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Baseline

The original plan plus or minus approved changes.


Budget At Completion (BAC)
The estimated total cost of the project when done.
Budgeted Cost of Work Performed (BCWP)
The sum of the approved cost estimates for activities completed during a given period
(usually project-to-date).
Budgeted Cost of Work Scheduled (BCWS)
The sum of the approved cost estimates for activities scheduled to be performed during a
given period.
Chart of Accounts
Any numbering system used to monitor project costs by category (e.g., labor, supplies,
materials). The project chart of accounts is usually based upon the corporate chart of
accounts of the primary performing organization.
Code of Accounts
Any numbering system used to uniquely identify each element of the WBS.
Contingency Reserve
A separately planned quantity used to allow for future situations which may be planned
for only in part ("known unknowns"). Contingency reserves are intended to reduce the
impact of missing cost or schedule objectives. Contingency reserves are normally
included in the project's cost and schedule baselines.
Cost Budgeting
Allocating the cost estimates to individual project components.
Cost Control
Controlling changes to the project budget.
Cost Estimating
Estimating the cost of the resources needed to complete project activities.
Cost Performance Index (CPI)
The ratio of budgeted costs to actual costs (BCWP / ACWP). CPI is often used to predict
the magnitude of a possible cost overrun using the following formula: original cost
estimate/CPI = projected cost at completion.
Cost Variance (CV)
Any difference between the estimated cost of an activity and the actual cost of that
activity. In earned value, CV = BCWP-ACWP.
Earned Value
1. A method for measuring project performance. It compares the amount of work that was
planned with what was actually accomplished to determine if cost and schedule
performance is as planned.
2. The BCWP for an activity or group of activities.

Definition (1) is also called Earned Value Analysis.


Estimate at Completion (EAC)
The expected total cost of an activity, a group of activities, or of the project when the
defined scope of work has been completed. Most techniques for forecasting EAC include
some adjustment of the original cost estimate based on project performance to date.

EAC = Actuals-to-date + ETC.


(Also known as Forecast Final Cost)
Estimate To Complete (ETC)
The expected additional cost needed to complete an activity, a group of activities, or the
project. Most techniques for forecasting ETC include some adjustment to the original
cost estimate based on project performance to date.
Fixed Costs
Costs that do not change based on the number of units. These costs are nonrecurring.
Life Cycle Costing
The concept of including acquisition, operating, and disposal costs when evaluating
various alternatives. Also known as the total cost of ownership.
Management Reserve
A separately planned quantity used to allow for future situations which are impossible to
predict. ("unknown unknowns") Management reserves are intended to reduce the risk of
missing cost or schedule objectives. Use of management reserves requires a change to
the project's cost baseline.
Parametric Estimating
An estimating technique that uses a statistical relationship between historical data and
other variables to calculate an estimate.
Payback Period
The number of time periods up to the point at which cumulative revenues exceed
cumulative costs and, therefore, the project has turned a profit.
Percent Complete (PC)
The percentage of the amount of work which has been completed on an activity or group
of activities.
Project Cost Management
A subset of project management that includes the processes required to ensure that the
project is completed within the approved budget.
Schedule Performance Index (SPI)
The ratio of work performed to work scheduled. (BCWP / BCWS)
Schedule Variance (SV)
Any difference between the scheduled completion of an activity and the actual completion
of that activity. In earned value, BCWP - BCWS.
Value Analysis
A cost-reduction tool that involves careful analysis of a design or item to identify all the
functions and the cost of each. It considers whether the function is necessary and
whether it can be provided at a lower cost without degrading performance or quality.
Working Resource

Planning

The process of determining what physical resources and what quantities of each should
be used to perform project activities.

Input includes: WBS, historical information, scope statement, resource pool description,
and organizational policies.

Methods used:
o
Expert judgment: consultants, professional and technical associations, industry
groups, other units within the performing organization.
o
Alternatives identification: Any technique such as brainstorming and lateral
thinking used to generate different approaches to the project.
Output includes: Resource requirements - a description of what types of resources are
required and in what quantities for each element of the WBS.

Cost Estimating:

The process of developing an estimate of the costs of the resources needed to complete
project activities.

Input includes: WBS, resource requirements, resource rates, activity duration estimates,
historical information, chart of accounts.

Methods used:
o
Analogous estimating: (top down estimating) Uses the actual cost of a previous
similar project as the basis for estimating the cost of the current project. Analogous
estimating is frequently used to estimate total project costs when there is a limited
amount of detailed information about the project. (e.g., in the early project phases) It is
generally less costly than other estimating techniques, but it is also generally less
accurate. Most reliable when 1) the previous projects are similar in fact and not just in
appearance, 2) the individuals or groups preparing estimates have the needed expertise.
o
Parametric modeling: Uses project characteristics (parameters) in a
mathematical model to predict project costs. Models may be simple or complex. Most
reliable when 1) the historical information used to develop the model was accurate, 2)
the parameters used in the model are readily quantifiable, and 3) the model is scalable.
o
Bottom-up estimating: Involves estimating the cost of individual work items, then
summarizing or rolling-up the individual estimates to get a project total. The cost and
accuracy of bottom-up estimating is driven by the size of the individual work items:
smaller work items increase both cost and accuracy. The project management team must
weigh the additional accuracy against the additional cost.
o
Computerized tools: Project management software and spreadsheets can assist
with cost estimating.
Output includes: cost estimates, supporting detail, and the cost management plan. The
cost management plan describes how cost variances will be managed. It is a subsidiary
element of the overall project plan.

