FINAL PROJECT COST MANAGEMENT STUDENT COPY.ppt

PM 568 : PROJECT
COST MANAGEMENT
Facilitators:
Prof. Theo Adjei-Kumi PMP
Dr. Mrs. Ivy Abu PMP
Dr. Michael Addy PMP
DEPARTMENT OF CONSTRUCTION TECHNOLOGY & MANAGEMENT
DEPARTMENT OF CONSTRUCTION TECHNOLOGY & MANAGEMENT
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY
KUMASI, GHANA
KUMASI, GHANA

Lecture 1
Terminologies and Plan Cost Management

PROJECT COST MANAGEMENT
General Considerations
• Close connection between cost and time
• Estimating should be based on WBS for accuracy
• Estimating should be done by the person doing the work
• Historical information is key to improving estimates
• Costs (and time, scope and resources) should be managed to
estimates
• Cost (and time, scope and resource) baseline should be kept
and not changed except for approved changes
• Plans should be revised as necessary, during execution
• Corrective action should be taken when necessary

General Considerations - VERY IMPORTANT
• A Project Manager should not just accept time or cost directives or
requirements from management. At the very least he/she should
analyze the needs of the project, come up with their own estimate,
and then try to reconcile any differences.

Accuracy of Estimates
– Order-of-magnitude estimates
• Made during initiation and in the range of –25% to +75%
Or + 50%
– Budget Estimate
• Made during planning and in the range –10% to +25%
– Definitive Estimate
• Also made during planning and in the range –5% to
+10% others use + 10%

Example of Order-of-Magnitude Estimate
Project Y is being initiated and management needs to have a rough idea about its
cost. Based on expert judgement, we think Project Y is going to be 20% more
demanding than Project X, which is a similar project completed a couple of years
ago at a cost of GHS 780,500. In other words, we think the cost of Project Y could
be 20% higher than that of Project X. On the basis of this, the cost of Project Y can
be estimated as:
GHS 780,500 * 1.2 = GHS 936,600
However, we are operating at a –25% to +75% level of uncertainty. Therefore, our
Order-of-Magnitude Estimate is:
(GHS 936,600*0.75) to (GHS 936,600*1.75)
i.e. GHS 702,450 to GHS 1,639,050
03:15 PM 8

ACCOUNTING STANDARDS AND TERMINOLOGY
03:15 PM 9

Accounting Standards and Terminology
Net Present Value (NPV)
•Present value of the total benefits less costs (for project selection, the higher the
NPV the better)
Internal Rate of Return (IRR)
•The discount rate at which project inflows and outflows are equal (for project
selection, the higher the IRR the better)
Benefit Cost Ratio (BCR)
•Comparison of benefits to costs of different projects (for project selection, the
higher the BCR the better)
Payback Period
•The number of time periods it takes to recover your investment (for project
selection, the lower the PBP the better)
03:15 PM 10

Accounting Standards and Terminology (cont.)
Opportunity Cost
•Opportunity given up by selecting one project over another (for project
selection, the lower the opportunity lost the better )
Sunk Costs
•Expended Costs – not considered when deciding whether to continue with a
troubled project
Law of Diminishing Returns
•At a point in time of a project, the more resources you put into the project,
the less (diminishing) you get (returns) out of it.
Working Capital
•Current assets minus current liabilities
03:15 PM 11

Types of Cost
Variable Cost
•Costs which change with the amount of production
Fixed Cost
•Costs that do not change as production changes
Direct Cost
•Costs directly attributable to work on the project
Indirect Cost
•Overhead costs or costs incurred for the benefit of more than one project
03:15 PM 12

Depreciation
Straight Line
•The same amount of depreciation is taken each year
Accelerated Depreciation
•Accelerated depreciation is faster than straight line
– Double declining balance
– Sum of Years Digits
•Overheads
– General Overheads
– Project Overheads
03:15 PM 13

Other Concepts
Life Cycle Costing
•The total cost of the project including development and maintenance
Value Analysis or Value Engineering
•Finding a less costly way to do the same scope of work without sacrificing
quality.
•Involves :
– Value Planning
– Value Engineering and
– Value Analysis
03:15 PM 14

Definition and Processes
• The processes required to ensure that the project
is completed within the approved budget.
• Major processes are (4 No.):
– Plan Cost Management
– Estimate Costs
– Determine Budget
– Control Costs

PROJECT COST MANAGEMENT PROCESSES

FINAL PROJECT COST MANAGEMENT STUDENT COPY.ppt

• Is the process that defines/establishes the policies/how the project
cost will be estimated, budgeted, managed, monitored and controlled.
• It provides guidance and direction on how project costs will be
managed throughout the project.
• We extract raw data from the INPUTS and convert it to Cost
Management Plan by using the listed TECHNIQUES.
• INPUTS
– Project Charter (i.e. provides the high-level project requirements so that
detailed product requirements can be developed e.g. preapproved financial
resource, project approval requirements that will influence the
management of project cost)
– Project Management Plan
 Schedule Management Plan Provides processes and controls
that will impact cost
estimation
 Risk Management Plan
PLAN COST MANAGEMENT

