PROJECT COST MANAGEMENT - FINAL NHI ANH 03.ppt

Project Cost Management
ME – DUONG VO NHI ANH

2
Learning Objectives
 Explain basic project cost management principles,
concepts, and terms.
 Discuss different types of cost estimates and methods
for preparing them.

3
Learning Objectives
 Understand the processes involved in cost budgeting
and preparing a cost estimate and budget.
 Understand the benefits of earned value management
and project portfolio management to assist in cost
control.
 Describe how project management software can assist
in project cost management.

4
What is Cost and Project Cost Management?
 Cost is a resource sacrificed or foregone to achieve a specific objective, or
something given up in exchange.
 Costs are usually measured in monetary units, such as dollars.

5
What is Cost and Project Cost Management?
 Project Cost is including Investment costs, Operating costs
Example: a project
buy a building then
lease offices

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Project Cost Management?
 Project cost management includes the
processes required to ensure that the project is
completed within an approved budget.

7
Project Cost Management?
 Project cost management includes the
processes required to ensure that the project is
completed within an approved budget.

8
Project Cost Management Processes
 Cost estimating: Developing an approximation or
estimate of the costs of the resources needed to
complete a project.
 Cost budgeting: Allocating the overall cost estimate
to individual work items to establish a baseline for
measuring performance.
 Cost control: Controlling changes to the project
budget.

Types of Costs (review)
Costs that do not vary
with production or sales
level.
Costs that vary directly with
the level of production.
The sum of the fixed and
variable costs for any
given level of production.

14
Basic Principles of Cost Management
 Profits are revenues minus expenses.
 Life cycle costing considers the total cost of ownership, or
development plus support costs, for a project.
 Target Cost (TC)

15
 Profits are revenues minus expenses.
 Life cycle costing considers the total cost of
ownership, or development plus support costs,
for a project.
 Target Cost (TC)

16
 Cash flow analysis determines
the estimated annual costs and
benefits for a project and the
resulting annual cash flow.

17
 Tangible costs or benefits are those costs or benefits that an
organization can easily measure in dollars.
 Intangible costs or benefits are costs or benefits that are
difficult to measure in monetary terms.
 Direct costs are costs that can be directly related to producing
the products and services of the project.
 Indirect costs are costs that are not directly related to the
products or services of the project, but are indirectly related to
performing the project.
 Sunk cost is money that has been spent in the past; when
deciding what projects to invest in or continue, you should not
include sunk costs.

18

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 Sunk cost is money that has been spent in the past; when
deciding what projects to invest in or continue, you should not
include sunk costs.

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 Learning curve theory states that when many items are
produced repetitively, the unit cost of those items decreases
in a regular pattern as more units are produced.
 Reserves are dollars included in a cost estimate to mitigate
cost risk by allowing for future situations that are difficult
to predict.
 Contingency reserves allow for future situations that may be
partially planned for (sometimes called known unknowns)
and are included in the project cost baseline.
 Management reserves allow for future situations that are
unpredictable (sometimes called unknown unknowns).

Costs as a Function of Production
Experience
 This drop in the average cost with accumulated
production experience is called the experience curve
(or the learning curve).

22
Cost Estimating
 Project managers must take cost estimates seriously if they want to complete
projects within budget constraints.
 It’s important to know the types of cost estimates, how to prepare cost
estimates, and typical problems associated with cost estimates.

23
Cost Estimation Tools and Techniques
 Basic tools and techniques for cost estimates:
 Analogous or top-down estimates: Use the actual cost of a previous, similar
project as the basis for estimating the cost of the current project.
 Bottom-up estimates: Involve estimating individual work items or activities
and summing them to get a project total.

24
Cost Estimation Tools and Techniques
 Basic tools and techniques for cost estimates:
 Analogous or top-down estimates: Use the actual cost of a
previous, similar project as the basis for estimating the cost of
the current project.
 Bottom-up estimates: Involve estimating individual work
items or activities and summing them to get a project total.
 Parametric modeling: Uses project characteristics
(parameters) in a mathematical model to estimate project
costs.
 Computerized tools: Tools, such as spreadsheets and project
management software, that can make working with different
cost estimates and cost estimation tools easier.

Work Breakdown Structure (WBS)
 A basic tool in project management
 A framework for defining all project work
elements and their relationships, collecting and
organizing information, developing relevant cost
and revenue data, and management activities.
 Each level of a WBS divides the work elements
into increasing detail.

