Project Cost Management

Test 3.2: Project Planning Process – Time Management 3.2

Total Achived
No. Initial Name
Marks Percentage

1 MMR Mohammad Mamunur Rashid 20 63%

2 MAM Alok Mallick 19 59%
3 AKR Mohammad Abu Kawser Rozan 18 56%
4 PRK Parves Raksand Kamal 18 56%
5 NAP Mohammad Nurul Alam Patwary 18 56%
6 MAH Mohammad Ashraful Haque 18 56%
7 GSA S.M. Golam Sarwor Azad 18 56%
8 ZIT Mohammad Zahidul Islam Talukder 18 56%
9 SKS Sundwip Kumar Siddah 18 56%
10 MAE Mohammad Aminul Ehsan 18 56%
11 MPM Mohammad Polash Mahmood 17 53%
12 MSH Mohammad Sadiqul Hasan 14 44%
13 MAR Mohammad Aminur Rashid 12 38%
14 MRI AKM Rafiqul Islam 91% - 100%: Excellent
0 0%
81% - 90%: Good
15 SEN Sitat-E-Noor 0 0% 71% - 80%: Satisfactory
16 KSI Kazi Shirajul Islam 0 0% 61% - 70%: Fair
51% - 60%: Poor
41% - 50%: Very Poor
0% - 40%: Failed
 Test 3.2: Project Planning Process – Time Management 3.2

90
80
70
60
50
40
30
20
10
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32

Total performance on each question:

 Test 3.2: Initiating Process Group
1.1.2 Management wants the project completed in 40 days. The cost performance index (CPI) is
1.1, the project critical path duration is 38 days with a standard deviation of two days.
What is the maximum project float?

A) Zero days
B) Two days
`
C)
D)
Four days
One day

Standard deviation is a range that an estimate can vary +/- from the mean. The project needs
to be done in 40 days, and the schedule calls for 38 days, so the project float is 2 days. With a
standard deviation of two days, the project will take 38 +/- 2 days, or 36 to 40 days.
Therefore, project float could be 0 to 4 days.
Project Management Process
Project Cost Management
Project Cost Management Processes

1. Plan Cost Management

2. Estimate Costs
3. Determine Budget
4. Control Costs

In some projects, especially with smaller scope, cost estimation and cost
budgeting are so tightly linked that they are viewed as a single process.
Quick Fact Cost Management Processes

 Costing is different from Pricing. Costing includes the monetary

resource required to complete the project and pricing normally
include a profit margin.
 Costing is based on WBS and controlled by Control Accounts
 Costing shall be ideally done by a team who perform the work
 Schedule get affected by funding and project manager shall manage
the link with organization
 Padding is not a good practice
 Final schedule can be done only after costing and final costing can only
be done after risk since risk management involves budget for handling
risk
Cost Management
Life Cycle Cost
 Project cost management is primarily concerned with cost needed to complete
project activities however cost management shall consider the effect of project
decisions on the subsequent recurring cost of operation, maintenance and
support of deliverables. Remember the product life cycle.

 Some decisions on project cost management have direct impact on future

recurring cost. Example – Reduction in some features of project may reduce
project cost but may make future operations more difficult and hence resulting
overall more cost to organizations.

 Some project costing may involve predicting and analyzing the future financial
performance of deliverables and may include techniques such as Return on
Investments (ROI), Discounted Cash Flow and Investment Pay Back Analysis.
 7.1 Plan Cost Management

Analytical techniques
 Developing the cost management plan may involve choosing strategic options to fund
the project such as: self-funding, funding with equity, or funding with debt. The cost
management plan may also detail ways to finance project resources such as making,
purchasing, renting, or leasing. These decisions, like other financial decisions affecting
the project, may affect project schedule and/or risks.
 Organizational policies and procedures may influence which financial techniques are
employed in these decisions. Techniques may include (but are not limited to): payback
period, return on investment, internal rate of return, discounted cash flow, and net
present value.

