PMGT401-07 Project Cost Management-04

PMGT- 401:
Project Management Fundamentals
07 Project Cost Management
PMGT- 401: Project Management Fundamentals

2009 Bob Xourafas, P.Eng, PMP, Proprietary
Page 1
07 Project Cost Management:

Definition
Definition:
Project Cost Management includes the
processes involved in estimating,
budgeting, and controlling costs so that
the project can be completed within the
approved budget
You have to
remember the
definition
7.1 Estimate Costs- Planning

Processes: 7.2 Determine Budget - Planning
7.3 Control Costs- Monitoring and Control

Page 2
Learning Objectives
By the end of this chapter you will be able to:
Understand the main activities that take place during Estimate Costs
and Determine Budget Planning and Control Costs
The topics that will be covered are:
Estimate Costs
Estimates of the approximate costs of the resources (human, materials,
etc.) needed to complete the activities identified on the project schedule
Determine Budget
The process of aggregating the estimated costs of individual activities or
work packages to establish an authorized cost baseline
Control Costs
The process of monitoring the status of the project to update the project
budget and managing changes to the cost baseline.

Page 3
Reading Materials
Text:
Chapter 7
References:
PMBOK: Section 7

Page 4
07 Project Cost Management:

Process Mapping
Initiating
4.1 Develop
Project
Charter
Planning
4.2 Develop Project
Management Plan
5.1 Collect
Requirements
Executing
Monitoring &
Controlling
4.3 Direct and

Manage Project
Execution
4.4 Monitor and

Control Project
Work
5.2 Define Scope
4.5 Perform
Integrated Change
Control
5.3 Create WBS
5.4 Verify Scope
6.1 Define Activities
5.5 Control Scope
6.2 Sequence
Activities
6.3 Estimate Activity
Resources
Closing
4.6 Close Project
or Phase
6.6 Control
Schedule
7.3 Control Costs
6.4 Estimate Activity

Durations
6.5 Develop Schedule
7.1 Estimate Costs
7.2 Determine Budget

07 Project Integration
04
Cost Management
Management
2009
Bob
Xourafas,
Bob Xourafas,
P.Eng, PMP
P.Eng, PMP, Proprietary
Page 5
Project Cost Management Processes

Since you finished your project schedule development, you now have
an exhaustive breakdown of project activities, and you have some
pretty good duration estimates.
Now the question thats forever on the mind of the executive management
staff: how much is it going to cost?
The purpose of the Estimate Costs process is to answer that

question.
Every project has a budget, and part of completing a project
successfully is completing it within the approved budget.
Sometimes project managers are not responsible for the budget
portion of the project. This function is assigned instead to a functional
manager who is responsible for tracking and reporting all the project
costs.
Keep in mind that if you, as the project manager, dont have responsibility
for the project budget, your performance evaluation for the project should
not include budget or cost measurements (tracking and reporting on
project costs).
Page 6
Cost Management Plan

Before diving into the Project Cost Management
processes, you should know that these processes
are governed by the Cost Management Plan
Cost Management Plan is created during the Develop
Project Management Plan process (see 04 Project
Integration Management, 4.3 Develop Project
Management Plan).
Sets out the format and establishes the criteria for
planning, structuring, estimating, budgeting, and
controlling project costs.
The cost management processes and their associated
tools and techniques are usually selected during the
project life cycle definition and are documented in the
cost management plan.
Page 7
Cost Management Plan

It is a subsidiary of the Project Management Plan and some
of the elements of this plan include, but arent limited to, are
the following:
Precision levels, or the rounding youll use for project costs
(hundreds, thousands, and so on)
Units of measure for resources such has hours for staff resources
and hourly rates for contractor staff
Control account links so that cost estimates for WBS elements can
be linked directly to the accounting system
Variance thresholds for costs
Earned value rules (covered in the Estimate Costs Tools and
Techniques section)
Reporting formats
Process descriptions
How risk budgets, contingencies and management reserves will be
reported and assessed (11-Project Risk Management)
Page 8
7.1 Estimate Costs

Page 9
7.1 Estimate Costs:

Inputs-Tools & Techniques-Outputs
Tools &
Techniques
Inputs
Outputs
1.
Scope baseline
1.
Expert judgment
2.
Project schedule
2.
3.
Human resource plan
Analogous
estimating
1.
4.
Risk register
Parametric
estimating
Activity Cost
estimates
2.
Basis of Estimates
5.
Enterprise
environmental
factors
3.
Project document
updates
6.
Organizational
process assets

3.
4.
Bottom-up
estimating
5.
Three point
estimates
6.
Reserve analysis
7.
Cost of quality
8.
Project
management
estimating
software
9.
Vendor bid
analysis
Page 10
7.1 Estimate Costs:

Definitions
Estimate Costs
Project Estimate Costs involves developing an approximation
(estimate) of the costs of the resources (people, equipment,
materials) needed to complete project activities
In approximating cost, the estimator considers the causes of
variation of the final estimate for purposes of better managing the
project.
Estimate Costs vs. pricing

Estimate Costs is coming up with the most likely cost for
completing the project
When a project is performed under contract, pricing is a business
decision.
Pricing: how much will an organization charge for completing the
project under the contract?

