04 project cost managment

• 1. Project Cost ManagementWaleed El-Naggar, MBA, PMPCompanyLOGO

2. Agenda1. Definitions2. Payback / Time Value of Money3. Estimate Cost4. Determine Budget5. Control Cost6. Earned Value Management5/16/2009 Compiled by: Waleed El-Naggar 2 3. Project Cost Management Cost Management includes the processes involved in estimating, budgeting, and controlling costs so that the project can be completed within the approved budget. Project managers must make sure their projects are well defined, have accurate time and cost estimates and have a realistic budget that they were involved in approving Costs are usually measured in monetary units like dollars5/16/2009 Compiled by: Waleed El-Naggar 3 4. Definitions (1) Profit = Revenue Costs Profit Margin = Profit / Revenue Cash flow refers to the movement of cash into orout of the project. Direct costs are costs that can be directly relatedto producing the deliverable of the project Salaries, cost of hardware & softwarepurchased specifically for the project5/16/2009 Compiled by: Waleed El-Naggar 4 5. Definitions (2) Indirect costs are costs that are not directly related to the deliverable of the project, but are indirectly related to performing the project Cost of electricity, paper towels Reserves are dollars included in a cost estimate to mitigate cost risk by allowing for future situations that are difficult to predict5/16/2009Compiled by: Waleed El-Naggar5 6. Definitions (3) Sunk cost is money that has been spent in the past; when deciding what projects to invest in or continue, you should not include sunk costs To continue funding a failed project because agreat deal of money has already been spenton it is not a valid way to decide on whichprojects to fund Sunk costs should be forgotten5/16/2009Compiled by: Waleed El-Naggar 6 7. Definitions (4) Variable Costs: change with the amount of production (cost of material). Fixed Costs: do not change with production (rent, setup costs, etc) Net present value: the total present value (PV) of a time series of cash flows. It is a standard method for using the time value of money to appraise long-term projects5/16/2009 Compiled by: Waleed El-Naggar 7 8. Definitions (5) Internal Rate of Return: interest rate received for an investment consisting of payments and income that occur at regular periods Opportunity Cost: The cost given up by selecting one project over another. Payback Period: The time it takes to recover your investment in the project before you start accumulating profit.5/16/2009 Compiled by: Waleed El-Naggar8 9. Payback PeriodYearProject A Project B0-1,000-1,0001 500 1002 400 3003 300 4004 100 6005/16/2009 Compiled by: Waleed El-Naggar 9 10. Project A5/16/2009Compiled by: Waleed El-Naggar 10 11. Project B5/16/2009Compiled by: Waleed El-Naggar 11 12. The Time Value of Money A dollar received today is worth more than a dollar received tomorrow This is because a dollar received today can beinvested to earn interest The amount of interest earned depends on therate of return that can be earned on theinvestment Time value of money quantifies the value of a dollar through time5/16/2009 Compiled by: Waleed El-Naggar12 13. Example of PV Calculation0 123 410%100300300 -5090.91 247.93 225.39 -34.15 530.08 = PV5/16/2009 Compiled by: Waleed El-Naggar 13 14. 7.1 Estimate Costs The Process of developing an approximation (estimate) for the cost of the resources necessary to complete the project activities It is also important to develop a cost management plan that describes how cost variances will be managed on the project Pricing: Assessing how much the organization will charge for the product or service5/16/2009Compiled by: Waleed El-Naggar14 15. Estimate Costs: Inputs 1. Scope Baselines Scope Statement WBS WBS Dictionary 2. Project Schedule 3. Human Resource Plan5/16/2009Compiled by: Waleed El-Naggar 15 16. Estimate Costs: Inputs 4. Risk Register (Risk mitigation costs) 5. Enterprise Environmental Factors 6. Organizational Process Assets5/16/2009 Compiled by: Waleed El-Naggar 16 17. Estimate Costs: T & T 1. Expert Judgment 2. Analogous Estimating (Top down) 3. Parametric Estimating 4. Bottom-up estimating 5. Three-point Estimating5/16/2009Compiled by: Waleed El-Naggar 17 18. Estimate Costs: T & T 6. Reserve Analysis 7. Cost of Quality 8. Project Management Estimating Software 9. Vendor Bid analysis5/16/2009 Compiled by: Waleed El-Naggar 18 19. Estimate Costs: T & T1. Activity Cost Estimates2. Basis of Estimates How it was developed Estimation Assumptions Constraints Range of possible estimates (e.g., $10010%) Confidence Level of the estimate3. Project Document Updates5/16/2009 Compiled by: Waleed El-Naggar19 20. Quiz Analogous estimating:A. uses bottom-up estimating techniques.B. is used most frequently during the executingprocesses of the projectC. uses top-down estimating techniques.D. uses actual detailed historical costs.The answer is: C5/16/2009 Compiled by: Waleed El-Naggar 20 21. QuizThe cost of choosing one project and giving upanother is called:A. fixed cost.B. sunk cost.C. net present value (NPV).D. opportunity cost. The answer is: D5/16/2009Compiled by: Waleed El-Naggar 21 22. 7.2 Determine Budget Allocating the overall cost estimate to individualactivities or work packages, in order to establish acost baseline for measuring project performance An important goal is to produce a cost baseline A time-phased budget that project managers useto measure and monitor cost performance Estimating costs for each major project activityover time provides management with a foundationfor project cost control Providing info for project funding requirements atwhat point(s) in time will the money be needed5/16/2009Compiled by: Waleed El-Naggar22 23. Determine Budget: Inputs1. Activity Costs Estimates2. Basis of Estimates3. Scope Baseline4. Project Schedule5. Resource Calendars6. Contracts7. Organizational Process Assets5/16/2009 Compiled by: Waleed El-Naggar 23 24. Determine Budget: T & T1. Cost Aggregation The work package cost estimates are aggregated forthe higher component levels of WBS.2. Reserve Analysis3. Expert Judgment4. Historical Relationships5. Funding Limit Reconcillation5/16/2009 Compiled by: Waleed El-Naggar 24 25. Determine Budget: Outputs1. Cost Performance Baseline2. Project Funding Requirements3. Project Document Updates5/16/2009 Compiled by: Waleed El-Naggar 25 26. 7.3 Control Costs The process of monitoring the status of the project costsand managing the changes to the cost baseline. It includes: Monitoring cost performance to detect variances from the plan Ensuring that all appropriate changes are recorded Preventing incorrect, inappropriate, or unauthorized changes Informing the appropriate stakeholders of authorized changes Analyzing positive and negative variances and how they affect the other control processes5/16/2009Compiled by: Waleed El-Naggar26 27. Control Costs: Inputs1. Project Management Plan: Cost Performance Baseline Cost Management Plan2. Project Funding Requirements3. Work Performance Indicators4. Organizational Process Assets5/16/2009 Compiled by: Waleed El-Naggar 27 28. Control Costs: T & T1. Earned Value Management2. Forecasting3. To-Complete Performance Index4. Performance Reviews5. Variance Analysis6. Project Management Software5/16/2009 Compiled by: Waleed El-Naggar 28 29. Control Costs: Outputs1. Work Performance Measurements2. Budget Forecasts3. Organizational Process Assets Updates4. Change Requests5. Project Management Plan Updates6. Project Document Updates5/16/2009 Compiled by: Waleed El-Naggar 29 30. Earned Value Management EVM is a project performance measurement technique that integrates scope, time, & cost data Given a baseline, you can determine how well the project is meeting its goals You must enter actual information periodically to use EVM.5/16/2009Compiled by: Waleed El-Naggar30 31. EVM Terms Planned Value (PV), formerly called the budgeted cost ofwork scheduled (BCWS), also called the budget, is thatportion of the approved total cost estimate planned to bespent on an activity during a given period Actual Cost (AC), formerly called actual cost of workperformed (ACWP), is the total of direct & indirect costsincurred in accomplishing work on an activity during agiven period Earned Value (EV), formerly called the budgeted cost ofwork performed (BCWP), is the percentage of workactually completed multiplied by the planned value 5/16/2009Compiled by: Waleed El-Naggar 31 32. EVM Formulas5/16/2009 Compiled by: Waleed El-Naggar 32 33. EVM ExamplePV = $42,000EV = $38,000AC = $48,000CV = EV AC = $38,000 - $48,000 = -$10,000CV% = CV / EV = -$10,000 / $38,000 = -26%5/16/2009 Compiled by: Waleed El-Naggar 33 34. EVM Example contd.PV = $42,000EV = $38,000AC = $48,000SV = EV PV= $38,000 - $42,000 = -$4,000SV% = SV / EV= -$4,000 / $42,000 = -9.5%5/16/2009 Compiled by: Waleed El-Naggar 34 35. EVM