PROJECT COST MANAGEMENT - FINAL NHI ANH 03.ppt

A WBS has other characteristics.
 Both functional and physical work elements are
included.
 The content and resource requirements for a work
element are the sum of the activities and resources
of related subelements below it.
 A project WBS usually includes recurring and
nonrecurring work elements.

Cost and Revenue Structure
 Used to identify and categorize the costs and
revenues that need to be included in the analysis.
 The life-cycle concept and WBS are important
aids in developing the cost and revenue structure
for a project.
 Perhaps the most serious source of errors in
developing cash flows is overlooking important
categories of costs and revenues.

Figure 3-1 Bottom-Up Approach
to Determining the Cost of a College
Education

Figure 3-4 WBS (Three Levels) for
Commercial Building Project in
Example 3-2

The level of detail and accuracy of
estimates depends on
 time and effort available as justified by the
importance of the study,
 difficulty of estimating the items in question,
 methods or techniques employed,
 qualifications of the estimator(s), and
 sensitivity of study results to particular factor
estimates.

A variety of sources exist for cost
and revenue estimation.
 Accounting records: good for historical data, but
limited for engineering economic analysis.
 Other sources inside the firm: e.g., sales,
engineering, production, purchasing.
 Sources outside the firm: U.S. government data,
industry surveys, trade journals, and personal
contacts.
 Research and development: e.g., pilot plant, test
marketing program, surveys.

These models can be used in many
types of estimates.
 Indexes
 Unit technique
 Factor technique

In 2002 Acme Chemical purchased a large pump for
$112,000. Acme keys their cost estimating for these
pumps to the industrial pump index, with a baseline of
100 established in 1992. The index in 2002 was 212.
Acme is now (2010) considering construction of a new
addition and must estimate the cost of the same type
and size of pump. If the industrial pump index is
currently 286, what is the estimated cost of the new
pump?
Pause and solve

The unit technique is one that is widely
known and understood.
A “per unit factor” is used, along with the
appropriate number of units, to find the total
estimate of cost. An often used example is the cost
of a particular house. Using a per unit factor of, say,
$120 per square foot, and applying that to a house
with 3,000 square feet, results in an estimated cost of
$120 x 3,000 = $360,000.
This techniques is useful in preliminary estimates,
but using average costs can be very misleading.

The factor technique is an extension of
the unit technique where the products of
several quantities are summed and then
added to components estimated directly.
C = cost being estimated
Cd = cost of the selected component d estimated directly
fm = cost per unit of component m
Um = number of units of component m

Parametric cost estimating is the use of
historical cost data and statistical
techniques (e.g., linear regression) to
predict future costs. Parametric models
are used in the early design stages to get an
idea of how much the product (or project)
will cost, on the basis of a few physical
attributes (such as weight, volume, and
power).

The power-sizing technique (or exponential model) is
frequently used for developing capital
investment estimates for industrial plants and
equipment.
(both in $ as of the point in time
for which the estimate is desired)
(both in the same physical units)

Acme Logistics provides “Less than truck load” (LTL)
services throughout the U.S. They have several hubs
where they use cross-docking to move goods from one
trailer to another. Acme built its last hub 10 years ago,
and it had 36 dock doors. The cost index at that time
was 140, and the total cost was $6 million. Acme
plans a new hub that will have 48 dock doors. The
cost index now is 195, and Acme will use a capacity
factor of 0.82. What is the estimated cost of the new
hub?
Pause and solve

A learning curve reflects increased efficiency
and performance with repetitive
production of a good or service. The
concept is that some input resources
decrease, on a per-output-unit basis, as the
number of units produced increases.

Most learning curves assume a constant
percentage reduction occurs as the
number of units produced is doubled.

Learning curve example: Assume the first unit
of production required 3 hours time for
assembly. The learning rate is 75%. Find (a)
the time to assemble the 8th
unit, and (b) the
time needed to assemble the first 6 units.

A cost estimating relationship (CER)
describes the cost of a project as a
function of design variables.
There are four basic steps in developing a CER.
Problem definition
Data collection and normalization
CER equation development
Model validation and documentation

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Cost Management Plan
 A cost management plan is a document that describes
how the organization will manage cost variances on the
project.
 A large percentage of total project costs are often labor
costs, so project managers must develop and track
estimates for labor.

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Constructive Cost Model
(COCOMO)
 Barry Boehm helped develop the COCOMO models for
estimating software development costs.
 Parameters include:
 Function points: Technology-independent assessments of
the functions involved in developing a system.
 Source Lines of Code (SLOC): A human-written line of
code that is not a blank line or comment.
 Boehm suggests that only parametric models do not suffer
from the limits of human decision-making.

