Project Cost / Finance Management

MSPM Bahria University

Week : 3-4

Dr. M Shakeel
Project Cost Management

Dr. M Shakeel
 Project Cost Management

• Plan Cost Management

• Estimate Costs
• Determine Budget
• Control Costs

Dr. M Shakeel
 ESTIMATE COSTS
• Estimate Costs is the process of developing an
approximation of the cost of resources needed to
complete project work.
• The key benefit of this process is that it determines
the monetary resources required for the project.
• This process is performed periodically throughout the
project as needed.
• A cost estimate is a quantitative assessment of the
likely costs for resources required to complete the
activity
• It is prediction (based on the information known at a
given point in time)

Dr. M Shakeel
 ESTIMATE COSTS
• Cost estimates include the identification and
consideration of costing alternatives to initiate and
complete the project.
• Cost trade-offs 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.
• Cost estimates are generally expressed in units of
some currency
(i.e., dollars, euros, yen, etc.)

Dr. M Shakeel
 ESTIMATE COSTS
• Other units of measure, such as staff hours or staff days,
are used to facilitate comparisons by eliminating the
effects of currency fluctuations.
• Cost estimates should be reviewed and refined during
the course of project
• The accuracy of a project estimate will increase as the
project progresses through the project life cycle
• Costs are estimated for all resources that will be charged
to the project.
This includes but is not limited to Labor, materials,
equipment, Services, facilities, special categories such as
an inflation allowance, cost of financing, or contingency
costs.
Dr. M Shakeel
ESTIMATE COSTS

Dr. M Shakeel
ESTIMATE COSTS

Dr. M Shakeel
Estimate Costs: Inputs, Tools & Techniques, and Outputs

Dr. M Shakeel
Estimate Costs: Flow Chart

Dr. M Shakeel
 Estimate Costs: Inputs

Cost management plan: The cost management plan describes

estimating methods that can be used and the level of precision
and accuracy required for the cost estimate.
Describes how the project costs will be planned, structured, and
controlled.
Level of precision. This is the degree to which cost estimates will
be rounded up or down
Level of accuracy: The acceptable range used in determining
realistic cost estimates is specified

Dr. M Shakeel
 Estimate Costs: Inputs

Quality management plan: The quality management plan

describes the activities and resources necessary for the project
management team to achieve the quality objectives set for the
project.

Dr. M Shakeel
Estimate Costs: Inputs

Project Management is like fixing a car – you must break it

down into parts. You won’t find the problem if you can’t isolate the
defective part, and you can’t fix the problem if the defective part is
not separated from the main engine.

Scope baseline: The scope baseline includes

Project scope statement:
Work breakdown structure:
WBS dictionary:

Dr. M Shakeel
 Estimate Costs: Inputs

Project scope statement: The scope statement reflects funding constraints by

period for the expenditure of project funds or other financial assumptions and
constraints. (Section 5.3.3.1)
Typically written by the project manager, a scope statement outlines the entire
project, including any deliverables and their features, as well as a list of
stakeholders who will be affected. It will also include any major project
objectives, deliverables and goals to help measure success.

Dr. M Shakeel
Dr. M Shakeel
 Estimate Costs: Inputs

Work breakdown structure: The WBS provides the relationships among all the
project deliverables and their various components. (Section 5.4.3.1)
• A Work Breakdown Structure (WBS) represents this division of a project into
constituent tasks. It is a tabular or graphical representation of the tasks that
make up the project’s scope. The schedule and budget is then created
and tracked by task.

Dr. M Shakeel
 Estimate Costs: Inputs

Work breakdown structure

The WBS component used for the project cost accounting is called the control account
Each control account is assigned a unique code or account number(s) that links directly to
the performing organization’s accounting system.
The WBS is a hierarchical decomposition of the total scope of work to be carried out by the
project team to accomplish the project objectives and create the required deliverables.
Each descending level of the WBS represents an increasingly detailed definition of the
project work

Dr. M Shakeel
 Estimate Costs: Inputs

WBS dictionary: The WBS dictionary and related detailed statements of work
provide an identification of the deliverables and a description of the work in each
WBS component required to produce each deliverable. (Section 5.4.3.)

The WBS dictionary is a document that provides detailed deliverable, activity, and
scheduling information about each component in the WBS. The WBS dictionary is
a document that supports the WBS. Information in the WBS dictionary may
include but is not limited to:

Code of account identifier, Description of work, Assumptions and constraints,

Responsible organization, Schedule milestones, Associated schedule activities,
Resources required, Cost estimates, Quality requirements, Acceptance criteria,
Technical references, and Agreement information.

Dr. M Shakeel
Estimate Costs: Inputs

Dr. M Shakeel
Estimate Costs: Inputs

PROJECT DOCUMENTS:
Lessons learned register: Lessons learned earlier in the project with
regard to developing cost estimates can be applied to later
phases in the project to improve the accuracy and precision of
the cost estimates.

