Cost Management

Cost Management

Network diagram

Network diagram

Critical path• You are the project manager of a new project and

have figured out the following dependencies• Activity 1 can start immediately and has an

estimated duration of 3 weeks• Activity 2 can start after activity 1 is completed and

has an estimated duration of 3 weeks• Activity 3 can start after activity 1 is completed and

has an estimated duration of 6 weeks• Activity 4 can start after activity 2 is completed and

has an estimated duration of 8 weeks• Activity 5 can start after activity 4 is completed and

after activity 3 is completed which takes 4 weeks

Critical path• What is the duration of the critical path?• What is the float of activity 3?• What is the float of activity 2?• What is the float of the path with the longest float?• The resource working on activity 3 is replaced with

another resource who is less experienced. The activity will now take 10 weeks. How will this affect the project?

• After arguing with stakeholders, a new activity 6 is added to the project. It will take 11 weeks to complete and must be completed before activity 5 and after activity 3. Management is concerned that adding this activity will add 11 weeks to the project. How much longer will the project take now?

Agenda

• Understanding - Cost & Schedule • Earned value – Terms used• Graphical interpretation• Derived metrics from Earned value• Interpretation from sample reports

Life cycle costing

• Project cost• Maintenance cost

Value Analysis

• Finding a less costly way to do the same work

Cost Estimation

• This is a process where the estimates for each activity are made

Types of cost

• Variable Costs – Costs that change with the amount of production or the amount of work. Example – Cost of material, supplies and wages

• Fixed Costs – Costs that do not change as production changes. Example – Rent, setup

Types of cost

• Direct cost Costs that are directly attributable to the work

on the project. Example – material cost, salary• Indirect cost

Costs incurred for te benefit of more than one project. Example – Taxes

Cost estimation methods

• One-cost• Analogous• Parametric estimate• Bottom-up

One cost estimate

• One estimate per activity • Should be used in projects that do not require

a detailed high probable values

Analogous estimation

• Also called as Top down method• Overall project estimate given to the project

manager from the management or the sponsor

• This is a form of expert judgement

Parametric estimation

• Mathematical model based on historical records of previous projects

• There are 2 ways to create parametric estimates– Regression analysis – It tracks 2 variables to see if they are

related and creates a mathematical formula for use in future

– Learning curve – Efficiency improves as you do the same work again and again

Bottom up estimation

• Detailed estimation is done for each activity or the work package and the estimates are then rolled up into an overall project estimate

Cost budgeting

• A budget is merely a compilation of individual cost estimates

• Cost Aggregation -4. Project

3. Control Account2. Work Package

1. Activities

Cost budgeting

8. Cost budget7. Management reserve

6. Cost baseline5. Contingency reserve

4. Project3. Control Account

2. Work package1. Activities

Cost budgeting

• Contingency reserve – This is the extra amount of funds for the known risks remaining in the project

• Management reserve – This is for the unknown risks and changes in the project

• Thus, cost baseline will contain contingency reserve and the cost budget would include management reserve

Earned value Analysis

Objectives:

• What is it?

• Why do you need it?

• How do you do it?

Project Status

• How is your project going?• Will it be on time?• Will it be on budget?• What did we get for the money spent?

Definition

Earned value Analysis is an industry standard way to

• Measure a project’s progress• Forecast its completion date and final cost• Provide schedule and budget variances along

the way

Earned value analysis

• It compares the planned amount of work with what has actually been completed to determine if cost, schedule and work accomplished are progressing as planned

• It helps us to know if– There is any schedule slippage– There is any budget slippage– There is any slippage in work accomplished

Traditional cost method

• % of budget spent

• % of time elapsed- Incomplete & subjective

- Incorrect result

Traditional cost method

• 30% of budget spent

• 30% of time elapsed

• So only if 30% of work is done, it is fine

- Need to look at work accomplishment also

New terms

Planned Value (PV)

Budgeted cost of work scheduled (BCWS)

How much work should have been completed so far?

Actual Cost (AC)

Actual cost of work performed (ACWP)

How much have been actually spent?

Earned Value (EV)

Budgeted cost of work performed (BCWP)

What is the value of work that has been accomplished so far?

