Project Management Professional

Project Cost Management

Tamer George, PMP Senior Technical Office Engineer Orascom Construction Industries

Project Cost Management

Cost management is one of the fundamental and yet most challenging tasks for a project manager. Project Cost Management is primarily concerned with the cost of the resources needed to complete schedule activities. Project Cost Management should also consider the effect of project decisions on the cost of using, maintaining, and supporting the product, service, or result of the project. Project cost management should consider the stakeholder requirements for capturing costs, different stakeholders will measure project costs in different ways and at different times.

v Cost Management Concepts

Life Cycle Costing. Look at manage life cycle costs instead of just project costs.

Project Cost Management

Processes involved in estimating, budgeting, and controlling costs so that the project can be completed within the approved budget.

Estimate Costs Determine Budget Control Costs

Cost Management Process Estimate Costs Determine Budget Control Costs Done During Planning Process Group Planning Process Group Monitoring and Controlling Process Group

Project Cost Management

Cost Management Plan

Level of accuracy. Rounding of the data ( $100, $1000 ) based on the scope of activities and magnitude of the project. Units of measure. For each of the resources ( Staff hours, staff days, lump sum ). Organizational procedures links. Control accounts components of the WBS are assigned a unique codes that links directly to the performing organizations accounting system. Control thresholds. For monitoring cost performance, Agreed-upon amount of variation to be allowed before some action needs to be taken, ( % deviation from baseline ). Rules of performance measurement. Earned value management (EVM) rules of performance measurements are set.
Define WBS points, Techniques ( fixed formula, percent complete), Equations (EAC).

Reporting formats. Formats and frequency of cost reports.

Process descriptions. For each of the three cost management processes.

Cost management plan is part of the project management plan.

Project Cost Management

Types of Costs
Example Set-up Materials, supplies Training, Wages, travel Taxes Description Project costs that remain constant regardless the phase or output. Project costs that vary in relation to the output. Costs that are directly attributable to the work of the project Type Fixed Costs Variable Costs Direct Costs

Costs that are directly attributable to more than one Indirect Costs project (overhead) Amount of money needed above the estimate to reduce risk of overruns of project Cost reserves

Project Cost Management

Estimate Costs

Developing an approximation of the monetary resources needed to complete project activities. Cost trade-offs and risks must be considered, make or buy, buy or lease, and sharing of resources to achieve optimal costs for the project. The accuracy of project estimates will increase as project progresses through the project life cycle.
In the initiation phase have a rough order of magnitude (ROM) estimate in the range of 50%. Later in the project, as more information is known, estimates could narrow to a range of 10%.

Costs are estimated for all resources that will be charged to the project (labor, materials, equipment, services, and facilities).

Project Cost Management

Estimate Costs

Project Cost Management

Estimate Costs

Inputs
v Scope Baseline
deliverables, project boundaries, assumptions, and constraints (limited budget, delivery dates, available skilled resources, organizational policies).

Scope statement .. Product description, acceptance criteria, key

Work Breakdown Structure .. Provides the relationships among all

components of the project and project deliverables.

Project Cost Management

Estimate Costs

Inputs
Project Schedule
Estimate activity resources.
Determine the availability and quantities required of staff and material needed to perform schedule activities.

Estimate activity durations.

Where resources are applied per unit of time for the activity duration (financing allowance). Time-sensitive costs (materials with seasonal cost variations, labor regulatory agreements).

Human Resource Plan

Project staffing attributes, personnel rates, Related rewards/recognition.

Risk Register
Risks can be either threats or opportunities. Risk mitigation costs.

Project Cost Management

Estimate Costs

Inputs
Organizational Process Assets
Cost estimating policies. Cost estimating templates. Historical information. Lessons learned.

Enterprise Environmental Factors

Market conditions
What products, services are available in the market. From whom, and under what terms and conditions.

Published commercial information

Provide standard costs for materials and equipments. Published seller price lists.

Project Cost Management

Estimate Costs

Tools and Techniques

Expert Judgment
Guided by historical information. Determine whether to combine methods of estimating.

Analogous Estimating (Top-Down)

Using the actual cost of previous, similar projects as the basis for estimating the cost of the current project. It is a gross value estimating approach, sometimes adjusted for known differences. Frequently used to estimate costs when there is a limited amount of detailed information about the project. Applied to a total project or to segments of a project, used in conjunction with other estimating methods. Less costly and time consuming, but also less accurate. Uses expert judgment.

Project Cost Management

Estimate Costs

Tools and Techniques

Parametric Estimating
Uses a statistical relationship between historical data and other variables (square footage in construction). Can produce higher levels of accuracy depending upon data built into the model. Involves multiplying the planned quantity of work to be performed by the historical cost per unit to obtain the estimated cost. Applied to a total project or to segments of a project, used in conjunction with other estimating methods.

