PROJECT COST

MANAGEMENT
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“every project boils down to money “
 DEFINITIONS
 Cost
 The value of money that has been used up to produce something

( Material , Labor ) Direct Cost In-Direct Cost ( Management Overheads)

Variable Fixed Variable

Fixed ( Water , Power )
( Labor Salary ) ( Labor Bonus ) Labor Office Rent
Direct cost: include dedicated labor, material, supplies, equipment, licenses, fees, training, travel, or
professional service fees
Indirect cost : Example, if a color printer is shared by several project teams, it’s difficult to definitively
determine what percentage of costs each should share.
Variable cost: fluctuate and can't be predicted with absolute certainty. For example, travel or 2
transportation costs that can change depending upon the cost of fuel or certain commodities and types
of raw materials.
Fixed cost: are static throughout the project or have only a small likelihood of fluctuation. Fixed costs
are usually for items such as rents, leases, licenses, salaries, and fixed fees
THE BEST DESCRIPTION OF COSTS THAT
CHANGE WITH THE AMOUNT OF
PRODUCTION IS?
A ) Variable Costs

B ) Fixed Costs

C ) Direct Costs

D ) Sunk Costs

3
 DEFINITIONS
Opportunity Cost
 Opportunity cost
 The other project that you will not to do

Project A Project B
Selected Project

 Depreciation
 Loses of project value over project time

 Lifecycle costing “ Total Cost of Ownership”

 Including support & maintenance , reselling value

 Sunk Cost
 A cost that has already been incurred and thus cannot be recovered .
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 DEPRECIATION METHODS
Loses of project value over project time

Straight Line Depreciation

(Purchase Price - Approximate Salvage Value) ÷ Years of Useful Life.

Example:
A hypothetical laptop is worth $1,000. It can be scrapped at the end of a 5 year life for $100.
It's value can be depreciated as follows. 1,000 - 100 = 900. Then divide by the number of
years in it's useful life 900 ÷ 5 = 180. You can depreciate that laptop $180 per year over it's 5
year life. If we decided in year 4 that the laptop was good for an extra 5 years, we could only
deduct a total of $180 over the next 5 years or $36 per year.

Sum of the Years Year 1: 5 ÷ 15 = 33% ($297)

Year 2: 4 ÷ 15 = 27% ($243)
Sum of Years = 1 + 2 + 3 + 4 + 5 = 15. Year 3: 3 ÷ 15 = 20% ($180)
Year 4: 2 ÷ 15 = 13% ($117)
Year 5: 1 ÷ 15 = 07% ($63)

Double Declining Balance

First compute the straight-line depreciation. Then figure out the
total percentage of the asset that is depreciated the first year
and double it. 5
YOUR COMPANY HAS ASKED YOU TO
PROVIDE A COST ESTIMATE THAT INCLUDE
MAINTENANCE , INSTALLATION , SUPPORT ,
AND UPKEEP COSTS FOR AS LONG AS THE
PRODUCT WILL BE USED . WHAT IS THAT
KIND OF ESTIMATE CALLED
A ) Benefits Cost Ratio

B ) Depreciation

C ) Net Present Value

D ) Lifecycle Costing
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 PROJECT COST
MANAGEMENT
 Project cost management includes the processes involved in estimating, budgeting, and

controlling costs so that the project can be completed within the Approved Budget .

 It is primarily concerned with the cost of the resources needed to

ri es
l a
complete schedule activities . Sa

 Should consider the information needs of the project stakeholders

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WHY PLANNING FOR COST ?
• With proper planning, you can :

•Adjust the project plan to conform to the

budget

•Track and manage cost once the project

execution begins

• Compare actual cost to the original

planned cost and analyze any variances
between the two 8
9
7.1 PLAN COST
The process establishes the polices ,
Procedures , and documentation for
planning , managing , expending
and controlling project cost .

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7.1 Plan Cost (Inputs)
Scope Baseline
Components of the scope; baseline include :
Project scope statement , WBS , WBS Dictionary

Project Schedule
The type and quantity of resources and the
amount of time which those resources are applied to
complete the work of the project are major factors in
determining the project cost.

Project Charter
The project charter is used to provide the high-
level project requirements and high-level product
description of the project. 11
7.1 Plan Costs (Inputs)

Enterprise Environmental Factors

• Market conditions.
• Published commercial information.

Organizational Process Assets

• Cost estimating policies,
• Cost estimating templates,
• Historical information, and
• Lessons learned.

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7.1 Plan Cost (Tools & Techniques)
• Expert judgment guided by historical information, provides
valuable insight about the environment and information from prior
similar projects. Expert judgment can also suggest whether to
combine methods and how to reconcile differences between them.

