Project Co$t

Management
 Objective's of Presentation
Through this interaction, participants will enhance their:
Level of Knowledge and skills of project cost
management
Appreciation of the planning, estimating, budgeting
and controlling of project costs
Understanding of the professional cost management
methodologies, tools and techniques of PMBOK
 Project Cost Management
PCM definition
“Project Cost Management includes the
processes involved in planning, estimating,
budgeting, and controlling costs so that the
project can be completed within the
approved budget”
:
Project Cost Management
Key Words:
project cost management, resource, planning,
estimating, budget, control, forecasting

Area of PM Application: Universal

Topic Level: Process

Related Topics: Project planning, WBS

Reference: Wideman, R.M. Cost Control of Capital Projects,

BiTech Publishers Ltd., 1995
 Project Cost Management
(PCM)
What is PCM?
 You might think that PCM is managing the
"costs" on your project
 The reality is that you must manage
everything else that incurs cost
 Because if you don't, the costs will just
keep on climbing
 Whether you like it or not!
 So, what is PCM?
Project Cost Management is
The placing of responsibility on those in charge of any aspect
of the project
E.g. the managers, designers and implementers
To perform their respective roles and responsibilities within
prescribed limits
Specifically, agreed cost allowances or budgets
Then collecting cost data and comparing it to the corresponding
allowances
And taking appropriate management action
To contain the final results
 How would you define PCM?
Project Cost Management may be defined as
• The process of placing responsibility on the project's
designers and implementers
• To perform within agreed budget limits
• Either under contract
• Or, through verbal commitment
• The collecting of actual cost data in a suitable format
• Comparing that to corresponding budget data
• And taking corrective action as necessary
• Throughout, and as appropriate to, the project life span
 What does PCM encompass?
As with time management
You have to carefully manage what you do with the
money available
PCM is another vital function of project
management that includes
• Resource planning
• Cost estimating
• Cost budgeting
• Cost control
• Change control
 Is it that simple?
No, it certainly is not!
Two simple but essential principles must be
clearly understood:
1. There must always be a basis for comparison
2. Only future costs can be controlled
Therefore, PCM involves
• Careful project planning
• Especially a WBS extended to the activity level
• Estimating the costs of the planned resources
• Converting that estimate to a viable control budget
• Monitoring expenditures as work proceeds, and
• Modifying the approach if the findings are not satisfactory
 That sounds easy? – 1
Not really. There are a number of challenges, such
as:
• First and foremost, the problem of managing Project
scope
• A lack of understanding generally that estimates are no
better than just best available assessments
• And only as good as the data they are based on
• An unrealistic expectation of accuracy
• Hence an estimate should be expressed as a range, not
as a single number!
 That sounds easy? – 1
Not really. There are a number of challenges, such
as:
• First and foremost, the problem of managing project
scope
• A lack of understanding generally that estimates are no
better than just best available assessments
• And only as good as the data they are based on
• An unrealistic expectation of accuracy
• Hence an estimate should be expressed as a range, not
as a single number!
 That sounds easy? – 2
More challenges . . .
• The nature of PCM changes with the project life
span
• As we'll explain later
• The historical view of accounting
• Which is not the primary focus of PCM
• The difficulty of getting timely cost information
out of the normal accounting process
• The necessary data support facilities for effective
PCM are not available within the organization
 That sounds easy? – 3
Still more challenges . . .
• The difficulty of getting people to peer into the future,
or commit themselves
• During progress of the actual work they feel they
have more important things to do like getting the
work done!
• Some people think you can control costs simply
by turning off the money taps
• There is a tendency to ignore risks, and
• The result of "political interference" to get a project
approved
 Why bother with cost management?
The fact is, cost management is essential if you want
to
• Keep people on their toes
• Highlight misuse or wastage of resources
• Track budget change approvals
• Finish a project within approved budgets
• Avoid unwelcome surprises, for your corporate or
financial sponsor!
 Why is PCM so important?
PCM has a high profile in project management because
• Financial management is a way of life in all organizations
• Financially successful organizations depend on strict financial
control and the corporate accounting to support it
• They are comfortable with the idea of budgeting and
expenditure
• Most people understand the consequences of the money
running out
• Cost is seen as a major metric of successful project
management
 The most significant aspect of PCM
From a project perspective, it is important to
understand that
• Cost, or rather money, is simply the common denominator,
or metric, for bringing together disparate types of
resources
• I.e. accounting for use of labor, materials, equipment
• For management and control purposes
• However, like time, money itself should not be considered
as a resource unlike in corporate financial management
where money is the central purpose and is treated like a
commodity
 .

