Project Cost Management

PMGT- 401: Project Management Fundamentals
07 Project Cost Management
PMGT- 401: Project Management Fundamentals 07 Project Cost Management
Bob Xourafas, P.Eng, PMP
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07 Project Cost Management: Definition

Definition: Processes required to ensure the project is completed within the approved budget
You have to remember the definition
7.1 Estimate Costs- Planning Processes: 7.2 Determine Budget - Planning 7.3 Control Costs- Monitoring and Control
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Learning Objectives
By the end of this chapter you will be able to: Understand the main activities that take place during Estimate Costs and Determine Budget Planning and Control Costs The topics that will be covered are: Estimate Costs
Estimates of the approximate costs of the resources (human, materials, etc.) needed to complete the activities identified on the project schedule
Determine Budget
Allocation the overall cost estimate to the individual work activities identified on the project schedule
Control Costs
Control changes to the project budget
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Reading Materials
Text:
Chapter 7
References:
PMBOK: Section 7
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Project Cost Management Processes

The activities in the Project Cost Management Knowledge Area establish cost estimates for resources, establish budgets, and keep watch over those costs to ensure that the project stays within the approved budget. Two techniques are used in this Knowledge Area to decide among costing alternatives : life cycle costing and value engineering. These techniques can improve decision making, reduce costs, reduce activity durations, and improve the quality of the deliverables. Life Cycle Costs or Total Cost of Ownership (TCO) This costing technique considers the TOTAL cost to the organization for the ownership and acquisition of a product over its full life. This includes the cost producing the product, operation, support and where applicable, disposal.
PMGT- 401: Project Management Fundamentals 07 Project Cost Management Bob Xourafas, P.Eng, PMP
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Value Engineering This technique helps improve project schedules, profits, quality, and resource usage and optimizes life cycle costs.
What is it? Find a less costly way to do the same scope of work.
If a project team is looking at decreasing project cost but maintaining the same scope of work, they are performing value analysis. It requires the systematic use of techniques to identify the required project functions, assign values to these functions and provide functions at the lowest overall cost without loss of performance.
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07 Project Cost Management: Process Mapping

Initiating
4.1 Develop Project Charter
Planning
4.2 Develop Project Management Plan 5.1 Collect Requirements 5.2 Define Scope 5.3 Create WBS 6.1 Define Activities 6.2 Sequence Activities 6.3 Estimate Activity Resources 6.4 Estimate Activity Durations 6.5 Develop Schedule 7.1 Estimate Costs 7.2 Determine Budget
Executing
4.3 Direct and Manage Project Execution
Monitoring & Controlling

4.4 Monitor and Control Project Work 4.5 Perform Integrated Change Control 5.4 Verify Scope 5.5 Control Scope 6.6 Control Schedule 7.3 Control Costs
Closing
4.6 Close Project or Phase
PMGT- 401: Project Management Fundamentals 07 Project Integration 04 Cost Management Management
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07 Project Cost Management Main Activities

Initiating Planning
Determine how you will manage Costs in the project-Cost Management Plan Estimate costs Develop Budget Iterations-Go Back Finalize how to execute and control the cost Integrate Cost Management Plan into the over all Project Management Plan
Executing
Monitoring & Controlling

Measure according to the Cost Management Plan Measure against the Cost performance baselines
Closing
Determine variances and if they warrant corrective actions or changes

Recommend changes, preventative and corrective actions Use Integrated Change Control to determine other impacts Create Forecasts
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Since you finished your project schedule development, you now have an exhaustive breakdown of project activities, and you have some pretty good duration estimates.
Now the question thats forever on the mind of the executive management staff: how much is it going to cost?
The purpose of the Estimate Costs process is to answer that question. Every project has a budget, and part of completing a project successfully is completing it within the approved budget. Sometimes project managers are not responsible for the budget portion of the project. This function is assigned instead to a functional manager who is responsible for tracking and reporting all the project costs.
Keep in mind that if you, as the project manager, dont have responsibility for the project budget, your performance evaluation for the project should not include budget or cost measurements (tracking and reporting on project costs).
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Cost Management Plan

Before diving into the Project Cost Management processes, you should know that these processes are governed by the Cost Management Plan
Cost Management Plan is created during the Develop Project Management Plan process (see 04 Project Integration Management, 4.3 Develop Project Management Plan).
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Cost Management Plan

It is a subsidiary of the Project Management Plan and some of the elements of this plan include, but arent limited to, are the following:
Precision levels, or the rounding youll use for project costs (hundreds, thousands, and so on) Units of measure for resources such has hours for staff resources and hourly rates for contractor staff Control account links so that cost estimates for WBS elements can be linked directly to the accounting system Variance thresholds for costs Earned value rules (covered in the Estimate Costs Tools and Techniques section) Reporting formats Process descriptions How risk budgets, contingencies and management reserves will be reported and assessed (11-Project Risk Management)
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7.1 Estimate Costs
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7.1 Estimate Costs: Inputs-Tools & Techniques-Outputs

