Project Cost Management

Lecture 4

This is the instructor’s notes and student has to read the textbook for complete material.

Project Cost Management Slide 1

 Outline

1. Plan Cost Management

2. Estimate Costs Planning

3. Determine Budget
4. Control Costs Monitoring & Control

Project Cost Management Slide 2

Project Cost Management Processes

Project Cost Management Slide 3

Project Cost Management Processes (Cont.)

Project Cost Management Slide 4

 1. Plan Cost Management Process

 Plan cost management is the process of defining how the project

costs will be estimated, budgeted, managed, monitored, and
controlled.

 The key benefit of this process is to provide guidance and

direction on how the project costs will be managed throughout
the project.

Project Cost Management Slide 5

Plan Cost Management Process (Cont.)

Project Cost Management Slide 6

 Plan Cost Management Process (Cont.)
Inputs:
1. Project charter
 The project charter defines the project approval requirements, provides the pre approved financial
resources that will influence the management of the project costs.
2. Project management plan
 Schedule management plan: establishes the criteria and the activities for developing, monitoring,
and controlling the schedule. The schedule management plan provides processes and controls that will
impact cost estimation and management
 Risk management plan: provides the approach for identifying, analyzing, and monitoring risks. The
risk management plan provides processes and controls that will impact cost estimation and
management.
3. Enterprise environmental factors
 Organizational culture and structure, market conditions, currency exchange rates, etc.
4. Organizational process assets
 Existing formal and informal cost estimating and budgeting related policies, procedures, and guidelines
 Historical information and lessons learned repositories, etc.
Project Cost Management Slide 7
 Plan Cost Management Process (Cont.)
Tools & Techniques:
1. Expert Judgment
Expertise should be considered from individuals or groups with specialized knowledge or training in the following:
 Previous similar projects
 Information in the industry, discipline, and application area
 Cost estimating and budgeting
 Earned value mangement

2. Data analysis
 Alternative Analysis: can include reviewing strategic funding options such as: self funding, funding with equity,
or funding with debt. It can also include consideration of ways to acquire project resources such as making,
purchasing, renting, or leasing.

3. Meetings
 Project teams may hold planning meetings to develop the Cost management plan. Attendees may include the
project manager, the project sponsor, selected project team members, selected stakeholders , anyone with
responsibility for project cost.

Project Cost Management Slide 8

 Plan Cost Management Process (Cont.)
Outputs:
1. Cost management plan (*NOT the Cost estimates*)
 It’s a component of the project management plan.
 Describes how the project costs will be planned, structured,
and controlled.
 It can establish the following:
 Units of measure (such as staff hours, staff days, or weeks for
time measures; meters, liters, tons, kilometers, or cubic yards for
quantity measures; or lump sum)
 Level of Precision (rounding up or down, ex: US$ 995.59 to US$
1,000
 Level of Accuracy: the acceptable range (e.g.,±5%)
 Control thresholds (agreed upon amount of variation to be
allowed before some action needs to be taken)
 Organizational procedures links.
 Rules of performance measurement
 Reporting formats

Project Cost Management Slide 9

 2. Estimate Costs

 Estimate costs is the process of developing an approximation of

the cost of resources needed to complete project work.

 The key benefit of this process is to determine the monetary

resources required for the project.

Project Cost Management Slide 10

Estimate Costs (Cont.)

Project Cost Management Slide 11

 Estimate Costs (Cont.)
Tools & Techniques:
1. Analogous Estimating
 Using historical data from a similar activity or project.
 Used when there is a limited amount of detailed information.
 Less costly and less time-consuming but less accurate