The Project Cost Management processes include

the following:

Cost Estimating
Developing an approximation of the costs of the resources needed
to complete project activities.

Cost budgeting
Aggregating the estimated costs of individual schedule activities or work
packages to establish a total cost baseline for measuring project performance
Cost Control
Influencing the factors that create changes to the cost baseline
 What Do We Want to Know by
Managing Cost?
 through answering three questions,
 How did we perform ?
 How much we differ from plan?
 What is the implication for future!
 Cost Management Key Terms
PV - Planned Value, estimated value of the planned work
EV – Earned Value, estimated value of work done
AC – Actual Cost, what you paid
BAC – Budget at Completion, the budget for the total job
EAC –Estimate at Completion, what is the total job expected to
cost?
ETC – Estimate to Complete, forecasted costs to complete job
VAC – Variance at Completion, how much over/under budget do
we expect to be?
 Work Breakdown structure
Company owners and project managers use the Work Breakdown
Structure (WBS) to make complex projects more manageable. The
WBS is designed to help break down a project into manageable chunks
that can be effectively estimated and supervised.
Some widely used reasons for creating a WBS include:

 Assists with accurate project organization

 Helps with assigning responsibilities
 Shows the control points and project milestones
 Allows for more accurate estimation of cost, risk
and time
 Helps explain the project scope to stakeholders
 Estimating Methods
• Analogous (Top Down) estimating – Managers use
expert judgment or similar project costs [quick, less
accurate]
• Bottom-Up estimating – People doing work estimate
based on WBS, rolled up into project estimate [slow,
most accurate]
• Parametric estimating – Use mathematical model
• (i.e. cost per sq ft). [accuracy varies] Two types:
• Regression analysis – based on analysis of multiple
• data points
• Learning Curve – The first unit costs more than the
• 100th, forecasts efficiency gains
 Estimating Methods
• Vendor Bid Analysis – Estimating using bids +
allowances for gaps in bid scope [slow,
• accuracy depends on gaps]
• Reserve Analysis – Adding contingency to each
activity cost estimates as zero duration item
• [slow, overstates cost]
ANALOGOUS COSTING
Analogous cost estimating means using the actual cost of previous, similar projects as the
basis for estimating the cost of the current project. Analogous cost estimating is frequently
used to estimate costs when there is a limited amount of detailed information about the
project (e.g., in the early phases). Analogous cost estimating uses expert judgment

PARAMETRIC COSTING
Parametric estimating is a technique that uses a statistical relationship between historical data
and other to calculate a cost estimate for a schedule activity resource. This technique can
produce higher levels of accuracy depending upon the sophistication, as well as the underlying
resource quantity and cost data built into the model
BOTTOM-UP COSTING
This technique involves estimating the cost of individual work packages or individual schedule
activities with the lowest level of detail. This detailed cost is then summarized or “rolled up” to
higher levels for reporting and tracking purposes. The cost and accuracy of bottom-up cost
estimating is typically motivated by the size and complexity of the individual schedule activity
or work package. Generally, activities with associated effort increase the accuracy of the
schedule activity cost estimate
Determine Resource Cost Rate
The person determining the rates or the group preparing the
estimates must know the unit cost rates, such as staff cost
per hour and bulk material cost per cubic yard, for each
resource to estimate schedule activity costs. Gathering
quotes is one method of obtaining rates. For products,
services, or results to be obtained under contract, standard
rates with escalation factors can be included in the contract.

Reserve Analysis
reserves are estimated costs to be used at the discretion of the
project manager to deal with anticipated, but not certain, events.
These events are “known unknowns” and are part of the project
scope and cost baselines
 Essential definitions
Enterprise Environmental factors-refer to both internal and external factors that surround or
influence a project’s success. These factors may come from any or all of the enterprises
involved in the project. Enterprise environmental factors may enhance or constrain project
management options and may have a positive or negative influence on the outcome. They
are considered as inputs to most planning processes

Organisational process Assets- are any or all process related assets, from any or all of the
organizations involved in the project that can be used to influence the project’s success.”
Examples include: plans, procedures, lessons learned, historical information, schedules, risk data
and earned value data. Organizational Process Assets fall into two broad categories—Processes
and Procedures, and the Corporate Knowledge Base.

