Project Cost Management

What is Project Cost

Management?
• Project Cost Management includes the
processes required to ensure that the project
is completed within the approved budget.

• The processes of Project Cost Management

include
• Estimate Costs
• Determine Budget
• Control Costs
 Project Cost Management Overview

• Estimate Costs
– Developing an approximation of the costs of the
resources needed to complete project activities.

• Determine Budget
– Aggregating the estimated costs of individual activities
or work packages to establish a cost baseline.

• Control Costs
– Influencing the factors that create cost variances and
controlling changes to the project budget.
 Cost Management plan
• The cost management plan can establish:
– Units of Measure.
Each unit used in measurements is defined, such as staff
hours, staff days, week, lump sum, etc., for each of the resources.

– Organizational Procedures Links.

The WBS component used for the project cost accounting is called a
control account (CA). Each control account is assigned a code or
account number that is linked directly to the performing organization’s
accounting system.

– Control Thresholds.
Variance limit for costs or other indicators (e.g., person-days, volume of
product) at designated time points over the duration of the project can be
defined to indicate the agreed amount of variation allowed.

– Precision Level.
Schedule activity cost estimates will adhere to a rounding of the data to a
prescribed precision (e.g., $100, $1,000), based on the scope of the
activities and magnitude of the project, and may include an amount for
contingencies.
 Cost Management plan
• Earned Value Rules.
– Earned value management computation formulas for determining the
estimate to complete are defined.
– Earned value credit criteria (e.g., 0-100, 0-50-100, etc.) are
established,)
– Define the WBS level at which earned value technique analysis will be
performed.

• Reporting Formats.
The formats and frequency for the various cost reports are
defined.

• Process Descriptions.
Descriptions of each of the three cost management
processes are documented.
 Project Cost Management
• In many application areas, predicting and analyzing the
prospective financial performance of the projects product
is done outside the project.

• Project Cost Management is primarily concerned with

the cost of the resources needed to complete schedule
activities. However, Project Cost Management should
also consider the effect of project decisions on the cost
of maintaining, and supporting the product, service, or
result of the project.

• Project Cost Management considers the information

requirements of the project stakeholders.
 Terms and definitions
• Life-Cycle Costing (LCC) is the total cost for the
ownership and acquisition of the product over its full life
cycle.
LCC = R&D costs + production cost + construction cost
+ operation and maintenance cost + product
retirement and phase-out cost.
• Value Engineering is a creative approach used to
optimize life-cycle costs, save time, increase profits,
improve quality, expand market share, solve problems,
and/or use resources more effectively.
 General Accounting Terms
Indicates Term
The value today of future cash flows • Present Value (PV)
The sum of the present value of all income • Net Present Value (NPV)
and expenditures of a project. Greater
than 0 is good.

The determination of the discount rate at the • Internal Rate of Return

point of NPV = 0. (IRR)
The amount of time that will pass before the • Payback Period
net revenues = costs incurred.

A comparison of revenue to costs. Greater • Benefit Cost Ratio (BCR)

than 1 is good.
The loss of selecting one project vs. another. • Opportunity Costs
 Estimate Costs
• Cost Estimating - is the process of developing
an approximation (estimate) of the cost of the
resources needed to complete project activities:

– Includes identifying and considering various costing

alternatives

– Cost Estimating involves developing an assessment

of the likely quantitative result, what will it cost the
performing organization to provide the product or
service or result.
Estimate Costs
 Input of Estimate Costs

 Scope Baseline

 Project Schedule

 Human Resource Plan

 Risk Register.
 Input to Estimate Costs
• Enterprise Environmental Factors
– Marketplace conditions.
– Commercial databases.

• Organizational Process Assets

– Cost estimating policies.
– Cost estimating templates.
– Historical information.
– Project files.
– Project team knowledge.
– Lessons learned.
 Types of Costs
Examples Description Type
Rent Project costs that remain constant Fixed costs
regardless of phase or output.

Project costs that vary in relation to Variable costs

the output.

Costs that are directly attributable Direct costs

to the project being estimated.

Costs that are attributable to more Indirect costs

than one project. Also known as
overhead.

Amount of money needed above the Cost reserves

estimate to reduce risk of overruns
of project objectives to a level
acceptable to the organization.
 Tools of Estimate costs
1. Analogous (Top-Down) Estimating: uses the cost of a previous,
similar project as basis of estimating the cost of the current project.

2. Parametric Estimating: uses project characteristics (parameters) in a

mathematical model to predict project costs.

3. Bottom-up Estimating: involves approximating the cost of individual

activities or work packages, then rolling up the individual estimates to
get the project total.

