Section 4: Cost Management

Cost Management

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Project Delivery Plan 1. Risk Management

2. Roles & Responsibilities

3. Scope Management

4. Cost Management5. Schedule Management

6. Change Management

7. Procurement Management

8. Communications Management

9. Quality Management

10. Transition to Construction Plan

Cost Management includes the processes involved in planning, estimating, budgeting, funding, managing, and controlling costs so that a project is completed within the approved budget. (PMI)

Cost Management

This topic covers the following:

• Learning Objectives

• Example of Cost Management Plan

• Why does the PDP include Cost Management?

• What is the PM’s role in Cost Management?

• How do you create a Cost Management Plan?

• Risk Based Cost Estimating

• Summary

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Learning Objectives

Participants will:

• Recognize the value and purpose of a Cost Management Plan

• Be able to create a Cost Management Plan

• Understand Risk Based Cost Estimating concepts

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Cost Management principles support consistency in estimating and managing project costs. Why does consistency matter?

•Helps Project Managers to create estimates that can be compared

•Supports the analysis and management of groups of projects at a “portfolio” level

Why Include a Cost Management Plan?

Standardizing estimating procedures:•Captures assumptions, risks, and uncertainties

•Ensures estimates are updated at milestones and in the event of big changes to:

–Schedule

–Major item quantities or unit costs

–Scope

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Why Include a Cost Management Plan?

Consistency in project estimating will equip PMs and CDOT to:

•Clearly define and articulate the level of confidence associated with cost estimates.

•Efficiently respond to proposals for new funding initiatives.

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Why Include a Cost Management Plan?

Example Cost Management Plan

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What is the PM’s Role in Cost Management?

Create a Cost Management Plan. Develop a scoping level cost estimate.

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Manage preconstruction costs and develop construction estimate. Update cost estimate at FIR and FOR.

Monitor and Control preconstruction costs. Analyze cost impacts of changes.

How do you create a Cost Management Plan?

The initial Base Cost Estimate:

• Includes Preconstruction and Construction Costs

• Does not include contingency. . . yet

• Is calculated using the (new) Project Cost Planner Tool

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What is contingency??? • Uncertainty related to unknowns (risks) and unit prices.

How is contingency typically incorporated into project estimates?• Inflate quantities

• Use higher unit prices

• Add contingency percentage at end

• Other approaches?

What’s the problem with this approach?• Lack of consistency makes it tough to compare apples to apples

• Contingency can be unintentionally compounded

Contingency is not going away – we just need to manage it better. Managing it consistently lets us know how much is included and what it represents.

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Risk Based Cost Estimating Overview

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Contingency and Risk Based Cost Estimating

Risk-Based Cost Estimating is a method of estimating that:

• Applies statistical modeling to the base cost estimate to generate a range for the cost associated with uncertainty.

• Allows the estimate to change as project development matures through Scoping, FIR, and FOR; as “knowns” increase, the unknowns and the need to hold contingency (Risk Reserve) decreases.

Why use a Risk-Based Cost Estimating approach?

• Provides a systematic approach for assessing project level contingency, as a function of level of design development and risks

• Minimizes tendency to hold excessive contingency at the project level (previously contributed to $1.5B cash balance)

• Reduces contingency overall enabling more funding to be leveraged to maximize project delivery

• Supports release of contingency as risks are retired; released funds can be used to enhance scope or fund other projects

• Enables portfolio level analysis to ensure funding is adequate to deliver a portfolio of projects (like SB-267)

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Risk-Based Cost Estimating Approach

1. Estimate Base Cost: Project cost that can be expected if the project materializes as planned and there is no occurrence of risk. Includes the known and quantified items and the known but not yet quantified (i.e. allowances)

2. Estimate Risk Reserve: An estimate of costs associated with identified uncertainties (primarily as a function of level of design development)

3. Enter resultant “Project Planned Amount” by WBS in new SAP fields

4. Initial SAP entry coincides with Project Delivery Plan (PDP) endorsement (Scoping Milestone)

5. Update at FIR and FOR milestones

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Developing the Base Cost Estimate

The Project Cost Planner Tool provides the Base Cost Estimate. An Excel version is available on the Project Management webpage (a web-based version is in development).