Sample data

BCWS

ACWP

BCWP

The complete set

Schedule Variance & Cost Variance

Schedule Variance = BCWP-BCWS

$49,000

- 55,000

SV = - $ 6,000

Cost Variance = BCWP-ACWP

$49,000

56,000

CV = - $7,000

Performance MetricsSPI: Schedule Performance Index

SPI=BCWP/BCWSSPI<1 means project is behind

schedule

CPI: Cost Performance Index

CPI= BCWP/ACWPCPI<1 means project is over budget

CSI: Cost Schedule Index (CSI=CPI x SPI)

The higher the CSI from 1.0, the project is less likely to recover

Performance Metrics - Calculation

SPI: BCWP/BCWS

49,000/55,000 = 0.891

CPI: BCWP/ACWP

49,000/56000 = 0.875

CSI: SPI x CPI

.891 x .875 = 0.780

Derived Metrics

Forecast – Metrics I

BAC: Budget at completion

Total original budgeted cost

Same as BCWS at completion

EAC: Estimate at completion (EAC=PV/CPI)

Final cost of the project

Forecast – Metrics II

SAC: Schedule at completion (SAC=Schedule/SPI)

Estimated duration of the project

VAC: Variance at completion (VAC=BAC-EAC)

Forecast of final cost variance

Forecast Metrics - CalculationBAC: BCWS at completion

1,02,000

EAC: BAC/CPI

1,02,000/0.875 = 116571.43

SAC: Schedule/SPI

12/0.891 = 13.47

VAC: BAC - EAC

1,02,000 – 1,16,571.43 = -14,571.43

Catch up – Metrics

TCPI: To complete performance index

TCPI=(Planned Budget –EV) /

(Final cost - AC)

Indicates how much should we perform to

meet the project schedule

Catch up metrics - CalculationTCPI: To complete performance index

(1,02,000 – 49,000) / (1,02,000 – 56,000)

= 53,000 / 46,000

= 1.1522

Graphical representation

How to do the earned value analysis on projects?

• Break down activities into small possible tasks to pinpoint schedule and cost performance problems

• Allocate the cost to be expended on each activity

• Schedule the activities over time

• As the project progresses, the percent of work completed should be monitored

• Actual cost accrued for each activity should also be recorded

• Calculate the earned value and its derived metrics

Earned value analysis – How?

Earned value analysis – How?

Earned value analysis – How?

Earned value report – across Projects

Quality performance index

A project can have an excellent cost and schedule performance index. Does it mean it will meet the customers requirement?

We can introduce a new column called ‘Quality Performance Index’ to measure how well the project conforms to the customers requirement

Project overall performance index

The project’s overall performance index could be calculated by multiplying the 3 index values

Overall performance index =

Cost Performance Index *

Schedule Performance Index *

Quality Performance Index

Earned value analysis - Benefits

• Better visibility into project performance• Reduced cycle time as rework is prevented• Overall accuracy in estimation and budgeting

process increases• Mitigate the risk of cost overrun and schedule

slippage at an early stage

Earned value analysis - Limitations

• EVM has no provision to measure project quality. It is possible for EVM to indicate a project is under budget, ahead of schedule and scope fully executed, but still have unhappy clients and ultimately unsuccessful results

• Traditional definitions of EVM typically assume that project accounting and project network schedule management are prerequisites to achieving any benefit from EVM

Summary

• Earned value is the point in time evaluation• How much work did you PLAN to complete?

(Planned Value)• How much work did you ACTUALLY

complete? (Earned Value)• How much did you spend to complete the

work? (Actual Cost)

Summary

Earned Value Analysis (EVA)– Earned Value Analysis is an objective

method to measure project performance in terms of scope, time and cost–Use EVA metrics are used to measure

project health and project performance

Exercise 1

• Fence 4 sides of a land is expected to take about one day for each side and $1000 per side. Today is the end of day 3. Calculate PV, EV, AC, BAC, CV, CPI, SV, SPI

Activity Day 1 Day 2 Day 3 Day 4 Status

Side 1 S….F 100%, $1000Side 2 S….PF ….F 100%, $1200Side 3 PS….S..PF 50%, $ 600Side 4 PS…PF Not yet started

Answer

• PV $3000• EV $2500• AC $2800• BAC $4000• CV -$ 300• CPI 2500/2800 = .893• SV -500• SPI 2500/3000 = .833

Exercise - 2

• It is estimated that in 3 hours 120 beads, in 7 hours 280 beads and in 10 hours 400 beads could be made. Each bead would cost 0.02$.

• As the project moves on, at the end of 3rd hour only 80 beads have been made and the amount spent is 3$

References

• http://en.wikipedia.org/wiki/Earned_value_management

• http://www.projectlearning.net/pdf/I2.1.pdf• http://www.projectsmart.co.uk/docs/earned-

value.pdf