Created by ejlp12@gmail.

com, June 2010

7 - Project Cost
Management
Project Management Training
Project Cost Management
Monitoring &
Controlling Processes

Planning
Processes

Enter phase/ Initiating Closing Exit phase/

Start project Processes Processes End project

Executing
Processes

Process
Knowledge
Area Initiating Planning Executing Monitoring & Closing
Control

Cost Estimating
Cost Cost Budgeting Cost Control
Project Cost Management
• The process involved in estimating, budgeting, and controlling cost
so that the project can be completed within approved budget
• Life cycle costing
– Looking at the cost of whole life of the product (include maintenance)
• Value analysis (value engineering)
– Looking at less costly way to do the same work within the same scope
• Law of Diminishing Returns
– E.g. adding twice resource to task may not get the task done in half cost/time

• Time value of money (depreciation)

• Cost will also affect the schedule
• Cost risk vs. Type of contract
7.1 Estimate Cost
• The process of developing approximation of the monetary resources needed to
complete project activities
– Cost trade-offs & risk must be considered
– Cost estimates should be refined

Tools &
Inputs Techniques Outputs
1. Scope baseline 1. Expert judgment 1. Activity cost estimates
2. Project schedule 2. Analogous estimating 2. Basis of estimates
3. Human resource plan 3. Parametric estimating 3. Project document
4. Risk register 4. Bottom-up estimating updates
5. Enterprise 5. Three-point estimates
environmental factors 6. Reserve analysis
6. Organizational process 7. Cost of quality
assets 8. Project management
estimating software
9. Vendor bid analysis
Types of Cost
• Variable Costs
– Change with the amount of production/work
– e.g. material, supplies, wages
• Fixed Costs
– Do not change as production change
– e.g. set-up, rental

• Direct Costs
– Directly attributable to the work of project
– e.g. team travel, recognition, team wages
• Indirect Costs
– overhead or cost incurred for benefit of more than one project
– e.g. taxes, fringe benefit, janitorial services
 Quality/Accuracy of Cost Estimation
Estimate Accuracy

Rough Order
of Magnitude • Most difficult to estimate as very little project info
+/- 50%
(ROM) is available, made during initiating process

• Used to finalize the Request for Authorization

Budget -10%
Estimate (RFA), and establish commitment, made during
+25%
planning phase

Definitive -5%
Estimate • During the project and refined
10%
7.2 Determine Budget
• Process of aggregating the estimated cost of individual activities or work
packages to establish an authorized cost baseline.

Tools &
Inputs Techniques Outputs
1. Activity cost estimates 1. Cost aggregation 1. Cost performance
2. Basis of estimates 2. Reserve analysis baseline
3. Scope baselines 3. Expert judgment 2. Project funding
4. Project schedule 4. Historical relationship requirements
5. Resource calendars 5. Funding limit 3. Project document
reconciliation updates
6. Contracts
7. Organizational process
assets
Cost Aggregation
• Reserves & risk management are important Cost Budget
while estimating!
Management reserves
– Contingency reserves: 🡪 Cost Baseline
the cost impacts of the remaining risk Cost baseline

– Management reserves: 🡪 Cost Budget Contingency reserves

extra fund to cover unforeseen risk or changes to
Project estimates
the project
Control account estimates

Work package estimates

Activity estimates
Determines Budget: Other considerations
• High level parametric estimate as a rule of thumb
– E.g. testing cost 50% of development cost

• Funding limit reconciliation = checking cash flow

– When the money will be available?

• Reconciliation needed before proposed cost baseline and cost budget

become final
– Such reconciliation is part of integration management
7.3 Control Cost
• The process of monitoring the status of the project to update the project
budget and managing changes to the cost baseline

Tools &
Inputs Outputs
Techniques
1. Project management 1. Earned value 1. Work performance
plan management measurement
2. Project funding 2. Forecasting 2. Budget forecast
requirement 3. To-complete 3. Organizational process
3. Work performance performance index updates
information 4. Performance reviews 4. Change requests
4. Organizational process 5. Variance analysis 5. Project management
assets 6. Project management plan updates
software 6. Project document
updates
How to control cost?
• Follow the cost management plan

• Look at any organizational process asset that are available

• Manage change
– Recording all appropriate change
– Preventing incorrect change
– Ensuring requested changes are agreed upon
– Managing the actual changes when and as they occur

• Measure and measure and measure (monitoring)

Progress Report
• Progress/performance report (output from communication area)
– Where work cannot be measured, estimate could be done by a guess

• Percent complete:
– 50/50 Rule
– 20/80 Rule
– 0/100 Rule
Activity is considered X percent complete when it begins and get credit for
the last Y percent only when it is complete
Earned Value Management
• Method to measure project performance against scope, schedule
and cost baseline (performance measurement baseline)

• Interpretation of basic EVM performance measures

– Cost Performance Index (CPI)
– Schedule Performance Index (SPI)

Image captured from Practice Standard for Earned Value Management, PMI © 2005
Earned Value Technique Example:
Project Budget: $400K
Project Schedule: 4 months

At the 3 month checkpoint:

Spent: $200K
Work completed: $100K
Terms and Formulas Definition Example
Earned Value (EV) As of today, what is the estimated value of the
work actually accomplished? $100K

Actual Cost (AC) As of today, what is the actual cost incurred for
the work accomplished? $200K

