Project Cost Management

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 Outline
Cost management processes
Resource planning
Cost estimating
Cost budgeting
Cost controlling

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What is Cost and Project Cost Management?
Cost is a resource sacrificed or fore-gone to achieve a specific

objective or something given up in exchange

Costs are usually measured in monetary units like birr, dollar, etc

Project cost management includes the processes required to

ensure that the project is completed within an approved budget

Project managers must make sure their projects are well defined, have

accurate time and cost estimates and have a realistic budget that they
were involved in approving

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 Project Cost Management Processes
1. Resource planning: determining what resources and quantities
of them should be used

2. Cost estimating: developing an estimate of the costs and

resources needed to complete a project

3. Cost budgeting: allocating the overall cost estimate to

individual work items to establish a baseline for measuring
performance

4. Cost control: controlling changes to the project budget

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 Cost of Software Defects
Phase of Software Development Relative Cost to Repair Defects
Requirements and Analysis 1
Coding and Unit Test 5
Integration and System Test 10
Beta Test 15
Post-Product Release 30
NB:  is a normalized unit of cost and can be expressed in dollars, person-hours, et.

 It is much more cost-effective to spend money on defining user

requirements and doing early testing on IT projects than to wait
for problems to appear after implementation
 If it would cost $1,000 to repair a software defect in the
requirements and analysis phase but it would cost $30,000 to
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fix it in the post-product release phase
 Resource Planning
The nature of the project and the organization will affect
resource planning
Some questions to consider:
How difficult will it be to do specific tasks on the
project?
Is there anything unique in this project’s scope
statement that will affect resources?
What is the organization’s history in doing similar
tasks?
Does the organization have or can it acquire the
people, equipment, and materials that are capable and
6 available for performing the work?
 Cost Estimating
An important output of project cost management is a

cost estimate
There are several types of cost estimates, and tools

and techniques to help create them

It is also important to develop a cost management plan

that describes how cost variances will be managed on

the project
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 Cost Estimation Tools and Techniques

3 basic tools and techniques for cost estimates:

Analogous or top-down: use the actual cost of a

previous, similar project as the basis for the new estimate

Bottom-up: estimate individual work items and sum

them to get a total estimate

Parametric: use project characteristics in a mathematical

model to estimate costs

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 Typical Problems with Cost Estimates
Developing an estimate for a large software project is a complex
task requiring a significant amount of effort. Remember that
estimates are done at various stages of the project
Many people doing estimates have little experience doing them.
Try to provide training and mentoring
People have a bias toward underestimation. Review estimates and
ask important questions to make sure estimates are not biased
Management wants a number for a bid, not a real estimate. Project
managers must negotiate with project sponsors to create realistic
cost estimates

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 Cost Budgeting

Cost budget involves allocating the project

cost estimate to individual work items and

providing a cost baseline.

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 Cost Control

Project cost control includes

 monitoring cost performance

 ensuring that only appropriate project changes are included

in a revised cost baseline

 informing project stakeholders of authorized changes to the

project that will affect costs

Earned value management is an important tool for cost

11 control
 Earned Value Management (EVM)

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 Earned Value Management (EVM)

EVM is a project performance measurement

technique that integrates scope, time, and cost data

Given a baseline (original plan plus approved

changes), you can determine how well the project is

meeting its goals
You must enter actual information periodically to use

13 EVM.
 Earned Value Management

Earned Value Analysis is an industry standard way to:

 measure a project’s progress,

 forecast its completion date and final cost, and
 provide schedule and budget variances along the way.
By integrating three measurements, it provides consistent,

numerical indicators with which you can evaluate and

compare projects.
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 EMV enables