Project Cost Management

Estimate Costs

Tools and Techniques

Bottom-Up Estimating
Involves estimating the cost of individual work packages or activities with the greatest level of specified details. This detailed cost is then rolled up to higher levels for reporting and tracking purposes. More accurate, but takes more time and expenses. Requires a detailed analysis of the project. Influenced by the size and complexity of the individual activity or work package. Estimating a component of work.

Project Cost Management

Estimate Costs

Tools and Techniques

Three-Point Estimate
Improving the accuracy of activity cost estimates by considering estimation uncertainty and risk. Program Evaluation and Review Technique (PERT), uses three estimates to define an activity duration. Most likely (cM). Optimistic (cO). Pessimistic (cP). Expected (cE).

cE = cO + 4cM + cP 6

Project Cost Management

Estimate Costs

Tools and Techniques

Reserve Analysis
Contingency reserves for cost uncertainty. A percentage of estimated cost or a fixed number. May be used, reduced, or eliminated as more precise information available.

Cost of Quality (COQ) Project Management Estimating Software Vendor Bid Analysis
The project team examine the price of individual deliverables to drive a cost that supports the final total project cost.

Project Cost Management

Estimate Costs

Outputs
Activity Cost Estimates
Quantitative assessments of the probable costs of all resources required to complete project work. labor, materials, equipment, services, facilities, IT, contingency reserves.

Basis of Estimate
Documentation of the basis of estimate. Documentation of all assumptions made. Documentation of any known constraints. Indication of the confidence level of final estimate. Indication of the range of possible estimates ($10.000 (10%)).

Project Documents Updates

Risk register.

Project Cost Management

Determine Budget

Aggregating the estimated costs of individual activities or work packages to establish an authorized cost baseline. Cost baseline includes all authorized budgets, but excludes management reserves. Project cost performance will be measured against the authorized budget.

Project Cost Management

Determine Budget

Project Cost Management

Determine Budget

Inputs
v Activity Cost Estimates v Basis of Estimates v Scope Baseline
Scope statement. Work Breakdown Structure.

Project Cost Management

Determine Budget

Inputs
Project Schedule
Planed start and finish dates for the projects activities, milestones, work packages, control accounts.

Resource Calendars
Indicate resource costs over the duration of the project.

Contracts
Costs relating to products, services, or results that have been purchased.

Organizational Process Assets

Policies, procedures, and guidelines. Cost budgeting tools. Reporting methods.

Project Cost Management

Determine Budget

Tools and Techniques

Cost Aggregation
Schedule activity cost estimates are aggregated by work packages in accordance with the WBS. Work package cost estimates and then aggregated for the higher component levels of the WBS (control accounts) and ultimately for the entire project.

Reserve Analysis
Contingency reserves .. Allowances for unplanned but potentially required changes result from realized risks identified in risk register. Management reserves .. Budgets reserved for unplanned changes to project scope or cost, not part of project cost baseline, but included in the total budget.

Expert Judgment
Consultants, stakeholders (include customers). Industry groups, professional associations.

Project Cost Management

Determine Budget

Tools and Techniques

Historical Relationships
Result in parametric estimates or analogous estimates involve the use of project characteristics (parameters) to develop mathematical models to predict total project costs.
Residential home construction is based on a certain cost per square foot of space.

They are most likely to be reliable when:

Historical information used to develop the model is accurate.

Parameters used in the model are readily quantifiable. Models are scalable, such as work for large project, a small project, and phases of a project.

Project Cost Management

Determine Budget

Tools and Techniques

Funding Limit Reconciliation
The expenditure of funds should be reconciled with any funding limits on the commitment of funds for the project. A variance between the funding limits and the planned expenditures will necessitate the rescheduling of work to level out the rate of expenditures. Rescheduling can impact the allocation of resources.

Project Cost Management

Determine Budget

Outputs
Cost Performance Baseline
Authorized time-phased budget at completion (BAC) used to measure, monitor and control overall cost performance on the project. Developed as a summation of the approved budgets by time period (S-curve). When comparing actual to planned, the cost baseline serves as the planned cost.

Project Cost Management

Determine Budget

Outputs
Project Document Updates
Risk register. Cost estimates. Project schedule.

Project Funding Requirements

Total and periodic (quarterly, annually) funding requirements are derived from the cost baseline. Established to exceed, usually by a margin, to allow for either early progress or cost overruns. Total funding required included in cost baseline, plus management reserves. Funding often occurs in incremental amounts.

Project Cost Management

Control Costs

Monitoring the status of the project to update the project budget and managing changes to the cost baseline. Updating the budget involves recording actual costs spent to date. Analyzing the relationship between the consumption of project funds to the physical work being accomplished for such expenditures.

Project Cost Management

Control Costs
Influencing the factors that create changes to the cost baseline. Ensuring requested changes are acted on in a timely manner. Managing the actual changes when and as they occur. Ensuring that cost expenditures do not exceed the authorized funding, by period and in total for the project. Monitoring cost performance to isolate and understand variances from the approved cost baseline. Monitoring work performance against funds expended. Preventing unapproved changes from being included in the reported cost or resource usage. Informing appropriate stockholders of all approved changes and associated costs. Acting to bring expected cost overruns within acceptable limits.

