Project-Cost-Management.ppt

Project Cost ManagementProject Cost Management

PMBOK Chapter 7PMBOK Chapter 7

PROCESS GROUPSPROCESS GROUPS

Cost Estimating

Cost Budgeting

Cost Control

I

Planning

E

Controlling

C

Cost EstimatingCost Estimating

Cost estimating and Pricing:Cost estimating and Pricing: Cost estimating: how much will it cost the performing Cost estimating: how much will it cost the performing

organization to provide the product or service organization to provide the product or service involved?involved?

Pricing: how much will the performing organization Pricing: how much will the performing organization charge for the product or service? charge for the product or service? Business decisionBusiness decision..

Estimating should be done by the person doing Estimating should be done by the person doing the work.the work.

Cost EstimatingCost Estimating

Based on the WBS to increase the accuracy.Based on the WBS to increase the accuracy. Project managers should analyze the needs of Project managers should analyze the needs of

the project, to compare and reconcile any the project, to compare and reconcile any differences with cost requirements from differences with cost requirements from management.management.

1. WBS2. Resource

requirements3. Resource rates.4. Act. duration est.5. Historical info.6. Chart of accounts7. Risks

1. Analogous est.2. Parametric

modeling3. Bottom-up est.

1. Cost estimates2. Cost

management plan

Inputs Tools Outputs

Cost EstimatingCost Estimating Cost estimates for all resources that will be Cost estimates for all resources that will be

charged to the project.charged to the project. Generally expressed in units of currency to facilitate Generally expressed in units of currency to facilitate

comparisons both within and across projects.comparisons both within and across projects. Generally includes appropriate risk response planning.Generally includes appropriate risk response planning.

Supporting detail must include:Supporting detail must include: Reference to WBS.Reference to WBS. How it was developed?How it was developed? Assumptions made.Assumptions made. Range of possible results.Range of possible results.

Cost management plan how cost variances will Cost management plan how cost variances will be managed.be managed.

Cost BudgetingCost Budgeting

Allocate the overall cost estimates to individual Allocate the overall cost estimates to individual activities or work packages to establish a cost activities or work packages to establish a cost baseline for measuring project performance.baseline for measuring project performance.

1. Cost estimates2. WBS3. Project schedule4. Cost

management plan

1. Cost budgeting tools and techniques

1. Cost baseline

Inputs Tools Outputs

Cost BudgetingCost Budgeting

The cost baseline will be used to measure and The cost baseline will be used to measure and monitor cost performance of the project.monitor cost performance of the project.

Expected Cash Flow

Cost Baseline

Cumulative Values

Time

Estimates vs. AccuracyEstimates vs. Accuracy

Most difficult to estimate as very Most difficult to estimate as very little project info is availablelittle project info is available

EstimateEstimate AccuracyAccuracy

Order of Order of Magnitude Magnitude (Early)(Early)

-25%-25%

+75%+75%

Budget Budget EstimateEstimate

-10%-10%

+25+25

Definitive Definitive EstimateEstimate

-5%-5%

10%10%

Used to finalize the Request for Used to finalize the Request for Authorization (RFA), and establish Authorization (RFA), and establish commitmentcommitment

Development stage estimate. Development stage estimate. Needed to predict revised project Needed to predict revised project completion datecompletion date

Tools for Estimating (and Tools for Estimating (and Budgeting)Budgeting)

Top Down Top Down EstimatingEstimating

Accuracy depends on experienceAccuracy depends on experienceFast, but estimates are roughFast, but estimates are rough

Bottom Up Bottom Up EstimatingEstimating

Slow, but reliableSlow, but reliableHigh cost (time) / WBS neededHigh cost (time) / WBS neededBuy-in from the teamBuy-in from the team

Parametric Parametric ModelingModeling

Mathematical models to predict costsMathematical models to predict costsTwo types: REGRESSION ANALYSIS, Two types: REGRESSION ANALYSIS,

and LEARNING CURVEand LEARNING CURVE

Delphi Delphi Method Method (analogous)(analogous)

Expert judgmentExpert judgmentTasks need not to be identifiedTasks need not to be identifiedConsiderable experience neededConsiderable experience needed

Cost ControlCost Control

Monitor Cost PerformanceMonitor Cost Performance Detect and understand variances from Detect and understand variances from

plan plan Ensure all changes are recorded and Ensure all changes are recorded and

agreed uponagreed upon Prevent bogus changes from being Prevent bogus changes from being

included in cost baselineincluded in cost baseline Inform stakeholders of authorized changesInform stakeholders of authorized changes Bring costs within acceptable limitsBring costs within acceptable limits

Cost Control Cost Control

Understand what is driving variances, good and Understand what is driving variances, good and bad, and decide what action to take.bad, and decide what action to take.