WBS Dictionary-The WBS dictionary includes entries for each WBS component that
briefly defines the scope or statement of the work, defines deliverables, contains a list of
associated activities, and provides a list of recognized milestones to gage progress

Approved change requests-refers to a change request that has been submitted by the requestors, has
been reviewed by the appropriate parties through use of the integrated change control process, and has
been granted authorization to be take place
 Essential definitions
Risk Register-The risk register or risk log becomes essential as it records
identified risks, their severity, and the actions steps to be taken. It can be a
simple document, spreadsheet, or a database system, but the most effective
format is a table. A table presents a great deal of information in just a few
pages
Cost Baseline-ultimately, project management includes a variety of
responsibilities within one’s team in order to achieve maximum results for their
employer. In regards to money and remaining in business, providing a budget
that is adjusted to time is considered a cost baseline.
Performance reports- is filled out by the project manager and submitted on a
regular basis to the sponsor, project portfolio management group, Project
Management Office or other project oversight person or group.
Earned Value Analysis-report shows specific mathematical metrics that are
designed to reflect the health of the project by integrating scope, schedule,
and cost information. Information can be reported for the current reporting
period and on a cumulative basis.
 Essential Definitions
Resource Calendar-Keeping track of schedules and time
management is one of the most fundamentally important tasks that
are the responsibility of the project management team and or the
project management team leader. One of the best ways to
accomplish this feat is through the careful and well orchestrated
use of calendars to keep track of the multitude of project related
events, occurrences, and dates that will take place during the
project’s life cycle.
Enterprise environmental factors
– Market condition
– Published commercial information
Cost performance baseline
– Authorized time‐phased Budget at Completion
(BAC) used to measure, monitor and control
overall cost performance (S shape curve)
 Cost Budgeting
• Budgeting is allocating costs to work packages
to establish a cost baseline to measure project
performance
• Remember Contingency items are for unplanned
but required changes it is not to cover things
such as:
 Price escalation
 Scope & Quality Changes
Funding Limit Reconciliation – Smoothing out
the project spend to meet management
expectations
Cost Aggregation
Schedule activity 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. Reserve
analysis establishes contingency reserves, such as the management contingency reserve,
that are allowances for unplanned, but potentially required, changes. Such changes may
result from risks identified in the risk register
Reserve Analysis
Management contingency reserves are budgets reserved for unplanned, but potentially
required, changes to project scope and cost. These are “unknown unknowns,” and the
project manager must obtain approval before obligating or spending this reserve.
Management contingency reserves are not a part of the project cost baseline, but are
included in the budget for the project. They are not distributed as budget and, therefore, are
not a part of the earned value calculations
Parametric estimating
The). parametric estimating technique involves using project characteristics (parameters) in
a mathematical model to predict total project costs. Models can be simple (e.g., one model
of software development costs uses thirteen separate adjustment factors, each of which
has five to seven points within it).
COST TYPES
Sunk Costs: A historical or expended cost. Since the cost has been expended,
we no longer have control over the cost. Sunk costs are not included when
considering alternative courses of action.
Costs: Nonrecurring costs that do not change based on the number of units,
like expenses related to equipment required to complete a project.
Variable Costs: Costs that rise directly with the size of the project, like
expenses related to consumable materials used to accomplish the project.
Indirect Costs: Costs that are part of the overall organization’s cost of doing
business and are shared among all the current projects. These include salaries of
corporate executives, administrative expenses, any cost that would be considered
part of overhead.
Opportunity Costs: The cost of choosing one alternative and, therefore, giving
up the potential benefits of another alternative.
Direct Costs: Costs incurred directly by a specific project. These include cost
for materials associated with the project, salary of the project staff, expenses
associated with subcontractors.
 Cost Types

Direct Costs
Related “Directly” to the project
ex. Labor hours, material, equipment, food, travel. .
.

Indirect Costs
Overhead used for more than one project
ex. Building rent, taxes, janitorial services
 Cost Types
A cost by any other name, really isn’t the
same!
Variable Cost – Changes with volume
Fixed Cost – Stays the same, regardless of volume
TC = VC+FC

COST vs VOLUME
 Cost Types
Project Costs
Are incurred while the project is being fulfilled.

Life Cycle Costs

Includes the costs after project completion.

