Project Cost Management

PROJECT COST
MANAGEMENT

Asoka Perera
Construction Engineering and Management Division
Department of Civil Engineering
University of Moratuwa

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 Project Cost Management
Project Management Knowledge areas

 Project Integration management

 Project scope management
 Project time management
 Project cost management
 Project quality management
 Project Human resource management
 Project Communication management
 Project risk management
 Project procurement management

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 Project Cost Management
Overview of lecture

The place of Project cost management

in project management
Project Cost estimating
Project Cost budgeting
Project Cost control
Examples and Exercises
Discussions
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 Project Cost Management
Cost Management :OVERVIEW

 Project Cost Management includes the

processes involved in
Planning and estimating,
Budgeting, and
Controlling costs so that the project can be
completed within the approved budget.

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 Project Cost Management
Cost Management :OVERVIEW
 Project Cost Management includes the
processes involved in
Cost Estimating – developing an approximation of the
costs of the resources needed to complete project
activities.
Cost Budgeting – aggregating the estimated costs of
individual activities or work packages to establish a cost
baseline.
Cost Control – influencing the factors that create cost
variances and controlling changes to the project budget.

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 Project Cost Management
Cost Management :OVERVIEW

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 Project Cost Management
Cost Management :OVERVIEW

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 Project Cost Management
Some Videos

Knoweledge area overview

Cost Management Process

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 Project Cost Management
1.0 Project Cost Estimating

The modern Project Management approach

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 Project Cost Management
1.0 Project Cost Management

 A few important aspects

developing an approximation of the costs of the
resources needed to complete each schedule
activity
possible causes of variation of the cost
estimates, including risks
The accuracy of a project estimate will increase
as the project progresses through the project life
cycle - ±50% to ±10%

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 Project Cost Management
1.0 Cost Estimating - Inputs

1.1.1 Enterprise Environmental Factors

Marketplace conditions. What products,
services, and results are available in the
marketplace, from whom, and under what
terms and conditions
Commercial databases. Example BSR from
ICTAD, COCMO for software.

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 Project Cost Management
1.0 Cost Estimating - Inputs

1.1.2 Organizational Process Assets

Cost estimating policies.
Cost estimating templates.
Historical information.
Project files.
Project team knowledge.
Lessons learned.

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 Project Cost Management
1.0 Cost Estimating - Inputs

1.1.3 Project Scope Statement

The project scope statement describes the
business need, justification, requirements,
and current boundaries for the project.
One of the most common constraints for
many projects is a limited project budget.
The project scope statement also provides
the list of deliverables, and acceptance
criteria for the project and its products,
services, and results.
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1.0 Cost Estimating - Inputs

1.1.4 Project Work Breakdown Structure

(WBS)
The project’s work breakdown structure
(WBS) provides the relationship among all
the components of the project and the
project deliverables.

WBS IS THE KEY FOR

PROJECT MANAGEMENT
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 Project Cost Management
1.0 Cost Estimating - Inputs

1.1.4 Project Work Breakdown Structure

(WBS)
The project’s work breakdown structure
(WBS) provides the relationship among all
the components of the project and the
project deliverables.
More details of WBS

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 Project Cost Management
1.0 Cost Estimating - Inputs

1.1.4 Project Work Breakdown Structure

(WBS) – Some Examples
Sysnet Case Study – Draw WBS
Some Examples are in the note

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 Project Cost Management
1.2 Cost Estimating – Tools and Techniques

1.2.1 Analogous Estimating

Analogous cost estimating means using the
actual cost of previous, similar projects as
the basis for estimating the cost of the
current project.
1.2.2 Determine Resource Cost Rates
Determining unit rates
Some calculation is given in Appendix

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2 Project Cost Management
Approximate Cost Estimating
Approximate estimates might be regarded as
having an accuracy of more or less 20%;
 House – per m2 as Rs.40,000
School per child
Hospital per bed
Road per km
Water tank per m3
We will do an example under Assignment
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2 Project Cost Management
2.6 Preliminary Cost Estimating
civil engineers require preliminary estimates at the
‘sketch plan’ or ‘outline proposal’ stage to address the
evolving scheme design and ultimately agree on an
outline cost plan with the client.
 Preliminary estimates are used to help determine the
relative costs of alternative designs or alternative
scheme proposals to address a client's need(s), and
thus guide the team in deciding on a (practicable)
detailed design.