Inputs
1. 2. 3. 4. 5. Scope baseline Project schedule Human resource plan Risk register Enterprise environmental factors Organizational process assets 3. 4. 5. 6. 7. 8.
Tools & Techniques

1.
2.
Outputs
Expert judgment
Analogous estimating Parametric estimating Bottom-up estimating Three point estimates Reserve analysis Cost of quality Project management estimating software Vendor bid analysis 1. Activity Cost estimates
2.
3.
Basis of Estimates
Project document updates
6.
9.
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7.1 Estimate Costs

As with time estimates, the work breakdown structure (WBS) is the key to determining accurate cost estimates.
The Estimate Costs process develops a cost estimate for the resources (human and material) required for each schedule activity. This includes weighing alternative options and examining trade-offs. Estimate Costs includes identifying and considering various costing alternatives.
Discussion re: trade-offs Example:
In most application areas, additional work during a design phase could reduce the cost of the production phase. The cost-estimating process must consider whether the cost of the additional design work will be offset by the expected savings.
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7.1 Estimate Costs

Best Management Practices:
Estimating should be based on the WBS to improve accuracy Estimating should be done by the person doing the work Historical information is the key to improving estimates Costs (and time, scope and resources) should be managed to estimates A cost (and time, scope and resources) baseline should be kept and not changed except for approved project changes Corrective actions should be taken when cost problems (and time, scope and resources) occur A project manager should never just accept time or cost requirements from management:
The PM and the project team should analyze the needs of the project, come up with their own estimate and reconcile any differences.
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7.1 Estimate Costs: Definitions

Estimate Costs
Project Estimate Costs involves developing an approximation (estimate) of the costs of the resources (people, equipment, materials) needed to complete project activities
In approximating cost, the estimator considers the causes of variation of the final estimate for purposes of better managing the project.
Estimate Costs vs. pricing

Estimate Costs is coming up with the most likely cost for completing the project
When a project is performed under contract, pricing is a business decision.

Pricing: how much will an organization charge for completing the project under the contract?
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Types of Costs A decision must be made as to what type of costs will be included in the estimates. This decision is documented in the Cost Management Plan Variable Cost Any cost that changes with the amount of production or the amount of work e.g., cost of materials, supplies, wages Fixed Cost Non-recurring costs that do not change as production changes e.g., set-up, rental Direct Cost Costs that are directly attributable to the work on the project e.g., team travel, team wages, cost of material used on project
Indirect Cost Overhead items or costs incurred for the benefit of more that one project; typically allocated to the project through accounting system e.g., taxes, fringe benefits, facilities
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Working Capital
Amount of money company has to invest, including investment in projects or current assets, minus current liabilities
Depreciation
Large assets (e.g. equipment) purchased by a company lose value over time. Accounting standards call this depreciation. There are two forms of depreciation:
Straight line depreciation: The same amount of depreciation is taken each year. A $1,000 item with a ten year useful life and no salvage value (worth at the end of its life) would be depreciated at $100 per year Accelerated depreciation: depreciates faster than Straight Line. Depreciates more in first few years and less in later years A $1,000 item with a ten year useful life and no salvage value (worth at the end of its life) would be depreciated at $180 the first year, $150 the second year, $130 the next, etc.
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Cost Sample Question You have been assigned as the project manager on a new project. The organization uses a strong matrix structure. You need to purchase computers to do the project. This is an example of: A. B. C. D. Limited cost Diminishing cost Fixed cost Indirect cost
Answer : ? C fixed cost (benefits only this project)
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7.1 Estimate Costs: Inputs

1. Scope baseline 2. Project schedule 3. Human resource plan
Skills, rates, performance reward/recognition (see 09 Human Resource Project Management)
An understanding of any risk uncovered to date. Remember, a full risk analysis of the details of the project will not have been completed before costs are estimated. The project team should consider the extent to which the effect of risk is included in the cost estimates for each activity. Market conditions in terms of procurements from outside the organization As with several other processes Ive covered, keep in mind organizational policies (such as Estimate Costs policies or templates), historical information, previous project files, constraints, and assumptions when deriving your cost estimates.
4. Risk register

5. Enterprise environmental factors

6. Organizational process assets
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7.1 Estimate Costs: Tools & Techniques

Expert Judgment
Expert judgment gained, guided by historical information can be used for cost estimating and also decide what methods of estimation (tools and techniques) should be used.
Analogous or Top-Down estimating