1. Cost Baseline2. Performance

Reports3. Change Requests4. Cost

Management Plan

1. Cost Change Control System

2. Performance Measurement

3. Earned Value Management

4. Additional Planning

5. Computerized Tools

1. Revised Cost Estimates

2. Budget Updates3. Corrective Action4. Estimate at

Completion5. Project Closeout6. Lessons learned

Inputs Tools Outputs

Cost ControlCost Control

Work completion methods:Work completion methods:• 0/100 0/100 Conservative approach. No work, no Conservative approach. No work, no

money.money.• 20/80 20/80 20% at start of the project, the rest when 20% at start of the project, the rest when

it is completed.it is completed.• 50/50 50/50 Liberal approach. Liberal approach.

Cost Control: Earned Value Cost Control: Earned Value ManagementManagement

Earned Value:

Integrates cost, time and scope. Used to forecast future performance and project completion dates

Key concepts:Key concepts:EV = Earned Value (BCWP)EV = Earned Value (BCWP)

Estimated value of the work actually accomplishedEstimated value of the work actually accomplished

PV = Planned Value (BCWS)PV = Planned Value (BCWS)Estimated value of the work planned to be doneEstimated value of the work planned to be done

AC = Actual Cost (ACWP)AC = Actual Cost (ACWP)Actual cost incurred for the work accomplishedActual cost incurred for the work accomplished

Earned Value ManagementEarned Value Management

BAC = Budget At Completion BAC = Budget At Completion Estimated total cost of the project when doneEstimated total cost of the project when done

EAC = Estimate At Completion EAC = Estimate At Completion Forecast of most likely total project cost based on Forecast of most likely total project cost based on

projectproject performance and risk quantificationperformance and risk quantification

CPI = Cost Performance Index CPI = Cost Performance Index Ratio of budgeted costs to actual costRatio of budgeted costs to actual cost

SPI = Scheduled Performance Index SPI = Scheduled Performance Index Estimated total cost of the project when doneEstimated total cost of the project when done

Earned Value Management Earned Value Management Key Formulas:Key Formulas:

CV = Cost Variance = EV- ACCV = Cost Variance = EV- ACNegativeNegative is over budget, Positive is under budget is over budget, Positive is under budget

SV = Schedule Variance = EV- PVSV = Schedule Variance = EV- PVNegativeNegative is behind schedule, Positive is ahead schedule is behind schedule, Positive is ahead schedule

CPI = Cost Performance Index = EV / ACCPI = Cost Performance Index = EV / AC SPI = Schedule Performance Index = EV / PVSPI = Schedule Performance Index = EV / PV EAC = Estimate At Completion =EAC = Estimate At Completion =

BAC / CPI BAC / CPI Most often used formula Most often used formula AC + ETCAC + ETC AC + BAC - EVAC + BAC - EV AC + (BAC - EV) / CPIAC + (BAC - EV) / CPI

EAC = Estimate At Completion = EAC - ACEAC = Estimate At Completion = EAC - AC VAC = Variance At Completion = BAC - EACVAC = Variance At Completion = BAC - EAC

Cost Types Cost Types

Direct Costs Direct Costs

Related “Directly” to the projectRelated “Directly” to the project

ex. Labor hours, material, equipment, ex. Labor hours, material, equipment, food, travel. . .food, travel. . .

Indirect Costs Indirect Costs

Overhead used for more than one projectOverhead used for more than one project

ex. Building rent, taxes, janitorial ex. Building rent, taxes, janitorial servicesservices

Cost TypesCost Types

A cost by any other name, really isn’t the same!A cost by any other name, really isn’t the same!• Variable Cost – Changes with volume Variable Cost – Changes with volume • Fixed Cost – Stay the same, regardless of volumeFixed Cost – Stay the same, regardless of volume

COSTCOST

Volume Volume

TC = VC+FC

VC

FC

Cost Types Cost Types

Project Costs Project Costs Are incurred while the project is being Are incurred while the project is being

fulfilled.fulfilled.

Life Cycle CostsLife Cycle CostsIncludes the costs after project completion.Includes the costs after project completion.

There may be temptation to lower project costs at There may be temptation to lower project costs at the expense of long term costs. Life Cycle the expense of long term costs. Life Cycle Costing gives the PM a way to consider costs Costing gives the PM a way to consider costs outside of the scope of project fulfillmentoutside of the scope of project fulfillment