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 Project Cost Management
2 Project Cost Management
 2.6 Preliminary Cost Estimating: Elemental
Division
• 1. Substructure - Demolition, site clearance,
earthworks, foundations
• 2. Superstructure Frame, floors, roof, external walls
• 3. Internal finishes Wall, floor, ceiling
• 4. Fittings and fixtures Internal architecture, painter
work
• 5. Services Sanitary, water, heating, air-
conditioning, mechanical and electrical services
• 6. External works Site organisation, drainage,
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 Project Cost Management
1.2 Cost Estimating – Tools and Techniques

1.2.3 Bottom-up Estimating

This technique involves estimating the cost
of individual work packages or individual
schedule activities with the lowest level of
detail. Example typical BOQ
1.2.4 Parametric Estimating
Determining unit rates
Some calculation is given in Appendix

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 Project Cost Management
1.2 Cost Estimating – Tools and Techniques

1.2.5 Project Management Software

MS Project, Primavera
Custom System such as Billest – Details
are in Appendix
1.2.4 Vendor Bid Analysis
Other cost estimating methods include
vendor bid analysis and an analysis of what
the project should cost. – Competitive
Bidding
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 Project Cost Management
1.2 Cost Estimating – Tools and Techniques

1.2.7 Reserve Analysis

Many cost estimators include reserves, also
called contingency allowances, as costs in
many schedule activity cost estimates.
1.2.8 Cost of Quality
Cost of quality can also be used to prepare
the schedule activity cost estimate

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 Project Cost Management
2 Project Cost Management

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 Project Cost Management
1.3 Cost Estimating – Outputs

1.3.1 Activity Cost Estimates

Logon case study : MS Project output
1.3.2 Activity Cost Estimate Supporting
Detail
 Description of the schedule activity’s project scope of work
 Documentation of the basis for the estimate (i.e., how it was
developed)
 Documentation of any assumptions made
 Documentation of any constraints
 Indication of the range of possible estimates (e.g., $10,000 (-10% /
+15%) to indicate that the item is expected to cost between $9,000
and $11,500).
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 Project Cost Management
1.3 Cost Estimating – Outputs

1.3.3 Requested Changes

The Cost Estimating process may generate
requested changes
1.3.4 Cost Management Plan (Updates)
If approved change requests result from the
Cost Estimating process

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 Project Cost Management
2.0 Cost Budgeting – Inputs

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 Project Cost Management
2.1 Cost Budgeting – Inputs

2.1.1 Project Scope Statement

Formal periodic limitations of the
expenditure of project funds can be given in
the project charter or contract.
2.1.2 Work Breakdown Structure
2.1.3 WBS Dictionary
2.1.4 Activity Cost Estimates
2.1.5 Activity Cost Estimate Supporting
Detail
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2.1 Cost Budgeting – Inputs

2.1.6 Project Schedule

MS Project can produce this
2.1.7 Resource Calendars
MS Project has this
2.1.8 Contract
What you sign
2.1.9 Cost Management Plan
MS Project can give this

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 Project Cost Management
2.2 Cost Budgeting – Tools and Techniques

2.2.1 Cost Aggregation

Schedule activity cost estimates are
aggregated by work packages in
accordance with the WBS.
2.2.2 Reserve Analysis
Reserve analysis establishes contingency
reserves, such as the management
contingency reserve, that are allowances
for unplanned, but potentially required,
changes.
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 Project Cost Management
2.2 Cost Budgeting – Tools and Techniques

2.2.3 Parametric Estimating

mathematical model to predict total project
costs.
2.2.4 Funding Limit Reconciliation
Large variations in the periodic expenditure
of funds are usually undesirable for
organizational operations. Therefore, the
expenditure of funds is reconciled with the
funding limits set by the customer or
performing organization on the
31 disbursement of funds for the project.
© Asoka Perera
 Project Cost Management
2.3 Cost Budgeting – Outputs

2.3.1 Cost Baseline

The cost baseline is a time-phased budget
that is used as a basis against which to
measure, monitor, and control overall cost
performance on the project.
It is developed by summing estimated costs
by period and is usually displayed in the
form of an S-curve

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 Project Cost Management
2.3 Cost Budgeting – Outputs

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 Project Cost Management
2.3 Cost Budgeting – Outputs

