Pm deep dive cost management

PM DeepDivePM DeepDive

Project Cost ManagementNiraj Agarwal- Niraj Agarwal

May 2011Slide 1

Project Cost ManagementProject Cost ManagementDefinition

Project Cost Management includes the processes involved in planning Project Cost Management includes the processes involved in planning, estimating, budgeting, and controlling costs so that the project can be completed within the approved budget.

• Cost Estimating developing an approximation of the costs of the • Cost Estimating – developing an approximation of the costs of the monetary resources needed to complete project activities.

• Cost Budgeting – aggregating the estimated costs of individual ti iti k k t t bli h t b liactivities or work packages to establish a cost baseline.

• Cost Control – influencing the factors that create cost variances and controlling changes to the project budget.

May 2011Slide 2

Project Cost ManagementProject Cost ManagementTypes of Project Costs

• Direct Project Cost - The costs directly attributable to a project Direct Project Cost The costs directly attributable to a project, including all personnel, goods and/or services together with all their associated costs. E.g. team travel, team wages, training,material,etc.

• Indirect Project Cost All costs which do not form a part of the final • Indirect Project Cost - All costs which do not form a part of the final product, but which are none the less required for the orderly completion of the project and which may include, but not necessarily be limited to field administration, direct supervision, incidental tools and limited to field administration, direct supervision, incidental tools and equipment, startup costs, contractor’s fees, insurance, taxes, etc.

• Fixed Project Costs - Those costs which do not change with change in volume of output E g set-up rental etcvolume of output. E.g. set-up, rental, etc.

• Variable Project Costs - Those costs that vary proportionately with volume of output. E.g. material cost, supplies, wages, etc.

May 2011Slide 3

Project Cost ManagementProject Cost ManagementAnalogous Estimating

• It means using the actual cost of previous similar projects as the It means using the actual cost of previous, similar projects as the basis for estimating the cost of the current project.

• It uses expert judgment.

• This type of estimate is typically done as part of the business case development or during the early stages of scope planning when there isn’t a lot of detail on the project.

• An analogous estimate may be done for the project as a whole or for selected phases or deliverables. It is not typically used to estimate individual work packages.

• Analogous estimates are the least accurate of all the estimating techniques but also the least costly.

May 2011Slide 4

Project Cost ManagementProject Cost ManagementParametric Estimating

• Same as the technique used in duration estimatingSame as the technique used in duration estimating.

• This technique uses a mathematical model to compute costs, and it most often uses the quantity of work multiplied by the rate.

• Parametric estimating is dependent on the accuracy of the data used to create the model.

May 2011Slide 5

Project Cost ManagementProject Cost ManagementBottom - Up Estimating

• Assigns a cost estimate to each work package on the project Assigns a cost estimate to each work package on the project.

• The WBS and the project resource requirements are critical inputs for a bottom - up estimate.

• The idea is that you start at the work package level of the WBS and calculate the cost of each activity assigned to that work package.

• The sum of all the work package estimates provides the estimate of p g pthe total project cost.

• Bottom - up estimates are the most accurate of all the estimating techniques, but they ’re also the most time - consuming to perform.tec ques, but t ey e a so t e ost t e co su g to pe o .

May 2011Slide 6

Project Time ManagementProject Time ManagementThree Point Estimates

• Three point estimates used:Three point estimates used:

- Most likely(M) : Most likely cost of the schedule activity

- Optimistic(O) : Activity cost is based on a best-case scenario

- Pessimistic(P) : Activity cost is based on a worst-case scenario

• Estimating based on 3 formulas:

i PERT Activity Cost : C = (P + 4M + O)/6i. PERT Activity Cost : C = (P + 4M + O)/6

May 2011Slide 7

Project Cost ManagementProject Cost ManagementSample project cost estimate

May 2011Slide 8

Cost Estimating Cost Estimating ITTO

May 2011Slide 9

Cost Estimating Cost Estimating ITTO

May 2011Slide 10

Project Cost ManagementProject Cost ManagementEstimating Tips

• Brainstorm with your project teamBrainstorm with your project team

• Communicate the type of estimate you are providing & the level of accuracy they provide.