Cost Budgeting

The process of allocating the overall cost estimates to individual work items in order to
establish a cost baseline for measuring project performance.

Input includes: cost estimates, WBS, and project schedule.

Methods used: cost estimating tools and techniques.

Output includes: Cost baseline - a time-phased budget used to measure and monitor cost
performance. It is developed by summing estimated costs by period and is usually
displayed in the form of an S-curve.

Cost Control
The process of:
o
Influencing the factors which create changes to the cost baseline to ensure that
changes are beneficial
o
Determining that the cost baseline has changed
o
Managing the actual changes when and as they occur.
Cost control includes:
o
Monitoring cost performance to detect variances from plan.
o
Ensuring that all appropriate changes are recorded accurately in the cost
baseline.
o
Preventing incorrect, inappropriate, or unauthorized changes from being
included in the cost baseline.
o
Informing appropriate stakeholders of authorized changes.

Input includes: cost baseline, performance reports, change requests, and cost
management plan

The methods used in cost control include:


o
Cost change control system: Defines the procedures by which the cost baseline
may be changed. Includes the paperwork, tracking system and approval levels necessary
for authorizing changes. (should be integrated with the overall change control system)
o
Performance measurements: Used to access the magnitude of any variations
which do occur. (example: earned value analysis)
o
Additional planning: Prospective changes may require new or revised cost
estimates or analysis of alternative approaches.
o
Computerized tools

Output from cost control: revised cost estimates, budget updates, corrective action,
estimate at completion (EAC), and lessons learned.

Cost Management Concepts


Estimates
Order of Magnitude
o
Range: -25% + 75%
o
An approximate estimate made without detailed data
o
Used during the initial evaluation of the project (Concept)
o
Other terms: SWAG, feasibility, conceptual, ball park
Budget
o
Range: -10% + 25%
o
Used to establish the funds required for the project (Development)
o
Also used to obtain approval for the project
o
Other terms: appropriations
Definitive
o
Range: -5% + 10%
o
Prepared from well defined specifications, data, drawings, etc.
o
Used for bid proposals, bid evaluations, contract changes, extra work, legal
claims, permit and government approvals.

Cost Estimating vs. Pricing

Cost Estimating involves developing an assessment of how much it will cost the
performing organization to provide the product or service.

Pricing is a business decision -- how much the performing organization will charge for
the product or service.

Life Cycle Costing

Project Cost Management is primarily concerned with the cost of the resources needed to
complete the project.

A broader view of Project Cost Management is Life Cycle Costing.


o
Life Cycle Costing includes acquisition, operating, maintenance, and disposal
costs.
o
Project Cost Management should consider the effect of project decisions on the
cost of using the project product. (i.e., limiting the number of design reviews may reduce
the cost of the project but increase the product maintenance costs and customer
operating costs.)

Cost Types

Sunk Costs: A historical or expended cost. Since the cost has been expended, we no
longer have control over the cost. Sunk costs are not included when determining
alternative courses of action.

Fixed Costs: Nonrecurring costs that do not change based on the number of units.

Variable Costs: Costs that rise directly with the size of the project.

Indirect Costs: Costs that are part of the overall organization's cost of doing business
and are shared among all the current projects.

Opportunity Costs: The cost of choosing one alternative and, therefore, giving up the
potential benefits of another alternative.

Direct Costs: Costs incurred directly by a specific project.

Depreciation

Straight-line Method: Takes an equal credit during each year of the useful life of an
asset.

Accelerated Method: Writes off the expense even faster than straight-line.
o
Double-declining balance
o
Sum-of-the-years digits

Profitability Measures for Project Selection (in order of


increasing complexity)

Return on Sales (ROS)


o
ROS = NEBT/Total Sales NEBT=net earnings before taxes (gross profit)
o
ROS = NEAT/Total Sales NEAT=net earnings after taxes (net profit)
Return on Assets or return on investment
o
ROA = NEAT/Total Assets
o
ROI = NEAT/Total Investment
Present Value (PV)
o
The value today of future cash flows based on the concept that payment today is
worth more than payment tomorrow.
o
For a given future payment t years from now:
PV =

__M _
(1 + r)**t

M = amount of payment t years from now


r = interest rate (also called discount rate)
Benefit-cost ratio (BCR) = PV of revenue/PV of costs Target Revenue should be at
least 1.3X the cost
o
IRR: Internal Rate of Return - the percentage rate that makes the present value of
costs equal to the present value of benefits.
o

Earned Value Analysis

BCWS: Baseline, Scheduled or Planned Costs

BCWP: Amount budgeted for the work performed

ACWP: Actual Cost of Work Performed

BAC: Total Budgeted Costs

EAC: Estimated at Completion

VAC: Variance at Completion.


o
The difference between the total amount the project was supposed to cost (BAC)
and the amount the project is now expected to cost (EAC).
o
VAC = BAC - EAC

CPI = BCWP / ACWP (measures efficiency)

CV = BCWP - ACWP

SPI = BCWP / BCWS (measures efficiency)

SV = BCWP - BCWS

Percent Complete (accomplished): BCWP / BAC (real value of work accomplished)

Percent Spent: ACWP / BAC

EAC = BAC / CPI or EAC = ACWP + ETC

ETC = EAC - ACWP

Rule of thumb: You can use indexes (CPI or SPI) to determine efficiency if you've
completed at least 20% of the project.

50-50 Rule of progress reporting: When beginning a task, charge 50% of its BCWS to its
account; when the task is completed, charge the remaining 50% to its account. Assumes:
all tasks generally are of the same size.

Capital
Current assets minus liabilities.