Page 11
7.1 Estimate Costs:

Definitions
Types of Costs
A decision must be made as to what type of costs will be included in the
estimates. This decision is documented in the Cost Management Plan
Variable Cost
Any cost that change with the amount of production or the amount of work
e.g., cost of materials, supplies, wages
Fixed Cost
Non-recurring costs that do not change as production changes
e.g., set-up, rental
Direct Cost
Costs that are directly attributable to the work on the project
e.g., team travel, team wages, cost of material used on project
Indirect Cost
Overhead items or costs incurred for the benefit of more that one project;
typically allocated to the project through accounting system
e.g., taxes, fringe benefits, facilities
Page 12
7.1 Estimate Costs:

Definitions
Working Capital
Amount of money the company has to invest, including investment
in projects or current assets, minus current liabilities
Depreciation
Large assets (e.g. equipment) purchased by a company lose value
over time. Accounting standards call this depreciation.
There are two forms of depreciation:
Straight line depreciation: The same amount of depreciation is taken
each year.
A $1,000 item with a ten year useful life and no salvage value
(worth at the end of its life) would be depreciated at $100 per
year
Accelerated depreciation: depreciates faster than Straight Line.
Depreciates more in first few years and less in later years
A $1,000 item with a ten year useful life and no salvage value
(worth at the end of its life) would be depreciated at $180 the first
year, $150 the second year, $130 the next, etc.
Page 13
7.1 Estimate Costs:

Inputs
1. Scope baseline
2. Project schedule
3. Human resource plan
Skills, rates, performance reward/recognition (see 09 Human Resource

Project Management)
4. Risk register
An understanding of any risk uncovered to date. Remember, a full risk

analysis of the details of the project will not have been completed before
costs are estimated.
The project team should consider the extent to which the effect of risk is
included in the cost estimates for each activity.
5. Enterprise environmental factors
Market conditions in terms of procurements from outside the organization
6. Organizational process assets
As with several other processes Ive covered, keep in mind organizational

policies (such as Estimate Costs policies or templates), historical
information, previous project files, constraints, and assumptions when
deriving your cost estimates.

Page 14
7.1 Estimate Costs:

Tools & Techniques
Expert Judgment
Expert judgment gained, guided by historical information can be
used for cost estimating and also decide what methods of
estimation (tools and techniques) should be used.
Analogous or Top-Down estimating

Top or middle managers use expert judgment or the actual time
and cost on a previous, similar project as the basis for estimating
the current project.
Analogous estimating uses historical information and thus is a
form of expert judgment.
It is generally less costly and time consuming than other project
estimation techniques, but it is also less accurate.
Used to estimate project cost early in the project, when detail
project information is scarce.

Page 15
7.1 Estimate Costs:

Tools & Techniques
Bottom-Up Estimating
Involves estimating the cost of individual activities or work
packages from WBS, and summarizing, or rolling up, to get the
project level

Page 16
7.1 Estimate Costs:

Tools & Techniques
Parametric Estimating
Parametric estimating involves using project
characteristics (parameters) in a
mathematical model to predict project costs.
Example: Cost/line-of-code, cost/linear
meter, cost/installation
Two types of parametric modeling:
Regression analysis: scatter diagram
Tracks two variables to see if they are
related and creates a mathematical
formula to use in future parametric
estimating
100
80
60
40
20
0
0
Learning Curve: Graphical presentations or repetitive activities in which

continuous operations will lead in reduction in time, cost and resources.
The 100th room painted will cost less than the first room because of
improved efficiencies.
Page 17
7.1 Estimate Costs:

Tools & Techniques
Accuracy of Estimates
Project cost estimates should come with an indication of
the range of possible results, especially at the project
detail level
Accuracy Ranges
Q: Why do ranges tighten up? A: progressive elaboration
Level
Estimating
Phase
Range
Time to
Prepare
Rough order of
magnitude (ROM)
Top Down
Initiation
50%.
Days
Budget
Top Down
Planning
10%
Weeks
Definitive
Bottom Up
Planning
5%
Months

Page 18
7.1 Estimate Costs:

Tools & Techniques
Three-Point Estimates
PERT analysis-see 06 Project Time Management
The most likely estimate, CM the cost of the activity, based on
realistic effort assessment for the required work and any predicted
expenses.
The optimistic estimate, CO the activity cost based on analysis of the
best-case scenario for the activity
The pessimistic estimate, CP the activity cost based on analysis of
the worst-case scenario for the activity.
Average Cost = (CP + 4 CM + CO) / 6
Standard Deviation : (CP - CO) / 6
Variance = {(CP - CO) / 6}2
PERT is a probabilistic approach (follows the beta probability
distribution)
PERT indicates the estimate's degree of uncertainty
Page 19
7.1 Estimate Costs:

Tools & Techniques
Reserve Analysis
Cost estimates may include contingency reserves (also known
as contingency allowances) to account for cost uncertainty.
You might choose to add a percentage of the total estimated cost,
a fixed number or estimated using quantitative methods.
We will discuss contingency reserves in detail in Chapter 11, Project
Risk Management
Contingency reserves can later be reduced or eliminated, as

more precise information about the activity becomes available.
Cost of Quality
The cost of quality should also be included in activity cost
estimating
We will discuss the cost of quality in Chapter 08 Project Quality
Management

Page 20
7.1 Estimate Costs:

Tools & Techniques
Project Management Software
The project management software is a tool that can help you
establish project cost estimates and can help you quickly
determine estimates given different variables and alternatives.
Vendor Bid Analysis

As the name implies, this is a process of gathering information
from vendors to help you establish cost estimates.
You can accomplish this by requesting bids or quotes or working

with some of your trusted vendor sources for estimates.
You should compare vendor bids when using this tool and
technique and not rely solely on one vendor to provide you with
estimates.

Page 21
7.1 Estimate Costs:

Outputs
Activity Cost estimates
Costs are estimated for all resources that are applied to the activity cost estimate. This
includes direct labor, materials, equipment, services, facilities, information technology,
and special categories such as an inflation allowance or a cost contingency reserve.
Indirect costs, if they are included in the project estimate, can be included at the
activity level or at higher levels.
Estimate Costs generally includes considering appropriate risk response planning,

such as contingency plans
Basis of Estimates
A description of the work that was estimated.
A description of how the estimate was developed or the basis for the estimate.
A description of the assumptions made about the estimates or the method used to
determine them.
A description of the constraints.
A range of possible results. Like the time estimates, you should state the cost
estimates within ranges such as $500 $75.

Page 22
7.1 Estimate Costs:

Outputs
Project Document Updates
All documents associated with cost estimating may require updating

Page 23
7.2 Determine Budget

Page 24
7.2 Determine Budget:

Definition
Determine Budget
The next process concerns determining the cost baseline, which
is the primary output of the Determine Budget process.
The Determine Budget process aggregates the cost estimates of
activities and establishes the cost baseline for the project that is
used to measure performance of the project throughout the
remaining process groups.
Only the costs associated with the project become part of the
project budget. For example, future period operating costs are not
project costs and therefore arent included in the project budget.
The cost baseline is the expected cost for the project. Remember
that costs are tied to the financial system through the chart of
accountsor code of accountsand are assigned to project
activities at the work package level of the WBS.
The budget will be used as a plan for allocating costs to project
activities.
Page 25
Determine Budget (CB):

Inputs-Tools & Techniques-Outputs
Inputs
1. Activity cost
estimates
2. Basis of estimates
3. Scope baseline
4. Project schedule
5. Resource
calendars
Tools & Techniques

1.
2.
3.
4.
Cost aggregation
Reserve analysis
Expert judgment
Historical
relationships
5. Funding limit
reconciliation
Outputs
1. Cost
performance
baseline
2. Project funding
requirements
3. Project
document
updates
6. Contracts
7. Organizational
process assets

Page 26

Inputs
1. Activity cost estimates
2. Basis of estimates
3. Scope baseline
4. Project schedule
5. Resource calendars
6. Contracts
Ive covered all these inputs before except Contract
Contract will be covered in Chapter 12, Procurement

Management

Page 27

Tools & Techniques
Cost aggregation
Cost aggregation is the process of tallying the schedule activity
cost estimates at the work package level and then totaling the
work package levels to higher-level WBS component levels (such
as the control accounts).
Reserve analysis
Ive covered reserve analysis already.
Note that reserve analysis in this process also takes into
consideration management AND contingency reserves for
unplanned changes to project scope and project costs.
Management AND contingency reserves will be covered in detail in
Chapter 11, Project Risk Management
Historical relations
Historical relations of project parameters that are used in
analogous of parametric estimation should be closely examined
in determining the project budget
Page 28

Tools & Techniques
8 COST BUDGET
$1423
7 MANAGEMENT
RESERVE
$68
6 COST
BASELINE
$1355
5 CONTINGENCY
RESERVE
$105
4 PROJECT
$1250
3 CONTROL
ACCOUNTS
$850
2 WORK
PACKAGES
$100
1 ACTIVITIES
$25
$25
Cost
Aggregation
$400
$250
$25
$500
$25
Page 29

Tools & Techniques
Expert judgment Always to be used as a tool in any
process
Funding limit reconciliation
The next thing to be check is the project cash flow (for example
monthly cash flow) against the funding available for the project (in
this example, monthly funding available).
Funding may not be available when it is required causing

changes to the project (usually rescheduling of work) and
iterations of the project management plan.
There is an other obvious reconciliation needed before the cost
baseline and cost budget become final:
Reconciliation with any funding constraints identified in the
project scope statement.