2.3.2 Project Funding Requirements

Funding requirements, total and periodic
(e.g., annual or quarterly), are derived from
the cost baseline and can be established to
exceed, usually by a margin, to allow for
either early progress or cost overruns.
Some portion of the management
contingency reserve can be included
incrementally in each funding step or
funded when needed
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 Project Cost Management
2.3 Cost Budgeting – Outputs

2.3.3 Cost Management Plan (Updates)

If approved change requests result from the
Cost Budgeting process, then the cost
management plan component of the project
management plan is updated if those
approved changes impact the management
of costs

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 Project Cost Management
2.3 Cost Budgeting – Outputs

2.3.4 Requested Changes

The Cost Budgeting process can generate
requested changes that affect the cost
management plan or other components of
the project management plan. Requested
changes are processed for review and
disposition through the Integrated Change
Control process.

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 Project Cost Management
3.0 Cost Control – Overview

 Influencing the factors that create changes to

the cost baseline
 Ensuring requested changes are agreed upon
 Managing the actual changes when and as
they occur
 Assuring that potential cost overruns do not
exceed the authorized funding periodically
and in total for the project

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 Project Cost Management
3.0 Cost Control – Overview

 Monitoring cost performance to detect and

understand variances from the cost baseline
 Recording all appropriate changes accurately
against the cost baseline
 Preventing incorrect, inappropriate, or
unapproved changes from being included in
the reported cost or resource usage
 Informing appropriate stakeholders of
approved changes
 Acting to bring expected cost overruns within
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 Project Cost Management
3.0 Cost Control – Overview

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 Project Cost Management
3.1 Cost Control – Inputs

 3.1.1 Cost Baseline

 3.1.2 Project Funding Requirements
 3.1.3 Performance Reports
 3.1.4 Work Performance Information
 Work performance information pertaining to the status and
cost of project activities being performed is collected. This
information includes, but is not limited to:
• Deliverables that have been completed and those not yet
completed
• Costs authorized and incurred
• Estimates to complete the schedule activities
• Percent physically complete of the schedule activities
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3.1 Cost Control – Inputs

 3.1.5 Approved Change Requests

Approved change requests from the Integrated
Change Control process can include modifications
to the cost terms of the contract, project scope,
cost baseline, or cost management plan.
 3.1.6 Project Management Plan
The project management plan and its cost
management plan component and other
subsidiary plans are considered when
performing the Cost Control process

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 Project Cost Management
3.2 Cost Control – Tools and Techniques

 3.2.1 Cost Change Control System

A cost change control system, documented
in the cost management plan, defines the
procedures by which the cost baseline can
be changed. It includes
• the forms, documentation, tracking systems, and
• approval levels necessary for authorizing
changes.
• The cost change control system is integrated
with the integrated change control process.

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3.2 Cost Control – Tools and Techniques

 3.2.2 Performance Measurement Analysis

Performance measurement techniques help
to assess the magnitude of any variances
PM now use Earned Value method
compares
• the cumulative value of the budgeted cost of
work performed (earned) at the original allocated
budget amount to both the budgeted cost of
work scheduled (planned) and to the actual cost
of work performed (actual).

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3.2 Cost Control – Tools and Techniques

 3.2.2 Performance Measurement Analysis

Performance measurement techniques help
to assess the magnitude of any variances
PM now use Earned Value method
compares
• the cumulative value of the budgeted cost of
work performed (earned) at the original allocated
budget amount to both the budgeted cost of
work scheduled (planned) and to the actual cost
of work performed (actual).

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 Project Cost Management
COST CONTROL
Systems in Current Use
 Earned Value Technique
 Earned value analysis involves calculating
five values for each activity or summary
activity from a project’s WBS
 Five main variables are:
• The Planned Value(PV, Earlier BCWS);
• The Earned Value(E V, Earlier BCWP);
• The Actual Costs(AC, Earlier ACWP);
• The Cost Variance (CV,);
• The Schedule Variance (SV);
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 Project Cost Management
COST CONTROL
Systems in Current Use
 Earned Value Technique
 Five main variables are:
• The Planned Value(PV, Earlier BCWS);
• Planned Value is how much the project should
cost to get to a specific point in the schedule.
• For example, if a project has a budget of
Rs.100,000 and month six represent 40% of the
project work, the PV for month six is Rs.40,000/=.
Planned Value used to be known as the Budget
Cost of Work Schedule (BCWS)