• Analytical Techniques
 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.

• Meetings
 Project teams hold planning meetings to develop the cost
management plan.

 Attendees at these meetings may include the project manager,

the project sponsor, selected project team members, selected
stakeholders, anyone with responsibility for project costs, and
others as needed. 13
PLAN COST ( OUTPUTS )
COST MANAGEMENT PLAN MAY INCLUDES :

 The planning effort of the processes of the Cost Management Plan is a part of the
develop project management plan
( Cost management plan can establish the following )

• Units of measure - Define units of measurement for each of

the resources

• Organizational procedure links - The WBS component

used for the project cost accounting is called a control
account (CA); each CA is assigned a code or account number

• Control thresholds ( Amount of variation ) Indicates and

agreed-upon amount of variation to be allowed before some
actions need to be taken
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PLAN COST ( OUTPUTS )

0.00# • Precision level - The prescribed precision for rounding

data related to schedule activity cost estimates

• Reporting formats - The format for various cost

reports

• Process descriptions - Descriptions of each of the three

cost management processes
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 Smaller Scope Large Scope

}
Cost Estimating Cost Estimating

Cost Budgeting
Cost Budgeting

Single Process
( Short Period – Single Person ) Two separate Process
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17
7.2 ESTIMATE
COSTS

The process of developing an

approximation (estimate) of
the cost of the monetary resources
needed to complete project activity

• Estimator must consider the possible causes of variation

of cost estimates, including risks
• Includes identifying and considering various costing
alternatives / Cost Trade-offs
• Costs for schedule activities are estimated for all resources
that will be charged to the project
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7.2 ESTIMATE COSTS ( ACCURACY OF ESTIMATE )

Initiation / Planning Execution

Starting

Rough Order of Budget Estimate Definitive Estimate

Magnitude ( ROM ) ( -10 / +25 ) ( -5 / +10 )
Estimate ( + / - 50% )
Or (-25 / +75 )

Cost Accuracy

Project Progress
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7.2 Estimate Costs (Inputs)

Scope Baseline
Components of the scope; baseline include :
Project scope statement , WBS , WBS Dictionary

Project Schedule
The type and quantity of resources and the
amount of time which those resources are applied to
complete the work of the project are major factors in
determining the project cost.

Human Resource Plan

Project staffing attributes, personnel rates, and
related rewards/recognition 20
7.2 Estimate Costs (Inputs)
Risk Register
The risk register should be reviewed to consider risk
mitigation costs.

Enterprise Environmental Factors

• Market conditions.
• Published commercial information.

Organizational Process Assets

• Cost estimating policies,
• Cost estimating templates,
• Historical information, and
• Lessons learned. 21
7.2 Estimate Costs (Tools & Techniques)
• Expert judgment Provide you with Labor rates , Material cost ,
Inflation , Risk factors that effect your estimation

• Analogous Estimating “Top-down Estimating “

Depends on actual cost of similar other projects activity
Less ( Time Consuming / Costly )

• Parametric Estimating Using parameters can produce a

higher level of accuracy

• Bottom-Up Estimating The cost of individual work is

estimated with the greatest level of specified details

• Three-Point Estimates ( PERT )

More accuracy
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7.2 Estimate Costs (Tools & Techniques)
• Reserve Analysis ( Contingency Reserve ) Part of
Funding Requirement

• Cost of Quality (COQ) Assumption about cost of quality

• Project Management Estimating software

• Vendor Bid Analysis : Proposals from prequalified vendors

Factors affecting costs:

-Risks : During early phases, the greatest risk to budget accuracy is usually that the
scope, activity, and constraints aren’t fully known

-Total Cost of Ownership/Life-Cycle:

-Cost of Quality: Cost that is incurred to achieve required quality

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-Marketplace Conditions
7.2 Estimate Costs (Outputs)
• Activity Cost Estimates
Quantitative assessment of the probable costs
required to complete project work

• Basis of Estimates
The amount and type of additional details
supporting the cost estimates vary by application
area
- How it was developed ( Cost Estimation )
- Assumptions / Constrains
- Range of possible estimates
- Inclusions / Exclusions.