Page 30

Outputs
Cost Baseline
You develop the cost baseline, the first output of Determine
Budget, by adding the costs of the WBS elements (remember,
these costs were aggregated with the cost aggregation tool and
technique) according to time periods.
This is also known as the projects time-phased budget at
completion (BAC).
Most projects span some length of time, and most organizations
time the funding with the project.
In other words, you wont get all the funds for the project at the
beginning of the project; theyll likely be disbursed over time.
The cost baseline is used to measure, monitor and control the

overall actual cost performance of the project against the project
cost requirements.

Page 31

Outputs
Cost Baseline
Cost baselines can be displayed graphically, with time increments on

one axis and dollars expended on the other axis, as an S curve
shown above.
The reason for this is that project spending starts out slowly, gradually
increases over the projects life until it reaches a peak, and then
tapers off again as the project wraps up. Large projects are difficult to
graph in this manner because the timescale isnt wide enough to
accurately show fluctuations in spending. There are other methods
that more accurately graph costs that youll look at in the Control
Costs process.
Page 32

Outputs
Project Funding Requirements
Project funding requirements are the total amount of money spent
on the project.
They are determined from the cost baseline and might include a
management contingency reserve thats used to manage cost
overruns, particularly early in the project.
As I said earlier, spending usually starts out slowly on the project and
picks up speed as you progress.
Sometimes, the expected cash flows dont match the pace of

spending.
Project funding requirements accounts for this by using a
management reserve contingency (usually a margin or percentage of
the cost baseline) thats released in increments with the project
budget.

Page 33

Tools & Techniques
8 COST BUDGET
$1423
7 MANAGEMENT
RESERVE
$68
6 COST
BASELINE
$1355
5 CONTINGENCY
RESERVE
$105
4 PROJECT
$1250
3 CONTROL
ACCOUNTS
$850
2 WORK
PACKAGES
$100
1 ACTIVITIES
$25
$25
$400
$250
$25
$500
$25
Page 34

Outputs
Project Document updates
Project documents associated with budgeting may require
updates
Specifically,
Risk register
Cost estimates
Project schedule

Page 35
7.3 Control Costs

Page 36
7.3 Control Costs:

Definitions
The Control Costs process manages changes to project

costs as outlined in the cost management plan.
Control Costs Includes:
Monitoring actual cost performance to detect and understand
variances from the cost baseline
Ensuring all appropriate cost changes are recorded accurately in the
cost baseline
Preventing incorrect, inappropriate, or unauthorized cost changes
from being included in the cost baseline
Informing stakeholders of authorized changes
Acting to bring expected costs within acceptable limits
All budget changes should be agreed to and approved by

the project sponsor where applicable (the criteria for
approvals should be outlined in the change control system
documentation).

Page 37
7.3 Control Costs:

Definitions
Integrated Change Control lays the foundation for all
the change control processes in other knowledge
areas
Communications
10.3 Performance
Reporting
Integration
4.6 Integrated
Change Control
Subsidiary Change Control Process

Scope Change Control
Schedule Change Control
Cost Change Control
Quality Change Control
Contract Administration
Change Control
Page 38
7.3 Control Costs:

Inputs-Tools & Techniques- Outputs
Inputs
1. Project
management
plan
2.
3.
4.
Project funding
requirements
Work
performance
information
Organizational
process assets

Tools &
Techniques
Outputs
1. Earned Value
Management
1.
Work performance
measurements
2. Forecasting
2.
Budget forecasts
3. To-complete
performance
index
3.
Organizational process
assets updates
(lessons learned)
4.
Change requests
5.
Project management
plan updates
6.
Project document
updates
4. Performance
reviews
5. Variance
analysis
6. Project
management
software
Page 39
7.3 Control Costs:

Inputs
1. Project management plan
Cost baseline and cost management plan
2. Project funding requirements
Already discusses in 7.2
3. Work performance information
Include information on actual work performance such as
how much work has been completed and at what actual
costs
Existing cost-control policies, procedures and
guidelines
Cost control tools
Reporting cost methods