Planned Value (PV) As of today, what is the estimated value of work

planned to be done? $300K

Cost Variance (CV) Negative is over budget $100K – $200K

= EV - AC Positive is under budget = ($100K)

Schedule Variance (SV) Negative is behind schedule $100K - $300K

= EV - PV Positive is ahead schedule = ($200K)

Cost Performance Index We are getting $__ worth of work out of every $100K/$200K
(CPI) = EV/AC $1 spent. Are funds being used efficiently? = 0.5 i.e. 50%

Schedule Performance We are (only) progressing at __ percent of the $100K/$300K

Index (SPI) = EV/PV rate originally planed = 0.33 i.e 33%

4/0.33
Revised Total Duration Baseline Duration/Schedule Performance Index
= 12 months
Slide adapted from the original which taken from www.alphaPM.com
Earned Value Technique
Terms and Formulas Definition

Budget at completion (BAC) How much did we BUDGET for the TOTAL project effort?

Estimate at Completion (EAC) What do we currently expect the TOTAL project cost (a
= BAC / CPI forecast)?

Estimate to Complete (ETC) From this point on, how much MORE do we expect it to cost to
= EAC - AC finish the project (a forecast)?

Variance at Completion (VAC) As of today, how much over or under budget do we expect to
= BAC – EAC be at the end of the project?

• EAC is an important forecasting value.

Earned Value: Graphical Representation
TODAY
(Reporting
day) Projection of
schedule
delay
at completion
Estimate at
Completion
EAC Projection of (EAC)
cost
variance
at
BAC completion
(VAC)
AC Budget at
Completion
(BAC)
COST

Cost
Variance
(CV)

PV

Schedul
e
Variance
ACTUA (SV)
EV L
PLAN

EARN
VALUE

TIME
Project is over budget & behind schedule
Earned Value Management

EV can be calculated by
(%progress) x (planned man-
days)
Image captured from Practice Standard for Earned Value Management, PMI © 2005
 Exercise
• You have a project to build a box. The box is six sided. Each side is to take one
day to build and is budgeted for $1000 per side. The sides are planned to be
completed one after the other. Today is the end of day three.

• Using the following project status chart, calculate PV, EV, AC, BAC, CV, CPI, SV,
SPI, EAC, ETC, VAC.
• Describe your interpretation based on the calculation!

Task Progress Cost spent

||||||||||||||||||||||||||||||||||||||||
Side 1 100%
$1,200
||||||||||||||||||||||||||||||||||||||||
Side 2 100%
$1,000

Side 3 ||||||||||||||||||||||||||||||75% $750

Side 4 ||||||||||||||||||||50% $500

Side 5 0% $0

Side 6 0% $0
Exercise Solution
Parameter Calculation Result
PV
EV
AC
BAC
CV
CPI
SV
SPI
EAC
ETC
VAC

Project is below/over budget?

Project is late/ahead schedule?
How much more money we need?
Exercise Solution
Parameter Calculation Result
PV 1000 + 1000 + 1000 3000
(100% x 1000) + (100% x 1000) + (75% x 1000) +
EV 3025
(50% x 1000)
AC 1200 + 1000 + 750 + 500 3450
BAC 6 x 1000 6000
CV 3025 - 3450 -425
CPI 3025 / 3450 0.88
SV 3025 - 3000 25
SPI 3025 / 3000 1.01
EAC 6000 / 0.88 6818.18
ETC 6818.18 - 3450 3368.18
VAC 6000 - 6818.18 -818.18

• over budget, getting 0.88 dollar for every dollar we spent,

• ahead schedule, progressing 101% of the rate planned,
• probably will spend $6818 at the end (estimation),
• need $3368 to complete,
• over budget at the end for about $818 (estimation)
Forecasting EAC
• There are many ways to calculate EAC, depending on the
assumption made.
• Simple EAC calculation (EAC = BAC/CPI) assume that the
cumulative CPI adequately reflects past performance that will
continue to the end of the project.

• AC+(BAC-EV)
– Used when current variances are thought to be atypical of the future

• AC+[(BAC-EV)/(Cumulative CPI + Cumulative SPI)]

– It assumes poor cost performance and need to hit a firm completion date.
To-Complete Performance Index (TCPI)
• Helps the team determine the efficiency that must be achieved on
the remaining work for a project to meet a specified endpoint, such
as BAC or the team’s revised EAC

• TCPI
BACKUP SLIDES
Forecasting EAC
• Common alternative way to calculate EAC

Table captured from Practice Standard for Earned Value Management, PMI © 2005
Earned Schedule - An emerging EVM practice
• SPI($)
– At project start SPI is reliable
– At some point SPI accuracy diminishes
– Toward the project end it is useless (SPI = 1 at project end)
– Doest not show weeks/months of schedule variance
• SPI(t)
– Time based schedule measures
– Create a SPI that is accurate to the of the project

SV(t) = ES – AT
SPI(t) = ES / AT

• ES = Earned Schedule (Planned time)

• AT = Actual time

See more resources about earned schedule at http://www.earnedschedule.com

EVM – Hints to remember

• EV comes first in every formula

• If it’s variance, the formula is EV – something
• If it’s index, EV / something
• If it relates to cost, use Actual Cost
• If it relates to schedule, use PV
• Negative numbers are bad, positive is good

Copied from Rita’s book

 Next topic:
Project Quality Management

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