Project Cost Management Chapter 7

Project Cost Management

Chapter 7

Organized By Khalid Aljehani & Riyad Bakedo.Under the supervision of Dr. Naill Al MomaniKAU, EMBA Program PMP Course.Fall 2010

30 Apr 2010Khalid & Riyad, KAU, EMBA, PMP Course 2

Introduction:

• Project Cost Management is the knowledge use for managing costs. Processes in this area help to ensure a project is completed within the approved budget

• It includes the processes involving in estimating, budgeting and controlling costs.

• These processes interact with each other and with processes in the other knowledge areas as well


Project Cost Management Overview :

Control Costs

Determine Budget

Estimate Costs


Definitions:

1. Estimate Costs-The process of developing an approximation of the monetary resources needed to complete project activates.

2. Determining Budget-The process of aggregating the estimated costs of individual activates or work packages to establish an authorized cost baseline.

3. Control Costs: The process on monitoring the status of the project to update the project budget and managing changes to the cost baseline.

Each process has specified: 1) Inputs, 2) Tools / Techniques3) Outputs


Inputs• Scope baseline.• Project schedule.• Human Resource plan.• Risk register.• Enterprise environmental

factors.• Organizational process

assets.

Tools & Techniques• Expert judgment.• Analogous estimating.• Parametric estimating.• Bottom-Up estimating.• Three –point estimates.• Reserve analysis.• Cost of quality.• Project management

estimating software.• Vendor bid analysis.

Out puts• Activity cost estimates.• Basis of estimates.• Project document

updates.

Estimate Cost:7.1 Estimate Cost 7.2 Determine Budget 7.3 Control Cost


Scope baselineThe scope baseline is the approved project scope statement, WBS, and WBS dictionary. These collectively provide the deliverables, statements of work, constraints, and assumptions that are necessary for accurate cost estimating. Project scheduleThe project schedule specifies the planned start and finish date for each scheduled activity. Human resource planThe human resource plan contains details regarding the how the project will be staffed and the labor rates for estimating costs

Inputs

Estimate Cost:


Enterprise environmental factorsFactors beyond the project’s boundaries impact costs, including marketplace conditions and the pool of available suppliers. Organizational process assetsLessons learned, project files, and historical information from the organization are crucial for good estimates.

Estimate Cost:Inputs


Expert judgment, relies on historical experience to assess and adjust estimates. Analogous estimating uses the costs from similar projects or activities as the basis for the current project. Parametric estimating uses mathematical formulas to derive estimates.

Bottom-up estimating decomposes activities to the lowest level possible for cost estimating purposes, and then aggregates component costs back up to a summary activity level

Tools & Techniques

Estimate Cost:


Three-point estimates (PERT analysis), help to remove the uncertainty from estimates by providing a weighted average using the pessimistic, optimistic, and most-likely values. The Formula:

(Optimistic Estimate + (4 x Most-Likely Estimate ) +

Pessimistic Estimate)6

Example: Optimistic Most Likely Pessimistic$75 $100 $150

Three-point estimate = ($75 + (4 x $100) + $150) / 6Three-point estimate = $104.17

Estimate Cost:Tools & Techniques


Activity cost estimates , are a complete accounting of all component costs, such as labor, resources, services, fees, licenses, of a scheduled activity. Basis of estimates, is the supporting detail to the activity cost estimates including the references for cost estimate, considered assumptions, constraints, range of accuracy, and the confidence level in the estimate. Project document updates, the process of estimating costs can result in updates to several project documents, including the WBS, and the WBS dictionary.

Estimate Cost:Outputs


Estimate Cost Data Flow Diagram:


Inputs• Activity cost estimates.• Basis of estimates.• Scope baseline.• Project schedule.• Resource calendars.• Contracts.• Organizational process assets.

Tools & Techniques• Cost aggregation.• Reserve analysis.• Expert judgment.• Historical relationships.• Funding limit reconciliation.

Out puts• Cost performance baseline.

• Project funding requirements.

• Project document updates.

Determine Budget:7.1 Estimate Cost 7.2 Determine Budget 7.3 Control Cost


Cost aggregation, Individual costs are aggregated in many different ways for budgeting purposes, including at the work package, deliverable, summary activity, or other classification levels. Reserve analysis , are time or cost buffers in the project schedule or budget that help the project respond to uncertainties Expert judgment, is based upon the experience and knowledge of subject matter experts.

Tools & Techniques

Determine Budget:


Historical relationships, refers to the characteristics of the current and past projects that can be used to develop models that aid in budgeting. Funding limit reconciliation, matches the project's planned need for funding with the organization's ability to provide that funding

Tools & Techniques

Determine Budget:


Cost performance baseline is a time-phased budget that is used for project cost management, monitoring, and reporting. It is commonly shown as an S-curve graph. Project funding requirements, refers to the entire estimated cost of the budget, including any contingency or management reserves.

Outputs

Determine Budget:


Cost performance baseline

Determine Budget:




Inputs• Project management plan.

• Project funding requirements.

• Work performance information.

• Organizational process assets.

Tools & Techniques• Earned value management.

