Project Cost Management

Sections of this presentation were adapted from A Guide to the Project Management

Body of Knowledge 3rd Edition, Project Management Institute Inc., © 2004

Project Cost Management

“The processes involved in planning, estimating, budgeting, and controlling costs so that the budget can be completed within the approved budget”

Why Do We Manage Cost?

Part of triple constraint, can’t manage one without the others (scope, time, and quality)

Plots of cost and scope against plan can help spot problems early

Cumulative Value

Time

Planned Value (PV)

Actual Costs (AC)

Earned Value (EV)

Today

Is this project over/under budget?

Is it ahead of/behind schedule?

Cost Management Key Terms

PV - Planned Value, estimated value of the planned work

EV – Earned Value, estimated value of work done

AC – Actual Cost, what you paid

BAC – Budget at Completion, the budget for the total job

EAC –Estimate at Completion, what is the total job expected to cost?

ETC – Estimate to Complete, forecasted costs to complete job

VAC – Variance at Completion, how much over/under budget do we expect to be?

How Do We Manage Cost?

Three processes Cost Estimating Cost Budgeting Cost Control

Cost Estimating

Cost Budgeting

Cost Control

Cost EstimatingEnterprise Environmental Factors

Organizational Process Assets

Project Scope Statement

Analogous estimating

Determine resource cost rates

Bottom up estimating

Parametric estimating

Project management software

Vendor bid analysis

Reserve analysis

Cost of quality

Inputs OutputsTools & Techniques

Work Breakdown Structure

WBS Dictionary

Cost Estimating

Cost Budgeting

Cost Control

Project Management Plan• Schedule Mgmt

Pln

• Staffing Mgmt Pln

• Risk Register

Activity Cost Estimates

Activity Cost Estimates Supporting Detail

Requested Changes

Cost Management Plan Updates

Estimating Methods

Analogous (Top Down) estimating – Managers use expert judgment or similar project costs [quick, less accurate]Bottom-Up estimating – People doing work estimate based on WBS, rolled up into project estimate [slow, most accurate]Parametric estimating – Use mathematical model (i.e. cost per sq ft). [accuracy varies] Two types:

Regression analysis – based on analysis of multiple data pointsLearning Curve – The first unit costs more than the 100th, forecasts efficiency gains

Estimating Methods

Vendor Bid Analysis – Estimating using bids + allowances for gaps in bid scope [slow, accuracy depends on gaps]Reserve Analysis – Adding contingency to each activity cost estimates as zero duration item [slow, overstates cost]

Cost Budgeting

Project Scope StatementCost aggregation

Reserve analysis

Parametric estimating

Funding limit reconciliationInputs

OutputsTools & Techniques

Cost Estimating

Cost Budgeting

Cost Control

Cost Baseline

Project Funding Requirements

Cost Management Plan Updates

Requested Changes

Work Breakdown Structure

WBS Dictionary

Activity Cost Estimates

Activity Cost Estimates Supporting Detail

Project Schedule

Resource Calendars

Contract

Cost Management Plan

Cost Budgeting

Budgeting is allocating costs to work packages to establish a cost baseline to measure project performanceRemember Contingency items are for unplanned but required changes it is not to cover things such as:

Price escalation Scope & Quality Changes

Funding Limit Reconciliation – Smoothing out the project spend to meet management expectations

Cost ControlCost Baseline

Project Funding Requirements

Performance Reports

Cost change control system

Performance measurement analysis

Forecasting

Project performance reviews

Project management software

Variance management

Inputs OutputsTools & Techniques

Work Performance Information

Approved Change Requests

Cost Estimating

Cost Budgeting

Cost Control

Project Management Plan

Cost Estimate Updates

Cost Baseline UpdatesPerformance Measurements

Forecasted Completion

Requested Changes

Recommended Corrective Actions

Organizational Process Assets Updates

Project Management Plan Updates

Earned Value

Progress is compared against the baseline to determine whether project is ahead of or behind planPercent complete can be difficult to measure, some managers use rules

50/50 Rule – Assumed 50% complete when task started, final 50% at completion

20/80 Rule – 20% at start 0/100 Rule – No credit until complete

Planned Value (PV) – Budgeted CostEarned Value (EV) – Actual work completedActual Cost (AC) – Costs incurredEstimate to Complete (ETC) – What’s LeftEstimate at Completion (EAC) – What final cost will be

Earned Value Graph

Variance at Completion

(VAC)

Target Cost &

Schedule

Schedule Variance (Time)

Planned Value (PV)

Earned Value (EV)

Earned Value Formulas

NAME FORMULA NOTESCost Variance (CV) EV-AC Negative = Over budget

Positive = Under budget

Schedule Variance (SV)

EV-PV Negative = Behind Schedule Positive = Ahead of Schedule

Cost Performance Index (CPI)

EV/AC How much are we getting for every dollar we spend?

Schedule Perform Index (SPI)

EV/PV Progress as % against plan

Estimate to Complete (ETC)

EAC-AC How much more do we have to spend?

Variance at Completion (VAC)

BAC-EAC At the end of the day, how close will we be to plan?

Estimate at Completion (EAC)

See following slide

Earned Value Formulas (Cont’d)

NAME FORMULA NOTESEstimate at Completion (EAC)

BAC/CPI Use if no variances from BAC have occurred

AC+ATC Use when original estimate was bad. Actuals + New estimate

AC+BAC-EV Use when current variances are not expected to be there in the future

AC+(BAC-EV)/CPI Use when current variances are expected to continue

Barn Exercise

You have a project to build a new barn. The specs for building the barn are to construct 4 sides and then an angled roof. Each side of the barn is to take one day to build as is the roof. The budgeted amount is $2,000 per side and $2000 applied to the roof cost. The sides are to be completed one after the other. Today is the end of day four.

Tricks for Earned Value

EV is always firstVariance = EV minus somethingIndex = EV divided by somethingIf the formula relates to cost use ACIf the formula relates to schedule use PVInterpreting results: negative is bad and positive is goodInterpreting results: greater than one is good, less than one is bad

PV

AC ETCEAC

BACProject Start

Current Status

Terms to Remember

Present ValueNet Present Value (NPV)Internal Rate of Return (IRR)Payback PeriodBenefit Cost Ratio = BCR>1, Payback is greater than the costOpportunity CostSunk Cost

Working CapitalStraight Line DepreciationAccelerated Depreciation

Double Declining Balance Sum of Years Digits

Value Analysis (Value Engineering)

You won’t be calculating most of these numbers on the test, just remember the concepts for general questions

Answers to Questions

1 – C

2 – D

3 – B

4 – A

5 – C

6 – B

7 – C

8 – A

Answers to Questions (Cont’d)What is: Calculation: Answer: Interpretation of Answer:

PV $500+$500+$500 $1,500 We should have completed $1500

EV $500+$500+$250 $1,250 We actually completed $1,250 worth of work

AC $500+$1000+$250 $1,750 We have actually spent $1,750

BAC $500+$500+$500+$500 $2,000 Our project budget is $2000

CV $1,250 - $1,750 -$500 We are over budget by $500

CPI $1,250/$1,750 0.714 We are only getting $0.71 out of every dollar that we are spending on the project

SV $1,250 - $1,500 -$250 We are behind schedule

SPI $1,250/$1,500 0.833 We are progressing at 83% of the planned rate

EAC $2,000/0.714 $2,801 We currently estimate the project will cost $2,801

ETC $2,801-$1,750 $1,051 We need to spend $1,051 to finish the project

VAC $2,000 - $2,801 -$801 We currently expect to be $801 over budget when the project is completed