Top or middle managers use expert judgment or the actual time and cost on a previous, similar project as the basis for estimating the current project. Analogous estimating uses historical information and thus is a form of expert judgment. It is generally less costly and time consuming than other project estimation techniques, but it is also less accurate. Used to estimate project cost early in the project, when detail project information is scarce.
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Bottom-Up Estimating
Involves estimating the cost of individual activities or work packages from WBS, and summarizing, or rolling up, to get the project level
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Advantages of Analogous Estimating
Quick Tasks need not be identified Less costly to develop Gives the PM an idea of the level of managements expectations Overall project costs will be capped
Disadvantages
Less accurate Estimates are based on limited amount of detail information about the project Requires considerable experience to create a good estimate Infighting at the highest management level to gain the biggest piece of the pie without knowing the size of the pie Extremely difficult for projects with uncertainty
Advantages of Bottom-Up Estimating

More Accurate Gains buy-in from the team
Disadvantages
Takes time and expense to do this estimate Tendency for the team to pad estimates
Based on a detail analysis of the project Provides a basis for monitoring and controlling
Requires that the project be defined and understood Team infighting to gain the biggest piece of the pie
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Parametric Estimating
Parametric estimating involves using project characteristics (parameters) in a mathematical model to predict project costs. Example: Cost/line-of-code, cost/linear meter, cost/installation Two types of parametric modeling: Regression analysis: scatter diagram Tracks two variables to see if they are related and creates a mathematical formula to use in future parametric estimating
100 80 60 40 20 0 0 2 4 6
Learning Curve: Graphical presentations or repetitive activities in which continuous operations will lead in reduction in time, cost and resources. The 100th room painted will cost less than the first room because of improved efficiencies.
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Accuracy of Estimates
Project cost estimates should come with an indication of the range of possible results, especially at the project detail level
Accuracy Ranges
Q: Why do ranges tighten up? A: progressive elaboration
Level
Order of Magnitude Budget Definitive
Estimating
Top Down Top Down Bottom Up
Phase
Initiation Planning Planning
Range
-25% to +75% -10% to +25% -5% to +10%
Time to Prepare
Days Weeks Months
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Three-Point Estimates
PERT analysis-see 06 Project Time Management
Reserve Analysis
Cost estimates may include contingency reserves (also known as contingency allowances) to account for cost uncertainty. You might choose to add a percentage of the total estimated cost, a fixed number or estimated using quantitative methods.
We will discuss contingency reserves in detail in Chapter 11, Project Risk Management
Contingency reserves can later be reduced or eliminated, as more precise information about the activity becomes available.
Cost of Quality
The cost of quality should also be included in activity cost estimating We will discuss the cost of quality in Chapter 08 Project Quality Management
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Project Management Software
The project management software is a tool that can help you establish project cost estimates and can help you quickly determine estimates given different variables and alternatives.
Vendor Bid Analysis

As the name implies, this is a process of gathering information from vendors to help you establish cost estimates. You can accomplish this by requesting bids or quotes or working with some of your trusted vendor sources for estimates.
You should compare vendor bids when using this tool and technique and not rely solely on one vendor to provide you with estimates.
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7.1 Estimate Costs: Outputs

Activity Cost estimates Cost estimates are quantitative assessments of the likely costs of the resources (labor, materials, supplies, etc) required to complete project activities. Estimate Costs generally includes considering appropriate risk response planning, such as contingency plans Basis of Estimates
A description of the work that was estimated.
A description of how the estimate was developed or the basis for the estimate. A description of the assumptions made about the estimates or the method used to determine them. A description of the constraints. A range of possible results. Like the time estimates, you should state the cost estimates within ranges such as $500 $75.
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7.1 Estimate Costs: Outputs

Project Document Updates
All documents associated with cost estimating may require updating
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7.2 Determine Budget
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7.2 Determine Budget: Definition

Determine Budget
The next process concerns determining the cost baseline, which is the primary output of the Determine Budget process.
The Determine Budget process aggregates the cost estimates of activities and establishes the cost baseline for the project that is used to measure performance of the project throughout the remaining process groups. Only the costs associated with the project become part of the project budget. For example, future period operating costs are not project costs and therefore arent included in the project budget. The cost baseline is the expected cost for the project. Remember that costs are tied to the financial system through the chart of accountsor code of accountsand are assigned to project activities at the work package level of the WBS. The budget will be used as a plan for allocating costs to project activities.
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Determine Budget (CB): Inputs-Tools & Techniques-Outputs

Inputs 1. Activity cost estimates 2. Basis of estimates 3. Scope baseline 4. Project schedule 5. Resource calendars 6. Contracts 7. Organizational process assets Tools & Techniques 1. 2. 3. 4. Cost aggregation Reserve analysis Expert judgment Historical relationships 5. Funding limit reconciliation Outputs
1. Cost performance baseline