1. Knowing where you are on schedule?

2. Knowing where you are on budget?

3. Knowing where you are on work

accomplished?
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 Earned Value Management Terms
Planned value (PV), formerly called the budgeted cost
of work scheduled (BCWS), also called the budget, is
that portion of the approved total cost estimate planned
to be spent on an activity during a given period
Actual cost (AC), formerly called actual cost of work
performed (ACWP), is the total of direct and indirect
costs incurred in accomplishing work on an activity
during a given period
Earned value (EV), formerly called the budgeted cost
of work performed (BCWP), is the percentage of work
actually completed multiplied by the planned value
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 Earned Value Formulas
TERM FORMULA

Earned Value EV = BAC  Percent Completed

Cost Variance CV = EV – AC

Schedule Variance SV = EV – PV

Cost Performance Index CPI = EV/AC

Schedule Performance Index SPI = EV/PV

To estimate what it will cost to complete a project or how long it will take based
on performance to date, divide the budgeted cost or time by the appropriate
index.
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 Rules of Thumb for EVA Numbers

 Negative numbers for cost and schedule variance indicate

problems in those areas.

The project is costing more than planned or taking longer than planned

Zero variance shows that the project is running according to the plan

 CPI and SPI > 1.0 indicate exceptional performance

 CPI and SPI < 1.0 indicate poor performance

If CPI or SPI = 1, it shows that the project is performing according to

its plan
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 Example
Suppose you have a software project which is planned
to be completed in 9 months with a budget of Birr
900,000.
After a month,10% of the project is completed at a
total expense of Birr 100,000, but the planned
completion was 15%.
Given:
Budget At Complete (BAC) = Birr 900,000
AC = Birr 100,000
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 Compute
a) PV
b) EV
c) CV - interpretation
d) SV - interpretation
e) CPI - interpretation
f) SPI - interpretation
g) Forecast -Budget at complete
h) Forecast - Time at complete
i) Overall project’s traffic light status
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 …solution

a) Planned Value = Planned Completion (%) * BAC

= 15% * Birr 900,000

= Birr 135,000

b) Earned Value = Percent Completed (%) * BAC

= 10% * Birr 900,000

= Birr 90,000
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 …continued
CV = EV – AC The project is
costing more
= 90,000 – 100,000 than planned
because CV is
= -10,000 less than zero.

SV = EV – PV
= 90,000 – 135,000 The project is
= - 45,000 taking longer
than planned
because SV is
less than zero.

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 …continued
CPI= EV / AC
= 90,000 / 100,000
It shows Poor
= 0.90 Performance
SPI= EV/PV because CPI
and SPI are
= 90,000 / 135,000 less than one.

= 0.67

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 Forecasting Cost
If the project continues at the current
performance, what is the true cost of the
project?
Estimate at Complete
= Budget at Complete (BAC) / CPI
= Birr 900,000 / 0.90 = Birr 1,000,000
At the end of the project, the total project
cost will be Birr 1,000,000
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 Forecasting Time

If the project continues at the current

performance, what is the true time of the
project?
Estimate at Complete
= Original Time Estimate / SPI
= 9 months / 0.67 = 13.43 months
The project will be completed by the end
of 13.34 months.
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 Establish Ranges to Guide Traffic Light
Status

Traffic light status is useful in conveying overall

project’s status with one color
Establish objective SPI and CPI ranges to determine
the true project color.
Average of CPI & SPI i.e. (CPI+SPI)/2

Green [1.0 - 0.95] Good

Warning
Yellow [0.94 - 0.85] Bad
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Red [0.84 - 0]
 Therefore, for the above example,

overall project’s traffic light status is

= (CPI+SPI)/2
= (0.90+0.67)/2
= 0.78 Bad

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 ?
Many
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thanks!
  QUIZ-2(5%)
1) Write all project cost management process?
2) How did you understood Earned value management(EVM) in cost
project management?
3) Suppose you have a software project which is planned to be
completed in one year with a budget of Birr 500,000.After a half
month,15% of the project is completed at a total expense of Birr
100,000, but the planned completion was 20%.
So, calculate:
a) PV ?
b) EV ?
c) CV ?
d) SV ?
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