Page 40
7.3 Control Costs:

Tools & Techniques
Earned Value Management
Many project managers manage their project performance by
comparing planned to actual results.
With this approach, you could easily be on time but overspend
according to your plan.
A better method is Earned Value Management (EVM)
Simply stated, EMV compares what youve received or produced to
what youve spent.
Earned value management integrates cost, time and scope:

to measure project performance to date,
forecast future project performance, and
forecast future project completion dates

Page 41
7.3 Control Costs:

Tools & Techniques
Earned Value Management
The EVM continuously monitors the percent complete of the
project, the planned value (PV), earned value (EV), and actual
costs (AC) expended to produce the work of the project (Ill cover
the definition of these terms shortly).
When variances that result in cost changes are discovered
(including schedule variances and cost variances), those changes
are managed using the cost change control system.
The primary function of this analysis technique is to:
determine and document the cause of the variance,

to determine the impact of the variance (youll do this with the
EVM formulas shortly), and
to determine whether a corrective action should be
implemented as a result.

Page 42
7.3 Control Costs:

Tools & Techniques
To perform the EVM calculations, you need to first gather
the four measurements mentioned earlier:
The percent complete of the project,
The Planned value (PV)
The Actual cost (AC), and
The Earned value (EV).

Page 43
7.3 Control Costs:

Tools & Techniques
Percent complete of project
Many project managers determine how much work has been
completed by asking team members for an estimate of percent
complete for each task.
On projects where work cannot be measured, this estimate is
simply a guess. This is time consuming and almost always a
complete waste of time because a guess does not provide a
confident estimate of the actual percent complete.
If a project has been planned using a WBS, and tasks require
about 80 hours of work, we have alternatives to percent complete.
Because tasks will be completed faster and more frequently, we
can forget percent complete and use one of the following:
50/50 RULE - A task is considered 50% complete when it starts. The
remaining 50% credit is given when the task is completed
20/80 RULE - A task is considered 20% complete when it starts. The
remaining 80% credit is given when the task is completed
0/100 RULE - A task does not get credit for partial completion, it get
100% credit only full completion
Page 44
7.3 Control Costs:

Tools & Techniques
Planned value (PV)
The planned value (PV) is the cost of work that has been
approved (budgeted) for a schedule activity or WBS component to
be completed during a given time period.
These budgets are established during the planning processes.
The total PV is also referred as Budget at Completion (BAC),
and/or Performance Measurement Baseline (PMB)
PV is also called budgeted cost of work scheduled (BCWS).
Example:
According to my project plan by July , I plan to complete

several activities that have been approved (budgeted) at $ 400.
Therefore at the end of July the planned value PV = $ 400.

Page 45
7.3 Control Costs:

Tools & Techniques
Earned value
Earned value (EV) is the value of the work (schedule activity or
WBS component) completed to date as it compares to the
budgeted amount (PV) assigned to the work component.
EV is also called budgeted cost of work performed (BCWP).
EV cannot be greater than PV
EV = PV * percent complete
Example:
Suppose that at July 1, I completed only 81% of my planned

activities
Therefore at July 1,
EV = $ 400 * 81% = $ 325

Page 46
7.3 Control Costs:

Tools & Techniques
Actual cost
Actual cost (AC) is the cost of completing the work (a schedule
activity or WBS component) in a given time period. AC is also
called actual cost of work performed (ACWP).
Actual costs might include direct and indirect costs but must
correspond to what was budgeted for the activity.
If the budgeted amount did not include indirect costs, do not include
them here.
Later youll see how to compare this to PV to come up with

variance calculation results.
Example:
Suppose that at July 1, I collect all the actual costs and the total figure
is $ 325.
Therefore at the end of the first month AC = $325

Page 47
7.3 Control Costs:

Tools & Techniques
We can plot all the PV, AC, and EV measurements graphically to show
the variances between them.
If there are no variances in the measurements, all the lines on the graph
remain the same, which means the project is progressing as planned.
The following figure shows an example that plots these three
measurements.
PV = 400, EV = 375, AC = 325

Page 48
7.3 Control Costs:

Tools & Techniques
Cost Variance
Cost variance is one of the most popular variances that project
managers use
Cost variance shows whether your actual costs are higher than
budgeted (with a resulting negative number) or lower than
budgeted (with a resulting positive number).
The cost variance (CV) is calculated as follows:
CV = EV AC
CV = Negative, OVER BUDGET
CV = Positive, UNDER BUDGET
In our Example
CV = $ 375-$ 345 = $ 50 ($50 under budget as of July 1)
A negative cost variance is often non-recoverable
Page 49
7.3 Control Costs:

Tools & Techniques
Schedule Variance
Schedule variance, also a popular variance, tells you whether the
schedule is ahead or behind what was planned for this period in
time. The schedule variance (SV) is calculated as follows:
SV = EV PV
SV = Negative, BEHIND SCHEDULE

SV = Positive, AHEAD OF SCHEDULE
Lets plug in the numbers:
SV = $375-$400 = -$25 (Behind schedule as of July 1)

Page 50
7.3 Control Costs:

Tools & Techniques
Performance Indexes
Together, the CV and SV are known as efficiency
indicators for the project.
Cost and schedule performance indexes, (CPI and SPI)
are primarily used to calculate performance efficiencies.
Theyre often used in trend analysis to predict future
performance.
Youll need to know the calculations and what the results
mean.
If CPI or SPI is greater than 1, youve got better than expected
performance. If the result is less than 1, youve got poor
performance. If it equals 1, youre right on target.

Page 51
7.3 Control Costs:

Tools & Techniques
Cost Performance Index (CPI)
The cost performance index (CPI) is calculated this way:
CPI = EV AC
CPI = 375 325 =1.15
Interpretation: as of July 1, we are getting $1.15 for every dollar
invested on this project
Burn Rate= 1/CPI
Schedule Performance Index (SPI)

The schedule performance index (SPI) is calculated this way:
SPI = EV PV
SPI = 375 400 =0.94
Interpretation: Uh-oh, not so good. You are only progressing at
94% of the rate planned
Page 52
7.3 Control Costs:

Tools & Techniques
Forecasting
Forecasting uses the information youve gathered to date and
estimates the future conditions or performance of the project
based on what you know when the calculation is performed.
Forecasts are based on work performance information (an output
from the Executing process group).
There are two types of forecasting techniques: estimate to
complete (ETC) and estimate at completion (EAC).
ETC: From this point onwards, how much MORE do we expect to
cost to finish the job?
EAC: What do we currently expect the total project to cost at this
rate?
Each has three variations. Both of these formulas use a new
parameter you havent seen yet called budget at completion
(BAC).
BAC is the sum of all the budget values established for all the work of
the project. How much did we BUDGET for the TOTAL job? (includes
approved change requests)
Page 53
7.3 Control Costs:

Tools & Techniques
One of the areas of confusion is the difference between EAC, ETC and
the other terms. The following diagram may help.
Start
Date
Baseline Plan
Today
BAC
PV
EAC
Current Plan

AC
ETC
Page 54
7.3 Control Costs:

Tools & Techniques
Estimate to Complete (ETC)
Estimate to complete (ETC) tells you how much it will cost
to complete all the remaining work for a schedule activity
or WBS component or the project.
ETC based on a new estimate using bottom-up
estimating
This ETC does not require a formula.
This is simply a revised estimate based on the performance of
the resources to date. By examining how quickly or how
productively the resources have been utilized so far, the project
team can determine an ETC by looking at the remaining work
and determining a new estimate based on the comparison to
past work.
This ETC method is the most accurate and comprehensive
ETC calculation.
Page 55
7.3 Control Costs:

Tools & Techniques
Estimate to Complete (ETC)
The two remaining ETC calculations use earned value data.
These are quick to perform but not as accurate as the project team
manually examining the remaining work and making a new
estimate based on past performance.
ETC = (BAC EV) cumulative CPI
Used when you believe that future cost variances will be similar to the
types of variances youve seen to date
ETC = (1000 375) 1.15 = $ 543
ETC = (BAC EV)

When you believe that future cost variances will not be similar to the
types of variances youve seen to date

ETC = (1000-375)= $625
Page 56
7.3 Control Costs:

Tools & Techniques
Estimate at completion (EAC) estimates (or forecasts) the expected
total cost of a work component, a schedule activity, or the project at its
completion.
EAC Equations
Application
BAC / cumulative CPI
AC + ETC
AC + BAC - EV
AC+(BAC-EV)/ (cumulative
CPI x cumulative SPI)

Accepts that the project performance to date

will be continued in the future. The ETC work
will be performed at the same cumulative CPI
Past Estimating Assumptions are not valid This method is used when the past estimating
assumptions are not valid and fresh estimates
are applied to the project. ETC should be
based on bottom-up estimating
Accepts the actual project performance (good
or bad) and predicts that all future ETC work
will be accomplished as per the plan (at the
budgeted rate)
Variances will be present in the future - This
method is used when the assumption is that
the current variances will be continue to be
present in the future.
Page 57
7.3 Control Costs:

Tools & Techniques
To-Complete Performance Index (TCPI)
TCPI is the calculated projection of the cost performance that
must be achieved on the remaining work to meet a specified
management goal, i.e., BAC or EAC
TCPI is the ratio of the remaining work to the funds remaining
TCPI has its focus on future performance.
In other words, TCPI shows the efficiency at which the resources
on the project should be utilized for the remainder of the project.
TCPI value above 1 indicates utilization of the project team for
the remainder of the project can be stringent.
TCPI value below 1 indicates utilization of the project team for
the remainder of the project should be lenient