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Project Cost Planner Tool input includes:1. Project location

2. Project delivery method

3. Level of design development

4. ROW, utilities, and RR work

5. Major construction items• Earthwork, pavement, major structures,

traffic/ITS, etc.

6. Minor construction items • Removals/resets, environmental,

drainage/utilities, roadway appurtenances, mobilization, traffic control, lighting and electrical, signing and striping, traffic signalization, and miscellaneous

Input – Project Cost Planner Tool

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A relatively small number of bid items (Major Construction Items) comprise a large percentage of total bid amounts. Region specific, historic unit cost data from the Engineering Estimates & Market Analysis (EEMA) database is used to calculate costs.

Similarly, EEMA data is used to estimate minor construction items as a percent of the major items.

How does the Project Cost Planner Tool work?

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How does the Project Cost Planner Tool work?

Project Managers can override the Model Estimate by changing the Unit Cost in the Region Estimate column Changes are flagged via REDfont.

Project Cost Planner Tool Output –Base Cost Model/Region Estimate

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Project Manager “submits” the Region Estimate to Region management (likely RE) for approval. When approved, it becomes the Base Cost Estimate.

Base Cost Estimate Approval

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The Next Step is to Calculate Risk Reserve

Risk Reserve accounts for the uncertainty, contingency, inflated quantities & unit prices, etc.

There are 2 approaches to calculate Risk Reserve:

Approach 1 – Streamlined For 'Design to Budget' projects: The CPCT provides this option to calculate risk reserve based on design maturity.

Approach 2: For all other projects: Risk reserve will be calculated by the Region PMO Rep or PMO HQ using @Risk, a statistical tool.

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Approach 1: “Design to Budget” Projects

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For Approach 1, the CPCT uses the percentages in the table below to determine risk reserve. The PM selects the level of maturity of the design, and the CPCT does the rest.

1Based on recommendation of American Association of Cost Engineers.

• Risk reserve is calculated using a probabilistic model that integrates major component quantity uncertainties, unit price variability, and other risks

• Results from the Project Cost Planner Tool are input to the model

Risk Reserve

Approach 2: Calculating Risk Reserve using @Risk

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Risk reserve decreases as design progresses

Approach 2: Calculating Risk Reserve Using @Risk

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Risk Reserve will be calculated by PMO Reps or PMO HQ (for larger projects) using an Excel tool called @Risk.

Recording Total Project Cost/Base Cost Estimate in SAP

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The Planning Level Total Project Cost and Region Base Cost Estimate for Construction Items are manually input in the SAP Project Portal.

SAP Portal Data

Initial Planning Amount (inherited by PM)

Base Cost Estimate for Construction Items (Project Cost Planner Tool: Sum of Sections A+B+C)

Calculating the RBCE at Scoping provides:

• Provides early confirmation that the scope can be accomplished within the planning budget for the project.

Updating the RBCE at FIR and FOR provides:

• A quick, ball park comparison to the more detailed, quantity-based estimates developed by the PM and by EEMA.

• A basis for the PM and Region to manage Risk Reserve.

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When should the Risk Based Cost Estimate be calculated and updated?

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When Should the Risk Based Cost Estimate be calculated and updated?

Cost Est w-PCPT

Summary

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• The Cost Management Plan addresses the process for creating and updating cost estimates, as well as the schedule and forum (i.e., regular team meetings) for updating cost information.

• CDOT is moving towards Risk Based Cost Estimating for all projects.

• Base cost estimates will be calculated using the Project Cost Planner Tool. Risk Reserve will be calculated using design maturity or the @Risk.

Questions/Discussion

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