2. Project funding requirements
3. Project document updates
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7.2 Determine Budget: Inputs

1. Activity cost estimates 2. Basis of estimates 3. Scope baseline
4. Project schedule
5. Resource calendars 6. Contracts
7. Organizational process assets

Ive covered all these inputs before except Contract
Contract will be covered in Chapter 12, Procurement Management
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7.2 Determine Budget: Tools & Techniques

Cost aggregation
Cost aggregation is the process of tallying the schedule activity cost estimates at the work package level and then totaling the work package levels to higher-level WBS component levels (such as the control accounts).
Reserve analysis
Ive covered reserve analysis already. Note that reserve analysis in this process also takes into consideration management AND contingency reserves for unplanned changes to project scope and project costs.
Management AND contingency reserves will be covered in detail in Chapter 11, Project Risk Management
Historical relations
Historical relations of project parameters that are used in analogous of parametric estimation should be closely examined in determining the project budget
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8 COST BUDGET $1423 7 MANAGEMENT RESERVE
Cost Aggregation
$68
6 COST BASELINE
$1355
5 CONTINGENCY RESERVE
$105
4 PROJECT
$1250
3 CONTROL ACCOUNTS
$850
$400
2 WORK PACKAGES
$100
$250
$500
1 ACTIVITIES
$25
$25
$25
$25
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Expert judgment Always to be used as a tool in any process
Funding limit reconciliation
The next thing to be check is the project cash flow (for example monthly cash flow) against the funding available for the project (in this example, monthly funding available). Funding may not be available when it is required causing changes to the project (usually rescheduling of work) and iterations of the project management plan. There is an other obvious reconciliation needed before the cost baseline and cost budget become final: Reconciliation with any funding constraints identified in the project scope statement.
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7.2 Determine Budget: Outputs

Cost Baseline
You develop the cost baseline, the first output of Determine Budget, by adding the costs of the WBS elements (remember, these costs were aggregated with the cost aggregation tool and technique) according to time periods.
This is also known as the projects time-phased budget at completion (BAC). Most projects span some length of time, and most organizations time the funding with the project.
In other words, you wont get all the funds for the project at the beginning of the project; theyll likely be disbursed over time.
The cost baseline is used to measure, monitor and control the overall actual cost performance of the project against the project cost requirements.
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Cost Baseline
Cost baselines can be displayed graphically, with time increments on one axis and dollars expended on the other axis, as an S curve shown above. The reason for this is that project spending starts out slowly, gradually increases over the projects life until it reaches a peak, and then tapers off again as the project wraps up. Large projects are difficult to graph in this manner because the timescale isnt wide enough to accurately show fluctuations in spending. There are other methods that more accurately graph costs that youll look at in the Control Costs process.
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Cost Baseline
Large projects might have more than one cost baseline.
For example, you might be required to track human resource costs, material costs, and contractor costs separately.
The cost baseline should also contain appropriations for risks Additionally, youll want to set aside money for contingency reserves. This is for the unforeseen, unplanned risks that might occur.
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Project Funding Requirements
Project funding requirements are the total amount of money spent on the project.
They are determined from the cost baseline and might include a management contingency reserve thats used to manage cost overruns, particularly early in the project.
As I said earlier, spending usually starts out slowly on the project and picks up speed as you progress. Sometimes, the expected cash flows dont match the pace of spending.
Project funding requirements accounts for this by using a management reserve contingency (usually a margin or percentage of the cost baseline) thats released in increments with the project budget.
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8 COST BUDGET $1423 7 MANAGEMENT RESERVE
$68
6 COST BASELINE
$1355
5 CONTINGENCY RESERVE
$105
4 PROJECT
$1250
3 CONTROL ACCOUNTS
$850
$400
2 WORK PACKAGES
$100
$250
$500
1 ACTIVITIES
$25
$25
$25
$25
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Project Document updates
Project documents associated with budgeting may require updates
Specifically,
Risk register
Cost estimates
Project schedule
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7.3 Control Costs
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7.3 Control Costs: Definitions
The Control Costs process manages changes to project costs as outlined in the cost management plan.
Control Costs Includes: Monitoring actual cost performance to detect and understand variances from the cost baseline Ensuring all appropriate cost changes are recorded accurately in the cost baseline Preventing incorrect, inappropriate, or unauthorized cost changes from being included in the cost baseline Informing stakeholders of authorized changes Acting to bring expected costs within acceptable limits

All budget changes should be agreed to and approved by the project sponsor where applicable (the criteria for approvals should be outlined in the change control system documentation).
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7.3 Control Costs: Definitions

Integrated Change Control lays the foundation for all the change control processes in other knowledge areas
Communications
10.3 Performance Reporting
Integration
4.6 Integrated Change Control
Subsidiary Change Control Process