• Project Document Updates

Project Document that may be updated , but 24

not are limited to risk register

 7.2 Estimate Costs

Inputs
Inputs Tools
Tools&&Techniques
Techniques Outputs
Outputs
•• Enterprise
Enterprise •• Analogous •• Activity
ActivityCost
Cost
Environmental Analogousestimating
estimating
EnvironmentalFactors
Factors •• Expert
Expertjudgment
judgment
estimates
estimates
•• Organizational
OrganizationalProcess
Process •• Bottom-up •• Basis
Basisofofestimates
estimates
Assets Bottom-upestimating
estimating •• Project
Assets •• Parametric
Parametricestimating
estimating Projectdocument
document
•• Scope
Scopebaseline
baseline •• Project updates
updates
•• Project ProjectManagement
Management
Projectschedule
schedule Software
Software
•• Human
Humanresource
resourceplan
plan •• Vendor
•• Risk VendorBidBidAnalysis
Analysis
Riskregister.
register. •• Reserve
ReserveAnalysis
Analysis
•• Cost
CostofofQuality
Quality
•• Three-point
Three-pointestimate
estimate

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7.2 Estimate Costs

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 7.3 Determine Budget
• Determine Budget is the process of Aggregating the estimated
costs of individual activities or work packages to establish an
authorized cost baseline.

• This baseline includes all authorized budgets, but excludes

management reserves.

• Project budgets constitute the funds authorized to execute the

project.

• Project cost performance will be measured against the authorized

budget.

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7.3 Determine Budget
Activity Cost Estimates (Inputs)

Basis of Estimates (Inputs)

Scope Baseline (Inputs)

Project schedule (Inputs)

Resource Calendars (Inputs)

Resource assigned and when they are assigned

Contracts (Inputs) Purchased product / service

Organizational Process Assets (Inputs)

• Existing formal and informal cost budgeting-
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related policies, procedures
• Cost budgeting tools,
 7.3 Determine Budget
BAC
8. Cost budget

7. Management reserves

6. Cost baseline

5. Contingency reserves
Budget At Completion
4. Project estimates

3. Control Account estimates

2. Work package estimates

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1. Activity estimates
7.3 Determine Budget
Cost Aggregation (Tool)
•Schedule activity cost estimates are aggregated by
work packages in accordance with the WBS
•Work package cost estimates are then aggregated
for the higher component levels of the WBS, such as
the control account, and ultimately for the entire
project
1.Activity Estimates ->2.Work Package
Estimates ->3. Control Account Estimates -
>4. Project Estimates ->5.Contingency
Reserves ->6.Cost Baseline ->7.Mgmt
Reserves ->8. Cost Budget.

Funding Limit Reconciliation (Tool)

•The expenditure of funds should be reconciled
with any funding limits on the commitment of
funds for the project. 30
7.3 Determine Budget

Reserve Analysis (Tools)

Contingency Reserve & Management reserve

Expert judgment (Tools)

Historical Relationships (Tools)

31
7.3 Determine Budget
Cost Performance Baseline (Output)
•The cost performance baseline is an authorized time-
phased budget at completion (BAC) used to measure,
monitor, and control overall cost performance on the
project.
•It is developed as a summation of the approved
budgets by time period and is typically displayed in the
form of an S-curve

Project Funding Requirements (Output)

•Total funding requirements and periodic funding
requirements (e.g., quarterly, annually) are derived
from the cost baseline.
•The cost baseline will include projected expenditures
plus anticipated liabilities.
•Funding often occurs in incremental amounts that are
not continuous, which appear as steps
•Project funding requirements = Project Budget
(Project Base Cost+Risk response cost[planned]) + 32
Reserve (contingency reserve[known unknowns] +
Management reserve[unknowns])
7.3 Determine Budget

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 7.3 Determine Budget
Inputs
Inputs Tools
Tools&&Techniques
Techniques Outputs
Outputs
•• Activity •• Cost
CostAggregation
Aggregation •• Cost
Costperformance
performance
Activitycost
cost •• Reserve
estimates
estimates ReserveAnalysis
Analysis baseline
baseline
•• Basis •• Historical
Historicalrelationships
relationships •• Project
ProjectFunding
Funding
Basisofofestimates
estimates •• Expert
•• Scope
Scopebaseline
baseline Expertjudgment
judgment Requirements
Requirements
•• Project •• Funding
FundingLimit
Limit •• Project
Projectdocument
document
Projectschedule
schedule Reconciliation updates
•• Resource
Resourcecalendars
calendars Reconciliation updates
•• Contracts
Contracts
•• Organizational
Organizational
process
processassets
assets

34
7.3 Determine Budget

35
36
 7.4 CONTROL COSTS

Behind schedule

Blown Your Project

Schedule Control ( Status )

Ahead of schedule

Over budget
Cost Control ( Status )

Under budget
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7.4 CONTROL COSTS

Control Costs is the process of monitoring the

status of the project to update the project
budget and managing changes to the cost
baseline.