Page 58
7.3 Control Costs:

Tools & Techniques
At the status date:
If the cumulative CPI falls below the baseline plan, all future work will
need immediately to be performed at the BAC range in order to stay
within the authorized BAC.
If BAC is no longer attainable, a new estimate at completion must de
determined and once approved, the project must perform at the EAC
level.
The equation of TCPI is:
Remaining Work ( BAC EV )

Funds Remaining ( BAC AC ) or ( EAC

AC )
Page 59
7.3 Control Costs:

Tools & Techniques
Tricks to Remember the Formulas
1. PV = BCWS (Budgeted Cost of Work Scheduled)
2. EV = BCWP (Budgeted Cost of Work Performed)

3. AC = ACWP (Actual Cost of Work Performed)
4. EV comes first in every formula
5. Variance: EV minus something

6. Indices : EV divided by something
7. Cost: use AC
8. Schedule: use PV
9. For variance interpretation, negative is bad, positive is good
10. For CPI and SPI interpretation, >1 is good, <1 is bad
11. For TCPI interpretation, >1 your future efficiency must

increase, <1 continuing with the present efficiency is fine
Page 60
Earned Value Analysis:

Exercise
Enough of these formulas how do I use them?
1
10
11
$5,000
20
21
30
$5,000
Notation
$10,000
31
40
D
$15,000
Start
Finish
Task ID
Task A, B, C and D are the critical path of the project. Each task is 10 days in
duration and their costs are as shown in the diagram. At the end of day 23,
Tasks A and B are complete, Task C is 50% complete, and $14, 000 over all
have been spent up to this point.
Lets do some calculations at the end of day 23.

Planned Value (PV)
= The planned value of the work planned to be done
= Estimated cost of the planned work at the end of day 23
= Task A + Task B + 3* $1,000 (Task C)
= $ 5,000+$ 5,000+$ 3,000
= $ 13, 000
Page 61

Exercise
1
10
11
$5,000
20
21
$5,000
Notation
30
C
$10,000
31
40
D
$15,000
Start
Finish
Task ID
Actual Cost (AC)

= Actual Cost of work completed
= $ 14,000
Budget at Completion (BAC)
= Budget for the full project
= $ 5,000(Task A) + $ 5,000(Task B) + $ 10,000(Task C) + $ 15,000(Task D)
= $ 35,000
Earned Value (EV)
=The sum of the approved cost estimates for activities completed during a given
period = Estimated cost of work that is completed at the end of day 23
= $ 5,000 + $ 5,000 + $10,000*.50 (because Task A, Task B are complete, Task
C is 50% complete)
= $ 15,000
Page 62

Exercise
1
10
11
$5,000
20
21
$5,000
Notation
30
C
$10,000
31
40
D
$15,000
Start
Finish
Task ID
CPI, Cost Performance Index

= EV / AC
= $ 15,000 /$ 14,000
= 1.07 thus the project is below budget and has a positive cost variance
SPI, Schedule Performance Index
= EV / PV
= $ 15,000 / $13,000
= 1.15 thus the project is progressing ahead of schedule, and has a positive
schedule variance
Estimate at completion (EAC)
= BAC / CPI
= $ 35,000 / 1.07
= $ 32,666
Page 63

Exercise
1
10
11
20
21
$5,000
$5,000
Notation
Schedule Variance, SV
SV = EV PV
= $15,000 - $13,000
= $2,000
30
$10,000
31
40
D
$15,000
Start
Finish
Task ID

TCPI = (BAC EV) / (BAC AC)
= ($35,000 - $15,000) / ($35,000 - $14,000)
= 0.95
Cost Variance, CV
CV = EV - AC
= $15,000 - $14,000
= $ 1,000
Variance at Completion, VAC
VAC = BAC EAC
= $35,000 - $32,666
= $ 2,334
Page 64
7.3 Control Costs:

Tools & Techniques
Project Performance Reviews
Project performance reviews are similar to status reviews.
They examine milestones due and those that have been
met.
They also look at the costs associated with performance
and schedule activities that are over and under budget.
Typically, performance reviews take place as meetings,
and their purpose is to examine schedule activities, work
packages, or cost account status and their progress to
date.
Three types of analyses are associated with performance
reviews:
Variance analysis, trend analysis, and earned value management.
Ive already covered the earned value management, so youll now
look at the other two.
Page 65
7.3 Control Costs:

Tools & Techniques
Variance Analysis
Variance management includes the processes for managing cost
and schedule variances and appropriate responses based on the
impact and level of variance.
The cost management plan should describe the variance
management and acceptable variance ranges
CV, SV and VAC

Variance at completion (VAC) calculates the difference between
the budget at completion and the estimate at completion.
It looks like this:
VAC = BAC EAC
Negative means that you are not doing well, you are over budget.
Positive means that you are doing well, you are under budget

Page 66
7.3 Control Costs:

Tools & Techniques
Project Management Software
Ive discussed project management software before.
Obviously, you can perform and monitor many of these
calculations using project management software.