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Typical Problems with IT
Cost Estimates
 Developing an estimate for a large software project is a
complex task that requires a significant amount of effort.
 People who develop estimates often do not have much
experience.
 Human beings are biased toward underestimation.
 Management might ask for an estimate, but really desire a
bid to win a major contract or get internal funding.

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Surveyor Pro Project Cost Estimate

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Surveyor Pro Software Development Estimate

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Cost Budgeting
 Cost budgeting involves allocating the project cost
estimate to individual work items over time.
 The WBS is a required input for the cost budgeting
process because it defines the work items.
 Important goal is to produce a cost baseline:
 A time-phased budget that project managers use to
measure and monitor cost performance.

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Surveyor Pro Project
Cost Baseline

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Cost Control
 Project cost control includes:
 Monitoring cost performance.
 Ensuring that only appropriate project changes are included in a
revised cost baseline.
 Informing project stakeholders of authorized changes to the
project that will affect costs.
 Many organizations around the globe have problems with cost
control.

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Earned Value Management (EVM)
 EVM is a project performance measurement technique
that integrates scope, time, and cost data.
 Given a baseline (original plan plus approved
changes), you can determine how well the project is
meeting its goals.
 You must enter actual information periodically to use
EVM.
 More and more organizations around the world are
using EVM to help control project costs.

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Earned Value Management Terms
 The planned value (PV), formerly called the budgeted cost of work
scheduled (BCWS), also called the budget, is that portion of the
approved total cost estimate planned to be spent on an activity
during a given period.
 Actual cost (AC), formerly called actual cost of work performed
(ACWP), is the total of direct and indirect costs incurred in
accomplishing work on an activity during a given period.
 The earned value (EV), formerly called the budgeted cost of work
performed (BCWP), is an estimate of the value of the physical work
actually completed.
 EV is based on the original planned costs for the project or activity
and the rate at which the team is completing work on the project or
activity to date.

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Rate of Performance
 Rate of performance (RP) is the ratio of actual work
completed to the percentage of work planned to have been
completed at any given time during the life of the project or
activity.
 Brenda Taylor, Senior Project Manager in South Africa,
suggests using this approach for estimating earned value.
 For example, suppose the server installation was halfway
completed by the end of week 1. The rate of performance
would be 50 percent (50/100) because by the end of week
1, the planned schedule reflects that the task should be 100
percent complete and only 50 percent of that work has been
completed.

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Table 7-4. Earned Value Calculations for
One Activity After Week One

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Rules of Thumb for Earned
Value Numbers
 Negative numbers for cost and schedule variance
indicate problems in those areas.
 A CPI or SPI that is less than 100 percent indicates
problems.
 Problems mean the project is costing more than
planned (over budget) or taking longer than planned
(behind schedule).

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Earned Value Calculations for a One-Year
Project After Five Months

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Earned Value Chart for Project after
Five Months
If the EV
line is
below the
AC or PV
line, there
are
problems
in those
areas.

65
Project Portfolio Management
 Many organizations collect and control an entire suite of
projects or investments as one set of interrelated activities in
a portfolio.
 Project portfolio management has five levels:
1. Put all your projects in one database.
2. Prioritize the projects in your database.
3. Divide your projects into two or three budgets based on type
of investment.
4. Automate the repository.
5. Apply modern portfolio theory, including risk-return tools that
map project risk on a curve.

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Using Software to Assist in Cost
Management
 Spreadsheets are a common tool for resource planning,
cost estimating, cost budgeting, and cost control.
 Many companies use more sophisticated and
centralized financial applications software for cost
information.
 Project management software has many cost-related
features, especially enterprise PM software.

67
Sample Project Portfolio Management Screen
Showing Project Health

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Chapter Summary
 Project cost management is traditionally a weak area in
IT projects, and project managers must work to
improve their ability to deliver projects within approved
budgets.
 Main processes include:
 Cost estimating
 Cost budgeting
 Cost control

CONTROL COSTS: INPUTS
 Project Management Plan
 Provide the Cost Performance baseline and Cost management plan to
control the costs.
 Project Funding Requirements
 Work Performance Information
 Work performance information includes information about project
progress, such as which deliverables have started, their progress and
which deliverables have finished.
 Information also includes costs that have been authorized and incurred,
and estimates for completing project work.
 Organizational Process Assets
 Existing formal and informal cost control-related policies, procedures,
and guidelines.
 Cost control tools.
 Monitoring and reporting methods to be used.