Project schedule: The schedule includes the type, quantity, and

amount of time
that team and physical resources will be active on the project.
The duration estimates will affect cost estimates when
resources are charged per unit of time and when there are
seasonal fluctuations in costs.
The schedule also provides useful information for projects that
incorporate the cost of financing (including interest charges).

Dr. M Shakeel
Estimate Costs: Inputs

PROJECT DOCUMENTS:
The project schedule is the tool that communicates what work
needs to be performed, which resources of the organization
will perform the work and the timeframes in which that work
needs to be performed.

The project schedule should reflect all of the work associated

with delivering the project on time.

Without a full and complete schedule, the project manager

will be unable to communicate the complete effort, in terms
of cost and resources, necessary to deliver the project.

Dr. M Shakeel
 Estimate Costs: Inputs

Resource requirements: Resource requirements identify the types and

quantities of resources required for each work package or activity.

Risk register: The risk register contains details of individual project

risks that have been identified and prioritized, and for which risk
responses are required.
The risk register provides detailed information that can be used to
estimate costs.

Dr. M Shakeel
Estimate Costs: Inputs

ENTERPRISE ENVIRONMENTAL FACTORS:

The enterprise environmental factors that can influence the
Estimate Costs process

These conditions describe what products,

Market conditions:
services, and results are available in the market, from whom,
and under what terms and conditions. Regional and/or global
supply and demand conditions greatly influence resource costs.

Resource cost rate information is

Published commercial information:
often available from commercial databases that track skills and
human resource costs, and provide standard costs for material
and equipment.
Published seller price lists are another source of information.

Dr. M Shakeel
Estimate Costs: Inputs

ENTERPRISE ENVIRONMENTAL FACTORS:

Exchange rates and inflation. For

large-scale projects that extend
multiple years with multiple currencies, the fluctuations of
currencies and inflation need to be understood and built into
the Estimate Cost process.

Dr. M Shakeel
 Estimate Costs: Inputs

ORGANIZATIONAL PROCESS ASSETS (OPA):

Most organizations have developed a range of templates,
contracts, registers, and assessment tools to assist the
management of their projects. Organizations have also acquired
knowledge in the form of lessons learned—and the organization’s
knowledge base that can be very useful
• Cost estimating policies,
• Cost estimating templates,
• Historical information and lessons learned repository.
• Standardized guidelines
• Proposal evaluation criteria
• Work breakdown structure templates
• Project schedule network diagram templates
• Risk templates
• Organizational standard processes

Dr. M Shakeel
Estimate Costs: Tools and Techniques

Dr. M Shakeel
 Estimate Costs: Tools and Techniques

Expert Judgment

• Expertise should be considered from individuals or groups

with specialized knowledge or training in the following topics:

• Previous similar projects

• Information in the industry, discipline, and application area;
• Cost estimating methods.

Dr. M Shakeel
 Estimate Costs: Tools and Techniques

Analogous estimating is a technique for estimating the duration or

cost of an activity or a project using historical data from a similar
activity or project.
• Analogous duration estimating is frequently used to estimate
project duration/cost when there is a limited amount of
detailed information about the project
• It is less costly and less time-consuming than other
techniques, but it is also less accurate

Dr. M Shakeel
Estimate Costs: Tools and Techniques

Analogous estimating:
• Analogous cost estimating uses the values such as scope, cost,
budget, and duration or measures of scale such as size,
weight, and complexity from a previous, similar project as the
basis for estimating the same parameter or measurement for
a current project.

• This technique relies on the actual cost of previous, similar

projects as the basis for estimating the cost of the current
project.

Dr. M Shakeel
 Estimate Costs: Tools and Techniques
Parametric estimating is an estimating technique in which an
algorithm is used to calculate cost or duration based on historical
data and project parameters.

• It uses a statistical relationship between historical data and

other variables (e.g., square footage in construction) to
calculate an estimate for activity parameters, such as cost,
budget, and duration.
• This technique can produce higher levels of accuracy
depending on the sophistication and underlying data built into
the model.
• Parametric cost estimates can be applied to a total project or
to segments of a project, in conjunction with other estimating
methods

Dr. M Shakeel
Estimate Costs: Tools and Techniques

Example

You are the project manager for the annual Earth Day 5k road race,
with three primary components: marketing, registration, and race-day
coordination.
• For marketing, there will be 500 flyers printed up at a cost $0.20
each.
• Last year the cost to host the registration website was $850.00 You
estimate the same this year.
• There will be four people used to coordinate the race. Each resource
will be paid $25 per hour and they will be working an estimated
seven hours, based on the race last year.