• INPUTS –cont’d
– Enterprise Environmental factors
 Organisational culture and structure
 Market conditions
 Currency exchange rates
 Published commercial information that tracks skills and
resource costs
 PMIS
 Productivity differences in different parts of the world
– Organizational Process Assets
 Financial controls procedures (i.e. accounting codes,
expenditures and disbursement reviews
 Historical information and lessons learned repository
 Existing cost estimating and budgeting-related policies,
procedures, guidelines

• TOOLS & TECHNIQUES
– Expert Judgment
 Expertise in previous similar project, information in the
industry, Cost Estimating and budgeting, Earned Value
Management
– Data Analysis
 Alternatives analysis e.g. reviewing funding options i.e. from
equity, self-funding or with debt
 Project Resource acquisition methods e.g. ways to acquire
project resources i.e. making, purchasing, renting etc.
– Meetings

• OUTPUTS
– Cost Management Plan/Budget Management Plan
– This is a component of the Project Management Plan and may
contain:
 Units of Measure for each resource
 Level of Precision i.e. rounding up of cost estimates
 Approved estimating technique
 Level of Accuracy i.e. about ±x% at the planning stage
 Organisational procedure links i.e. a WBS component used
for project cost accounting - Control Account, given a unique
code that links directly to the performing organization’s
accounting system

• OUTPUTS (cont’d)
– Cost Management Plan/Budget Management Plan
 Control Thresholds i.e. variances which need investigation
 Rules of Cost Performance Measurement
 Reporting Formats
 Guidance on indirect and direct costs
 Procedure for accounting for fluctuation in currency
 Procedure for accounting for fluctuation in cost of resources
 Roles and responsibilities for cost activities
 Strategic funding choices
 Etc.

Here, we will describe the steps needed to perform the process of developing the
COST MANAGEMENT PLAN.
1.From the project charter, extract information about
 preapproved financial resources from which you can develop the details of
the project cost; and
 project requirements that will influence cost management.
2. From the schedule management plan and risk management plan, get
information about which processes and controls may influence cost management,
such as cost estimates.
3. From the enterprise environmental factors, get information about the factors that
can influence the development of the cost management plan, such as
organizational structure and culture; market conditions in terms of product
availability globally and in different regions; productivity differences in different
regions, which will affect the cost of project work; any relevant cost-related
published data; currency exchange rates; and project management information
systems
Performing the Plan Cost Management Process:

4. From the organizational process assets, get information about the factors
that can influence the development of the cost management plan, such as
organizational policies and procedures regarding cost estimates,
budgeting, and financial control—e.g., account code, time reporting,
standard contract provisions, etc.—and historical information from lessons
learned from past projects.
5. Use data-analysis techniques such as alternatives analysis to choose one
option out of the many available; e.g., to choose which funding option will
be better or best: loan, self-funding, funding with equity; or whether to
make, buy, or rent a project-related item.
6. Use expert judgment where needed on cost management–related topics,
such as cost estimate, cost control, and budgeting.
7. Put all the information collected from steps 1 through 6 together into the
cost management plan document.
To facilitate this, you can hold meetings with relevant stakeholders, such as
the sponsor, needed team members, and anybody who has project cost–
related responsibilities.
Performing the Plan Cost Management Process (cont’d):

ESTIMATE COSTS
• Developing an approximation of the costs of the activities and resources needed to
complete the activities.
• Identifying costing alternatives
• Generally expressed in a currency to assist with comparisons
• May be refined with progressive elaboration

ESTIMATE COSTS
Developing costs of all efforts, including:
• Direct – Costs of labour, materials, equipment, training etc.
• Cost of Quality Efforts
• Cost of Risk Efforts
• Cost of PM’s time
• Cost of Project Management activities

ESTIMATE COSTS
Developing costs of all efforts, including:
•Expenses for physical office spaces used for the project
•Overhead costs such as management’s salaries and general office
expenses
•Rewards
•In the case of procurement, buyer should consider the profit of the
seller

Project Cost Category Example
Human Resources Salary rates of full-time and temporary
workers
Travelling Expenses Anyone who travels from one location to another to
do project work (including budget for
meals and lodging)
Training fees Conferences, workshops, outside contractors
Material Resources All the items your team might need to perform the
work, including software, equipment, or
other unique materials
Research Expenses Studies or data to support your project and
deliver the best value
Professional Services Legal advice, consultants, market research firms,
etc
Capital Expenditures Equipment or technical upgrades to complete the
project

ESTIMATE COSTS
INPUTS
• Project Management Plan
 Cost Management Plan
 Quality Management Plan
 Scope Baseline i.e. Scope Statement (e.g. Budget constraints),
WBS and WBS Dictionary
• Project Documents
 Lessons learned register
 Project Schedule i.e. type and quantity of resource and the time
taken by the resource
 Resource Requirements
 Risk Register

ESTIMATE COSTS
INPUTS (cont’d)
• Enterprise Environmental Factors
 Market conditions
 Published commercial information
 Etc.
• Organisational Process Assets
 Cost estimating policies
 Cost estimating templates
 Historical information
 Lessons learned.