Plan Cost Management called the “budget management plan” or “budget plan”
Cost Management Plan
Plan Cost Management called the “budget management plan” or “budget plan”
 Specifications for how estimates should be stated – in what currency?
 The level of accuracy needed for estimates.
 Reporting format to be used
 Guidelines for establishment of a cost baseline for measuring against as part of
project monitoring and controlling ( the cost baseline will ultimately be
established in Determine budget.)
 Cost change control procedures
 Funding decisions
 Guideline for dealing with potential fluctuations in resource cost and exchange
rates.
 Roles and responsibility for various cost activities.
 Control threshold; Control threshold are the amount of variation allowed
before you need to take action.
7.2 Estimate Cost
Project Cost Estimating
Type of Cost
Cost can or Indirect be Direct

Direct costs These costs are attributed directly to the project work and cannot be
shared among projects (Wages, Material, Equipment etc).

Indirect costs Overhead costs that incurred for the benefit of more than one project
(Taxes, Training, project management software license, and so on).

Cost can be Direct or Indirect

Variable costs Costs that vary depending on the amount of work or production
(Cost of materials, supplies, wages etc..).

Fixed costs These costs remain constant throughout the project (Cost of office
setup, rentals etc...).
Cost Estimating – Inputs
Scope Baseline
You need to know,
 What are you estimating?
 What is in your scope?
 What constrains have been placed on the project?
All these information can be found in project scope statement, WBS and WBS
dictionary.

Project Schedule
You need to know,
 When the work will occur?
 Timing of when you buy something effect its cost?
 You need to develop a time phase spending plan to control project expenditures
(budget) so that you knowhow much money will be spent during specific period
of time (e.g. January next month etc.)?
Cost also can effect the schedule e.g. the price of material or equipments may vary
due to factors like seasonal pricing fluctuations, new model release, etc. if you know
in advance that something going to be expansive and it is time to purchase. You
might need to change the schedule.
Cost Estimating – Inputs
Human Resources Plan
You need to know,
 What rates paid to worker?
 What resources and when you need to plan add costs in budget?
 What constrains have been placed on the project?

Risk Register
There are cost associated with the effort to deal proactive with risk (both
opportunities and threats). Risk are an inputs to this process because they influence
how cost are estimated, but they can also be an output because our choice related
to estimating cost have associated risk.
Cost Estimating - Tools and Techniques
Expert judgment
Expert judgment , guided by historical information , provides valuable insight about
the environment and information from previous similar projects.

Analogous Estimating (Top-Down Estimating)

 Analogous estimating relies on historical information to predict the cost of the
current project. It is also known as top-down estimating.
 The process of analogous estimating takes the actual cost of a historical project as
a basis for the current project.
 Analogous estimating uses historical data and expert judgment.
 Less costlier than other methods, faster but less accurate

Parametric Estimating
 Parametric estimate uses statistical relationship between historical data and other
variables
 Per sq.ft cost of previous project of similar nature was XYZ and hence the new projec
shall cost XYZ multiplied by new total area.
 Parametric estimate can be applied to total project or part of project.
Cost Estimating - Tools and Techniques
Bottom-up Estimating
 Cost estimation starts from bottom level.
 Each WBS work package is estimated and rolled up to higher level.
 While this method is more expensive, it is also one of the most accurate.

Three Point Estimates

PERT Formulas to be memorized are,

Expected Activity Duration (Triangular Distribution) =

Expected Activity Duration (Beta Distribution) =

Beta Activity Standard Deviation =

P = Pessimistic, M = Most likely, O = Optimistic

 Cost Estimating - Tools and Techniques
Vendor Bid Analysis
 Sometimes it’s just more cost effective to hire someone else to do the work. Other
times, the project manager has no choice because the needed skill set doesn’t exist
within the organization.
 In either condition, the vendors’ bids need to be analyzed to determine which
vendor should be selected based on their ability to satisfy the project scope, the
expected quality and the cost of their services.
 Cost Estimating – Outputs

Activity Cost Estimates

 The output of cost estimating is the actual cost estimates of the resources required
to complete the project work.

