PROJECT COST MANAGEMENT

PROJECT COST MANAGEMENT

Processes involved in planning, estimating, budgeting, financing, funding, managing and controlling costs so that the project can be completed within the approved budget

PROJECT COST MANAGEMENT

Plan Cost Management
Processes that establishes the policies, procedures and documentation for planning, managing, expending and controlling project costs Process of developing an approximation of the monetary resources needed to complete the project activities The process of aggregating the estimated costs of individual activities or work packages to establish an authorized cost baseline

Estimate Costs

Determine Budget

Control Costs
The process of monitoring the status of the project to update the project costs and managing changes to the cost baseline

Plan Cost Management

Plan Cost Management
Processes that establishes the policies, procedures and documentation for planning, managing, expending and controlling project costs Provides guidance and direction on how the project costs will be managed throughout the project

Plan Cost Management I/Ps

Project Management Plan

Scope Baseline
Schedule Baseline Other Information

project scope statement, WBS detail defines when the project costs will be incurred Cost related scheduling, risk, communications decisions

Project Charter Provides summary budget from which detailed project costs are developed EEF Culture, structure, market conditions, exchange rates, published commercial information i.e resource cost rates OPA Financial control procedures, historical info, financial databases, policies, procedures & guidelines

Plan Cost Management T/Ts

Expert Judgment Analytic Techniques Developing the project plan may include choosing strategic options such as self funding, funding with equity, or funding with debt May also detail ways to finance project resources such as making, purchasing, renting or leasing May affect project schedule and/or risk Payback period, return discounted cash flows on investment, IRR, NPV,

Meetings

Plan Cost Management O/Ps

Cost Management Plan Can establish the following

Units of Measure
Staff hours, staff days, weeks for time measure Meter, liters, tons, kilometers or cubic yards for quantity Lump sum in currency form Level of Precision degree to which activity cost estimates will be rounded up (US$100.49 to US$100 or US$995.59 to US$1000) Level of Accuracy the acceptable range (e.g., + 10%) used in determining realistic activity cost estimates

Plan Cost Management O/Ps

Cost Management Plan Can establish the following
Organizational Procedures Links WBS provides the framework for cost management plan WBS component used for the project cost accounting is called control account; assigned a unique code or account number that links directly to the performing organizations accounting system Control Thresholds Variance thresholds for monitoring cost performance may be specified to indicate an agreed-upon amount of variation to be allowed before some action needs to be taken

Plan Cost Management O/Ps

Cost Management Plan Can establish the following
of Rules of performance Measurement EVM rules performance measurement are set. The plan may

Define the points in the WBS at which measurements of control account will be performed Establish the EVM techniques (e.g, weighted mile stones, fixed formula, percent complete) Specify tracking methodologies and the EVM computation equations for calculating projected estimate at Completion (EAC) forecasts to provide a validity check on the bottom-up EAC

Plan Cost Management O/Ps

Cost Management Plan
Reporting formats Process descriptions

Can establish the following

Formats, Frequency

Descriptions of each of the other cost management processes are documented

Additional Details

strategic funding choices, procedures to account for fluctuations in currency exchange rates, procedure for project cost recording

Estimate Costs
Process of developing an approximation of the monetary resources needed to complete project activities Generally expresses in units of some currency ($, etc)

Estimate Costs I/Ps

Cost Management Plan
Defines how project cost will be managed and controlled. Includes methods used and level of accuracy required to estimate activity cost provides project staffing attributes, personnel rates and related rewards/recognition

Human Resource Management Plan

Scope base line

Project Scope Statement
acceptance criteria, key assumptions and constraints Provide product deliverables, project description, boundaries,

Work breakdown structure WBS dictionary

Estimate Costs I/Ps

Project Schedule
The type and quantity of resources and the amount of time which those resources are applied to complete the work of the project

Risk Register

Risk response costs

Enterprise Environmental Factors

Market Conditions What products, services and results are available in market, from whom, and under what terms and conditions. Regional and/or global supply and demand conditions greatly influence resource costs Published Commercial Information material and equipment Provide standard cost for

Organizational Process Assets Cost

templates, historical information, lessons learned

estimating

policies,

Estimate Costs T/Ts

Expert Judgment Analogous Estimating
Uses the values such as scope, cost, budget and duration or measures of scale such as size, weight and complexity from a previous, similar project as the basis for estimating the same parameter or measurement for a current project
Generally less costly and less time consuming but also less accurate

Parametric Estimating

Uses and statistical relationship between relevant historical data and other variables (e.g square footage in construction) to calculate a cost estimate for project work. Method of estimating a component of work. The cost of individual work packages or activities is estimated to the greatest level of specified detail. The detailed cost is then summarized or rolled up to higher levels for subsequent reporting and tracking purposes.