2. Parametric Estimating
 Uses a statistical relationship between relevant historical data and other variables

3. Three-Point Estimating
 The accuracy of single-point cost estimates may be improved by considering estimation uncertainty and
risk. Used when there is a limited amount of detailed information and insufficient historical data.
 M : Most Likely Cost
 O : Optimistic Cost
 P : Pessimistic Cost
 Triangular distribution: E = (M + O + P) / 3
 Beta distribution: E = (O + 4M + P) / 6
Project Cost Management Slide 12
 Estimate Costs (Cont.)
Tools & Techniques:
4. Bottom-up Estimating
 A method of estimating project cost by aggregating the estimates of the lower level components of the
WBS.
 When an activity’s cost cannot be estimated with a reasonable degree of confidence, the work within the
activity is decomposed into more detail. The detail costs are estimated. These estimates are then
aggregated into a total quantity for each of the activity’s costs.
 Most accurate technique

5. Data Analysis
 Alternatives analysis:
 Used to evaluate identified options in order to select which options or approaches to use to execute

and perform the work of the project.

 This allows the team to weigh resource, cost, and duration variables to determine an optimal

approach for accomplishing project work

 Example: evaluating the cost, schedule, resource, and quality impacts of buying versus making a

deliverable
Project Cost Management Slide 13
 Estimate Costs (Cont.)
Tools & Techniques (Cont.):
5. Data Analysis (Cont.)
 Reserve Analysis
 Cost estimates may include contingency reserves to account for cost uncertainty
 Contingency reserves budget is included within the cost baseline that is allocated for identified risks
 Contingency reserves are often viewed as the part of the budget intended to address the known unknowns that
can affect a project. For example, rework for some project deliverables could be anticipated, while the amount of
this rework is unknown.
 Cost of Quality
6. Project Management Information System (PMIS)
 Can include spreadsheets, simulation software, and statistical analysis tools to assist with cost estimating.
7. Decision Making
 The decision making techniques that can be used in the Estimate Costs process include voting
 Voting is an assessment process having multiple alternatives with an expected outcome in the form of
future actions. These techniques are useful for engaging team members to improve estimate accuracy and
commitment to the emerging estimates.

Project Cost Management Slide 14

 Estimate Costs (Cont.)
Outputs:
1. Costs Estimates
 Costs are estimated for all resources that are applied to the cost estimate includes:
 Direct Cost (labor, materials, equipment, and services)

 Inflation allowance, exchange rates

 Cost contingency reserve

 Indirect costs

2. Basis of Estimates
 Documentation of the basis of the estimate (i.e., how it was developed)
 Documentation of all assumptions made
 Documentation of any known constraints
 Documentation of identified risks included when estimating costs
 Indication of the range of possible estimates (e.g., US$ 10,000 ±10% to indicate that the item is
expected to cost between a range of values)

Project Cost Management Slide 15

 3. Determine Budget

 Determine budget is the process of aggregating the estimated

costs of individual activities or work packages to establish an
authorized cost baseline.

 The key benefit of this process is to determine the cost baseline

against which project performance can be monitored and
controlled.

Project Cost Management Slide 16

Determine Budget (Cont.)

Project Cost Management Slide 17

 Determine Budget (Cont.)
Tools & Techniques:
1. Cost Aggregation
 Cost estimates are aggregated by work packages in
accordance with the WBS.
 The work package cost estimates are then aggregated
for the higher component levels of the WBS (such as
control accounts) and, ultimately, for the entire project.

2. Data Analysis
 Reserve Analysis
 Contingency Reserve
 Management Reserve:
 Address the unknown unknowns that can affect a project.

 For unforeseen work that is within scope of the project

 Is not included in the cost baseline but is part of the overall project budget

 When an amount of management reserves is used to fund unforeseen work,

the amount of management reserve used is added to the cost baseline, thus
requiring an approved change to the cost baseline.
Project Cost Management Slide 18
 Determine Budget (Cont.)
Tools & Techniques (Cont.):
3. Funding Limit Reconciliation
 The expenditure of funds should be reconciled with any funding limits on the commitment of
funds for the project.
 A variance between the funding limits and the planned expenditures will sometimes necessitate
the rescheduling of work to level out the rate of expenditures.

4. Financing
 Financing entails acquiring funding for project
 It is common for long-term infrastructure and industrial to seek external sources of funds. If a
project is funded externally, the funding entity may have certain requirements that are required
to be met

Project Cost Management Slide 19

 Determine Budget (Cont.)
Outputs:
1. Costs Baseline
 Is the approved version of the time phased project budget.
 Excluding any management reserves.
 Can only be changed through formal change control procedures.
 It is used as a basis for comparison to actual results.