 Each resource in the project must be accounted for and assigned to a cost category.
Categories include the following:
 Labor costs
 Material costs
 Travel costs
 Supplies
 Hardware costs
 Software costs
 Special categories (inflation, cost reserve, and so on)
 Cost Estimating – Outputs
Estimating Accuracy
 Accuracy of estimate is normally refined during the course of project to reflect additional
details as it becomes available.
 Rough order of magnitude This estimate is “rough” and is used during the initiating
processes and in top-down estimates. The range of variance for the estimate can be from
+/- 50%.
 Later the estimate can be refined to a range of +/- 10%
 Refinements and range of accuracy depends on policies of individual organizations.

Basis of estimates
 Once the estimates have been completed, supporting detail must be organized and
documented to show how the estimates were created.
 Specifically, the supporting detail includes the following:
 Document basis of estimate (how it was developed)
 Information on the assumptions and constraints made while developing the cost
estimates.
 Information on the range of variance in the estimate For example, based on the
estimating method used, the project cost may be $220,000 ± $15,000.
 Indication of the confidence level of the final estimate
 7.3 Determine Budget

 Cost of completing individual activities are now completed.

 During budgeting, the cost of individual activities are complied to generate a
complete time phased budget.
 Cost of individual activities are rolled up to work package level and as the
work packages are now part of schedule baseline, this will result in a time
phased cost.
 Schedule, estimate and risk analysis shall be complete prior to budgeting.
 This cost is now linked to organization accounting system through control
accounts placed above work package.
7.3 Determine Budget – Tools and Techniques

Cost Aggregation
 Activity costs are rolled up to work package costs. Work package costs are
rolled up to control account cost and finally into project cost.

Reserve Analysis
Budget reserves are kept for both contingency reserve and management
reserve.

Contingency Reserves
 Monetary reserves kept for identified but unplanned changes (risks).
Project manager will normally have the authority to utilize contingency
reserves.
 Contingency reserves are placed for changes that can result from an
identified risk.
 Contingency reserves address the cost impact of the risk remaining
during risk response planning.
7.3 Determine Budget – Tools and Techniques

Management Risk
 Budget set aside to cover unforeseen risks or changes to the project. This is
the budget kept for unidentified risks.
 Management reserve will not be part of project budget and hence project
manager need approval from management for using this reserve.
 The cost baseline will contain the contingency reserve and the cost budget will
include the management reserve.
 Management reserves are not part of earned value calculations (since it is not
part of cost baseline & measurements are based on baselines)
 Management reserves are additional funds set aside to cover unforseen risks
to the project.
7.3 Determine Budget – Tools and Techniques
7.3 Determine Budget – Tools and Techniques
7.3 Determine Budget – Tools and Techniques
Historical Relationships
 A historical knowledge of previous project of similar nature can be used for
determining budget.
 Parametric or Analogous estimates can be used. This method used the
statistical relationship between historical data and variable (Data multiplied by
variable)
Funding Limits Reconciliation
 Funding Limit Reconciliation is and organization’s approach to managing cash
flow.
 Budgeting will result in S curve showing time phased cost requirements and
project manager shall negotiate fund requirements with organization prior to
finalization of cost baseline and schedule.
 Changes in funding may results in changes to project management plan and
schedule.
 An realistic budget is project manager’s fault.
 Funding normally happed in steps where are expenditure follow S curve.
7.3 Determine Budget – Tools and Techniques

Cost Performance Baseline

 A project’s cost baseline is an authorized time-phased budget used to
measure, monitor and control overall cost performance of the project.

 Cost baseline forms the shape of an S-curve indicating low spending in the
initial stages of project and increasing towards end of the project.
7.3 Determine Budget – Outputs

Project Funding Requirements

 Funding requirements are derived from cost baselines.

 Funding often occurs in incremental rather than continuous.

 Total funds required are cost baseline plus management reserve, if any.
 Questions and Answers
The main focus of life cycle costing is to:

A. Estimate installation cost.

B. Estimate the cost of operations and maintenance.
C. Consider installation costs when planning the project cost.
`
D. Consider operation and maintenance costs in making project decisions.