ESTIMATE COSTS
TOOLS AND TECHNIQUES
• Analogous Estimating (heuristics)
Top or middle managers use expert judgment or actual time on
previous projects to estimate
• Bottom-up Estimating
The people doing the work create the estimates
• Parametric Estimating
Uses mathematical model to predict costs (e.g., cost per yard,
per line of code, per installation etc.)

ESTIMATE COSTS
TOOLS AND TECHNIQUES - continued
Three-point Estimating
 This method improves on the accuracy of single-point estimates by
considering estimating uncertainty and risk. This concept originated from
the Program evaluation and review technique (PERT).
 It uses three estimates to define an approximate range for an activity’s cost.
 Most Likely (Cm) – cost of the activity, based on realistic effort
assessment for the required work and any predicted expenses
 Optimistic (Co) – The cost based on analysis of the best-case scenario
for the activity
 Pessimistic (Cp) – The cost based on analysis of the worst-case
scenario for the activity
Ce= (Co+4Cm+Cp ) /6

ESTIMATE COSTS
• Reserve Analysis i.e. Consideration of contingency reserves to
cater for identified critical risk events
• Cost of Quality
• Vendor Bid Analysis i.e. based on responsive bids of projects

ESTIMATE COSTS
• Alternatives Analysis i.e. a technique used to evaluate identified
options in order to select approaches or options
• Project Management Information System
• Decision Making
• Expert Judgment

Cost of Quality
• Cost of Conformance
• Prevention Costs
• (Build a Quality Product)
– Training
– Document processes
– Equipment
– Time to do it right
• Appraisal Cost
• (Assess the quality)
– Testing
– Destructive testing loss
– Inspections
• Cost of Non-conformance
Internal Failure Costs
(Failures found by the project)
– Rework
– Scrap
External Failure Costs
(Failure found by the customer)
– Inventory costs
– Warranty costs
– Lost business
– Liabilities

ESTIMATE COSTS
OUTPUTS:
• Cost Estimates
• Basis of Estimates i.e. assumptions made, range of possible
estimates, any known constraints, risks included in the estimates etc.
• Project Documents Updates i.e. Assumption log, Lessons learned
register, Risk Register etc.

DETERMINE BUDGET
• The aggregation of the estimated costs of individual activities or
work packages to establish an authorized baseline
• Result is the budget and Cost Baseline against which project
performance can be monitored and controlled.
• Provides authorized project funding requirements

1. It is an essential part of securing project funding.
2. A well-planned budget provides the basis for project
cost control
3. A project budget has a direct effect on the company’s
financial viability.
Why a Project Budget is important

1. Break down your project into tasks and milestones.
2. Estimate each item in the task list.
3. Add your estimates together.
4. Add contingency and taxes.
5. Get approval.
5 Steps in Project Cost Budgeting

1. Can I define the project and its end goal?
2. Are there any ground rules, constraints, and assumptions I should
consider?
3. Do I have sources of data (Task List, WBS, Cost Estimates,
Schedule) to rely on?
4. Is the estimating methodology in use acceptable?
5. Do I know who is going to work on the project?
6. Do I have a list of resources and their rates to complete the project?
7. Can I compare my estimate against the best practices industry
standard?
8. Do I have contingency reserves to account for risk?
9. Who are the key project team members to help me in
estimating/budgeting process?
10. Am I on the same page with Project Stakeholders?
11. Can I compare the budget with original estimates and reconcile
differences?
Question to ask when Creating a Project Budget

DETERMINE BUDGET
INPUTS:
 Resource Management Plan- information on rates and travel costs of
resources
 Scope Baseline
• Project Documents
 Cost Estimates
 Basis of Estimates
 Risk Register
 Project Schedule

DETERMINE BUDGET
INPUTS:
• Business Documents i.e. business case (records critical financial
success factors) and benefits management plan (identifies target benefits
such as NPV calc, time-frame for realizing benefits, metrics associated
with the benefits etc.)
• Agreements i.e. for works contracted, contract sums become the basis of
budget
• Organisational Process Assets i.e. existing cost budget related policies,
tools for cost budgeting, reporting methods etc.
• Enterprise Environmental Factors

DETERMINE BUDGET
TOOLS AND TECHNIQUES:
• Cost Aggregation i.e. done by work packages in accordance
with WBS
• Data Analysis i.e. establishing contingency and management
reserves
• Expert Judgment

DETERMINE BUDGET
TOOLS AND TECHNIQUES:
• Historical Information Review
• Financing i.e. acquiring funding for projects
• Funding Limits Reconciliation i.e. reconciling the expenditure
of funds with any funding limits.