13–70
Glossary of Terms
TABLE 13.1
EV Earned value for a task is simply the percent complete times its original budget. Stated differently,
EV is the percent of the original budget that has been earned by actual work completed.
PV The planned time-phased baseline of the value of the work scheduled. An approved cost estimate
of the resources scheduled in a time-phased cumulative baseline [BCWS—budgeted cost of the
work scheduled].
AC Actual cost of the work completed. The sum of the costs incurred in accomplishing work. [ACWP
—actual cost of the work performed].
CV Cost variance is the difference between the earned value and the actual costs for the work
completed to date where CV = EV – AC.
SV Schedule variance is the difference between the earned value and the baseline line to date where
SV = EV – PV.
BAC Budgeted cost at completion. Total budgeted cost of the baseline or project cost accounts.
EAC Estimated cost at completion.
ETC Estimated cost to complete remaining work.
VAC Cost variance at completion. VAC indicates expected actual over- or under-run cost at completion.

CONTROL COSTS:
TOOLS & TECHNIQUES
 Earned Value Management
 Earned value management (EVM) integrates project scope, cost, and schedule
measures to help the project management team assess and measure project
performance and progress.
 EVM develops and monitors three key dimensions for each work package and
control account:
 Planned value (PV): is the authorized budget assigned to the work to be
accomplished for an activity or work breakdown structure component.
 Earned value (EV): is the value of work performed expressed in terms of the
approved budget assigned to that work for an activity or work breakdown structure
component.
EV = PV to date x RP
(RP: Rate of performance, the ratio of atual work completed to the percenatge pf
worked planned to have been completed at any given time)
 Actual cost (AC): is the total cost actually incurred and recorded in accomplishing
work performed for an activity or work breakdown structure component.

•We will track Earned Value to see if the project is staying true to the budget
and planned burn rate.
•Project controls become even more important when changes occur as a
result of unforeseen conditions, scope change etc. Any time there are
unforeseen expenditures, we will document the cause of the changes and
who is responsible for the extra costs.
•With this on-going measurement of the cost and completion schedule, we
can advise the management team of any potential issues completing the
project on time and / or within budget.

CONTROL COSTS:
TOOLS & TECHNIQUES
 Earned Value Management
 Variances from the approved baseline will also be monitored:
 Schedule variance (SV): is a measure of schedule performance on a
project. It is equal to the earned value (EV) minus the planned value (PV).
 The EVM schedule variance is a useful metric in that it can indicate a
project falling behind its baseline schedule.
 EVM SVs are best used in conjunction with critical path methodology
(CPM) scheduling and risk management.
SV = EV – PV
 Cost variance (CV): is a measure of cost performance on a project. It is
equal to the earned value (EV) minus the actual costs (AC).
 The EVM CV is particularly critical because it indicates the relationship of
physical performance to the costs spent. Any negative EVM CV is often
non-recoverable to the project.
CV= EV – AC

13–76
Digital Camera Prototype Project Baseline Gantt Chart
FIGURE 13.7

13–77
Work Breakdown Structure with Cost Accounts
FIGURE 13.6

13–79
Digital Camera Prototype Status Reports: Periods 1–3
TABLE 13.2

13–80
Digital Camera Prototype Status Reports: Periods 4 & 5
TABLE 13.2 (cont’d)

13–81
Digital Camera Prototype Status Reports: Periods 6 & 7
TABLE 13.2 (cont’d)

13–82
Digital Camera Prototype Summary Graph ($000)
FIGURE 13.9

13–83
Digital Camera Project-Tracking Gantt Chart
Showing Status—Through Period 7
FIGURE 13.10

13–84
Project Rollup End
Period 7 ($000)
FIGURE 13.11

13–85
Indexes to Monitor Progress
 Performance Indexes
 Cost Performance Index (CPI)
 Measures the cost efficiency of work accomplished to date.
 CPI = EV/AC
 Scheduling Performance Index (SPI)
 Measures scheduling efficiency
 SPI = EV/PV
 Percent Complete Indexes
 Indicates how much of the work accomplished represents of the total
budgeted (BAC) and actual (AC) dollars to date.
 PCIB = EV/BAC
 PCIC = AC/EAC

13–86
Interpretation of Indexes
TABLE 13.3
Index Cost (CPI) Schedule (SPI)
>1.00 Under cost Ahead of schedule
=1.00 On cost On schedule
<1.00 Over cost Behind schedule

EMV EXAMPLE 1
 To illustrate the concept of EVM and all the formulas, assume a
project that has exactly one task. The task was baselined at 8
hours, but 11 hours have been spent and the estimate to
complete is 1 additional hour. The task was to have been
completed already. Assume an Hourly Rate of $100 per hour.