• Estimate the total cost

Dr. M Shakeel
Estimate Costs: Tools and Techniques

Marketing: Cost: $100 for brochures (parametric estimating 500 x

$0.20)

Registration Cost: $850 (analogous)

Coordination Cost: $700 (parametric estimating 4 x $25 x 7)

Total cost: ($100 +$850+$700= $1650)

Dr. M Shakeel
 Estimate Costs: Tools and Techniques

Comparison between analogous and parametric

estimating
Similarities
• Can be used for both duration and cost estimating
• Essentially a combination of historical information (leveraging past
projects/activities) and expert judgment
Differences
• Analogous is considered top-down and is less accurate than
parametric. Analogous estimating uses an “analogy” – comparing a
past similar project to your current project.
• Parametric is more accurate, specifically when the underlying data is
scalable. Parametric uses a relationship between variables (a unit
cost/duration and the number of units) to develop the estimate

Dr. M Shakeel
Estimate Costs: Tools and Techniques

Bottom-up estimating is a method of estimating project duration

or cost by aggregating the estimates of the lower level
components of the WBS

• When an activity’s duration cannot be estimated with a

reasonable degree of confidence, the work within the activity
is decomposed into more detail. The detail durations are
estimated. These estimates are then aggregated into a total
quantity for each of the activity’s durations.

Dr. M Shakeel
Dr. M Shakeel
Dr. M Shakeel
Estimate Costs: Tools and Techniques

Top Down estimating is a project estimating technique whereby

the overall project is estimated first, and individual tasks are
apportioned from it. You start from the top of the pyramid and
work downwards.

• This type of project budgeting usually occurs when there is a

fixed budget and/or the scope of the project must fit within a
predetermined funding level,

Dr. M Shakeel
 Estimate Costs: Tools and Techniques

Top-Down versus Bottom-Up Estimating

Top-Down Estimates
Are usually are derived from someone who uses experience and/or
information to determine the project duration and total cost.
Are made by top managers who have little knowledge of the
processes used to complete the project.
Bottom-Up Approach
Can serve as a check on cost elements in the WBS
by rolling up the work packages and associated cost accounts to major
deliverables at the work package level.

Dr. M Shakeel
Top-Down versus Bottom-Up Estimating

Bottom-up estimating is a method of estimating a component of

work. The cost of individual work packages or activities is
estimated to the greatest level of specified detail.

The detailed cost is then summarized or “rolled up” to higher

levels for subsequent reporting and tracking purposes.

The cost and accuracy of bottom-up cost estimating are typically

influenced by the size and complexity of the individual activity or
work package.

Dr. M Shakeel
THREE-POINT ESTIMATING:

The accuracy of single-point cost estimates may be improved by

considering estimation uncertainty and risk and using three estimates
to define an approximate range for an activity’s cost:

Dr. M Shakeel
Estimate Costs: Tools and Techniques

Dr. M Shakeel
Estimate Costs: Tools and Techniques

Dr. M Shakeel
Estimate Costs: Tools and Techniques

Dr. M Shakeel
Estimate Costs: Tools and Techniques

Dr. M Shakeel
Estimate Costs: Tools and Techniques

Triangular Distribution
The simplest three point estimate is the simple average of the three
values (known as the triangular distribution):

E = (a + m + b) / 3
Where:
E = estimated cost
a = optimistic value
m = most likely value
b = pessimistic value

Dr. M Shakeel
Estimate Costs: Tools and Techniques

Beta Distribution
The beta distribution places the final estimate closer to the most likely
value:
E = (a + 4m + b) / 6
Where:
E = estimated cost
a = optimistic value
m = most likely value
b = pessimistic value

Comparison:
• The triangular distribution is the default and should be used if there is no
reason to use anything else.
• The beta distribution should be chosen when there is more confidence in the
most likely value, that is, where the final estimate should be tighter to the
mean.

Dr. M Shakeel
 Estimate Costs: Tools and Techniques

Three Point Estimating and Risk Analysis

The key benefit of three point estimating is the way it takes into account
project risk.

• The project success factors are determined

• Risks which might affect the project success factors are identified.
• The risks are analyzed and prioritized to determine which are the most
important.
• The project is divided into tasks (a work breakdown structure).
• Each task receives three estimates:
• Optimistic. Assuming the risks do not occur.
• Most likely. Assuming the risk occurrence level that is most likely to occur. Similar to
other estimate types.
• Pessimistic. Assuming that the risks occur.
• The Three Point Estimating procedure is used to determine the final
estimate for each task.

Dr. M Shakeel
Estimate Costs: Tools and Techniques

DATA ANALYSIS: Data analysis techniques that can be used in the

Estimate Costs process include but are not limited to:

Alternatives analysis: a technique used to evaluate identified options

in order to select which options or approaches to use to execute and
perform the work of the project.
• An example would be evaluating the cost, schedule, resource, and quality
impacts of buying versus making a deliverable.