• Make use of any available templates

• Get estimates from the people doing the work.

• Document any assumptions you have made• Document any assumptions you have made

May 2011Slide 11

Cost BudgetingCost BudgetingDefinition

Cost Budgeting is the process of aggregating all the cost estimates and Cost Budgeting is the process of aggregating all the cost estimates and establishing a cost baseline for the project.

The cost baseline is the total expected cost for the project. Once approved it’s used throughout the remainder of the project to measure approved, it s used throughout the remainder of the project to measure the overall cost performance.

May 2011Slide 12

Cost BudgetingCost BudgetingITTO

May 2011Slide 13

Cost BudgetingCost BudgetingITTO

May 2011Slide 14

Cost BudgetingCost BudgetingReserves

Contingency Reserves “A separately planned quantity used to allow for Contingency Reserves A separately planned quantity used to allow for future situations which may be planned for only in part (sometimes called ‘known unknowns’). For example, rework is certain, the amount of rework is not. The contingency fund is usually under the g y ydiscretion of the project manager, who controls how these funds are spent.

“ A l l d i d ll Management Reserve “ A separately planned quantity used to allow for future situations which are impossible to predict (sometimes called “unknown-Unknowns”). Management reserves may involve cost or schedule Management reserves are intended to reduce the risk of schedule. Management reserves are intended to reduce the risk of missing cost or schedule objectives. The management fund is usually controlled by upper management.

May 2011Slide 15

Project Cost ControlProject Cost ControlDefinition

• Project Cost Control is primarily concerned with Controlling Changes Project Cost Control is primarily concerned with Controlling Changes to the project budget

• The processes of gathering, accumulating, analyzing, reporting and managing the costs on an on going basis managing the costs on an on-going basis.

• Includes project procedures, project cost changes, monitoring actual versus budget, variance analysis, integrated cost/schedule reporting,

l i d ti tiprogress analysis and corrective actions.

May 2011Slide 16

Project Cost ControlProject Cost ControlDefinition

• Project Cost Control is primarily concerned with Controlling Changes Project Cost Control is primarily concerned with Controlling Changes to the project budget

• The processes of gathering, accumulating, analyzing, reporting and managing the costs on an on going basis managing the costs on an on-going basis.

• Includes project procedures, project cost changes, monitoring actual versus budget, variance analysis, integrated cost/schedule reporting,

l i d ti tiprogress analysis and corrective actions.

May 2011Slide 17

Earned Value AnalysisEarned Value Analysis

• Integrates cost, schedule and scopeIntegrates cost, schedule and scope

• Better that comparing projected vs. actual because time and cost are analyzed separately

• Terms:• Terms:

- PV / BCWS – Budgeted Cost of Work Scheduled /Planned Value

- EV / BCWP – Budgeted Cost of Work Performed / Earned Value

- AC /ACWP – Actual Cost of Work Performed / Actual Cost

May 2011Slide 18

Earned Value AnalysisEarned Value Analysis

• BAC – Budget at Completion (how much did you budget for the total BAC Budget at Completion (how much did you budget for the total job)

• EAC – Estimate at Completion (what do we expect the total project to cost)cost)

• ETC – Estimate to Completion (how much more do we expect to spend to finish the job)

• VAC – Variance at Completion (how much over/under budget do we expect to be)

May 2011Slide 19

Earned Value AnalysisEarned Value Analysis

• Variance = (Plan – Actual)( )

• Cost Variance (CV): EV– AC; -ve is over budget , +ve is under

• Schedule Variance (SV): EV– PV; +ve is behind schedule, +ve is ahead

• Cost Performance Index (CPI): EV/ ACCost Performance Index (CPI): EV/ AC

- I am only getting x¢ out of every $

• Schedule Performance Index (SPI): EV/ PV

I am only progressing x % of the planned rate- I am only progressing x % of the planned rate

• Estimate at Completion (EAC): BAC / CPI

- As of now we expect the total project to cost x$

E ti t t C l t (ETC) EAC AC• Estimate to Complete (ETC): EAC – AC

- how much will it cost from now to completion

• Variance at Completion: BAC – EAC; when the project is over how much more or less did we spendmore or less did we spend