Bottom-up Estimating

Estimate Costs T/Ts

Three-Point Estimating
Most Likely (cM) Optimistic (cO) Pessimistic (cP) Triangular Distribution cE= (cM + cO + cP)/3 Beta Distribution cE= (cO + 4cM + cP)/6

Reserve Analysis May include contingency reserves to account for cost uncertainty. Contingency reserves are the budget within the cost baseline that is allocated for identified risks, which are accepted and for which contingent or mitigating responses are developed
Cost of Quality estimates Assumptions about COQ may be used to prepare the

Project Management Software Vendor Bid Analysis Group Decision Making Techniques Brainstorming, NGT, Delphi

Estimate Costs O/Ps

Activity Cost Estimates
Quantitative assessments of the probable costs required to complete project work. Presented in summary form or in detail. Costs are estimated for all resources that are applied to the activity cost estimate. This includes, but is not limited to, direct labour, materials, equipment, services, facilities, information technology and special categories such as cost of financing (including interest charges, an inflation allowance, exchange rates or a cost contingency reserve)

Basis of Estimate The supporting documentation providing a clear and complete understanding of how the cost estimate was derived Documentation of the basis of the estimates Documentation of all assumptions made Documentation of any known constraints Indication of the range of possible estimates (e.g $10,000( + 10%) to indicate that the item is expected to cost between a range of values), and Indication of the confidence level of the final estimates

Project Documents Updates

Determine Budget
Process of aggregating the estimated cost of individual activities or work packages to establish an authorized cost baseline Determines the cost baseline against which projects performance can be monitored and controlled

Determine Budget I/Ps

Cost Management Plan Scope Baseline
Project Scope Statement
How project costs will be managed & controlled

Formal limitations by period for the expenditure of the project funds can be mandated by the organization, by agreement or by other entities such as Govt agencies. These funding constraints are reflected in the project scope statement

Work breakdown structure WBS dictionary

Activity Cost Estimates Project Schedule Used to aggregate costs to the calendar periods in which the costs are planned to be incurred Resource Calendars Risk Register Agreements To aggregate the risk response costs

Organizational Process Assets

Determine Budget T/Ts

Cost Aggregation
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
Contingency reserves and the management reserves

Expert Judgment Historical Relationships

Funding Limits Reconciliation

Determine Budget O/Ps

Cost Baseline
Approved version of the time phased project budget

Determine Budget O/Ps

Project Funding Requirements
Total funding requirements and periodic funding requirements (quarterly, annually) derived from the cost baseline

Project Document Updates

Activity cost estimates Project schedule Risk register

Control Costs
Process of monitoring the status of the project to update the project cost and managing changes to the cost baseline Provides the means to recognize variance from the plan in order to take corrective action and minimize risk.
Includes

Influencing the factors that create changes to the authorized cost base line Ensuring that all change requests are acted on in a timely manner Managing the actual changes when and as they occur Ensuring that cost expenditures do not exceed the authorized funding, by period, by WBS components, by activity and in total for the project Monitoring cost performance to isolate and understand variances from the approved cost baseline Monitoring work performance against funds expended Preventing un approved changes from being included in the reported cost or resource usage Informing appropriate stake holders of all approved changes and associated costs Bringing expected cost overruns within acceptable limits

Control Costs I/Ps

Project Management Plan

Cost Baseline

Cost baseline is compared with actual results determine if a change, corrective action or preventive action is necessary

to

Cost Management Plan

controlled

How the project costs will be managed and Projected expenditures plus anticipated

Project Funding Requirements liabilities

Work Performance Data Includes information about project progress, such as which activity have started, and which deliverable have finished. Information also includes costs that have been authorized and incurred

Organizational Process Assets Existing formal and informal cost control related policies procedures and guidelines Cost control tools Monitoring and reporting methods to be used

Control Costs T/Ts

Earned Value Management (EVM)
Methodology that combines scope, schedule and resource measurement to access the project performance and progress Develops and monitors three key dimensions for each work package and control account Planned Value Earned Value Actual Cost