In matrix management organizations, if the organization maintains many of the

characteristic of the functional organization and the project managers are considered
more like project coordinators or expediters, it is called a:
A. Strong matrix
B. Project team
`
C. Weak matrix
D. Project office

A project manager is responsible for all that goes on in the project. One of the most
important duties that the project manage can perform is the function of:
A. Risk management
B. Quality management
C. Cost management
`
D. Integration
 Questions and Answers
Resource leveling will generally:
A. Reduce the time needed to do the project
B. Increase the total time necessary to do all the tasks
`
C. Reduce the over utilization of resources
D. Reduce resources to the lowest skill that is possible

Decisions as to the types of projects that should be accomplished and strategic plans as to the
quality of the projects that are required should be the decision of which of the following?
A. Project manager
B. Procurement manager
`
C. Upper management
D. Stakeholders

What are the major advantages of the functional type of organization?

A. Single point of contact for the customer
`
B. Stable organizational structure
C. Project orientation
D. Multifunctional teams are easy to form
 Questions and Answers
A project manager and her project team are analyzing risk in their project. One of the things that
they might do to help identify potential risks or opportunities would be to review:
A. The project budget
B. The goals and objectives of the project
`
C. Lessons learned from other similar projects
D. The monetary value of changes for similar projects

What officially creates the project?

A. The project initiating document.
B. The kickoff meeting.
`
C. The project charter.
D. The statement of work.

210. You have been asked to take charge of project planning for a new project, but yo have very
little experience in managing projects. What will be the best source of help for you?
A. Your education.
B. You on-the-job training.
`
C. Historical information.
D. Your functional manager.
7.4 Control Cost

 Control cost is the processes of monitoring the status of project based

on cost baseline.

 Do not confuse control cost with cost control

 Any change in authorized funding shall only be done through

integrative change control
7.4 Control Cost - Inputs
Project Funding requirements
The project funding requirements include projected expenditures plus
anticipated liabilities.

Work Performance data

Work performance data includes information about project progress, such as
which activities have started, their progress, and which deliverables have
finished. Information also includes costs that have been authorized and
incurred.
7.4 Control Cost – Tools and Techniques
Earned Value Management
 Earned value management will indicate status and health of project at
any time and can predict possible outcomes.
 EVM can be used for analysis of cost and schedule baselines
 Earned Value Management is carried out using the three main inputs
 Planned Value (PV)
 Earned Value (EV)
 Actual Cost (AC)
7.4 Control Cost – Tools and Techniques
7.4 Control Cost – Tools and Techniques
Planned Value (PV)
 Authorized budget assigned to the work to be accomplished on a
particular Day.
 It means, value of planned work to be done as on today.

 Work package XX have a 4 stages and each stage will take one week to
complete with $500 estimated cost per stage.

 What is the PV on 3rd Week = Total value of planned work to be

completed on third week in monetary term (500X3 =1500).

 Total Planned Value for project will be approved total budget (Remember
– Management reserve is not part of EVM) and is known as Budget at
completion (BAC)
7.4 Control Cost – Tools and Techniques
Earned Value (EV)
 Estimated (not actual) value of work actually complete terms.

 Work package XX have a 4 stages and each stage will take one week to
complete with $500 estimated cost per stage. End of 2nd week 3 stages
were completed what is the PV and EV.

PV on 2nd Week = Total value of planned work to be completed on second

week in monetary terms (500 X 2 = 1000)

EV on 2nd week = Estimated value of work completed (500 X 3 = 1500)

7.4 Control Cost – Tools and Techniques
Actual Cost (AC)
 Actual cost spend to complete the work completed.

 Work package XX have a 4 stages and each stage will take one week to
complete with $500 estimated cost per stage. End of 2nd week 3 stages
were completed and contractor has spend 1700. What is the PV, EV & AC

PV on 2nd Week = Total value of planned work to be completed on

second week in monetary terms (500 X 2 = 1000)

EV on 2nd week = Estimated value of work completed (500 X 3 = 1500)

AC on 2nd Week = Actual cost spend of work already completed (1700)

7.4 Control Cost – Tools and Techniques
 Variances from approved baselines (Cost & Schedule) can now be
analyzed.

 SV (Schedule Variance) = EV-PV (Difference between estimated value of

work completed and estimated value of work planned)

 CV (Cost Variance) = EV-AC (Difference between estimated value of work

completed and actual cost of work completed)

 SPI (Schedule Performance Index) = EV/PV

 CPI (Cost Performance Index) = EV/AC

Tips
 EV comes first in all equations.
 For Schedule related equation there is PV and AC for cost related
7.4 Control Cost – Tools and Techniques
Forecasting
 Using the earned value analysis, team can now forcast the project
performance.