• Forecasting.• To – complete performance index.

• Performance reviews.• Variance analysis.• Project management software.

Out puts• Work performance measurement.

• Budget forecasts.• Organizational process assets update change requests.

• Project management plan updates project document updates.

Control Costs:7.1 Estimate Cost 7.2 Determine Budget 7.3 Control Cost


Project management plan , includes the cost management plan which describes how project costs will be managed, reported on, and controlled. The cost performance baseline is also part of the project management plan, and it’s used to compare actual costs to planned costs. Project funding requirements, refers to the entire estimated cost of the budget, including any contingency or management reserves. It’s used to compare actual costs to planned costs.

Inputs

Control Costs:


Work performance information , is any data that related to the work which produces the project deliverables. Examples are schedule and progress status information, budget and cost status, quality status, estimates to complete, resource utilization information, and lessons learned. Organizational process assets , are the source of existing policies, processes, organizational data and knowledge. The organization may have cost-related policies, procedures, and reporting methods that must be followed. .

Inputs

Control Costs:


Earned value management, measures the performance of the project. It also provides a way to forecast future performance based on what's happened so far with the project. Forecasting, involves predicting future performance based on historical work performance information and expert judgment. To-complete performance index (TCPI), is a formula that provides the level of performance that must be achieved to meet either the budget at completion (BAC) or the estimate at completion (EAC).

Tools & Techniques

Control Costs:


Performance reviews, are assessments that analyze the project’s historical cost performance. It includes earned value measurements, variance analysis, and trend analysis. Variance analysis, compares expected cost performance to what is actually occurring, and determines the causes of any variance uncovered.

Project management software, automated tools can help in monitoring, tracking, and reporting on earned value measurements.

Tools & Techniques

Control Costs:


Work performance measurements includes work performance information that specifically provides mathematical measurements of performance that is communicated to stakeholders. It may also report on earned value values for WBS components or control accounts within the WBS. Budget forecasts on the project’s expected completion cost and variances is documented and provided to stakeholders throughout the project.

Outputs

Control Costs:


Organizational process assets updates for the lessons learned, corrective actions taken and the reasons, and the causes of financial variances. Change requests to the cost baseline as required

Outputs

Control Costs:




Control Costs Formulas: Acronym Name Formula

AC Actual CostAC = actual cost of the

project up to the measurement period

BAC Budget at Completion BAC = total budgeted cost of the project

EV Earned Value EV = Actual % complete x BAC

PV Planned Value PV = Planned % complete x BAC

CV Cost Variance CV = EV - AC


Control Costs Formulas: Acronym Name Formula

SV Schedule Variance SV = EV - PV

CPI Cost Performance Index CPI = EV / AC

SPI Schedule Performance Index SPI = EV / PV

EAC Estimate at Completion EAC = BAC / CPI

ETC Estimate to Complete ETC = EAC - AC

VAR Variance at Completion VAR = BAC - EAC


Control Costs Formulas: Example:

•4-month project: Total budget $1,000,000 = Budget at completion (BAC) •Project cost at end of month three: $950,000 = Actual cost (AC) •Estimated work complete at end of month three: 80% •Actual work complete at end month three: 75%

4-month project (BAC) =1,000,000

M 1 M 2 M 3 M 4

Planned work complete = 80%Actual work complete = 75%


Control Costs Formulas: Planned value

PV = Planned % Complete x BAC PV = 80% x $1,000,000 = $800,000

Earned value

EV = Actual % Complete x BACEV = 75% x $1000,000 = $750,500

Cost variance

CV = EV – ACCV = $750,000 - $950,000 = -$200,000

Planned Value (PV) is how much work was

expected to be completed

Earned Value (EV) is how much work has

actually been completed

Cost Variance (CV) is how the cost of the

project is comparing to the value of work

completed


Control Costs Formulas: Cost performance index

CPI = EV / AC CPI = $750,500 / $950,000 = 0.79

For every $1 input (cost) , we are earning only $0.8 in work output

Cost Performance Index (CPI) shows how

much work is being completed for every unit

of cost spent (Output/Input)


Control Costs Formulas:

Schedule performance index

SPI = EV / PVSPI = $750,500 / $800,000 = 0.94

For every hour we planned , we are completing only 0.94 hours.

Schedule Performance Index

(SPI) shows how close the actual completed work compared to the

schedule


Control Costs Formulas: Estimate at completion

EAC = BAC / CPIEAC = $1000,000 / 0.94 = $1,063,829 Based on current performance, the project will be completed at cost = $1,063,829.