4. Three Point Estimate: (pessimistic+(4*most likely)+ optimistic)/6

5. Computerized Tools: can facilitate rapid consideration of costing

alternatives.

6. Other : Ex. vendor bid analysis. Determine resource cost rates,

Reserve Analysis, Cost of Quality
 Outputs of Estimate Costs
• Activity Cost Estimates
– The resulting cost estimates are quantitative assessments of the likely costs
of the resources required to complete project activities.

• Bases of Estimate
– A description of the scope of work estimated
– Documentation of the basis of estimate. How it was developed.
– Documentation of any assumption made.
– An indication of the range of possible results.

• Project Document updates

– The Cost Estimating process may generate requested changes that may
affect the cost management plan, activity resource requirements, and other
components of the project plan.
– The cost management plan describes how the cost variances will be
managed.
– This plan could include descriptions of what will constitute a major problem
vs. that of a minor problem, roles and responsibilities for managing major
and minor problems, etc.
Q: Analogous Estimating
a. Uses bottom-up estimation techniques
b. Is used most frequently in the executing
phase of the project
c. Uses top-down estimation techniques
d. Uses actual detailed Historical costs
 Types of Estimates and Degree of
Accuracy
Purpose Accuracy When Type
(Project
Phase)
Get a quick idea -50% to +75% Pre-proposal Order of Magnitude (ROM)
of the project (Low)
costs ( Ballpark or rough order of
magnitude)
RFP response -10% to +25% Initiation Phase Budget Estimate
and donor (Medium)
negotiations
Monitor actual -5% to +10% Planning Phase Definitive
costs and (High)
purchases
Q:: An order of Magnitude is made during
which project management phase?
a. Planning
b. Closing
c. Executing
d. Initiating
 Determine Budget
• Determine Budget - is the process which
involves allocating the overall cost estimates to
individual activities or work packages to establish
a cost baseline for measuring project
performance

• Budgeting involves:
– Allocating of the cost estimate over the time period
required to do the work. The estimate provides the
"should cost" for each task or activity
– Determining the specific time period needed to
perform each project task or activity
– Developing a time-phased cost baseline that becomes
the plan-of-record based on how the "should cost"
have been spread out over time
Determine Budget
 Determine Budget Inputs
• Activity Cost Estimates
• Basis of Estimate
• Scope Baseline
– Scope Statement.
– Work Breakdown Structure
– WBS Dictionary The WBS dictionary
• Project Schedule
• Resource Calendars
• Contracts
• OPA
 Determine Budget Inputs
• Project Schedule
– The project schedule includes planned start
and finish dates for the project, schedule
activities, schedule milestones, work
packages, planning packages, and control
accounts.
• Resource Calendars
 Determine Budget Tools and
Techniques
• Cost Aggregation
– Schedule activity cost estimates are aggregated by
work packages in accordance with the WBS.
• Reserve Analysis
– It establishes contingency reserves, such as the
management reserve as allowances for unplanned
changes resulting from risks.
• Expert Judgment
• Historical Relationships

• Parametric Estimating
 Determine Budget Tools and
Techniques
• Funding Limit Reconciliation
– The expenditure of funds is reconciled with
the funding limits set .
– Reconciliation will necessitate the scheduling
of work to be adjusted to smooth or regulate
those expenditures. Rescheduling can impact
the allocation of resources..
 Determine Budget Outputs
• Cost Performance Baseline.
– It is a time phased budget that will be used to measure and
monitor cost performance on the project.
– When comparing actual to planned, the cost baseline serves as
the “planned cost.”

• Project Funding Requirements

– Funding requirements, total and periodic are derived
from the cost baseline and can be established to
exceed, usually by a margin, to allow for either early
progress or cost overruns.

• Project Document Updates

 Project Cost Budgeting
8.Cost Budget 1634 LE

7. Management Reserve 134 LE

6. Cost Baseline 1500 LE

5. Contingency Reserve 125 LE

4. Project 1375 LE

3. Control Account 475 LE 540 LE 360 LE

2. Work Package 278 LE 262 LE

1. Activities 96 LE 87 LE 95 LE
For the following project, prepare the cost baseline in tabular and graphical format .

Assume overhead is 15% and a typical month has 25 work days. Direct costs are assumed to be distributed

according to the progress of each activity based on time. The control period is based on monthly bases.

Direct Cost Duration

Dependency Activity Cost Item
LE Days
12000 15 -- A
AB001
20000 60 A B
15000 45 A C
30000 30 A D AB002
12000 15 A E
10000 45 B,C,D,E F AB003
For the following software developing project, develop the cost baseline in tabular and graphical format .