Control Costs T/Ts

Earned Value Management (EVM)
Planned Value

(PV) Authorized budget assigned to scheduled work To be accomplished for an activity or WBS component Total of the PV is also performance measurement baseline (PMB) Total planned value is also known as budget at completion (BAC) (EV) Measure of work performed, expressed in terms of the budget authorized for the work EV measured cannot be greater than the authorized PV budget for a component Often used to calculate the percent complete of a project EV is monitored both incrementally to determine current status and cumulatively to determine the long term performance trends

Earned Value

Control Costs T/Ts

Earned Value Management (EVM)
Actual Cost (AC) Is the realized cost incurred for the work performed on an activity during the specified time period It is the total cost incurred in accomplishing the work that the EV measured Will have no upper limit; what ever is spent to achieve the EV will be measured

Control Costs T/Ts

Earned Value Management (EVM)
Schedule Variance Measure of schedule performance expressed as the difference between EV and PV Amount by which the project is ahead of behind the planned delivery date at a given point in time Measure of schedule performance on a project EVM schedule variance will ultimately equal zero when the project is completed because all of the planned values will have been earned SV=EV-PV

Control Costs T/Ts

Earned Value Management (EVM)
Cost Variance Amount of budget deficit or surplus at a given point in time, expressed as the difference between EV and AV Measure of cost performance on a project CV = EV-AC

Control Costs T/Ts

Earned Value Management (EVM)
Schedule Performance Index (SPI) Measure of schedule efficiency expressed as the ratio of EV to PV Measures how efficiently the project team is using its time SPI = EV/PV SPI > 1.0 indicates more work was completed than was planned SPI < 1.0 indicates less work was completed than was planned

Control Costs T/Ts

Earned Value Management (EVM)
Cost Performance Index (CPI) Measure of the cost efficiency expressed as a ratio of EV to AC CPI = EV/AC CPI > 1.0 indicates a cost underrun of performance to date CPI < 1.0 indicates a cost overrun of performance for work completed of budgeted resources,

Control Costs T/Ts

Forecasting

Project team may develop a forecast for the estimate at completion (EAC) that may differ from the budget at completion (BAC)
If it becomes obvious that the BAC is no longer viable, the PM should consider the forecasted EAC Involves making projections of conditions and events in the projects future based on current performance information and other knowledge available at the time of the forecast EACs are based on the actual cost incurred for work completed, plus an estimate to complete (ETC the remaining work) EAC = AC + Bottom-up ETC

Control Costs T/Ts

Forecasting
EAC Forecast for ETC work performed at the budget rate

It accepts the actual project performance todate as represented by the actual cost and predicts that all future ETC work will be accomplished at the budgeted rate EAC = AC + (BAC EV)

EAC Forecast for ETC work performed at the present CPI

It assumes what the project has experienced todate can be accepted to continue in the future EAC = BAC/CPI

EAC Forecast for ETC work considering both SPI and CPI factors
In this the ETC work will be performed at an efficiency rate that considers both the cost and schedule performance indices EAC = AC + [(BAC EV)/(CPI x SPI)]

Control Costs T/Ts

To-Complete Performance Index (TCPI) It is a measure of the cost performance that is required to be achieved with the remaining resources in order to meet a specified management goal, expressed as the ratio of the cost to finish the outstanding work to the remaining budget TCPI = Work remaining (BAC EV)/Funds remaining (BAC AC) or (EAC AC)

Performance Reviews Variance Analysis It is the explanation corrective actions) for Cost CV = EV AC Schedule SV = EV PV Variance at completion VAC = BAC EAC (cause, impact and

Trend Analysis It examine project performance overtime to determine if performance is improving or deteriorating. Graphical analysis techniques are used

Control Costs T/Ts

Performance Reviews Earned Value Performance It compares the performance measurement baseline to actual schedule and cost performance. If EVM is not used then the analysis of the cost baseline against actual costs for the work performed is used for cost performance comparison Project Management Software

Reserve Analysis

Control Costs O/Ps

Work Performance Information Cost Forecasts Change Requests Project Management Plan Updates
Cost Baseline Cost Management Plan

CV, SV, CPI, SPI, TCPI, VAC

EAC or a bottom-up EAC

Project Documents Updates

Cost estimates Basis of estimates

Organizational Process Assets Updates

Causes of variances Corrective action chosen and the reasons Financial data basis Lessons learn