Estimate to complete

ETC = EAC - ACETC = $1,063,829 - 950,000 = $113,829

Based on current performance, the project requires $113,829 to get it finished

Estimate At Completion (EAC)

forecasts the total cost of the project based on

current project performance

Estimate To Complete (ETC) forecasts how

much more money will be required to finish the

project


Control Costs Formulas: Variance at completion

VAR = BAC – EACVAR = $1,000,000 - $1,063,829 = -$63,829 Based on current performance, the project will run about $63,829 over budget

Variance At Completion (VAR) predicts difference

between the budgeted and actual project cost

at the end of the project


Thank You

Thank You

PMP Preparation Questions

Organized By Khalid & Riyad.Under the supervision of Dr. Naill Al MomaniKAU, EMBA Program PMP Course.Fall 2010


WBS Element PV EV ACP $1,000 $1,100 $1,150Q $2,000 $1,800 $2,100R $1,000 $1,200 $1,050S $2,000 $1,900 $1,800

1. Using the table above, the cost performance index (CPI) for WBS Element R is:

a. 0.875b. 1.14c. 0.952d. 0.833

1. b

CPI = EV / ACCPI = 1200 / 1050CPI = 1.14

Q&A:



2. Using the table above, which WBS element is over budget and behind schedule? (important) a. Element Pb. Element Qc. Element Rd. Element S

2. b

CV = EV – AC = 1800 – 2100 = -300 (over budget)SV = EV – PV = 1800 – 2000 = -200 (behind schedule)

Q&A:



3. Using the table above, which WBS element has a favorable cost variance of $150? a. Element Pb. Element Qc. Element Rd. Element S

3. c

CV = EV – AC = 1200 – 1050 = 150 favorable variance

Q&A:


4. The work breakdown structure, the work packages, and the company’s accounting system are tied together through the: a. Chart of accountsb. Overhead ratesc. Budgeting systemd. Capital budgeting process

4. a

Q&A:


5. Management reserves are normally defined as a percentage of the total budget. As a project goes through its life cycle phases, the project manager wants the dollar value of the management reserve to ___________, whereas the customer wants the dollar value of the management reserve to ___________. a. Increase, increaseb. Increase, decreasec. Decrease, increased. Remain the same, be returned to the customer

5. d

Q&A:


6. Which of the following types of cost are not relevant to making project financial decisions: a. Sunk costb. Opportunity costc. Material costd. Labor cost

6. a

Q&A:


7. Upon completion of 75% of the project, the original schedule and cost estimate that were submitted at the inception of the project are referred to as the: a. Baselineb. Budgeted costsc. Estimates upon completion costsd. Scheduled costs

7. a

Q&A:


8. Which of the following would increase the accuracy of estimating the project cost? a. Pricing out the work at higher levels in the work breakdown structureb. Using historical data from a non similar projectc. Talking to people who have worked on similar projectsd. Intuition

8. c

Q&A:


9. Using the table Above, the labor rate cost variance is:

9. d

Labor Rate Cost Variance = Planned Cost (BAC) – Actual Cost (AC)Labor Rate Cost Variance = 10.50 – 10.72 Labor Rate Cost Variance = -0.22

Q&A:Direct Labor Direct Material

Planned price/unit $10.50 $14.77Actual units/hour 6374 hours 5433 unitsActual cost $68,329 $83,994Actual price/unit $10.72 $15.46

a. $66,927.00b. $68,329.00c. $386.00d. ($0.22)


10. What tool have project managers come to use to identify the costs associated with a project? a. A bill of materialsb. A Gantt chartc. An arrow diagram networkd. A work breakdown structure

10. d

Q&A:


11. Cost estimating:

A. Involves developing an estimate of the costs of the resources needed to complete project activities. B. Includes identifying and considering various costing alternatives.C. Involves allocating the overall estimates to individual work items. (cost budgeting) D. A and CE. A and B

11. e

Q&A:


12) Which type of project cost estimate is the most accurate?

A) Preliminary B) Definitive C) Order of magnitude D) Conceptual

12. B

Q&A:


13) )Cost budgeting can be best described by which of the following?

A) The process of developing the future trends along with the assessment of probabilities, uncertainties, and inflation that could occur during the project

B) The process of assembling and predicting costs of a project over its life cycle C) The process of establishing budgets, standards, and a monitoring system by which the investment cost of the project can be measured and managed

D) The process of gathering, accumulating, analyzing, reporting, and managing the costs on an on-going basis

13. C

Q&A:


14) ) Cost controls can be best described by which of the following?

A) The process of developing the future trends along with the assessment of probabilities, uncertainties, and inflation that could occur during the project

B) The process of assembling and predicting costs of a project over its life cycle

C) The process of assembling and predicting costs of a project over its life cycle

D) The process of gathering, accumulating, analyzing, reporting, and managing the costs on an on-going basis.

14. D

Q&A:


15) ) Three Point Statistical Estimating Formula Group. Expected Value = A) (Optimistic + (4 X Most Likely) + Pessimistic ) x 6

B) (Optimistic + (4 X Most Likely) + Pessimistic ) divided by 6

C) (Optimistic + (4 X Most Likely) x Pessimistic ) divided by 6

D) Optimistic + (4 + Most Likely) + Pessimistic ) divided by 6

15. B

Q&A:


16) ) Which is not a technique used for cost estimation :

A) Analogous Estimating B) Bottom-up Estimating C) C) Parametric Estimating D) Vendor Bid Analysis E) Resource Leveling

16. E

Q&A:

Project Cost Management Chapter 7

Documents

khalid riyad

project budget

emba program pmp course

project files

current project

cost estimating purposes

accurate cost estimating

khalid aljehani riyad