Project cost control includes:

•Influencing the factors that create changes to the authorized cost baseline,

•Ensuring that all change requests are acted on in a timely manner,

•Managing the actual changes when and as they occur,

•Ensuring that cost expenditures do not exceed the authorized funding, by period
38
and in total for the project,

•Monitoring work performance against funds expended,

7.4 Control Costs ( Tools )
Project Management Plan (Input)

The project management plan contains the following

information that is used to control cost:

•Cost Performance Baseline.

•Cost Management Plan.

Organizational Process Assets (Input)

•Existing formal and informal cost control-related

policies, procedures,
•Cost control tools; and
•Monitoring and reporting methods to be used

Project Funding Requirements (Input)

Work Performance Information (Input) Project 39

progress , Deliverable status , Actual cost
 7.4 Control Costs

• Earned Value Management (Tools)

• Forecasting (Tools)

• To-Complete Performance Index (TCPI) (Tools)

• Performance Reviews (Tools)

• Variance Analysis (Tools)

• Project Management SW (Tools)

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1. Earned Value Management Analysis

41
 MANAGEMENT

Cost
EAC
Data date

BAC

Actual Cost AC

PV
Planned Value CV= EV - AC
SV= EV - PV
EV
Time
42
 Earned Value Management Analysis

• Earned Value. (EV)

Value of work performed expressed in terms of the approved budget

• Planned Value. (PV)

Authorized budget assigned to the work to be accomplished for an activity or
work breakdown structure component.

• Actual Cost. (AC)

Total cost actually incurred and recorded in accomplishing work
performed for an activity or work breakdown structure component.

• Schedule Variance (SV)

is a measure of schedule performance on a project.

SV = ( EV – PV ) Negative Recoverable
• Cost Variance (CV)
is a measure of cost performance on a project. 43
CV = ( EV – AC ) Negative Often Non-Recoverable
 Earned Value Management Analysis
• Schedule performance index (SPI)
Is a measure of progress achieved compared to progress planned on a the
project.
SPI = ( EV / PV )

Also must be measure against :

CRITICAL PATH to know project finish ( ahead – behind )

• Cost performance index (CPI)

Is a measure of the value of work completed compared to the actual cost on
the project.
CPI = ( EV / AC )
Measure to know project cost
( Under Budget=Under Run / Over Budget Overrun )

44
WHICH OF THE FOLLOWING REPRESENTS THE VALUE OF
WORK WE HAVE ACTUALLY COMPLETED?

A ) Earned value

B ) Planned value

C ) Actual cost

D ) Estimate to complete

45
 Earned Value Management Analysis
Example
We are about to produce 20 tables in 20 days cost is $20 for each.

How much BAC ( Budget at completion )= ???

BAC = $20 * 20 tables = $400

Today is day 4 How much is the PV ?

PV = $20 x 4 tables = $80

At day 4 i earned only 3 tables, how much is the EV ?

EV = $20 x 3 tables = $60
AC = $90
SV = EV – PV = 60 – 80 = -$20
CV =EV – AC = 60 – 90 = -$30
SPI = EV / PV = 60 / 80 = 0.75 Lower = Loser 46
CPI = EV / AC = 60 / 90 = 0.666
 2. Forecasting

Estimate At Completion (EAC) actual costs incurred for work completed, plus an
estimate to complete (ETC) the remaining work.

EAC = ( AC + ETC )

EAC forecast for ETC work performed at the Budgeted rate

EAC = AC + ( BAC – EV )
= 90 + ( 400 – 60 ) = $430
EAC forecast for work performed at the Percent CPI

EAC = BAC / CPI

= 400 / .66 = $606.6
EAC forecast for ETC work considering both SPI and CPI factors

EAC = AC + [ ( BAC – EV ) / ( CPI * SPI ) ]

= 90 + [ (400 – 60 ) / ( 0.75 * 0.66 ) ] 47
= $776.86
 2. Forecasting

Estimate At Completion (EAC) Cases

Typical - Some variances have occurred and it

is expected to continue in future too.

Atypical - Some variances have occurred and it is not

expected to continue in future.

EAC ‘fundamentally flawed’ = AC + ETC

EAC ‘Typical’ = BAC / CPI

EAC ‘atypical’ = AC + (BAC – EV)

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3. To-Complete Performance Index (TCPI)

49
A PROJECT TEAM BUDGETED US $3000 FOR THE WORK
PERFORMED AND HAS SPENT US $4000 , TO DATE. IF
THEY BUDGETED US $5,000 FOR THE WORK
SCHEDULED , WHAT IS THE COST VARIANCE ( CV )?