OUTPUTS:
• Cost Baseline i.e. the authorized time-phased budget at completion
used to measure, monitor, and control overall cost performance on a
project
• Project Funding Requirements i.e. total funding requirements and
periodic funding requirements are derived from the cost baseline
• Project Document Updates e.g. cost estimates, risk register and
project schedule may be updated
DETERMINE BUDGET
A simplified example of Estimate Costs and Determine Budget is shown
in the next two slides

WBS
Act. ID
I tem
A
B
C
D 32,450.00
Remuneration for Basic Services
Position Unit Staff
Input
Rate
(Ghc)
Amount
(Ghc)
Project Manager Person-day 5 600.00 3,000.00
Content Developer (2 No.) Person-day 20 400.00 8,000.00
Content Designer (2 No.) Person-day 20 400.00 8,000.00
Quality Officer Person-day 5 300.00 1,500.00
SUB-TOTAL 50 20,500.00
Supporting Staff
Description Unit Staff Input
Rate
(Ghc) Amount (Ghc)
Project Management
Assistant Person-day 5 300.00 1,500.00
Assistant Content Developer Person-day 10 300.00 3,000.00
Assistant Content Designer Person-day 10 300.00 3,000.00
Secretary Person-day 10 200.00 2,000.00
SUB-TOTAL 35 9,500.00
Out-of-Pocket Expenses
Description Unit Quantity
Rate
(Ghc) Amount (Ghc)
Hotel Accommodation Nights 0 500.00 0.00
Subsistence Allowance (per diem)
Days 0 250.00 0.00
Equipment Eqt Days 0 3,800.00 0.00
Travel Expenses (4WD
Wagon + driver + fuel) veh-day 0 2,000.00 0.00
SUB-TOTAL 0.00
Miscellaneous Expenses
Type Unit Qty
Rate
(Ghc) Amount (Ghc)
Printing & Reproduction Cost Item 2,450.00
Communication Cost 5,000.00
SUB-TOTAL 2,450.00
Content Development & Design
Content Development & Design Duration: 15 Days (from Schedule)
ACTIVITY TOTAL
M
ISCELLAN
EOUS EXPENSES
Description
OUT-OF-POCKET EXPEN
SES
BASIC SERVICES 30,000.00
Development of Training Manual
Amount ( Ghc)
0.00
2,450.00

COMPONENT
2.1 Development of Training Manual 58,300.00
2.1.1 Content Development & Design 32,450.00
2.1.2
Content Documentation and Formatting 5,450.00
2.1.3 Delivery Slides Preparation 3,500.00
2.1.4 Delivery Piloting and Feed back 14,500.00
2.1.5 Refinement & Compilation of Final Training Manual 2,400.00
2.2 Delivery of Training 65,000.00
xxxxx
xxxxx
TOTAL 123,300.00
ADD
Project Overheads (7%) 8,631.00
General Overheads (5%) 6,165.00
138,096.00
ADD Contingency Reserves (10%) 13,809.60
Sub-total 151,905.60
ADD: GetFund + NHIL (5 %) 7,595.28
ADD: COVID Levy (1%) 1,519.06
ADD: VAT (12.5%) 20,127.49
PROJECT COST
BASELINE 181,147.43
SUMMARY OF PRICE PROPOSAL
NAME OF ACTIVITY
WBS TOTAL (Ghc)
Act. ID

CONTROL COSTS
• Concerned with:
– Influencing the factors that create change to the cost
baseline
– Ensure that changes are acted upon in a timely manner
– Managing the actual changes when they occur
– Ensure that cost expenditures do not exceed the authorised
funding, by period and in total for the project

CONTROL COSTS
• Concerned with:
–Monitoring cost performance to isolate and understand
variances from the approved cost baseline
–Informing appropriate stakeholders of all approved changes
and associated cost
–Acting to bring expected cost overruns within acceptable
limits

CONTROL COSTS
– Involves:
• Ensuring that all appropriate changes are recorded in the
baseline
• Preventing incorrect, inappropriate or unauthorized
changes from being added to the cost baseline
• Generally search for the “whys” of both positive and
negative variances

Control Costs - INPUTS
 Cost Baseline
 Performance Measurement Baseline i.e. cost, schedule, scope

The Performance Measurement Baseline (PMB).
•The PMB consists of a time-phased aggregation of the resources (expressed in budgetary
terms) required to execute the work scope of the project, usually in a Work Breakdown
Structure (WBS) and within which we would perform EV analysis.
•The PMB is often shown as a cumulative X/Y curve (as in the diagram below) – this is the
‘baseline’ against which cost and schedule performance is compared using EVM metrics.
The full PMB should also include and define how Earned Value will be measured and
taken through the life of the project.

