Project Cost Management

Project Cost
Management
Prepared by P resented by:

Engr. Mohamed Eid , Engr. Tarek Khairy ,
PMP® PMP®
Project Cost
Management

PMP® PMP®
Project Cost
Management
Cost management describing the required

processes to Estimate, build up the budget,
control the costs so that the project can be
completed through the required budget

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PMP® PMP®
Definitions
What is whole of life cost?
is a means of comparing options and their associated

Cost and income streams over a period of time. Costs to be taken
into account include both initial capital or procurement
costs, opportunity costs and future costs.
Don’t pay less for lower quality then pay more for
maintenance.

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 On some projects, especially those of smaller scope, cost estimating and cost budgeting are
tightly linked
 and can be viewed as a single process that can be performed by a single person over a relatively
short period of time.
 These are presented here as distinct processes because the tools and techniques for each are
different.
 The ability to influence cost is greatest at the early stages of the project, making early scope
definition critical

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 Direct vs. Indirect Cost
 Direct Cost: Directly attributable to project work.
 Indirect cost: Such as overhead, benefits, and costs incurred for
more than project like equipments.
 Fixed vs. Variable Cost
 Fixed cost: Costs that are not changed with production such as
setup cost and rental cost
 Variable cost: Costs that are changed with production such as

material and labors.
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Now you need to think first about your
plan
1-How you will work to finalize this issue

2-Who will be involved
3-What tool could we need
4-What Process could we follow
5-Do I need to refer to lesson Learned
Many questions will be in mind you need

to answer it

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Plan Cost Management is the process that establishes the policies, procedures, and documentation for
planning , managing, expending, and controlling project costs. The key benefit of this process is that it
provides guidance and direction on how the project costs will be managed throughout the project.

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.

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Analytical Techniques
Developing the cost management plan may involve choosing strategic options to
fund the project such as:
self-funding, funding with equity, or funding with debt. The cost management
plan may also detail ways to finance project resources such as making,
purchasing, renting, or leasing. These decisions, like other financial decisions
affecting the project, may affect project schedule and/or risks.
Scheduling Management Plan:

It’s a component of the project management plan and shows how you are going
to develop, monitor, and control the cost.
It can establish the following:
Units of measure, Level of precision, Level of accuracy, Organizational procedures
links, Control thresholds, Rules of performance measurement, Reporting formats,
Process descriptions .

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NOW Prepare to estimate
Prepared by Presented by:

Engr. Mohamed Eid , Engr. Mohamed Abdulhaq ,
PMP® PMP®
Estimate Costs is the process of developing an approximation of the monetary resources needed to complete
project activities. The key benefit of this process is that it determines the amount of cost required to complete project work.
Cost estimates are a prediction that is based on the information known at a given point in time. Cost estimates include
the identification and consideration of costing alternatives to initiate and complete the project. Cost tradeoffs and risks
should be considered, such as make versus buy, buy versus lease, and the sharing of resources in order to achieve optimal
costs for the project.
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Project Management Software
The software referred to here might be any software used for estimating. If a project has
hundreds or thousands of activities, each of which has similar cost components added like
overhead, software can significantly speed up the calculations.
Reserve Analysis
.This involves identifying which activities on the project have significant risks and determining how much
time and money to set aside to account
for the risks if they occur.
 contingency reserves are used for known risks, which are specifically identified risks.
 management reserve is used to accommodate unknown risks, or unidentified risks.

Engr. Mohamed Eid , PMP® Engr. Tarek Khairy , PMP®
Cost of Quality:
• All costs incurred in preventing nonconformance, apprising, or rework.
This will be discussed later in Quality Management.
Vendor Bid Analysis:

• Analysis of cost estimate based on
responsive bids from qualified vendors.

Cost Estimates:Costs are estimated for all resources such as:
• Direct Cost (Labor, materials, equipment, services, facilities, IT)
• Cost of financing (interest), inflation allowance, exchange rates.
• Contingency reserve.,Insurance fees.
• Taxes,Overhead (Site overhead and main office)
Rough Order of Magnitude (ROM) Estimate This type of estimate is usually made
during project initiating. A typical range for ROM estimates is -25 to +75 percent from
actual, but this range can vary depending on how much is known about the project when creating the
estimates.
•Budget Estimate This type of estimate is usually made during project planning and is in the range
of -10 to+25 percent from actual.
•Definitive Estimate As the project progresses, the estimate will become more refined. Some project
managers use the range of + / -10 percent from actual, while others use -5 to + 10 percent from actual.

BASIC OF ESTIMATE

BASIC OF ESTIMATE
 Supporting documentation which provides understanding of how the cost estimate was
derived.
 This may includes:

 Assumptions.
 Constraints.
 Ranges of 5%).
accuracy (ex:
 Confidence level of the final cost estimate.

Determine Budget is the process of aggregating the estimated costs of individual activities or work
packages to establish an authorized cost baseline. The key benefit of this process is that it determines the cost
baseline against which project performance can be monitored and controlled.

Cost Aggregation :
• Cost Estimates are aggregated within activities and rolled up to work package then rolled up to control accounts then rolled up to entire
project.

Reserve Analysis :
1. Contingency Reserve : Allowances for unplanned changes result from identified risks.
2. Management Reserve : Budgets reserved for unplanned changes to scope and cost.
Historical Relationships:
 Historical Relationships involve the use of project characteristics (parameters) to develop mathematical
models to predict total project costs.
 This results in parametric estimates or analogous estimates.