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 Project Cost Management
COST CONTROL
Systems in Current Use
 Earned Value Technique
 Five main variables are:
• The Earned Value(E V, Earlier BCWP);
• Earned Value is representative of the work
completed to date regardless of how it took to
accomplish it.
• For example, if a project has a budget of
Rs.100,000 and the work completed to date
represents 25% of the entire project work, its EV
is Rs.25,000/=. Earned Value used to be known
as the Budgeted Cost of Work Performed (BCWP)

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 Project Cost Management
COST CONTROL
Systems in Current Use
 Earned Value Technique
 Five main variables are:
• The Actual Costs(AC, Earlier ACWP);
• Actual Costs is the actual amount of monies the
project has required to date.
• For example, if a project has a budget of
Rs.100,000 and Rs.35,000/= has been spent on
the project to date, the AC of the project would
be Rs.35,000/=. This was earlier know as Actual
Cost of Work Performed (ACWP)

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 Project Cost Management
COST CONTROL
Systems in Current Use
 Earned Value Technique
 Five main variables are:
• The Cost Variance (CV,);
• A Cost Variance occurs when the actual cost of
the project work is more than or less than EV.
• For example, EV is calculated to be Rs.25,000/=,
but you had spend Rs.35,000/= to get there. As
such the Cost Variance (CV) is Rs.10,000/=.

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 Project Cost Management
COST CONTROL
Systems in Current Use
 Earned Value Technique
 Five main variables are:
• The Schedule Variance (SV);
• A Schedule Variance occurs when the EV is less
than the PV.
• For example, the project is supposed to be worth
Rs. 40,000/= in month six; however, at month six
your EV is only Rs.25,000/=. You have got SV of
Rs.15,000/=

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 Project Cost Management
COST CONTROL
Systems in Current Use
 Earned Value Technique
TERM FORMULA
Earned Value EV, Budgeted Cost of Work Performed (BCWP) =
budgeted cost to date X percent complete
Cost Variance CV = EV — AC(actual cost of work performed)
Schedule Variance SV = EV — PV
Cost Performance Index CPI = EV/AC
Schedule Performance Index SPI = EV/PV -
Budget at Completion BAC = Total Budget
Estimate at Completion EAC = BAC/CPI
Estimate to Complete ETC = EAC - AC
Variance at Completion VAC = BAC -EAC
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3.2 Cost Control – Tools and Techniques

 3.2.3 Forecasting
Use of Earned Value
• ETC based on new estimate.
• ETC based on atypical variances
• EAC using a new estimate
• using remaining budget
• EAC using CPIC

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3.2 Cost Control – Tools and Techniques

 3.2.4 Project Performance Reviews

Use of Earned Value
• Variance analysis
• Trend analysis
• Earned value technique

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3.2 Cost Control – Tools and Techniques

 3.2.5 Project Management Software

Project management software, such as MS
Project, Primavera and computerized
spreadsheets, is often used to monitor PV
versus AC, and to forecast the effects of
changes or variances
• Most of these software have standard reports for
Earned value method
• In USA it is compulsory to use Earned Value
method for reporting and Project Management

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 Project Cost Management
3.3 Cost Control – Outputs

 3.3.1 Cost Estimates (Updates)

Revised schedule activity cost estimates
are modifications to the cost information
used to manage the project.
3.3.2 Cost Baseline (Updates)
Budget updates are changes to an
approved cost baseline. These values are
generally revised only in response to
approved changes in project scope.

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3.3 Cost Control – Outputs

 3.3.3 Performance Measurements

The calculated CV, SV, CPI, and SPI values
for WBS components, in particular the work
packages and control accounts, are
documented and communicated to
stakeholders.
3.3.4 Forecasted Completion
Either a calculated EAC value or a
performing organization-reported EAC
value is documented and the value
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 Project Cost Management
3.3 Cost Control – Outputs

 3.3.5 Requested Changes

Analysis of project performance can
generate a request for a change to some
aspect of the project. Identified changes
can require increasing or decreasing the
budget.
3.3.6 Recommended Corrective Actions
Corrective action is anything done to bring
expected future performance of the project
in line with the project management plan.
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3.3 Cost Control – Outputs

 3.3.7 Organizational Process Assets (Updates)

Lessons learned are documented so they can
become part of the historical databases for
both the project and the performing
organization.
3.3.8 Project Management Plan(Updates)
Schedule activity, work package, or planning
package cost estimates, as well as the cost
baseline, cost management plan, and project
budget documents are components of the
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project management plan. © Asoka Perera
 Project Cost Management

Thank you

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