There may be temptation to lower project costs at the

expense of long term costs. Life Cycle Costing gives
the PM a way to consider costs outside of the scope of
project fulfillment
 Important Concepts
Sunk Costs
Forget ‘em, they’re gone

Working Capital
- Current Assets (Cash, Inventories, Accounts
Receivable)
- Liabilities (Notes, AP, Accruals)
 Cost and Project Selection
Present Value
Is $10,000 in your pocket now worth more than the $10,000 in
your pocket one year from now?
Yes! You can use the money now to make more money. The
10,000 in a year from now should be “discounted” to the present,
since it’s not worth as much.
 Present Value of Your PMP
Consulting Gig

Time Income Present Value

1 10,000 10,000

2 10,000 9,090

3 10,000 8,264

4 10,000 7,513

5 10,000 6,830

TOTAL 50,000 41,697

 Internal Rate of Return
What is the return on the money invested?

Expressed as percentage

Great for comparing between two projects of different value

Project A has an IRR of 21% and Project B has an IRR

of 14%. Which would I choose?
 Payback Period
How long until we get the money back?
“Quick and Dirty” method for project selection
Does not take into account the Time Value of Money

Your Project costs $50,000, and the cash flow it will

bring is $11,000 a year.

The Payback Period is. . . 5 years

Discount rate/Interest Rate....10%
 Payback Period
Cumulative
Inflow
(with
Cumulative Resulting Value discount@10%)
Return Inflow of cash flow(end
(without of year, with Note:the two (with
discount @10%) discount) or without
discount do not
differ too much in
duration

11,000 11,000 10,891 10,891

11,000 22,000 10,783 21,674
11,000 33,000 10,676 32,347
11,000 44,000 10,571 42,914
11,000 55,000 10,476 53,394
Break Even at The BE Point is With Discount Pay- Pay-Back Period
50,000 4yrs 7mths Back is Different is 4yrs 8 mths.
 Net Present Value
NPV, like Present Value, discounts future
cash flows to the present

PV of Revenue – PV of Costs
 Net Present Value: Your PMP Gig

Time Revenue Present Costs PV of Costs NPV

Value

0 10,000 10,000 12,000 12,000 -2,000

1 10,000 9,090 2,000 1,818 7,272

2 10,000 8,264 2,000 1,653 6,611

3 10,000 7,513 2,000 1,502 6,011

4 10,000 6,830 2,000 1,366 5.464

Total 50,000 41,697 20,000 18,339 23,358

 Payback Period
How long until we get the money back?
“Quick and Dirty” method for project selection
Does not take into account the Time Value of Money

Your Project costs $50,000, and the cash flow

it will bring is $11,000 a year.

The Payback Period is. . . 5 years

 Benefit Cost Ratio

Compares the revenues to the costs

Revenue in this is the same as “payback”
1 is the magic number where costs = revenue
Less than 1, costs are greater than benefits
Greater than 1, and the benefits are greater than costs.

If Project A has a BCR of 2.2 and Project B has a

BCR of 1.2, pick A.
 Earned Value
• Progress is compared against the Planned Value
(PV) – Budgeted
baseline to determine whether Cost
project is ahead of or behind plan Earned Value
(EV) – Actual
• Percent complete can be difficult work completed
to measure, some managers use Actual Cost (AC)
rules – Costs incurred
Estimate to
 50/50 Rule – Assumed 50% Complete (ETC)
complete when task started, final – What’s Left
50% at completion Estimate at
 20/80 Rule – 20% at start Completion
(EAC) – What
 0/100 Rule – No credit until complete final cost will be
The earned value Management involves developing these key values for
each schedule activity, work package, or control account:
Planned value (PV). PV is the budgeted cost for the work scheduled to be
completed on an activity or WBS component up to a given point in time.
Earned value (EV). EV is the budgeted amount for the work actually
completed on the schedule activity or WBS component during a given time
period.
Actual cost (AC). AC is the total cost incurred in accomplishing work on the
schedule activity or WBS component during a given time period. This AC
must correspond in definition and coverage to whatever was budgeted for the
PV and the EV (e.g., direct hours only, direct costs only, or all costs including
indirect costs).
Cost variance (CV). CV equals earned value (EV) minus actual cost (AC).
The cost variance at the end of the project will be the difference between the
budget at completion (BAC) and the actual amount spent. Formula: CV= EV -
AC
The earned value Management involves developing these key values for
each schedule activity, work package, or control account:
Schedule variance (SV). SV equals earned value (EV) minus planned value
(PV). Schedule variance will ultimately equal zero when the project is completed
because all of the planned values will have been earned. Formula: SV = EV - PV.
These two values, the CV and SV, can be converted to efficiency indicators to
reflect the cost and schedule performance of any project.
Cost performance index (CPI). A CPI value less than 1.0 indicates a cost
overrun of the estimates. A CPI value greater than 1.0 indicates a cost underrun
of the estimates. CPI equals the ratio of the EV to the AC. The CPI is the most
commonly used cost-efficiency indicator. Formula: CPI = EV/AC
Schedule performance index (SPI). The SPI is used, in addition to the
schedule status to predict the completion date and is sometimes used in
conjunction with the CPI to forecast the project completion estimates. SPI equals
the ratio of the EV to the PV. Formula: SPI = EV/PV
Earned Variance at
Completion

