8. implementation (2) cost management

Project Management –
Implementation (2)
8/13/2017 1Arch. Dania Abdel-Aziz/ Lecture 8
Arch. Dania Abdel-Aziz
University of Jordan
Year 2016/2017
Second Summer Semester

We are going to discus Project management under those main three
headlines:
1. Description.
2. Application.
3. Implementation Procedure.
8/13/2017 Arch. Dania Abdel-Aziz/ Lecture 8 2

IMPLEMENTATION COST

PROJECT COSTING ... Cost Management
What is cost?
• A resource sacrificed or forgone to achieve a specific objective. (Measure in
monetary amount).
Project Cost Management
• “The processes involved in planning, estimating, budgeting, and controlling costs
so that the budget can be completed within the approved budget”
Allocating overall cost
estimate to individual
work items
“Cost baseline”
Developing an
estimate of costs of
the resources
needed to complete
a project
Controlling change to
project budget

Why Do We Manage Cost?
• Part of triple constraint, can’t
manage one without the others
(scope, time, and quality).
• Plots of cost and scope against plan
can help spot problems early

Project Costs include:
1. Labour: (Hiring & paying the various personnel (workers)
involved in developing the project). Ex:Salary, Health benefit.
2. Materials: (Material costs apply to specific equipment and
supplies the project team will require in order to complete project
tasks). Ex : Softwarepackage.
3. Subcontractors: (Ex: marketing communications professional to
design the project’s promotional material)
4. Equipment and facilities: Rental of equipment, rental office, etc.
5. Travel: Business travel (car rental, airfare, hotels, and meals).

Types of Project Cost
In their book, Project Management Workflow, Dan Epstein and Rich
Maltzman describe the different kinds of costs that make up the whole
cost of a project. The 5 costs they cover are:
Opportunities to be adjusted
Schedule : Normal or
Expedited Costs

1. Direct Costs
Can be traced back to a
product and can be
measured.
Are specifically
identified by their
objectives.
Include materials, labor
and other direct costs.
Examples:
Direct materials.
1. Direct labor.
2. Direct work hours.
3. Use of equipments.
4. Use of facilities.
5. Number of employees.
6. Use of materials.
7. Consumption of services
8/13/2017 8Arch. Dania Abdel-Aziz/ Lecture 8
Direct labour rate X Total labour hours = Total direct labour cost

2. Indirect Costs
Not directly identifiable.
Costs not directly
related to the project
product.
Belong to the core
supporting business, but
cannot be directly
assigned to projects or
individual contracts.
Include
1. Fringe benefits.
2. Indirect manufacturing expenses.
3. General indirect expenses.
4. General and administrative expenses.

3. Fixed Costs
Remain constant in the total, independently of the amount of work
performed.
Remain the same even when the production line pauses or is null.
Include costs like:
1. Rent.
2. Depreciation.
3. Administrative team salaries.
4. General expenses.
Example:
If you are constructing a road, the
excavators and bulldozers are fixed
costs.

4. Variable Costs
Vary as changes in the
production are
implemented.
Can or cannot be
proportional to these
production changes.
If there’s no
production, there’s
no variable cost.
Include:
1. expenses with equipments and materials.
2. performance bonuses.
3. freight and sales comissions.

Example:
• In 1987, the Channel (Euro) Tunnel project begun. The objective of this
project was to construct an undersea high-speed train tunnel that would
connect Great Britain to France.
• The project was completed over a period of 3-4 years and at a cost of
about 13 billion U.S. dollars.
• The project employed over 15,000 people and had mammoth cost
overruns.
• This project required tremendous risk management skills. During the
construction of this project there were several variable costs, such as fuel
costs and labour rates.
4. Variable Costs

Example:
• Suppose you have hired a freelancer to develop a website in .NET. After a month,
you decide that the freelancer isn’t doing a good job and reach out to another
freelancer. The second freelancer convinces you that .NET is not the way to go and
that your website project would be better off based on the Java platform. The cost
associated with the .NET freelancer would be treated as Sunk Costs. However, if
the second freelancer could build on the .NET work of the first freelancer, then
your costs would not have sunk.
• Ideally, platform selection in software development projects should be taken very
early in the project, such as right after you Collect Requirements. As the decision
impacts many other factors, such as skill and infrastructure resources, it should
taken as early as possible in the project life-cycle. Sunk costs are often a
consequence of not collecting requirements properly
5. Sunk costs
Sunk costs are those that have been incurred in a project, but have not produced
value towards the project’s objectives.