2. Project Funding Requirements

 Total funding requirements and periodic funding requirements
(e.g., quarterly, annually) are derived from the cost baseline.
 The cost baseline will include projected expenditures plus
anticipated liabilities.
 Funding often occurs in incremental amounts, and may not be
evenly distributed, which appear as steps.
 The total funds required are those included in the cost baseline
plus management reserves.
Project Cost Management Slide 20
 4. Control Cost

 Control Cost is the process of monitoring the status of the

project to update the project costs and managing changes to the
cost baseline

 The key benefit of this process is to maintain the cost baseline

throughout the project.

Project Cost Management Slide 21

Control Cost (Cont.)

Project Cost Management Slide 22

 Control Cost (Cont.)
Tools & Techniques:
1. Data Analysis
 Earned Value Analysis
 Planned Value (PV): It is the authorized budget planned for the work to be accomplished for an activity.

 Earned Value (EV): It is the budget associated with the authorized work that has been completed

 Actual Cost (AC): Is the realized cost incurred for the work performed on an activity during a specific

time period

 Variance Analysis
 Schedule Variance (SV): ( SV = EV - PV )

 Cost Variance (CV): ( CV = EV - AC )

 Schedule Performance Index (SPI): ( SPI = EV / PV )

 Cost Performance Index (CPI): ( CPI = EV / AC )

Project Cost Management Slide 23

 Control Cost (Cont.)
Tools & Techniques (Cont.):

 PV =1000x180 = 180,000
 EV =1000x160 = 160,000
 AC =1200x160 = 192,000

 Variance
 SV = EV - PV = 160,000 – 180,000 = -20,000 (Behind Schedule)
 CV = EV - AC = 160,000 – 192,000 = -32,000 (Over Budget)

 Performance Index
 SPI = EV / PV = 160,000 / 180,000 = 0.88 (Behind Schedule)
 CPI = EV / AC = 160,000 / 192,000 = 0.83 (Over Budget)

Project Cost Management Slide 24

 Control Cost (Cont.)
Tools & Techniques (Cont.):

 AC= $ 900
 Variance
 SV = EV - PV = 600 - 800 = - 200 (Behind Schedule)

 CV = EV - AC = 600 - 900 = - 300 (Over Budget)

 Performance Index
 SPI = EV / PV = 600 / 800 = 0.75 (Behind Schedule)

 CPI = EV / AC = 600 / 900 = 0.66 (Over Budget)

Project Cost Management Slide 25

 Control Cost (Cont.)
Tools & Techniques (Cont.):

Project Cost Management Slide 26

 Control Cost (Cont.)
Tools & Techniques (Cont.):
1. Data Analysis (Cont.)
 Trend Analysis
 Forecasting: Estimate at Completion (EAC) = Actual costs + Estimate to Complete (ETC)

 The most common three ways used for calculating EAC (forecasting):
 If future work will be accomplished at the planned rate, use:

 EAC = AC + BAC - EV

 If the CPI is expected to be the same for the remainder of the project:
 EAC = BAC / CPI

 If both the CPI and SPI influence the remaining work:

 EAC = AC + [(BAC - EV) / (CPI x SPI)]

Project Cost Management Slide 27

Control Cost (Cont.)

Project Cost Management Slide 28

 Control Cost (Cont.)
Tools & Techniques (Cont.):
2. To-complete performance index (TCPI)
 It is a measure of the cost performance that is required to be achieved with the
remaining resources in order to meet a specified management goal.

 TCPI is expressed as the ratio of the:

 The equation for the TCPI based on the BAC:

 (BAC - EV) / (BAC - AC)
 (BAC - EV) / (EAC - AC) If BAC is no longer valid

Project Cost Management Slide 29

 Thank You

This is the instructor’s notes and student has to read the textbook for complete material.

Project Cost Management Slide 30