Project Cost Management

  • Ensure that the project is completed within budget Concerned with cost of resources needed to complete activities; consider effect of project decisions on cost of using product “life-cycle costing”
  • Most prospective financial impact of using the product is outside the project scope
  • Consider information needs of stakeholders, controllable and uncontrollable costs (budget separately for reward and recognition systems)
  • Estimating should be based on WBS to improve accuracy
  • Estimating should be done by the person performing the work
  • Having historical records is key to improving estimates
  • Costs (schedule, scope, resources) should be managed to estimates
  • A cost (schedule, scope, baseline) should be kept and not changed
  • Plans should be revised as necessary during completion of work
  • Corrective action should be taken when cost problems (schedule, scope and resources) occur.
Resource Planning:
Determining what physical resources and quantities are needed to perform work
Inputs to Resource Planning:
  • Work Breakdown Structure
  • Historical Information
  • Scope Statement – justification & objectives
  • Resource Pool Description – what resources are potentially available for resource planning
  • Organizational Policies – staffing, procurement
  • Work Breakdown Structure
  • Network Diagram
  • Schedule
  • Risks
  • Historical Information
  • Scope Statement – justification & objectives
  • Resource Pool Description – what resources are potentially available for resource planning
  • Organizational Policies – staffing, procurement
Resource Planning Tools & Techniques
  • Expert Judgment
  • Alternatives Identification
Resource Planning Outputs:
Resource Requirements – what type & how many resources are needed for each activity in the Work Breakdown Structure

Cost Estimating:
  • Develop approximate costs of resources
  • Distinguish estimating from pricing
  • Estimating – likely amount
  • Pricing – business decision
  • Identify alternatives and consider realigning costs in phases to their expected savings
Cost Estimating Inputs:
  • Work Breakdown Structure
  • Resource Requirements
  • Resource Rates (if known)
  • Activity Duration Estimates
  • Historical Information – (project files, commercial cost databases, team knowledge
  • Chart Of Accounts – coding structure for accounting; general ledger reporting
Cost Estimating Tools & Techniques
  • Analogous Estimating – “top down”; using actual costs from previous project as basis for estimate 
    • Reliable when previous projects are similar and individuals have expertise – form of expert judgment
  • Parametric Modeling – uses project characteristics in mathematical models to predict costs (e.g.building houses)
    • Reliable when historical information is accurate, parameters are quantifiable, and model is scalable
      • 2 types: Regression analysis, Learning Curve 
  • Bottom Up Estimating – rolling up individual activities into project total – smaller work activities have more accuracy - 
  • Computerized tools – spreadsheets, software 
  • Pro’s and Con’s
  • Analogous Estimating 
    • Quick  - Less Accurate
    • Tasks don’t need to be identified – Estimates prepared with little detail and understanding of project
    • Less costly – Requires considerable experience to do well
    • Gives PM idea of management expectations – Infighting at high levels of organization
    • Overall project costs are capped – Difficult for projects with uncertainty
  • Bottom Up Estimating
    • More Accurate – Takes time and expense
    • Gains buy-in from the team – Tendency for team to pad estimates
    • Based on detailed analysis of project – Requires that project be defined and understood
    • Provides a basis for monitoring and control – Team infighting to get biggest piece of pie
Outputs from Cost Estimating
  • Cost estimates – quantitative assessments of likely costs of resources required to complete tasks
    • For all resources of the project (labor, materials, supplies, inflation allowance, reserve)
    • Expressed in units of currency
  • Supporting Detail
    • Description of scope (reference to the WBS)
    • Documentation how estimate was developed
    • Indication of range of possible results
    • Assumptions
  • Cost Management Plan – how cost variances will be managed
  • Cost Risk: associated to seller for Fixed Price; associated to buyer for Time and Materials budget
Cost Budgeting 
Involves allocation of total estimate to individual work to establish a cost baseline to measure performance

Cost Budgeting Inputs
  • Cost Estimate
  • Work Breakdown Structure
  • Project Schedule – includes planned start and finish dates for items costs are allocated to
    • Needed to assign costs during the time period when the actual cost will be incurred
Cost Budgeting Tools & Techniques
 same as Cost Estimating Tools and Techniques

