the project cost baseline

• Management reserves allow for future situations that are

unpredictable (sometimes called unknown unknowns )
Determining the

• 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
Budget

• Important goal is to produce a cost baseline

• a time-phased budget that project managers use
to measure and monitor cost performance
Project Budget Component
Project budget
Budget
Budget of
of the
the project
project
8750 USD
8750 USD

Management
Management reserves
reserves
(unknown
(unknown risks)
risks)
500 USD
500 USD

COST
COST BASELINE
BASELINE PM
8250
8250 USD
USD

Contingency
Contingency reserves
reserves
(known
(known risks)
risks)
750
750 USD
USD

Cost
Cost of
of the
the project
project
7500
7500 USD
USD

CA
CA 11 CA
CA 22
4500
4500 USD
USD 3000
3000 USD
USD

WP
WP 11 WP
WP 22 WP
WP 33
1500
1500 USD
USD 3000
3000 USD
USD 3000
3000 USD
USD

Activity
Activity 11 Activity
Activity 22 Activity
Activity 33 Activity
Activity 44 Activity
Activity 55
500
500 USD
USD 1000
1000 USD
USD 3000
3000 USD
USD 1000
1000 USD
USD 2000
2000 USD
USD
Cost baseline
 • EVM is a project performance measurement technique that
integrates scope, time, and cost data

Earned • The planned value (PV), formerly called the budgeted cost of
work scheduled (BCWS), also called the budget, is that portion
Value of the approved total cost estimate planned to be spent on an
activity during a given period
Managemen
t (EVM) • Actual cost (AC), formerly called actual cost of work performed
(ACWP), is the total of direct and indirect costs incurred in
accomplishing work on an activity during a given period

• The earned value (EV), formerly called the budgeted cost of

work performed (BCWP), is an estimate of the value of the
physical work actually completed

• EV is based on the original planned costs for the project or

activity and the rate at which the team is completing work on
the project or activity to date
Earned Value Management The planned value (PV), formerly called
the budgeted cost of work scheduled
(BCWS), also called the budget, is that
portion of the approved total cost
estimate planned to be spent on an
activity during a given period

Actual cost (AC), formerly called actual

cost of work performed (ACWP), is the
total of direct and indirect costs incurred
in accomplishing work on an activity
during a given period

The earned value (EV), formerly called

the budgeted cost of work performed
(BCWP), is an estimate of the value of
the physical work actually completed
EV is based on the original planned costs
for the project or activity and the rate at
which the team is completing work on
the project or activity to date
Earned Value Formulas
 • Negative numbers for cost and schedule variance
indicate problems in those areas

• CPI and SPI less than 100% indicate problems

Rules of
thumb for • Problems mean the project is costing more than
Earned Value planned (over budget) or taking longer than
planned (behind schedule)
Numbers
• The CPI can be used to calculate the estimate at
completion (EAC)—an estimate of what it will cost
to complete the project based on performance to
date. The budget at completion (BAC) is the
original total budget for the project
Example 1

• EV>PV
• AC>PV
• AC>EV
Example 2

• EV>PV
• AC<PV
Example 3

• EV<PV
• EC<PV
Monitoring your
project using
Earned Value
Management
Example
• You are managing a software project with an initial budget estimate of 2 million USD.
During interim cost and schedule performance analysis, you figured out that:
• You should have spent $500,000 till now based on your initial plans and 1,000 man/days of
schedule activities
• You spent $600,000 till now and completed 1,100 man/days of schedule activities which
should have cost $450,000 based on your initial plans.
• You re-estimated the budget required for the remaining work to be done as $1,500,000.

• BAC (Budget at Completion)= 2 million USD ("initial budget estimate of 2 million USD" referred in the
scenario)
• PV (Planned Value) = $500,000 for cost related EVM calculations, ("You should have spent $500,000 till
now based on your initial plans)
• PV=1,000 man/days for schedule related EVM calculations ("You should have spent 1,000 man/days of
schedule activities" )
• AC (Actual Cost) = $600,000 ("You spent $600,000 till now" referred in the scenario)
• EV (Earned Value)= 1,100 man/days for schedule related EVM calculations,
• EV = $450,000 for cost related EVM calculations.
("completed 1100 man/days of schedule activities which should have cost $450,000 based on your initial
plans" referred in the scenario)
• ETC (Estimate to Complete) = $1.5 million USD ("You re-estimated the budget required for the remaining
work to be done as 1,500,000." referred in the scenario)
Earned Value Formulas
• BAC (Budget at Completion)= 2 million USD ("initial budget estimate of 2 million USD" referred in the
scenario)
• PV (Planned Value) = $500,000 for cost related EVM calculations, ("You should have spent $500,000
till now based on your initial plans)
• PV=1,000 man/days for schedule related EVM calculations ("You should have spent 1,000 man/days
of schedule activities" )
• AC (Actual Cost) = $600,000 ("You spent $600,000 till now" referred in the scenario)
• EV (Earned Value)= 1,100 man/days for schedule related EVM calculations,
• EV = $450,000 for cost related EVM calculations.
("completed 1100 man/days of schedule activities which should have cost $450,000 based on your initial
plans" referred in the scenario)
• ETC (Estimate to Complete) = $1.5 million USD ("You re-estimated the budget required for the
remaining work to be done as 1,500,000." referred in the scenario)

• CPI = EV/AC = $450,000/$600,000 = 0.75 (over planned costs)

• SPI = EV/PV = 1,100/1,000 = 1.10 (ahead of schedule)
• CV = EV - AC = $450,000 - $600,000 = -$150,000 (over planned costs)
• SV = EV - PV = 1,100 man/days - 1,000 man/days = 100 man/days (ahead of schedule)
• EAC (Estimate at Completion) = AC + ETC = $600,000 + $1,500,000 = $2,100,000 (more budget needed
that intially planned)
• VAC (Variance at Completion) = BAC - EAC = 2 million USD – EAC
So, VAC = $2,000,000 - $2,100,000 = -$100,000 (you are currentlly missing comparing to your planned
budget)
OUR SITUATION

• EV>PV
• AC>PV
• AC>EV