Assume overhead is 25% and a typical month has 25 work days. Direct costs are assumed to be distributed

according to the progress of each activity based on time. The control period is based on monthly bases.

Direct Cost Duration

Dependency Activity
LE Days
20000 10 -- A
30000 20 A B
60000 60 A C
15000 30 A D
30000 50 B,C,D E
 Control Costs
• Control Costs - is the process of:
– Influencing the factors that create changes to the cost baseline
– Ensuring requested changes are agreed upon
– Managing the actual changes when and as they occur
– Assuring that potential cost overruns do not exceed the
authorized funding periodically and in total for the project
– Monitoring cost performance to detect and understand variances
from the cost baseline Recording all appropriate changes
accurately against the cost baseline
– Preventing incorrect, inappropriate, or unapproved changes from
being included in the reported cost or resource usage
– Informing appropriate stakeholders of approved changes
– Acting to bring expected cost overruns within acceptable limits.
Control Costs
 Input for Control Costs
• Project Management Plan
The project management plan contains the following information that is used to
control cost:

Cost Performance baseline.

The cost performance baseline is compared with actual results to determine if a change,
corrective action or preventive action is necessary.

Cost management plan.

The cost management plan describes how the project costs will be managed and controlled.

• Project Funding Requirements

• Work Performance Information includes, but is not limited to:

– Performance Reports Performance reports provide information on cost and resource
performance as a result of actual work progress. Deliverables that have been
completed and those not yet completed
– Costs authorized and incurred
– Estimates to complete the schedule activities Percent physically complete
of the schedule activities.
• OPA
 Tools of Control Costs
• Earned Value Management
• Forecasting
• To-Complete Performance Index
• Performance Reviews
• Variance Analysis
• Project Management Sofware
 Outputs of Control Costs
• Work Performance Measurements

• Budget Forecasts: Forecasted Completion Either a calculated EAC value

or a performing organization-reported EAC value is documented and the
value communicated to stakeholders

• Organizational Process Assets (Updates) Lessons learned are

documented so they can become part of the historical databases for both
the project and the performing organization.

• Change Requests Analysis of project performance can generate a request

for a change to some aspect of the project.

• Project Management Plan (Updates)

• Cost Baseline (Updates) Budget updates are changes to an approved cost baseline.
Performance Measurements The calculated CV, SV, CPI, and SPI values for WBS
components, in particular the work packages and control accounts, are documented
and communicated (Section 10.3.3.1) to stakeholders.

• Recommended Corrective Actions A corrective action is anything done to bring

expected future performance of the project in line with the project management plan.
• Project Document Updates
 Earned Value Analysis
Earned Value : An objective measure of how much work has been accomplished.
Example : I planned to design 5 modules this month. Each module should take 100
hrs.
I will measure Earned Value based on number of modules completed

Month end…

Budget Plan Earned Value Actual

500 300 400

Schedule variance -200 Cost Variance -100

We should figure out what is going on. We have got 200hrs worth of work to catch
up on and we have already overspent by 100 hrs.
PV, EV & AC can be used to identify
variances and indexes:

Schedule variance (SV)

Cost variance (CV)
Schedule performance index (SPI)
Cost performance index (CPI)
 Earned Value Analysis

• From the variances and indexes, future

performance of the project can be forecasted by
deriving:
– Estimate at completion (EAC)
– Estimate to complete (ETC)

• By comparing to the:
– Budget at completion (BAC)
 Earned Value Equations
Indicates Equation Term
Good if >=0 SV = EV - PV Schedule Variance

Good if >=0 CV = EV - AC Cost Variance

Good if >=1 SPI = EV/PV Schedule Performance Index

Good if >=1 CPI = EV/AC Cost Performance Index

Actual cost EAC = BAC/CPI Estimate at Completion

How much more will ETC = EAC - AC Estimate to Complete

be spent

Good if >=0 VAC = BAC - EAC Variance at Completion

Earned Value Exercises
EV Quiz 1

BAC = $ 40k
EV = $ 20k
PV = $ 28k
AC = $ 26k

Calculate:

% of work Scheduled
% of Budget Spent
% of Work Accomplished
Cost Variance
Schedule Variance
Solution
• % of work scheduled PV/BAC = 28k/40k = $ 70%
• % of Budget Spent AC/BAC = 26k/40k = $ 65%
• %of Work Performed EV/BAC = 20k/40k = $ 50%
• Cost Variance EV-AC =20k-26k = $ -6k
• Schedule Variance EV-PV =20k-28k = $ -8k
Quiz 2
For the following example, calculate the schedule & cost variances. Assume the 50-50 approach.

Data Date
$100 $200

$100 $300

$50
$200

$250
$200

$200 $85