Example contd.PV = $42,000EV = $38,000AC = $48,000CPI= EV / AC= $38,000 / $48,000 = 0.79For each $1 spent, a work worth $0.79 was actually performed.5/16/2009 Compiled by: Waleed El-Naggar 35 36. EVM Example contd. PV = $42,000 EV = $38,000 AC = $48,000SPI= EV / PV= $38,000 / $42,000 = 0.90$0.90 worth of work was performed for each$1.00 worth of work that planned to be done..5/16/2009 Compiled by: Waleed El-Naggar 36 37. Estimate at Completion The managements assessment of the cost ofthe project at completion After variance analysis, the estimated cost atcompletion is determined Can use calculated indices or use managementjudgment.EAC = BAC / CPI(BAC=$80,000) = $80,000 / 0.79 = 101,2655/16/2009 Compiled by: Waleed El-Naggar37 38. Variance at CompletionVAC = BAC - EAC (BAC=$80,000) = $80,000 - $101,265 = -$21,265 Based on past performance, project will exceed planned budget by $21,265ETC= EAC - AC(BAC=$80,000) = $101,265 $48,000 = $53,2655/16/2009 Compiled by: Waleed El-Naggar 38 39. To-Complete Performance Index How well do we have to perform to get backon track The calculated project of cost performancethat must be achieved on the remaining workto meat a specified goal (BAC or EAC).5/16/2009 Compiled by: Waleed El-Naggar 39 40. Case 1 PV = $ 1,860 This is the ideal situation, where EV = $ 1,860 everything goes according to plan. AC = $ 1,8605/16/2009Compiled by: Waleed El-Naggar40 41. Case 2 In this Case, without Earned Value measurements, it PV = $ 1,900 appears were in good shape. Expenditures EV = $ 1,500 are less than planned. AC = $ 1,700Spending Variance = EV AC= - $ 2005/16/2009Compiled by: Waleed El-Naggar41 42. Case 2But with EV measurements,we see...$400 worth of work PV = $ 1,900is behind schedule in beingcompleted; i.e., we are 21 EV = $ 1,500percent behind where weplanned to be. AC = $ 1,700 SV = EV PV = - $ 400 SV % = SV / PV x 100 = - 21 %5/16/2009Compiled by: Waleed El-Naggar42 43. Case 2In addition, we can see...Actuals exceed ValueEarned (EV), i.e., $1,500worth of work was PV = $ 1,900accomplished but it cost$1,700 to do so. We have a EV = $ 1,500$200 cost overrun (i.e., 13%over budget) . AC = $ 1,700 CV = EV AC = - $ 200 CV % = CV / EV x 100 = -13 %5/16/2009Compiled by: Waleed El-Naggar 43 44. Case 2This means only 79 cents worthof work was done for each$1.00 worth of work planned to PV = $ 1,900be done.And, only 88 cents worth of EV = $ 1,500work was actually done for each$1.00 spent AC = $ 1,700 SPI = EV / PV = $ 0.79 CPI = EV / AC = $ 0.885/16/2009 Compiled by: Waleed El-Naggar 44 45. Case 2 This is the worst kind of scenario, where all performance indicators PV = $ 1,900 are negative. EV = $ 1,500 AC = $ 1,700 SV = - $ 400; SPI = 0.79 CV = - $ 200; CPI = 0.885/16/2009Compiled by: Waleed El-Naggar 45 46. Case 3 In this case there is bad news and good PV = $ 2,600 news. EV = $ 2,400 AC = $ 2,2005/16/2009Compiled by: Waleed El-Naggar 46 47. Case 3 The bad news is that our work efficiency is a bit low; were getting only 92 PV = $ 2,600 cents of work done on the dollar. As a result, we are behind schedule. EV = $ 2,400 AC = $ 2,200SPI = 0.92SV = - $ 200; SV % = - 8 %5/16/2009Compiled by: Waleed El-Naggar47 48. Case 3The good news is thatwere under-running ourbudget. Were getting PV = $ 2,600$1.09 worth of workdone for each $1.00were spending. EV = $ 2,400 AC = $ 2,200CV = $ 200; CV % = 8 %CPI = 1.095/16/2009 Compiled by: Waleed El-Naggar 48 49. Case 4 PV = $ 1,700 EV = $ 1,500In this case, thework is not being AC = $ 1,500accomplished onschedule...SV = - $ 200; SV % = - 12 %SPI = 0.885/16/2009 Compiled by: Waleed El-Naggar 49 50. Case 4 PV = $ 1,700...but the cost of EV = $ 1,500the workaccomplished is AC = $ 1,500just as webudgeted.CV = $ 0.00CPI = 1.005/16/2009 Compiled by: Waleed El-Naggar 50 51. Case 5 PV = $ 1,400 EV = $ 1,600A positive scenario; AC = $ 1,400right? But is it becausewe are out-performingour learning-curvestandards or becausewe planned toopessimistically?5/16/2009Compiled by: Waleed El-Naggar 51 52. Case 5 PV = $ 1,400 EV = $ 1,600Here in this case,we are getting AC = $ 1,400work done at 114percentefficiency...SPI = 1.14CPI = 1.145/16/2009 Compiled by: Waleed El-Naggar 52 53. Case 5 PV = $ 1,400 EV = $ 1,600...work is ahead ofschedule by 14 AC = $ 1,400percent andunder-running costby 12.5%. SV = $ 200; SV % = 14 % CV = $ 200; CV % = 12.5 %5/16/2009 Compiled by: Waleed El-Naggar 53 54. 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