Scope Change Control Schedule Change Control Cost Change Control Quality Change Control Contract Administration Change Control
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7.3 Control Costs: Inputs-Tools & Techniques- Outputs

Inputs 1. Project management plan
2. 3. Project funding requirements Work performance information Organizational process assets
Tools & Techniques

1. Earned Value Management 2. Forecasting 3. To-complete performance index 4. Performance reviews 5. Variance analysis 6. Project management software
1. 2. 3.
Outputs
Work performance measurements Budget forecasts Organizational process assets updates (lessons learned) Change requests Project management plan updates Project document updates
4. 5. 6.
4.
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7.3 Control Costs: Inputs

1. Project management plan Cost baseline and cost management plan 2. Project funding requirements Already discusses in 7.2 3. Work performance information Include information on actual work performance such as how much work has been completed and at what actual costs 4. Organizational process assets Existing cost-control policies, procedures and guidelines Cost control tools Reporting cost methods
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7.3 Control Costs: Tools & Techniques

Earned Value Management
Many project managers manage their project performance by comparing planned to actual results. With this approach, you could easily be on time but overspend according to your plan. A better method is Earned Value Management (EVM) Simply stated, EMV compares what youve received or produced to what youve spent.
Earned value management integrates cost, time and scope: to measure project performance to date, forecast future project performance, and forecast future project completion dates
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Earned Value Management
The EVM continuously monitors the percent complete of the project, the planned value (PV), earned value (EV), and actual costs (AC) expended to produce the work of the project (Ill cover the definition of these terms shortly). When variances that result in cost changes are discovered (including schedule variances and cost variances), those changes are managed using the cost change control system. The primary function of this analysis technique is to: determine and document the cause of the variance, to determine the impact of the variance (youll do this with the EVM formulas shortly), and to determine whether a corrective action should be implemented as a result.
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To perform the EVM calculations, you need to first gather the four measurements mentioned earlier: the percent complete of the project, the planned value (PV), actual cost (AC), and earned value (EV).
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Percent complete of project
Many project managers determine how much work has been completed by asking team members for an estimate of percent complete for each task. On projects where work cannot be measured, this estimate is simply a guess. This is time consuming and almost always a complete waste of time because a guess does not provide a confident estimate of the actual percent complete. If a project has been planned using a WBS, and tasks require about 80 hours of work, we have alternatives to percent complete. Because tasks will be completed faster and more frequently, we can forget percent complete and use one of the following:
50/50 RULE - A task is considered 50% complete when it starts. The remaining 50% credit is given when the task is completed
20/80 RULE - A task is considered 20% complete when it starts. The remaining 80% credit is given when the task is completed 0/100 RULE - A task does not get credit for partial completion, it get 100% credit only full completion
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Planned value (PV)
The planned value (PV) is the cost of work that has been approved (budgeted) for a schedule activity or WBS component to be completed during a given time period. These budgets are established during the planning processes. The total PV is also referred as Budget at Completion (BAC), and/or Performance Measurement Baseline (PMB) PV is also called budgeted cost of work scheduled (BCWS).
Example: According to my project plan By July , I plan to complete several activities that have been approved (budgeted) at $ 400. Therefore at the end of the first month the planned value PV = $ 400.
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Earned value
Earned value (EV) is the value of the work (schedule activity or WBS component) completed to date as it compares to the budgeted amount (PV) assigned to the work component. EV is also called budgeted cost of work performed (BCWP). EV cannot be greater than PV
EV = PV * percent complete
Example: Suppose that at July 1, I completed only 81% of my planned activities
Therefore at July 1, EV = $ 400 * 81% = $ 325
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Actual cost
Actual cost (AC) is the cost of completing the work (a schedule activity or WBS component) in a given time period. AC is also called actual cost of work performed (ACWP). Actual costs might include direct and indirect costs but must correspond to what was budgeted for the activity.
If the budgeted amount did not include indirect costs, do not include them here.
Later youll see how to compare this to PV to come up with variance calculation results.
Example: Suppose that at July 1, I collect all the actual costs and the total figure is $ 325. Therefore at the end of the first month AC = $325
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We can plot all the PV, AC, and EV measurements graphically to show the variances between them. If there are no variances in the measurements, all the lines on the graph remain the same, which means the project is progressing as planned. The following figure shows an example that plots these three measurements.
PV = 400, EV = 375, AC = 325