Dr. M Shakeel
Reserve Analysis: Contingency Reserves

Reserve analysis. Cost estimates may include contingency reserves

(sometimes called contingency allowances) to account for cost
uncertainty.
Contingency reserves are the budget within the cost baseline that is
allocated for identified risks.
• Contingency reserves are the budget within the cost baseline
that is allocated for identified risks, which are accepted and for
which contingent or mitigating responses are developed.
• Contingency reserves are often viewed as the part of the budget
intended to address the “known-unknowns” that can affect a
project. For example, rework for some project deliverables could
be anticipated, while the amount of this rework is unknown.

Dr. M Shakeel
Reserve Analysis: Contingency Reserves

• Contingency reserves can be provided at any level from the

specific activity to the entire project. The contingency reserve
may be a percentage of the estimated cost, a fixed number, or
may be developed by using quantitative analysis methods.

• As more precise information about the project becomes

available, the contingency reserve may be used, reduced, or
eliminated.

• Contingency should be clearly identified in cost documentation.

Contingency reserves are part of the cost baseline and the
overall funding requirements for the project.

Dr. M Shakeel
Reserve Analysis: Contingency Reserves

Dr. M Shakeel
Dr. M Shakeel
Estimate Costs: Tools and Techniques

Cost of quality:
• Assumptions about costs of quality may be used to prepare the
estimates. This includes evaluating the cost impact of additional
investment in conformance (good quality) versus the cost of
nonconformance (poor quality).

• It can also include looking at short-term cost reductions versus the

implication of more frequent problems later on in the product life
cycle.

Dr. M Shakeel
Estimate Costs: Tools and Techniques

• Rework • Complaints
• Delays • Repairing goods and redoing
• Re-designing services
• Shortages • Warranties
• Failure analysis • Customers’ bad will
• Re-testing • Losses due to sales reductions

Dr. M Shakeel
Estimate Costs: Tools and Techniques

• Checking and testing purchased goods and

services
To prevent poor quality
• In-process and final inspection/test • Quality planning
• Field testing • Supplier evaluation
• Product, process or service audits • New product review
• Calibration of measuring and test equipment

Dr. M Shakeel
Estimate Costs: Tools and Techniques

PROJECT MANAGEMENT INFORMATION SYSTEM (PMIS)

The project management information system can include
spreadsheets, simulation software, and statistical analysis tools to
assist with cost estimating. Such tools simplify the use of some cost-
estimating techniques and thereby facilitate rapid consideration of cost
estimate alternatives.

• DECISION MAKING
The decision-making techniques that can be used in the Estimate
Costs process include but are not limited to voting.
Voting is an assessment process having multiple alternatives with an
expected outcome in the form of future actions. These techniques
are useful for engaging team members to improve estimate
accuracy and commitment to the emerging estimates.

Dr. M Shakeel
Estimate Costs: Outputs

Cost estimates include quantitative assessments of the probable costs

required to complete project work, as well as contingency amounts to
account for identified risks, and management reserve to cover
unplanned work.

Cost estimates can be presented in summary form or in detail. Costs

are estimated for all resources that are applied to the cost estimate.
This includes but is not limited to direct labor, materials, equipment,
services, facilities, information technology, and special categories such
as cost of financing (including interest charges), an inflation allowance,
exchange rates, or a cost contingency reserve.
Indirect costs, if they are included in the project estimate, can be
included at the activity level or at higher levels.

Dr. M Shakeel
Estimate Costs: Outputs

Dr. M Shakeel
Estimate Costs: Outputs

Dr. M Shakeel
Estimate Costs: Outputs

Basis Of Estimates
The amount and type of additional details supporting the cost estimate
vary by application area. Regardless of the level of detail, the
supporting documentation should provide a clear and complete
understanding of how the cost estimate was derived.

Supporting detail for cost estimates may include:

• Documentation of the basis of the estimate (i.e., how it was
developed),
• Documentation of all assumptions made,
• Documentation of any known constraints,
• Documentation of identified risks included when estimating costs,

Dr. M Shakeel
Estimate Costs: Outputs
Project Documents Updates
Project documents that may be updated as a result of carrying out this
process include but are not limited to:

Assumption log. Described in Section 4.1.3.2. During the Cost Estimates

process, new assumptions may be made, new constraints may be
identified, and existing assumptions or constraints may be revisited and
changed. The assumption log should be updated with this new
information.
Lessons learned register. Described in Section 4.4.3.1. The lessons
learned register can be updated with techniques that were efficient and
effective in developing cost estimates.
Risk register. Described in Section 11.2.3.1. The risk register may be
updated when appropriate risk responses are chosen and agreed upon
during the Estimate Cost process.

Dr. M Shakeel