 Estimate at completion (EAC) may differ from Budget at Completion (BAC)

 Estimate to complete (ETC) is the estimate of remaining work. Now

Estimate at completion = AC + ETC.
 7.4 Control Cost – Tools and Techniques
EAC can be calculated by
1. There will be no variation for remaining work and will progress as
planned before ETC = BAC – EV and that means EAC = AC + ETC (BAC – EV)

2. The changes project experience will continue to occur for remaining

work. EAC = BAC/CPI (only cost efficiency is considered now)

3. Here team considers that remaining work will be completed at the same
efficiency rate considering cost and schedule performance. EAC = AC +
(ETC/CPI x SPI) & ETC = BAC – EV.

A variation to this is to weight CPI or SPI at different values as per project

managers judgment (to give weight to schedule performance or cost
performance as per previous performance). In case of an 70/30 ratio
EAC = AC + ((BAC-EV)/0.7CPIx0.3SPI))
 7.4 Control Cost – Tools and Techniques
4. Team think that original estimate if fundamentally flawed. Team need to
prepare new estimate for remaining work. This is the best way to forecast
but requires management effort and additional expenditure of costing,

EAC = AC + New Estimate for remaining work

7.4 Control Cost – Tools and Techniques
7.4 Control Cost – Tools and Techniques
7.4 Control Cost – Tools and Techniques
7.4 Control Cost – Tools and Techniques
7.4 Control Cost – Tools and Techniques
To Complete Performance Index (TCPI)

 TCPI predicts the efficiency that must be achieved for remaining work to
complete the remaining works with availble budget.

 TCPI = Work Remaining/Funds remaining

= (Budget At Completion – Earned Value) / (BAC – Actual cost)
= (BAC – EV)/ (BAC – AC)

If it is obvious that earlier estimated budget at completion can not be

achieved, Project manager develops a forecasted estimate at completion
(EAC). Once approved through integrative change control process, EAC
will superseded BAC and cost baseline will be revised.

Now TCPI = (BAC-EV)/(EAC-AC)

 7.4 Control Cost – Tools and Techniques
Now TCPI = Work Remaining/Funds remaining as per forecasted EAC
= Budget At – / EAC – (Completion Earned Value ) (Actual cost)

TCPI (based on original estimate or forecasted budget) will set a new baseline
for performance efficiency to be achieved to complete the works with funds
remaining.

If CPI falls below TCPI baseline, remaining works will not be completed with
available funds. All future works shall be accelerated to bring CPI within range.

TCPI TCPI value >1 means in future, more work must be achieved per every
dollar spent in the future compared to actual work achieved previously per
dollar.

TCPI value <1 means in future lesser work need to be achieved for every dollar
spent compared to past performance
7.4 Control Cost – Tools and Techniques
Examples

 A project has the following Earned value data assessed: AC: $ 4,000,000
CV: $ -500,000 SPI: 1.12 BAC: $ 9,650,000 What is the Earned value of the
project? What is the CPI? What is the TCPI?

 In your project, there have been several changes in the cost and schedule
estimates and the original estimating assumptions are no longer valid.
What is the Estimate at Complete for your project? BAC = $ 300,000, AC =
$100,000, EV = $ 150,000, CPI = $ 1.2, ETC = $ 120,000
7.4 Control Cost – Tools and Techniques
7.4 Control Cost – Tools and Techniques
 Next Week Test

1) Initiation Process (10 Questions)

2) Project Planning Process – Cost Management (20 Questions)

3rd April 2014 MS Project Training!

Every one MUST have MS Project 2013 in his Laptop