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Cost Variance
Cost variance is one of the most popular variances that project managers use Cost variance shows whether your actual costs are higher than budgeted (with a resulting negative number) or lower than budgeted (with a resulting positive number). The cost variance (CV) is calculated as follows:
CV = EV AC
CV = Negative, OVER BUDGET CV = Positive, UNDER BUDGET In our Example CV = $ 375-$ 345 = $ 50 ($50 under budget as of July 1) A negative cost variance is often non-recoverable
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Schedule Variance
Schedule variance, also a popular variance, tells you whether the schedule is ahead or behind what was planned for this period in time. The schedule variance (SV) is calculated as follows: SV = EV PV SV = Negative, BEHIND SCHEDULE SV = Positive, AHEAD OF SCHEDULE Lets plug in the numbers:
SV = $375-$400 = -$25 (Behind schedule as of July 1)
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Performance Indexes
Together, the CV and SV are known as efficiency indicators for the project. Cost and schedule performance indexes, (CPI and SPI) are primarily used to calculate performance efficiencies. Theyre often used in trend analysis to predict future performance. Youll need to know the calculations and what the results mean.
If CPI or SPI is greater than 1, youve got better than expected performance. If the result is less than 1, youve got poor performance. If it equals 1, youre right on target.
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Cost Performance Index (CPI)
The cost performance index (CPI) is calculated this way: CPI = EV AC Lets plug in the numbers: CPI = 375 325 =1.15 Interpretation: as of July 1, we are getting $1.15 for every dollar invested on this project
Schedule Performance Index (SPI)

The schedule performance index (SPI) is calculated this way: SPI = EV PV Lets plug in the numbers: SPI = 375 400 =0.94 Interpretation: Uh-oh, not so good. You are only progressing at 94% of the rate planned
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Forecasting
Forecasting uses the information youve gathered to date and estimates the future conditions or performance of the project based on what you know when the calculation is performed. Forecasts are based on work performance information (an output from the Executing process group). There are two types of forecasting techniques: estimate to complete (ETC) and estimate at completion (EAC). ETC: From this point onwards, how much MORE do we expect to cost to finish the job? EAC: What do we currently expect the total project to cost at this rate? Each has three variations. Both of these formulas use a new parameter you havent seen yet called budget at completion (BAC).
BAC is the sum of all the budget values established for all the work of the project. How much did we BUDGET for the TOTAL job? (includes approved change requests)
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One of the areas of confusion is the difference between EAC, ETC and the other terms. The following diagram may help.
Start Date
Baseline Plan
Today PV BAC
EAC
Current Plan
AC
ETC
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Estimate to Complete (ETC) Estimate to complete (ETC) tells you how much it will cost to complete all the remaining work for a schedule activity or WBS component or the project. ETC based on a new estimate using bottom-up estimating
This ETC does not require a formula.
This is simply a revised estimate based on the performance of the resources to date. By examining how quickly or how productively the resources have been utilized so far, the project team can determine an ETC by looking at the remaining work and determining a new estimate based on the comparison to past work. This ETC method is the most accurate and comprehensive ETC calculation.
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Estimate to Complete (ETC)
The two remaining ETC calculations use earned value data. These are quick to perform but not as accurate as the project team manually examining the remaining work and making a new estimate based on past performance. ETC = (BAC EV) cumulative CPI
Used when you believe that future cost variances will be similar to the types of variances youve seen to date Lets plug in the numbers: ETC = (1000 375) 1.15 = $ 543
ETC = (BAC EV)

When you believe that future cost variances will not be similar to the types of variances youve seen to date
Lets plug in the numbers: ETC = (1000-375)= $625
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Estimate at completion (EAC) estimates (or forecasts) the expected total cost of a work component, a schedule activity, or the project at its completion.
Formula for EAC 1 2

BAC / cumulative CPI
Application
Accepts that the project performance to date will be continued in the future. The ETC work will be performed at the same cumulative CPI Past Estimating Assumptions are not valid This method is used when the past estimating assumptions are not valid and fresh estimates are applied to the project. ETC should be based on bottom-up estimating Accepts the actual project performance (good or bad) and predicts that all future ETC work will be accomplished as per the plan (at the budgeted rate) Variances will be present in the future - This method is used when the assumption is that the current variances will be continue to be present in the future.
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AC + ETC
AC + BAC - EV
AC+(BAC-EV)/ (cumulative CPI x cumulative SPI)

TERMS TO KNOW Term Description
PV Planned Value
Alt. Description
Budgeted Cost of Work Scheduled (BCWS)
Interpretation
What is the estimated value of the work planned to be done?
EV
Earned Value
Budgeted Cost of Work Performed (BCWP)

Actual Cost of Work Performed (ACWP)
What is the estimated value of the work actually accomplished? (Approved cost estimates for activities completed during a given period) Actual cost incurred
How much did we BUDGET for the TOTAL job? (includes approved change requests)
AC
BAC
Actual Cost
Budget at Completion
EAC
ETC VAC
Estimate at Completion
Estimate to Complete Variance
What do we currently expect the total project to cost at this rate?