Control Costs - INPUTS
•Project Documents
 Lessons learned register
 Project funding requirements
 Work Performance Data i.e. information about project progress,
cost authorised and incurred, deliverables completed or in
progress
 Organisational process assets i.e. existing cost control policies,
monitoring and reporting formats etc

Control Costs – TECHNIQUES
• Expert Judgment i.e. expertise in variance analysis, EVM,
forecasting, financial Analysis
• Project Management Information System

Control Costs – TECHNIQUES
 Data Analysis
 Earned Value Analysis i.e. comparing the baseline to actual
performance
 Variance Analysis i.e. compare actual to planned/expected results
 Trend Analysis i.e. examine performance over time i.e. improving or
deteriorating
 Forecasting i.e. estimating the cost of a project based on the project
performance
 Reserve Analysis i.e. used to monitor the status of contingency and
management reserves

Lesson 4
Introduction to Earned Value Management

Earned Value Management:
• A method to measure scope, time and project performance
• Integrates cost, time and scope
• Can be used to forecast future performance and completion
dates
• More accurate than simply comparing planned to actual results

• EVM involves:
– PV (Planned Value):
• Estimated value of work planned to be done
– EV (Earned Value):
• Estimated value of work actually done
– AC (Actual Cost):
• Actual cost incurred
– Variances from the approved baseline
– Various Performance Indices i.e. Cost Performance Index (CPI),
Schedule Performance Index (SPI) etc.
03:15 PM 64
Earned Value Management (EVM)

Work Performance Information
•CV, SV, SPI, CPI, EAC, VAC etc documented and communicated to
stakeholders
Cost Forecasts
•EAC, ETC, TCPI documented and communicated to stakeholders
Change Requests
•Could be corrective or preventive action which can result in a change of cost
baseline
Project Management Plan Updates
•Updates of cost baseline
Project Document Updates
•Cost Estimates, Basis of Estimates, Assumption logs, lessons learned register,
risk register, etc.
03:15 PM 65
Outputs of EVM

Question:
You have spent GHS 322,168.00 on your project to date. The
programme manager wants to know why costs have been running
so high. You explain that the resource cost has been greater than
expected and should level out over the next six months. What
does the GHS 322,168.00 represent?
A. Earned Value
B. Actual Cost
C. Planned Value
D. Cost Performance Index
03:15 PM 66
EVM Exercises

Schedule Variance (SV)
• A measure of schedule performance on a project, calculated as:
SV = EV – PV
• What does it mean when SV = 0?
– Work for the period is completed
Question:
If planned value = GHS 8,000, earned value = GHS 10,000 and actual cost
= GHS 7,000, what is the schedule variance?
Solution:
EV = GHS 10,000, PV = GHS 8,000, AC = GHS 7,000
SV = EV – PV = GHS 10,000 – GHS 8,000 = GHS 2,000
67
03:15 PM
EVM Exercises

Cost Variance (CV)
• Measure of cost performance on a project calculated as:
CV = EV – AC
CV = 10,000.00 – 7,000.00=Ghc3,000.00
What does it mean when CV < 0?
• A negative CV is non-recoverable
• Means your expenditure exceeded your earnings
68
03:15 PM
EVM Exercises

Question:
Your team is paving a 32-km road. Every 4-km stretch is budgeted to cost
GHC5,000,000. You have just announced at your status meeting today that
you have completed 20 km of the road at a cost of GHC22,000,000. You
planned to accomplish 24 km of the road by today.
1.What is the Planned Value (PV) of the project?
PV = GHC5,000,000*24/4 = GHC5,000,000*6 = GHC30,000,000
2. What is your Earned Value?
EV = GHC5,000,000*20/4 = GHC5,000,000*5 = GHC25,000,000
3. Calculate the Cost Variance (CV) and interpret it.
CV = EV – AC = GHC25,000,000 – GHC22,000,000 = GHC3,000,000
SV = EV – PV = GHc25,000,000 – GHc30,000,000 = -GHc5,000,000
There is a cost underrun (saving) of GHC3,000,000
69
03:15 PM
EVM Exercises

Schedule Performance Index (SPI)
•A measure of progress achieved compared to progress planned on a
project, calculated as:
SPI = EV ÷ PV
•SPI < 1.0 indicates less work was completed than was planned
•SPI > 1.0 indicates more work was completed than was planned
Question:
• You found an SPI calculated for a project as 0.7. What does this mean?
– Project is behind schedule by 30%.
70
03:15 PM
EVM Exercises