Funding limit reconciliation
addresses the variance between funding limit and the planned expenditures for the project. This will occasionally require
the rescheduling of work to level out the rate of expenditure.
Example : Project Funds will be available on two batches :

$30 millions today and $25 millions after 6 months

Determine Budget: Outputs
Cost Baseline
The cost baseline is the approved version of the time-phased project budget, excluding any management reserves,
which can only be changed through formal change control procedures and is used as a basis for comparison to
actual results.

Project Funding Requirements :
• It can be derived from cost baseline. Funding often occurs in incremental amounts.

Control Costs is the process of monitoring the status of the project to update the project costs and managing changes
to the cost baseline. The key benefit of this process is that it provides the means to recognize variance from the plan in
order to take corrective action and minimize risk

PV (planned value) is a schedule
reference. It refers to how much
money you were planning to spend
on a project at some point in the
project schedule.
BAC (budget at completion)

refers to how much you planned to
spend for the entire project.
This is an output of the planning
phase.
Earned value. Earned value (EV)

is a measure of work performed
expressed in terms of the budget
authorized for that work. It is the
budget associated with the
authorized work that has been
PV - used to be called BCWS (budgeted cost of the work scheduled) EV - completed.
used to be called BCWP (budgeted cost of the work performed) AC - used
to be called ACWP ( actual cost of the work performed)

SV < 0 Behind Schedule CV < 0 Over Budget
CV = 0 On Budget
SV = 0 On Schedule
CV > 0 Under Budget
SV > 0 Ahead of Schedule
CPI < 1 Over Budget

SPI < 1 Behind Schedule
SPI = 1 On Schedule CPI = 1 On Budget
SPI > 1 Ahead of Schedule CPI > 1 Under Budget
Schedule Variance (SV) = EV – PV Cost Variance (CV) = EV – AC

Schedule Performance Index (SPI) = EV / Cost Performance Index (CPI) = EV /
PV AC

Key:
1– Use if a new estimate was
required (the original was flawed)
2– Use if spending will continue at

the budgeted rate: no BAC
variance
3– Use if current variances are

typical of the future
(current CPI will continue)
4– Use if sub-standard cost and

schedule performance will
continue, impacting the ETC

TCPI
to-complete performance index (TCPI) is calculated for projection of cost performance that must
be achieved on the remaining work to meet a specified management goal, such as the BAC or EAC. If it becomes obvious that the BAC is no
longer viable, project manager develops a forecasted estimate at completion. Once approved, the EAC effectively supersedes the BAC as the
cost performance goal.
• The equation for the TCPI based on the BAC: (BAC-EV)/ (BAC-AC)
• The equation for the TCPI based on the EAC: (BAC-EV)/ (EAC-AC)
• If TCPI is < 1, work remaining is less than the funds needed to accomplish the work.
• If TCPI is > 1, work remaining is more than the funds needed to accomplish the work.
• Ex :
BAC = 600,000.00 , EV = 200,000.00, AC= 250,000.00
TCPI = (400,000.00 ) / (350,000.00) = 1.14

Level of Effort (LOE)
An activity that does not produce definitive end products and is
measured by the passage of time.
Note: Level of effort is one of three earned valued management (EVM)
types of activities used to measure work performance.
Performance Reviews and Variance Analysis
Performance reviews are used to compare actuals to the plan. As such, they compare cost performance and
schedule performance to their respective baselines and use variance analysis, trend analysis and earned value to
compare actual performance to the plan.
The variance analysis is a key tool used to track any cost or schedule actual and compare it to the
baseline.


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Project Cost

Prepared by P resented by:

Prepared by P resented by:

Cost management describing the required

Prepared by P resented by:

What is whole of life cost?

is a means of comparing options and their associated

Prepared by P resented by:

Prepared by P resented by:

 Direct Cost: Directly attributable to project work.

 Indirect cost: Such as overhead, benefits, and costs incurred for

more than project like equipments.

 Fixed vs. Variable Cost

 Variable cost: Costs that are changed with production such as

1-How you will work to finalize this issue

Many questions will be in mind you need

Prepared by P resented by:

Prepared by P resented by:

Prepared by P resented by:

Scheduling Management Plan:

Prepared by P resented by:

Prepared by Presented by:

 management reserve is used to accommodate unknown risks, or unidentified risks.

Prepared by Presented by:

Vendor Bid Analysis:

Prepared by Presented by:

Prepared by Presented by:

Prepared by Presented by:

 This may includes:

Prepared by Presented by:

Prepared by Presented by:

Prepared by Presented by:

Prepared by Presented by:

Example : Project Funds will be available on two batches :

Prepared by Presented by:

Prepared by Presented by:

Prepared by Presented by:

Prepared by Presented by:

BAC (budget at completion)

Earned value. Earned value (EV)

Prepared by Presented by:

CPI < 1 Over Budget

Schedule Variance (SV) = EV – PV Cost Variance (CV) = EV – AC

Prepared by Presented by:

2– Use if spending will continue at

3– Use if current variances are

4– Use if sub-standard cost and

Prepared by Presented by:

Prepared by Presented by:

Performance Reviews and Variance Analysis

Prepared by Presented by:

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