Value (VAC)

Graph Target
Cost &
Schedule

Planned
Schedule
Value (PV) Variance
(Time)

Earned
Value (EV)
 Earned Value Formulas
NAME FORMULA NOTES
Cost Variance (CV) EV-AC Negative = Over budget
Positive = Under budget

Schedule Variance EV-PV Negative = Behind

(SV) Schedule
Positive = Ahead of
Schedule

Cost Performance EV/AC How much are we

Index (CPI) getting for every dollar
we spend?

Schedule Perform EV/PV Progress as % against

Index (SPI) plan

Estimate to Complete EAC-AC How much more do we

(ETC) have to spend?

Variance at BAC-EAC At the end of the day,

Completion (VAC) how close will we be to
plan?

Estimate at See the following

Completion (EAC) page
Earned Value Formulas (Cont’d)
NAME FORMULA NOTES
Estimate at
Complrtion (EAC) BAC/CPI Use if no variances from
BAC have occurred

Use when original

AC+ETC estimate
was bad. Actuals + New
estimate

Use when current

AC+BAC variances are not
-EV expected to be there in
the
future

Use when current

AC+(BAC variances are expected to
-EV)/CPI continue
 Building A Farm Hut Exercise
• You have a project to build a new farm hut
(Barn). The specs for building the hut are to
construct 4 sides and then an angled roof. Each
side of the hut is to take one day to build as is
the roof. The budgeted amount is $2,000 per
side and $2000 applied to the roof cost. The
sides are to be completed one after the other.
Today is the end of day four.
FORECASTING
Forecasting includes making estimates or predictions of conditions in the project's future based
on information and knowledge available at the time of the forecast.( Forecasts are generated,
updated, and reissued based on work performance information provided as the project is
executed and progressed).
BAC is equal to the total PV at completion for a schedule activity, work package, control
account, or other WBS component. Formula: BAC = total cumulative PV at completion.
ETC is the estimate for completing the remaining work for a schedule activity, work
package, or control account.
ETC based on new estimate. ETC equals the revised estimate for the work remaining, as
determined by the performing organization. This more accurate and comprehensive
completion estimate is an independent, non-calculated estimate to complete for all the work
remaining, and considers the performance or production of the resource(s) to date.
Alternatively, to calculate ETC using earned value data, one of two formulas is typically
used:
ETC based on atypical variances. This approach is most often used when current
variances are seen as atypical and the project management team expectations are that
similar variances will not occur in the future. ETC equals the BAC minus the cumulative
earned value to date (EVC). Formula: ETC = (BAC - EVC)
FORECASTING
ETC based on typical variances. This approach is most often used when current variances are
seen as typical of future variances. ETC equals the BAC minus the cumulative EVC (the
remaining PV) divided by the cumulative cost performance index (CPIC). Formula: ETC = (BAC -
EVC) / CPIC
EAC is the projected or anticipated total final value for a schedule activity, WBS component, or
project when the defined work of the project is completed. One EAC forecasting technique is
based upon the performing organization providing an estimate at completion:
EAC using a new estimate. EAC equals the actual costs to date (ACC) plus a new ETC that is
provided by the performing organization. This approach is most often used when past
performance shows that the original estimating assumptions were fundamentally flawed or that
they are no longer relevant due to a change in conditions. Formula: EAC = ACC + ETC
The two most common forecasting techniques for calculating EAC using earned value data are
some variation of:
EAC using remaining budget. EAC equals ACC plus the budget required to complete the
remaining work, which is the budget at completion (BAC) minus the earned value (EV). This
approach is most often used when current variances are seen as atypical and the project
management team expectations are that similar variances will not occur in the future. Formula:
EAC = ACC + BAC - EV
EAC using CPIC. EAC equals actual costs to date (ACC) plus the budget required to complete
the remaining project work, which is the BAC minus the EV, modified by a performance factor
(often the CPIC). This approach is most often used when current variances are seen as typical of
future variances. Formula: EAC = ACC + ((BAC - EV) / CPIC)
 Terms to Remember
• Present Value Working Capital
• Net Present Value (NPV) Straight Line Depreciation
• Internal Rate of Return (IRR) Accelerated Depreciation
• Payback Period  Double Declining Balance
• Benefit Cost Ratio = BCR>1,  Sum of Years Digits
Payback is greater than the Value Analysis (Value
cost Engineering)
• Opportunity Cost
• Sunk Cost