From this point onwards, how much MORE do we expect to cost to finish the job?
How much over or under budget do we expect at the end of the project?
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TERMS TO KNOW
Term
CV Cost Variance CPI Cost Performance Index SV Schedule Variance SPI Schedule Performance Index
Description
EV - AC Hint : EA
Interpretation
Negative is over budget, Positive is under budget
EV / AC
You are getting $__ out of every $1 investment Hint: instead of subtraction, divide EA Negative is behind and positive is ahead of schedule Hint : EP You are only progressing at __% of the rate planned Hint: instead of subtraction, divide EP
EV PV
EV / PV 1) BAC / CPI AC + ETC AC+ (BAC-EV) AC+(BAC-EV)/ CPI x SPI
EAC Estimate At Completion
2) 3) 4)
As of now, how much do you expect the total project to cost? Hint: first formula is used most frequently
ETC Estimate To Complete VAC Variance At Completion
EAC AC BAC EAC
How much more will the project cost? How much over or under budget will you be at the end of project?
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To-Complete Performance Index (TCPI)
TCPI is the calculated projection of the cost performance that must be achieved on the remaining work to meet a specified management goal, i.e., BAC or EAC TCPI is the ratio of the remaining work to the funds remaining TCPI has its focus on future performance. In other words, TCPI shows the efficiency at which the resources on the project should be utilized for the remainder of the project. TCPI value above 1 indicates utilization of the project team for the remainder of the project can be stringent. TCPI value below 1 indicates utilization of the project team for the remainder of the project should be lenient
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To-Complete Performance Index (TCPI)
At the status date:
If the cumulative CPI falls below the baseline plan, all future work will need immediately to be performed at the BAC range in order to stay within the authorized BAC.
If BAC is no longer attainable, a new estimate at completion must de determined and once approved, the project must perform at the EAC level.
The equation of TCPI is:
Remaining Work ( BAC EV ) Funds Remaining ( BAC AC ) or ( EAC AC )
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CPI and TCPI Discussion
Why is the CPI so important? Answer: because past cost performance can be used to accurately determine EAC The cumulative (from the beginning) CPI has been shown to stabilize from about the 20% completion point of project performance. Empirical scientific studies on actual contracts has shown that at the 20% point of project completion, the final projected EAC results will only change by plus or minus 10% In practical terms, one can immediately take the total authorized budget (BAC), divide it by the cumulative CPI and project the total costs of a project with an accuracy of plus or minus 10%.
EAC BAC Cumulative CPI
If management doesnt like the final cost projection, then corrective action can be taken to change the forecasted results. Few project management techniques give a comparable early-warning signal.
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Whereas the CPI is an indicator of past cost performance, the TCPI has its focus on future performance.
Sunk Costs Status at 50% Complete Opportunity Costs
1.25
1.00
TCPI Cost Baseline
Cumulative CPI
.75
The CPI can be thought of as sunk-costs. In the illustration shown, the for every dollar spent we only earned 75 cents of project work. If the project is exactly 50% complete, in order to stay within cost baseline, we must accomplish $1.25 for every dollar in the future. Will this likely happen? Questionable at best, but highly unlikely. More likely, a TCPI of 1.0 or .90 would be reasonable
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Once it becomes obvious that the budget is no longer achievable, the next question from management is: how much money will it cost to complete this job, called the estimate at completion (EAC). Preparing a new EAC forecast can get emotional. Unrealistic optimism sometimes takes over, at the expense of realism.
It is not uncommon for projects, when making a new EAC forecast to assume that everything will suddenly go right, and that all project risks are behind them
Thus an initial EAC may be unrealistic, unachievable. Piecemeal EACs are often the norm, where the EAC projection goes up each month (or other status reporting period) as actual performance is known.
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Tricks to Remember the Formulas
1. PV = BCWS (Budgeted Cost of Work Scheduled) 2. EV = BCWP (Budgeted Cost of Work Performed) 3. AC = ACWP (Actual Cost of Work Performed) 4. EV comes first in every formula 5. Variance: EV minus something
6. Indices : EV divided by something

7. Cost: use AC 8. Schedule: use PV 9. For variance interpretation, negative is bad, positive is good 10. For CPI and SPI interpretation, >1 is good, <1 is bad 11. For TCPI interpretation, >1 your future efficiency must increase, <1 continuing with the present efficiency is fine
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Earned Value Analysis: Exercise