Cost Performance Index (CPI)
• Considered the most critical EVM metric. It is a measure of value of
work accomplished compared with actual cost, calculated as:
CPI = EV ÷ AC
• CPI < 1.0 indicates a cost overrun for work completed
• CPI > 1.0 indicates a cost underrun of performance to date
Question:
• The Cost Performance Index (CPI) based on the amount of work
completed so far on a project is 0.75. What does this mean?
– There is a cost overrun of 25%/for every Ghc1.00 invested, a
return of Ghc0.75 is realised.
• How would you interpret the CPI if it were 1.15?
– There is a cost underrun of 15%.
71
03:15 PM
EVM Exercises

Forecasting
• A set of techniques for making predictions about future conditions
and events of a project based on information about past performance
• Key parameters in forecasting project cost include:
– Budget At Completion (BAC)
– Estimate To Complete (ETC)
– Estimate At Completion (EAC)
– Variance At Completion (VAC)
– To Complete Performance Index (TCPI)
72
03:15 PM
EVM Exercises

Budget at Completion (BAC)
• Total budget for a project (or a project component)
• Equals total PV for all works involved in the project.
Estimate to Complete (ETC)
• Cost expected to be incurred on the completion of all the remaining work of a
project (or a project component).
• From this point on, how much MORE do we expect it to cost to complete the
project?
• Using the Bottom-Up approach to forecast ETC is most preferred.
03:15 PM 73
EVM Exercises

Estimate at Completion (EAC)
• The expected total cost of a project (or a project component) based on
performance to date, or other factors identified by the project team (for
which reason it is sometimes called Latest Revised Estimate)
• Currently, how much is the project expected to cost?
• Necessary when it becomes obvious that BAC is no longer feasible, It is
calculated as:
EAC = AC + ETC
or EAC = BAC/CPI
Note: Estimate To Complete (ETC) can be calculated as:
ETC = EAC – AC
03:15 PM 74
EVM Exercises

Variance At Completion (VAC)
• It is the projected budget deficit or surplus (i.e. how much over or under
budget do we expect) at the end of the project?
• How efficiently must we use our remaining resources?
• It is calculated as:
VAC = BAC – EAC
• E.g. if BAC = GHS 200,000 and EAC = GHS 215,000,
VAC = GHS 200,000 – GHS 215,000 = – GHS 15,000
03:15 PM 75
EVM Exercises

You planned $1,500.00 to complete a work package scheduled to have
been finished today. The actual expenditure to date is $1,350.00. Work is
2/3 complete. What is the: Cost Variance? Schedule Variance? Cost
Performance Index? Schedule Performance Index? Estimate To
Complete? Estimate At Completion?
Solution:
CV = EV – AC = $1,500(2/3) - $1,350 = $1,000 - $1,350 = -$350
SV = EV – PV = $1,500(2/3) - $1,500 = $1,000 - $1,500 = -$500
CPI = EV/AC = ($1,500/(2/3) / $1,350) = 1,000/1,350 = 0.74
SPI = EV/PV = ($1,500(2/3))/$1,500 = $1,000/$1,500 = 0.67
ETC = (BAC-EV)/CPI = (1500-1000)/0.74 = $676
EAC = ETC + AC = $676 + $1,350 = $2,026
03:15 PM 77
EVM Exercises

Lecture 5
Introduction to Claim Management

What is a Claim?
• A demand made for compensation or additional remuneration to which one of the parties to the
contract considers he/she has a contractual right
• A recoup of a reasonable cost of the supplier caused through events which are at the responsibility of
the employer.
• A request by a party to a contract for recompense for some loss and/or expense that he has suffered
for which he would not be reimbursed by a payment under any other provision of the contract.
• Additional payments which may be due the party to the contract under provisions other than those
covering regular payments under a contract are often referred to as ‘claims’.
The term may also include damages for breach of contract = Common Law Claims

TYPES OF CLAIMS
1. CONTRACTUAL CLAIMS
2. COMMON LAW CLAIMS
3. QUANTUM MERUIT CLAIMS
4. EX GRATIA CLAIMS
81

CONTRACTUAL CLAIMS
CONTRACTUAL CLAIMS
• These are claims that arise out of the express provisions of the particular contract, eg.
for ‘direct loss and/or expense’ under certain clauses of the Conditions of Contract.
a) Prolongation or Delay Claims.
They come about as a result of extension of time.
b) Acceleration Claims
These result from expediting production pace to meet the original or revised contract
completion date.
c) Disruption Claims
These result from client’s changes which have extensive disruptive effect on the
project work..
82