You won’t be calculating most of these numbers on the test,

just remember the concepts for general questions
 Questions
Q1-project cost management includes all the following functions, except;
a. resource planning
b. cost estimating
c. resource leveling
d. cost budgeting
d. cost control

Q2-The output from resource planning includes;

a. job descriptions
b. Salary descriptions
c. The types of resources required
d. All of the above
e. None of the above
 Questions
Q3- Cost estimates may be expressed in;
a. labour
b. materials
c. supplies
d. inflation allowances
e. none of the above

Q4- resource planning must include consideration of the use of;

a. contractors, equipment, materials
b. people, computers, equipment
c. people, equipment, materials
d. contractors, computers, raw materials
E. none of the above.
 Questions
Q5- In the erarned value system, cost variance is computed as;
a. BCWP less BCWS
b. BCWP less ACWP
c. ACWP less BCWP
d. ACWP less BCWS
e. BCWS less BCWP

Q6- Earned value is;

a. percent complete
b. budgeted cost of work performed
c. completed work value
d. all of the above
e. b and c only
 Questions
Q7- if BCWS=100, BCWP=98, and ACWP=104, the project is,
a. ahead of schedule
b. headed for a cost overrun
c. doing the business
d. a and b only
e. a and c only

Q8- inputs to resource planning are;

a. the WBS
b. the scope statement
c. a resource pool description
d. organisational policies
e. all of the above
 Questions
Q9- Which of the following choices would indicate that your project was 10
percent under budget?
a. BCWS=100, BCWP=110
b. ACWP=100, BCWP=110
c. BCWS=100, ACWP=110
d. ACWP=110, BCWP=100
e. BCWP=100, BCWS=110

Q10- Parametric cost estimating involves;

a. using the WBS as the basis of estimating
b. defining the parameters of the project life cycle
c. calculating individual cost estimates for each work package
d. using rates and factors based on historical experience to estimate costs
e. b and c only
Answers to Questions

1–a  6–e
– 2–b  7-d
– 3–a  8-a
– 4–c  9-b
 10 - a
– 5–a
 EVA Question
Given a lawn to be cleaned up within four days at an estimated budget
Of Rm2,000, and today after three days the status of the project being;
EV=Rm1250, AC-Rm1750 with a daily planned expenditure=Rm500,
calculate the following:

PV EV CV
BAC CV CPI
SV SPI VAC(BAC-
EAC)
EAC(EAC/CPI) ETC(EAC-AC)
 Answers to Questions (Cont’d)
What is: Calculation: Answer: Interpretation of Answer:
PV $500+$500+$500 $1,500 We should have completed $1500
We actually completed $1,250
EV $500+$500+$250 $1,250
worth of work
AC $500+$1000+$250 $1,750 We have actually spent $1,750
BAC $500+$500+$500+$500 $2,000 Our project budget is $2000
CV $1,250 - $1,750 -$500 We are over budget by $500
We are only getting $0.71 out of
CPI $1,250/$1,750 0.714 every dollar that we are spending
on the project
SV $1,250 - $1,500 -$250 We are behind schedule
We are progressing at 83% of the
SPI $1,250/$1,500 0.833
planned rate
We currently estimate the project
EAC $2,000/0.714 $2,801
will cost $2,801
We need to spend $1,051 to finish
ETC $2,801-$1,750 $1,051
the project
We currently expect to be $801
VAC $2,000 - $2,801 -$801 over budget when the project is
completed
 Big Dig
Started construction on 1991 and planned
completion by 1997 (6 years), it was to cost $3
Billion, the project included 6 highways
($0.5 Billion per highway/year)
At the end of the first year, 1/2 highway was
completed and the cost was $2 Billion.
Do the EV analysis
 Big Dig: The Numbers