May 2011Slide 20

Earned Value AnalysisEarned Value AnalysisQuestion

Completion Budget

Work Performed

Actual Cost

Today is June 30th. —Data DateWork Unit

Completion Date

(in $M) PV

Performed (in $M)

EV

Cost (in $M)

AC

A Jan. 31 10 10 12B F b 8

Date1. What is the Cost Variance2. What is the Schedule VarianceB Feb. 28 5 4 5

C Mar. 31 6 8 8D 12-May 15 13 12E 30 Jun 20 20 30

Variance3. What is the CPI4. What is the SPI5. What is the EACE 30-Jun 20 20 30

F 18-Jul 3 0 0G Aug. 30 35 0 0H Sept 22 22 0 0

56. What is the ETC7. What is the Percent Complete

H Sept. 22 22 0 0I Oct. 29 12 0 0J Nov. 30 9 0 0

8. What is the Percent Spent

May 2011Slide 21

Earned Value AnalysisEarned Value AnalysisQuestion

Completion Budget

Work Performed

Actual What is the CV ? $55 - $67 = $12 (EV AC)Work Unit

Completion Date

(in $M) PV

Performed (in $M)

EV

Cost (in $M) AC

A Jan. 31 10 10 12B F b 8

-$12 (EV-AC)2. What is the SV ? $55 - $56 = -$1 (EV-PV)3. What is the CPI? 55/67 =

B Feb. 28 5 4 5C Mar. 31 6 8 8D 12-May 15 13 12E 30 Jun 20 20 30

.82 (EV/AC)4. What is the SPI? 55/56 = .98 (EV-PV)5 What is the EAC? 137/ 82 = E 30-Jun 20 20 30

F 18-Jul 3 0 0G Aug. 30 35 0 0H Sept 22 22 0 0

5. What is the EAC? 137/. 82 = $167 (BAC/CPI)6. What is the ETC? $167 - $67 = $100 (EAC-AC)

h hH Sept. 22 22 0 0I Oct. 29 12 0 0J Nov. 30 9 0 0

7. What is the Percent Complete? 55/137 = 40% (EV/BAC)8. What is the Percent Spent?

May 2011Slide 22

8. What is the Percent Spent? 67/137 = 49% (AC/BAC)

Pop QuizPop QuizQuestion 1

You are asked to prepare an estimate for a project business You are asked to prepare an estimate for a project business case to install a new group of servers at a new satellite office. There is very little detail about this project. What will you use to compute your estimate?p y

A. The price the client is willing to pay

B. A sophisticated modeling technique

C. The estimate provided by the project sponsor

D. The actual cost of a similar project

May 2011Slide 23

Pop QuizPop QuizQuestion 2

A discretionary fund used by the project manager to cover the A discretionary fund used by the project manager to cover the cost of possible adverse events during the project is known as which of the following?

A Management reserveA. Management reserve

B. Chart of accounts

C. Contingency fundg y

D. Cost baseline

May 2011Slide 24

Pop QuizPop QuizQuestion 3

You are developing a bottom - up estimate for the first phase of your You are developing a bottom up estimate for the first phase of your project. Which of the following is the most important input to complete this task?

A Historic data from a similar projectA. Historic data from a similar project

B. Schedule

C. The WBS

D. The scope statement

May 2011Slide 25

Pop QuizPop QuizQuestion 4

What is the most accurate estimate?What is the most accurate estimate?

A. Analogous estimate

B. Bottom - up estimate

C. Estimates based on expert judgment

D. Parametric estimate

May 2011Slide 26

Pop QuizPop QuizQuestion 5

You are the project manager for a large IT project. At the time You are the project manager for a large IT project. At the time you performed your cost estimates, the vendor you ’ re working with provided you with the following estimates:

Programming estimate = 320 hours at $135/hour Programming estimate = 320 hours at $135/hour.

Project management estimate = 320 hours at $155/hour.

Testing estimate = 150 hours at $85/hour. g /

What type of estimate are these?

A. Analogous

B. Bottom-up

C. Cost benefit

D ParametricD. Parametric

May 2011Slide 27

Thank You!Thank You!