COMMON LAW CLAIMS
COMMON LAW CLAIMS
• These claims are usually and misleadingly called ‘EX-
CONTRACTUAL’ or ‘EXTRA-CONTRACTUAL’ claims.
• They are claims for damages for breach of contract at Common
Law and/or legally enforceable claims for breach of some other
aspect of the law eg. in tort or for breach of copyright.
83
• A ‘quantum meruit’ claim (‘as much as he has earned’)
provides a remedy for a person who has carried out work
where no price has been agreed or where the original
contract has been replaced by a new one and payment
is claimed for work done under the substituted contract.
QUANTUM MERUIT CLAIMS
QUANTUM MERUIT CLAIMS

EX GRATIA CLAIMS
EX GRATIA CLAIMS
• An ex gratia (‘out of kindness’) claim is one which the employer is under
no legal obligation to meet. It is sometimes called a ‘sympathetic’ claim.
• Ex gratia claims are often put forward by suppliers but are seldom met
unless some benefit may accrue to the employer as a result. eg. An
employer might agree to make an ex gratia payment to save a supplier
from insolvency where the cost of employing another supplier to complete
the work would be more than the amount of the ex gratia payment.
84

GENERAL EVENTS THAT GIVE RISE TO CLAIMS
86

For Construction Industry (Especially) Events That Give
Rise To Claims include:
• Awaiting Drawings and instructions
• Delay during the execution of the works
• Difficulties with Nominated Suppliers and Sub-contractors
• Errors in setting out arising from incorrect data from the
Consultant
• Fossils, antiquities, etc
• High number of variation orders
• Method of construction
• Physical conditions
• Strikes
• Possession of and access to the site
• Substitution of materials
• Suspension
87

FOUNDATIONS FOR A SUCCESSFUL CLAIM
1. Entitlement
Entitlement
An entitlement within the contract must be shown, stated and proved. It is
usually necessary to state the clause or clauses under which the claim is
made.
2. Party’s Responsibility
Party’s Responsibility
Most clauses require a party’s responsibility to be clearly shown. This
includes action or inaction of the PM and others.
88

3. Notification of the Claim
Notification of the Claim
•Where the terms of the contract require notification of a claim, it is
essential that this is given and in accordance with any time requirements.
•Failure to do so may not invalidate the claim.
89
FOUNDATIONS FOR A SUCCESSFUL CLAIM cont’d
4. Extension of Time (EOT)
Extension of Time (EOT)
An extension of time must be requested where appropriate. This
normally forms a basis for a claim for entitlement to increased project
overheads or extra manpower and plant.
(Note: Not all extensions of time carry monetary entitlement)

5. Cost Records
Cost Records
Records must be capable of establishing the extra cost and expense
incurred.
6. Accuracy
Accuracy
Many claims fail because the records are inadequate or incorrect. Records
must be accurate and consistent. Photographs are particularly useful as
supporting evidence.
90
FOUNDATIONS FOR A SUCCESSFUL CLAIM cont’d

NB
• For a claim to be successful it must be well
prepared, based on the appropriate contract
clauses and founded on facts that are clearly
recorded, presented and provable.
91

THE STRUCTURE OF A TYPICAL CLAIM
• Introduction
• Contractual basis of the claim
• The details of the claim
• Quantification of the claim
• Appendices
92

Lecture 6
Key Concepts and Trends in Project Cost
Management

Key Concepts in Project Cost Management
• Project Cost Management is concerned with the cost of the resources
needed to complete project activities
• It should also consider the effects of project decisions on:
– subsequent recurring cost of using, maintaining and supporting the
product, service, or result of the project
• There is the need to recognize that different stakeholders measure project
costs in different ways and at different times
03:15 PM 94

Trends and Emerging Practices in Project Cost Management
• The expansion of earned value management (EVM) to include the
concept of Earned Schedule (ES).
• ES is an extension to the theory and practice of EVM.
• Earned Schedule theory replaces the Schedule Variance measures
used in traditional EVM (Earned value – Planned Value);
• With Earned Schedule (ES) and Actual Time (AT) i.e. SV=ES – AT
• The schedule performance index (SPI) using earned schedule metrics
is SPI=ES/AT.
• Earned Schedule theory also provides formulas for forecasting the
project completion date using earned schedule, actual time and
estimated duration
03:15 PM 95

Tailoring Considerations
Projects are unique and hence PMs need to tailor the way PCM processes are
applied, considering factors such as:
Knowledge Management
•Does the organization have a formal knowledge management and financial
database repository that is readily available to the Project Manager?
Estimating and Budgeting
•Does the organization have existing formal or informal cost estimating and
budgeting-related policies, procedures, and guidelines?
Earned Value Management
•Does the organization use earned value management in managing projects?
Use of Agile Approach
•Does the organization use agile methods? How does this impact cost
estimating?
Governance
•Does the organization have formal or informal audit and governance policies,
procedures and guidelines?
03:15 PM 96