EV = Earned Value = $0.25 Billion ($0.5/2)

PV = Planned Value = $0.5 Billion

AC = Actual Cost = $2 Billion

BAC = Budget At Completion = $3 Billion

 Big Dig: Performance

CV = EV - AC = $0.25 - $2 = - $1.75 Billion

Over Budget by $1.75 Billion

SV = EV - PV = $0.25 - $0.5 = - $0.25 Billion

Behind of schedule

CPI =EV / AC = $0.25 / $2 = 0.12

Getting 0.12 cents out of every dollar budgeted

SPI = EV / PV = $0.25 / $0.5 = 0.50

50% of progress planned

EAC = BAC / CPI = $3 / 0.50 = $ 6 Billion

 Big Dig: Performance

CV = EV - AC = $0.25 - $2 = - $1.75 Billion

Over Budget by $1.75 Billion

SV = EV - PV = $0.25 - $0.5 = - $0.25 Billion

Behind of schedule

CPI =EV / AC = $0.25 / $2 = 0.12

Getting 0.12 cents out of every dollar budgeted

SPI = EV / PV = $0.25 / $0.5 = 0.50

50% of progress planned

EAC = BAC / CPI = $3 / 0.50 = $ 6 Billion

 Big Dig

 Megabina Sdn Bhd Started construction of sky-

bridges in 2001 and planned completion by 2008 (8
years).They were to cost $12 Billion, the project
included 8 sky-bridges ($1.5 Billion per bridge/year)
 At the end of the year 4 three were completed and
the cost was $2.5Billion.
 Do the EV analysis
 Big Dig: The Numbers

EV = Earned Value = $3.5 Billion($1.5m*3)

PV = Planned Value = $6.0 Billion($1.5*4)

AC = Actual Cost = $2.5 Billion

BAC = Budget At Completion = $12 Billion

 Big Dig: Performance

CV = EV - AC = $3.5 - $2.5 = $1.00 Billion

Under Budget by $1.00 Billion

SV = EV - PV = $3.5 - $6.5 = - $3.00 Billion

Behind of schedule

CPI =EV / AC = $3.5 / $2.5 = 1.4

Getting 1.14 cents out of every dollar budgeted

SPI = EV / PV = $3.5 / $6.5 = 0.50

50% of progress planned

EAC = BAC / CPI = $12 / 0.50 = $ 24 Billion

Tools and Techniques
• Performance reviews
– Compare cost performance over time, schedule
activities or work packages overrunning and under
running the budget, and the estimated funds needed
to complete work in progress
– In EVM:
• Variance analysis: compares actual project (cost or schedule)
performance to planned or expected performance
• Trend analysis: examines project performance over time to
determine if performance is improving or deteriorating.
Graphical comparison of BAC versus EAC and completion
dates
• Earned value performance: compares the baseline plan to
actual schedule and cost performance
Tools and Techniques
• Variance analysis
– Cost performance measurements (CV, CPI) are used to
assess the magnitude of variation to the original cost
baseline
– Cause and degree of variance WRT the cost
performance baseline? ‐‐>corrective/preventive
action?
– High acceptable variance range at start, lower as the
project gets closer to complete
• Project Management software
– Monitoring PV, EV, and AC
Outputs
• Work performance measurements
– Calculated CV, SV, CPI, and SPI values for WBS components, work packages
and control accounts are documented and communicated to stakeholders
• Budget forecasts
– Calculated EAC value or bottom‐up EAC value is documented and
communicated to stakeholders
• Organizational Process Assets updates
– Cause of variance
– Corrective actions chosen and the reasons
– Other types of lessons learned from project cost control
• Change requests (through the Perform Integrated Change Control Process)
• Project management plan updates
– Cost performance baseline (scope, activity resources, cost estimates.
Sometimes new cost baseline should be prepared as cost variance is severe)
– Cost management plan
• Project document plan
– Cost estimates
– Basis of estimates
 References

1. Sections of this presentation were adapted from A Guide to

the Project Management Body of Knowledge , Third & partly
Fourth Editions, Project Management Institute Inc., © 2004/9
2. it is also drawn from various other presentations, publicly
uploaded
3. The presenter's expertise and Ingenuity were also employed
to upgrade the original presentation
Thank You !