Frequency of occurrence
Recurring and non-recurring Costs
• Repetitive, directs or indirects, which vary depending on the
production.
• Ex : Labour, Material , Logistics, Sales costs,
Daily/weekly/monthly/etc costs
Recurring Costs
•One-time expense only (Charges applied once at the
beginning or end of the project).
•Ex : Marketing analysis, Training , Outplacement services
that are paid only once.
Non-recurring costs

As indicated previously
Estimate Costs
Tool &
Technique
Input Output
• Work breakdown
structure.
• Resource
requirements.
• Resource rates.
• Activity duration
estimates.
• Historical
information.
• Analogous
estimating.
• Parametric
modelling
• Bottom-up
estimating
• Computerized
tools.
• Cost estimates.
• Supporting
detail.
• Cost
management
plan.

Estimating Methods
• Analogous (Top Down) estimating – Managers use expert judgment or
similar project costs [quick, less accurate].
• Parametric estimating – Use mathematical model (i.e. cost per sq meter).
• Bottom-Up estimating – People doing work estimate based on WBS, rolled
up into project estimate [slow, most accurate].
• Vendor Bid Analysis – Estimating using bids + allowances for gaps in bid
scope [slow, accuracy depends on gaps].
• Reserve Analysis – Adding contingency to each activity cost estimates as
zero duration item [slow, overstates cost].

Cost Estimating

Tool &
Technique
Output
• Involve allocating the project cost estimate to individual work items over time
The work items are based on the work breakdown structure (WBS) for the project.
• Main goal: to produce a cost baseline for measuring project performance &
project funding requirement
Input Output
• Cost estimates.
• Work Breakdown
structure.
• Project schedule.
• Cost
aggregation.
• Reserve
analysis .
• Parametric
estimating.
• Cost Baseline.
• Project Funding
Requirements.
• Cost
Management .
• Plan Updates.
• Requested
Changes.
Determine Budget

• Sample Time-based Budget
Activity Months
JAN FEB MAR APR MAY TOTAL
Survey 4,000 4,000
Design 5,000 3,000 8,000
Clear Site 4,000 4,000
Foundation 7,500 7,500
Framing 8,000 2,000 10,000
Plumb and Wire 1,000 4,000 5,000
Monthly Planned 4,000 9,000 10,500 9,000 6,000
Cumulative 4,000 13,000 23,500 32,500 38,500 38,500
Determine Budget

Input Tool &
Technique
Output
• Cost baseline.
• Performance
reports.
• Change
requests.
• Cost
management
plan.
• Cost change
control system.
• Performance
measurement.
• Additional
planning.
• Computerized
tools.
• Revised cost
estimates.
• Budgets update.
• Corrective
actions.
• Estimate at
completion.
• Lessons learned.
• Monitoring cost performance.
• Ensure that changes are included in cost baseline.
• Inform stakeholders of authorized changes which impacts to cost.
Cost Control

Cost Management Key Terms
• PV - Planned Value, estimated value of the planned work.
• EV – Earned Value, estimated value of work done ac.
• AC – Actual Cost, what you paid.
• BAC – Budget at Completion, the budget for the total job.

Control Costs : Earned Value Formulas

Control Costs
Sample of Earned Value calculation for one activity after week one Suppose
the server installation was halfway completed by the end of week 1.
Plan Cost = 10,000 , Actual Cost = 15,000, RP= 50%
Activity FORMULA Week 1
Earned Value (EV)
Cost Variance (CV)
Schedule Variance (SV)

Activity FORMULA Week 1
Earned Value (EV) EV = PV to date x RP = 10,000 * 50% = 5,000
Cost Variance (CV) CV = EV –AC = 5,000 – 15,000 = -10,000
Schedule Variance (SV) SV = EV – PV = 5,000-10,000 = -5,000

Earned Value Graph

Thank you 

8. implementation (2) cost management

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