Considerations for Agile/Adaptive Environments
• Projects with high degrees of uncertainty or partially defined scope may not
benefit from detailed cost calculations due to frequent changes
• Instead, lightweight estimation methods can be used to generate a fast, high-
level forecast of project cost
• This can then be easily adjusted as changes arise
• Detailed estimates are reserved for short-term planning horizons in a just-in-
time fashion
• In cases where high-variability projects are also subject to strict budgets, the
scope and schedule are more often adjusted to stay within cost constraints
03:15 PM 97

Lecture 7
Earned Value Management Exercises
03:15 PM 99

• Earned Value Management Exercises
– Based on the schedule provided and the Work Performance Data, for
each week (Wks 1 – 3), determine the following and interpret the
results:
– CV
– SV
– CPI
– SPI
– EAC
– ETC
– VAC
– TCPI
– Do a Trend Analysis for both CPI and SPI and interpret the results
03:15 PM 101

SAMPLE PROJECT SCHEDULE
1 2 3 4 5 6 7 8
A 2 400.00
B 3 300.00
C 2 400.00
D 3 250.00
E 2 200.00
Timing
Activity Duration Budget/week
BUDJETED COST OF WORK SCHEDULED - PV
1 2 3 4 5 6 7 8
A 2 400.00 400.00 400.00
B 3 300.00 300.00 300.00 300.00
C 2 400.00 400.00 400.00
D 3 250.00 250.00 250.00 250.00
E 2 200.00 200.00 200.00
PV 400.00 700.00 300.00 700.00 650.00 250.00 450.00 200.00
Cum PV 400.00 1,100.00 1,400.00 2,100.00 2,750.00 3,000.00 3,450.00 3,650.00
BAC = Ghc3,650.00
Activity Duration Budget/week Timing

WORK PERFORMANCE DATA FOR THE 1ST 3 WEEKS
% Comp. Act. Cost % Comp. Act. Cost % Comp. Act. Cost
A 2 400.00 40% 425.00 90% 750.00 100% 1,350.00
B 3 300.00 0% 0.00 30% 250.00 70% 545.00
C 2 400.00 0% 0.00 0% 0.00 0% 0.00
D 3 250.00 0% 0.00 0% 0.00 0% 0.00
E 2 200.00 0% 0.00 0% 0.00 0% 0.00
CUMULATIVE ACTUAL COSTS 425.00 1,000.00 1,895.00
3
Activity Duration Budget/week Work Performance Data (WPD) so far collected for first 3 weeks
1 2
Cum. Earned Values
1 2 3
A 2 400.00 320.00 720.00 800.00
B 3 300.00 0.00 270.00 630.00
C 2 400.00 0.00 0.00 0.00
D 3 250.00 0.00 0.00 0.00
E 2 200.00 0.00 0.00 0.00
CUMULATIVE EV 320.00 990.00 1,430.00
Activity Duration Budget/week

The challenge lies in:
•The mechanics of the method
•The cultural change required to underpin an EV based project control system
•When most organisations first attempt to use EVM, they typically find that it highlights
weaknesses or gaps in the project planning and control processes and capabilities.
•For example:
 A robust baseline needs to be developed as soon as possible after contract award –
this task alone challenges many organisations – and then it must be maintained.
 The planning process must identify all major project deliverables clearly, within the
PMB, not just the functional effort assumed to be required to deliver a project.
 Objective measures of physical progress must be assessed routinely.
 Business systems and processes need to provide data in a timely manner (e.g.
costs) and need to be structurally compatible with the needs of the EVM system.
 Finally, decades of evidence shows that when allowed to, people will find limitless
numbers of ways to manipulate EV results to hide bad news, usually in the mistaken
hope of giving themselves time to make the ‘issue’ go away – typically what this
does is to reduce the focus, resource and effort on the issue, quite possibly until it
becomes irreversible.
The good news is that this can be spotted quite easily and prevented, if we
choose to.
CHALLENGES IN THE USE OF EVM

• EV gives objective measures of status against the cost and schedule
goals of a project – there are no more primary or fundamental goals in
project management.
• Assuming an organisation follows the principles that underpin good
practice in EVM systems, it provides important data to project teams,
without which teams can operate in a vacuum regarding their
performance, or even worse, they could operate in an environment of
false optimism that does not see the level of challenge or issues in
their project, until it is too late to make a real impact on the same –
something that occurs far too often in projects.
• Earned Value is not just worth it. It is a fundamental tool to being in
control in large-scale risky development programmes.
Is Earned Value worth the effort?

Lesson 8
Quiz/Mid-semester Examinations

Lecture 9
Practice Presentations on Project Cost,
Procurement and Integration Management

Lecture 10
Practice Presentations on Project Cost,
Procurement and Integration Management

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