Enough of these formulas how do I use them?
1 A 10 11 B 20 21 C 30 31 D 40
$5,000
$5,000 Start Finish Task ID
$10,000
$15,000
Notation
Task A, B, C and D are the critical path of the project. Each task is 10 days in duration and their costs are as shown in the diagram. At the end of day 23, Tasks A and B are complete, Task C is 50% complete, and $14, 000 over all have been spent up to this point. Lets do some calculations at the end of day 23. Planned Value (PV) = The planned value of the work planned to be done = Estimated cost of the planned work at the end of day 23 = Task A + Task B + 3* $1,000 (Task C) = $ 5,000+$ 5,000+$ 3,000 = $ 13, 000
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1 A 10 11 B 20 21 C 30 31 D 40
$5,000
$10,000
$15,000
Notation
Actual Cost (AC) = Actual Cost of work completed = $ 14,000 Budget at Completion (BAC) = Budget for the full project = $ 5,000(Task A) + $ 5,000(Task B) + $ 10,000(Task C) + $ 15,000(Task D) = $ 35,000
Earned Value (EV) =The sum of the approved cost estimates for activities completed during a given period = Estimated cost of work that is completed at the end of day 23 = $ 5,000 + $ 5,000 + $10,000*.50 (because Task A, Task B are complete, Task C is 50% complete) = $ 15,000
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1 A 10 11 B 20 21 C 30 31 D 40
$5,000
$10,000
$15,000
Notation
CPI, Cost Performance Index = EV / AC = $ 15,000 /$ 14,000 = 1.07 thus the project is below budget and has a positive cost variance SPI, Schedule Performance Index = EV / PV = $ 15,000 / $13,000 = 1.15 thus the project is progressing ahead of schedule, and has a positive schedule variance Estimate at completion (EAC) = BAC / CPI = $ 35,000 / 1.07 = $ 32,666
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1 A 10 11 B 20 21 C 30 31 D 40
$5,000
$10,000
$15,000
Notation
Schedule Variance, SV SV = EV PV = $15,000 - $13,000 = $2,000 Cost Variance, CV CV = EV - AC = $15,000 - $14,000 = $ 1,000 Variance at Completion, VAC VAC = BAC EAC = $35,000 - $32,666 = $ 2,334
To-Complete Performance Index (TCPI) TCPI = (BAC EV) / (BAC AC) = ($35,000 - $15,000) / ($35,000 - $14,000) = 0.95
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Project Performance Reviews
Project performance reviews are similar to status reviews. They examine milestones due and those that have been met. They also look at the costs associated with performance and schedule activities that are over and under budget. Typically, performance reviews take place as meetings, and their purpose is to examine schedule activities, work packages, or cost account status and their progress to date. Three types of analyses are associated with performance reviews:
Variance analysis, trend analysis, and earned value management. Ive already covered the earned value management, so youll now look at the other two.
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Variance Analysis
Variance management includes the processes for managing cost and schedule variances and appropriate responses based on the impact and level of variance.
The cost management plan should describe the variance management and acceptable variance ranges
CV, SV and VAC Variance at completion (VAC) calculates the difference between the budget at completion and the estimate at completion. It looks like this:
VAC = BAC EAC Negative means that you are not doing well, you are over budget. Positive means that you are doing well, you are under budget
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Project Management Software Ive discussed project management software before. Obviously, you can perform and monitor many of these calculations using project management software.
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7.3 Control Costs: Outputs

Work performance measurements CV, SV, CPI, SPI, ETC, EAC, etc. Budget forecasts ETC, EAC, TCPI, etc Organizational process assets updates Lessons learned, causes of variances, corrective actions chosen and reasoning Change requests Project management plan updates Cost performance baseline, cost management plan Project document updates Cost estimates and basis for estimates Ive discussed most of these before, or they are self-explanatory. However, Ill point out a few points you should be aware.
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7.3 Control Costs: Outputs
Updated cost estimates include updating original cost estimates and other areas of the project management plan that these estimates might impact. As an example, perhaps the cost estimate for new hardware required for your project was recently revised. Suppose the cost estimate was needed because the equipment originally planned for in the project is no longer available and new equipment is ordered in its place. This might require revisions to other project activities, which will require you to revisit the project Planning and Executing processes. Control cost problems come about for many reasons, including incorrect estimating techniques, predetermined or fixed budgets with no flexibility, schedule overruns, inadequate WBS development, and so on. Good project management planning techniques during the planning processes might prevent cost problems later in the project. At a minimum, proper planning will reduce the impact of these problems if they do occur.

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Question and Answers
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Project Cost Management

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PMGT- 401: Project Management Fundamentals

07 Project Cost Management

PMGT- 401: Project Management Fundamentals 07 Project Cost Management

Bob Xourafas, P.Eng, PMP

07 Project Cost Management: Definition

You have to remember the definition

PMGT- 401: Project Management Fundamentals 07 Project Cost Management

Bob Xourafas, P.Eng, PMP

PMGT- 401: Project Management Fundamentals 07 Project Cost Management

Bob Xourafas, P.Eng, PMP

PMGT- 401: Project Management Fundamentals 07 Project Cost Management

Bob Xourafas, P.Eng, PMP