A ) ($1,000)
B ) $2,000
C ) $ 1,000
D ) ($2000)

50
 IF EARNED VALUE (EV) IS U.S.$300000, ACTUAL COST (AC) IS
U.S.$350000, AND PLANNED VALUE (PV) IS U.S. $375000, WHAT
DOES THE SCHEDULE PERFORMANCE INDEX (SPI)
INDICATE?

A ) You are progressing at 86% of the rate originally planned.

B ) You are progressing at 125% of the rate originally planned.
C ) You are progressing at 116% of the rate originally planned.
D ) You are progressing at 80% of the rate originally planned.

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 THE FORMULA, EAC = BAC/CPI, ASSUMES THAT :

A ) All subsequent work will be completed at the planned expenditures.

B ) All subsequent work will be completed at the planned expenditures,

excluding the work packages currently under way

C ) All subsequent work will be completed based upon the cost

performance to-date

D ) The cost performance cannot change during the project

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EXERCISE
.

53
EXAMPLE - WALL CONSTRUCTION

Wall Construction
Time = 1 week per wall
Cost = $ 1,000 per wall, materials and labor
Total Schedule = 4 weeks
Total Cost = $ 4,000

Working days 5 day per week starting on

Sunday and finish on Thursday by 5 PM
Assume production is liner

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 5 pm Wednesday, Week 2

How much work should

have been completed -
PV?
PLANNED Wall 1 100% = $ 1,000
Wall 2 80% = $ 800
Wall 3 0% = 0
Wall 4 0% = 0
PV = $ 1,800

55
 5 pm Wednesday, Week 2

10 % What is the budgeted

value of actual work -
EV?
EARNED
Wall 1 100% = $ 1,000
Wall 2 50% = $ 500
Wall 3 10% = $100
Wall 4 0% = 0
Total = $1,600
50 %

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5 pm Wednesday, Week 2

Total Cost to date –

AC = $ 2,250

57
5 PM WEDNESDAY, WEEK 2
Earned Value
PV $1,800
EV $1,600
AC $2,250

Schedule Variance = EV - PV
= $1,600 - $1,800
= ($200)
Cost Variance = EV - AC
= $1,600 - $2,250
= ($650)
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5 PM WEDNESDAY, WEEK 2
Performance Index
PV $1,800
EV $1,600
AC $2,250

SPI = EV / PV
= $1,600 / $1,800
= .9
CPI = EV / AC
= $1,600 / $2,250
= .7
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10- IF AC IS GREATER THAN YOUR EV ,
WHAT DOES THIS MEAN?

A ) The project is under budget

B ) The project is over budget

C ) The project is ahead of schedule

D ) The Project is behind schedule

60
7.3 Control Costs ( Outputs )

61
 7.3 Control Costs
Inputs
Inputs Tools
Tools&&Techniques
Techniques Outputs
Outputs
•• Project •• •• Work
WorkPerformance
Performance
Projectmanagement
management Earned
Earnedvalue
valuemanagement
management Measurements
plan
plan •• Performance
Performancemeasurement
measurement Measurements
•• Project •• Budget
Budgetforecasts
forecasts
ProjectFunding
Funding Analysis
Analysis •• Change
Requirements
Requirements •• Forecasting
Forecasting Changerequests
requests
•• Work •• •• Recommended
RecommendedCorrective
Corrective
WorkPerformance
Performance To-complete
To-completeperformance
performance action
Information
Information index
index(TCPI)
(TCPI) action
•• Organizational •• •• Organizational
OrganizationalProcess
Process
Organizational Performance
PerformanceReviews
Reviews
process •• Assets
Assets(Updates)
(Updates)
processassets
assets Project
ProjectManagement
Management •• Project
Software
Software Projectmanagement
managementplan
plan
•• Variance (Updates)
(Updates)
Varianceanalysis
analysis •• Project
Projectdocument
document(Updates)
(Updates)

62
7.4 Control Costs

63
 HALF WAY THROUGH THE EXECUTING PROCESSES OF
YOUR PROJECT, A TEAM MEMBER ALERTS YOU TO A
POTENTIAL COST OVERRUN FOR A SPECIFIC
DELIVERABLE. WHAT DO YOU DO FIRST?

A ) Determine the projected actual cost.

B ) Implement a change control process to track the change

C ) Inform the customer.

D ) Determine the cause of the overrun

64
YOU ARE HAVING DIFFICULTY ESTIMATING THE COST OF
YOUR PROJECT. WHICH OF THE FOLLOWING BEST
DESCRIBES THE MOST PROBABLE CAUSE OF YOUR
DIFFICULTY?

A ) Inadequate scope definition

B ) Unavailability of desired resources

C ) Lack of historical records from previous

projects

D ) Lack of company processes

65
THANK YOU

66