Page 67
7.3 Control Costs:

Outputs
Work performance measurements
CV, SV, CPI, SPI, ETC, EAC, etc.
Budget forecasts
ETC, EAC, TCPI, etc
Organizational process assets updates
Lessons learned, causes of variances, corrective actions chosen
and reasoning
Change requests
Project management plan updates
Cost performance baseline, cost management plan
Project document updates
Cost estimates and basis for estimates
Ive discussed most of these before, or they are self-explanatory.
However, Ill point out a few points you should be aware.

Page 68
7.3 Control Costs:

Outputs
Updated cost estimates include updating original cost estimates and

other areas of the project management plan that these estimates might
impact.
As an example, perhaps the cost estimate for new hardware required for
your project was recently revised.
Suppose the cost estimate was needed because the equipment
originally planned for in the project is no longer available and new
equipment is ordered in its place.
This might require revisions to other project activities, which will
require you to revisit the project Planning and Executing processes.
Control cost problems come about for many reasons, including incorrect
estimating techniques, predetermined or fixed budgets with no flexibility,
schedule overruns, inadequate WBS development, and so on.
Good project management planning techniques during the planning
processes might prevent cost problems later in the project.
At a minimum, proper planning will reduce the impact of these
problems if they do occur.

Page 69
Question and Answers

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PMGT- 401:

Project Management Fundamentals

07 Project Cost Management

PMGT- 401: Project Management Fundamentals

2009 Bob Xourafas, P.Eng, PMP, Proprietary

07 Project Cost Management:

7.1 Estimate Costs- Planning

7.3 Control Costs- Monitoring and Control

2009 Bob Xourafas, P.Eng, PMP, Proprietary

PMGT- 401: Project Management Fundamentals

2009 Bob Xourafas, P.Eng, PMP, Proprietary

PMGT- 401: Project Management Fundamentals

2009 Bob Xourafas, P.Eng, PMP, Proprietary

07 Project Cost Management:

4.3 Direct and

4.4 Monitor and

5.2 Define Scope

5.3 Create WBS

5.4 Verify Scope

6.1 Define Activities

5.5 Control Scope

6.4 Estimate Activity

PMGT- 401: Project Management Fundamentals

Project Cost Management Processes

The purpose of the Estimate Costs process is to answer that

2009 Bob Xourafas, P.Eng, PMP, Proprietary

Cost Management Plan

2009 Bob Xourafas, P.Eng, PMP, Proprietary

Cost Management Plan

2009 Bob Xourafas, P.Eng, PMP, Proprietary

7.1 Estimate Costs

PMGT- 401: Project Management Fundamentals

2009 Bob Xourafas, P.Eng, PMP, Proprietary

7.1 Estimate Costs:

Human resource plan

PMGT- 401: Project Management Fundamentals

2009 Bob Xourafas, P.Eng, PMP, Proprietary

7.1 Estimate Costs:

Estimate Costs vs. pricing

PMGT- 401: Project Management Fundamentals

2009 Bob Xourafas, P.Eng, PMP, Proprietary

7.1 Estimate Costs:

2009 Bob Xourafas, P.Eng, PMP, Proprietary

7.1 Estimate Costs:

2009 Bob Xourafas, P.Eng, PMP, Proprietary

7.1 Estimate Costs:

Skills, rates, performance reward/recognition (see 09 Human Resource

An understanding of any risk uncovered to date. Remember, a full risk

5. Enterprise environmental factors

Market conditions in terms of procurements from outside the organization

6. Organizational process assets

As with several other processes Ive covered, keep in mind organizational

PMGT- 401: Project Management Fundamentals

2009 Bob Xourafas, P.Eng, PMP, Proprietary

7.1 Estimate Costs:

Analogous or Top-Down estimating

PMGT- 401: Project Management Fundamentals

2009 Bob Xourafas, P.Eng, PMP, Proprietary

7.1 Estimate Costs:

PMGT- 401: Project Management Fundamentals

2009 Bob Xourafas, P.Eng, PMP, Proprietary

7.1 Estimate Costs:

Learning Curve: Graphical presentations or repetitive activities in which

2009 Bob Xourafas, P.Eng, PMP, Proprietary