Outputs from Cost Budgeting
  • Cost Baseline – time phased budget to measure and monitor cost performance
    • Developed by summing estimated costs by period (S curve of values vs. time)
    • Larger projects have multiple baselines to measure different aspects of cost performance
Cost Control
  • Concerned with influencing factors that create changes to the cost baseline that are beneficial
  • Determining that the cost baseline has changed
  • Managing actual changes as they occur
    • Monitor cost performance to detect variances
    • Record all appropriate changes accurately in the cost baseline
    • Preventing incorrect, unauthorized changes being included in the cost baseline
    • Informing stakeholders of authorized changes 
      • Determine the “why’s” of positive and negative variances
      • Integrated will all other control processes (scope, change, schedule, quality)
Inputs to Cost Control
  • Cost Baseline
  • Performance Reports – meet, exceed budget
    • 50/50 Rule – task is considered 50% complete when it begins and gets credit for remainder 50% only when completed
    • 20/80 Rule - task is considered 20% complete when it begins and gets credit for remainder 80% only when completed
    • 0/100 Rule – task only credited when fully completed
  • Change Requests
  • Cost Management Plan
Tools & Techniques of Cost Control
  • Cost Change Control System – defines the procedures by which the cost baseline may be changed
  • Performance Measurement – assess magnitude of cost variations (Earned Value Analysis) and what is causing the variance
  • Additional Planning – examine alternatives
  • Computerized Tools – forecast planned costs, track actual costs, forecast effect of cost changes
Cost Control Outputs
  • Revised Cost Estimate
    • Modifications to cost information; require stakeholder approval and adjustments to other project areas
  • Budget Updates – changes to approved cost baseline; revised in response to scope changes
  • Corrective Action
  • Estimate at completion – (EAC) – forecast of total expenditures
    • Actual to date plus remaining budget modified by a factor (cost performance index)
      • Current variances are seen to apply to future variances
    • Actual to date plus new estimate for remaining work
      • Original estimates are flawed, or no longer relevant
    • Actual to date plus remaining budget
      • Current variances are typical and similar variances will not occur in the future
  • Lessons Learned
Earned Value Analysis
  • Integrates cost, schedule and scope
  • Better that comparing projected vs. actual because time and cost are analyzed separately
  • Terms:
    • BCWS – Budgeted Cost of Work Scheduled (how much work should be done)
    • BCWP – Budgeted Cost of Work Performed a.k.a. Earned Value (how much work is budgeted, how much did we budget)
    • ACWP – Actual Cost of Work Performed (how much did the completed work cost)
Earned Value Analysis
  • Terms:
    • 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)
    • 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)
  • Formulas
    • Variance (Plan – Actual)
    • Cost Variance (CV): BCWP – ACWP; negative is over budget
    • Schedule Variance (SV): BCWP – BCWS; negative is behind schedule
    • Cost Performance Index (CPI): BCWP / ACWP
      • I am only getting x¢ out of every $
    • Schedule Performance Index (SPI): BCWP / BCWS
      • 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$ 
    • Estimate to Complete (ETC): EAC – ACWP; 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 spend (most common way of calculating EVA)
    • BCWP comes first in most formulas
    • If it is a variance, BCWP comes first
    • If it is an index, BCWP is divided by
    • If the formula relates to cost, use AWCP
    • If the formula related to schedule, use BWCP
    • Negative is bad; positive results are good
    • ETC refers to “this point on”; EAC refers to when job is completed
Accuracy of Estimates
  • Order of Magnitude Estimate: -25% - 75%; usually made during Initiation Phase
  • Budget Estimate: -10% - 25%; usually made during the Planning phase
  • Definitive Estimate: -5% - 10%; usually made during the Planning phase
Accounting Standards
  • Not usually part of the exam
  • Present Value (value today of future cash flows):
  • PV = FV/[ (1 + r) N]
    • FV = Future Value
    • R = Interest Rate
    • N = Number of time periods
  • Net Present Value: total benefits (income or revenue) less the costs. NPV is the sum of each present value of each income/revenue item  
  • Internal Rate of Return (IRR): company may select project based on highest IRR
  • Payback Period: number of time periods it takes to recover the investment in the project before generating revenues
  • Benefit Cost Ratio (BCR): compares costs to the benefits of different projects
    • Greater than 1 means benefits are greater than costs
    • Less than 1 means costs are greater than benefits
  • Opportunity Cost: opportunity given up by selecting one project over another
  • Sunk Costs: expended costs. Sunk costs should not be considered when determining to continue with a troubled project
  • Law of Diminishing Returns: the more that is put in the less of an outcome is received
  • Working Capital: current assets – current liabilities
  • Variable Cost: costs that change with the amount of production or the amount of work (materials, wages)
  • Fixed Cost: non-recurring costs that do not change
  • Direct Cost: directly attributable to project work (travel, wages, materials)
  • Indirect Cost: overhead items or costs for the benefit of more than one project (taxes, fringe benefits)
  • Depreciation: assets lose value over time
    • Straight Line depreciation: same amount is taken each year
    • Accelerated Depreciation: 2 forms
      • Double Declining Balance
      • Sum of the Years Digits
  • Life Cycle Costing: includes operations and maintenance phases
  • Value Analysis: find a less costly way to do same work
  • Make or Buy decisions –at Development (Planning) phase, not conceptual phase
  • Project Objectives – are not necessarily needed to fund project
  • Project Definition – focus on end product initially; costs and benefits will be evaluated later
  • 25% of project lifecycle expended at end of planning
  • No guarantees; only most likely results
  • Line of Balance charts are used for manufacturing
  • Negative Float – the late start date is earlier than the early start date
  • Value Engineering/analysis – does not trade performance for cost
  • Prospectus – profitability and technical feasibility used to solicit funding
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