EMV EXAMPLE 1
 Hourly Rate = $100
 PV = $800 ($100 * 8 hours)
 AC = $1100 ($100 * 11 hours)
 EV = $734 (baseline of $800 * 91.7% complete)
 BAC = $800 (8 hours * $100)
 SV = -$66 ($734 EV - $800 PV)
 SPI = 0.91 ($734 EV / $800 PV)
 CV = -$366 ($734 EV - $1100 AC) indicating a cost overrun
 CPI = 0.66 ($734 EV / $1100 AC) indicating over budget

EMV EXAMPLE 2
 A project has a budget of £10M and schedule for 10 months. It
is assumed that the total budget will be spent equally each
month until the 10th month is reached. After 2 months the
project manager finds that only 5% of the work is finished and a
total of £1M spent.

EMV EXAMPLE 2
 PV = £2M
EV = £10M * 0.05 = £0.5M
AC = £1M
 CV = EV - AC = 0.5 - 1 = -0.5M
CV% = 100 * (CV/EV) = 100*(-0.5/0.5) = -100% overrun
 SV = EV - PV = 0.5 - 2 = -1.5 months
SV% = 100 * (SV/PV) = 100*(-1.5/2) = -75% behind
 CPI = EV/AC = 0.5/1 = 0.5
SPI = EV/PV = 0.5/2 = 0.25

CONTROL COSTS:
TOOLS & TECHNIQUES
 Forecasting
 As the project progresses, the project team can develop a forecast for the
estimate at completion (EAC) that may differ from the budget at completion
(BAC) based on the project performance.
EAC = BAC / CPI, Estimated time to complete = Original time estimate/ SPI
 Forecasting the EAC involves making estimates or predictions of conditions
and events in the project’s future based on information and knowledge
available at the time of the forecast.
 The most common EAC forecasting approach is a manual, bottom-up
summation by the project manager and project team.
 The project manager’s bottom-up EAC method builds upon the actual costs
and experience incurred for the work completed, and requires a new estimate
to complete the remaining project work.
 Three common methods:
 EAC forecast for ETC work performed at the budgeted rate.
 EAC forecast for ETC work performed at the present CPI.
 EAC forecast for ETC work considering both SPI and CPI factors.

CONTROL COSTS:
TOOLS & TECHNIQUES
 To-Complete Performance Index (TCPI)
 The to-complete performance index (TCPI) is the calculated projection
of cost performance that must be achieved on the remaining work to
meet a specified management goal.
 Equation for the TCPI based on the BAC: (BAC – EV) / (BAC – AC).

CONTROL COSTS:
TOOLS & TECHNIQUES
 Performance Reviews
 Performance reviews compare cost performance over time, schedule
activities or work packages overrunning and under running the budget,
and estimated funds needed to complete work in progress.
 If EVM is being used, the following information is determined:
 Variance analysis.
 Trend analysis.
 Earned value performance.
 Variance Analysis
 Cost performance measurements (CV, CPI) are used to assess the
magnitude of variation to the original cost baseline.
 Important aspects of project cost control include determining the cause
and degree of variance relative to the cost performance baseline and
deciding whether corrective or preventive action is required.

CONTROL COSTS: OUTPUTS
 Work Performance Measurements
 The calculated CV, SV, CPI, and SPI values for WBS components, in
particular the work packages and control accounts, are documented and
communicated to stakeholders.
 Budget Forecasts
 Either a calculated EAC value or a bottom-up EAC value is documented
and communicated to stakeholders.
 Organizational Process Assets Updates
 Causes of variances
 Corrective action chosen and the reasons
 Other types of lessons learned from project cost control

CONTROL COSTS: OUTPUTS
 Change Requests
 Change requests can include preventive or corrective actions and are
processed for review and disposition through the Perform Integrated
Change Control process
 Project Management Plan Updates
 Cost performance baseline.
 Cost management plan.
 Project Document Updates
 Cost estimates
 Basis of estimates

Figure 3-6 Spreadsheet Solution,
Example 3-7

Figure 3-7 Spreadsheet Solution,
Example 3-8 (a) Regression
Dialogue Box

Figure 3-7 (continued)
Spreadsheet Solution, Example 3-8
(b) Regression Results

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