Project Cost Management

Control Costs

Project Cost Management

Control Costs

Inputs
v Project Management Plan
Cost Performance Baseline.
Compared with the actual results to determine if a change, corrective or preventive action is necessary.

Cost Management Plan.

Describes how the project costs will be managed and controlled.

Project Cost Management

Control Costs

Inputs
Work Performance Information
Provide information about project progress. Deliverables that have been completed and those not yet completed. Costs authorized and incurred. Estimates for completing project work.

Organizational Process Assets

Policies, procedures, and guidelines. Monitoring and reporting methods. Cost control tools.

Project Cost Management

Control Costs

Tools and Techniques

Earned Value Management
Integrates project scope, cost, and schedule measures to assess and measure project performance and progress. Used to forecast future performance and project completion dates and costs.

Planned value .. PV is the budgeted cost for the work scheduled to be completed on an activity or WBS
component, total PV for the project known as Budget At Completion (BAC).

Earned value .. EV is the budgeted amount for the work actually completed on the schedule activity or WBS

component during a given time period, describe the percentage completion of a project, EV cannot be greater than PV.

Actual cost .. AC is the total cost incurred in accomplishing work on the schedule activity or WBS component
during a given time period, AC have no upper limit.

Project Cost Management

Control Costs

Tools and Techniques

Earned Value Management
Schedule variance .. SV is a measure of schedule performance on a project.
SV = EV PV.

Cost variance .. CV is a measure of cost performance on a project.

CV = EV AC.

Schedule performance index .. SPI is a measure of progress achieved

compared to progress planned. SPI = EV/PV.

Cost performance index .. CPI is a measure of the value of work completed to

the actual cost. CPI = EV/AC.

Project Cost Management

Control Costs

Tools and Techniques

Earned Value Management

Project Cost Management

Control Costs

Tools and Techniques

Forecasting
Forecasting includes making estimates or predictions of conditions and events in the projects future based on information and knowledge available at the time of the forecast. Forecasts are generated, updated, and reissued based on work performance information provided as the project is executed. The work performance information covers the projects past performance and any information that could impact the project in the future.

Project Cost Management

Control Costs

Tools and Techniques

Forecasting
From the variances and indexes, future performance of the project can be forecasted by deriving: Estimate at completion (EAC)
Represents the amount that the entire project is now expected to cost, based on performance so far.

Estimate to complete (ETC)

Represents how much more is expected to be spent in order to completes the projects.

Budget at completion (BAC)

Represents the amount originally budgeted for the entire project.

Project Cost Management

Control Costs

Tools and Techniques Forecasting

Indication Good if 0 Good if 0 Good if 1 Good if 1 Budgeted rate Actual cost CPI , SPI How much more spent

Equation SV = EV - PV CV = EV - AC SPI = EV / PV CPI = EV / AC

Term Schedule Variance Cost Variance Schedule Performance Index Cost Performance Index

EAC = AC + BAC EV EAC = BAC / CPI Estimate at Completion EAC = AC + ((BAC EV)/(CPI * SPI)) ETC = EAC - AC Estimate to Complete

Project Cost Management

Control Costs

Tools and Techniques

To-Complete Performance Index
Calculated projection of cost performance that must be achieved on the remaining work to meet a specified management goal, such as BAC or EAC.

TCPI =

Work Remaining (BAC-EV) Funds Remaining (BAC-AC) or (EAC-AC)

It answers the question of : In order to stay within budget, What rate must we meet for the remaining work? Consider risks, schedule, and technical performance.

Project Cost Management

Control Costs

Tools and Techniques

Performance Reviews
Compare cost performance over time. Schedule activities or work packages overrunning and under running the budget. Estimated funds needed to complete work in progress. Variance analysis .. Compares actual project performance to planned or expected performance. Trend analysis .. Examines project performance over time to determine if performance is improving or deteriorating, (graphical analysis
technique).

Earned value performance .. Compares the baseline plan to actual schedule and cost performance.

Project Cost Management

Control Costs

Tools and Techniques

Variance Analysis
Cost performance measurements (CV, CPI) are used to assess the magnitude of variation to the original cost baseline. Determine the cause and degree of variance relative to the cost performance baseline. Deciding whether corrective or preventive action is required.

Project Management Software

Monitor the three EVM dimensions (PV, EV, and AC), to display graphical trends. Forecast a range of possible final project results.

Project Cost Management

Control Costs

Outputs
Budget Forecasts
The calculated EAC value is documented and communicated to stakeholders.

Work Performance Measurements

The calculated CV, SV, CPI, and SPI values for WBS components, are documented and communicated to stakeholders.

Organizational Process Assets Updates

Causes of variances. Corrective action chosen and reasons. Lessons learned from project cost control.

Project Cost Management

Control Costs

Outputs
Change Requests
Preventive or corrective action. Processed for review and disposition through the Perform Integrated Change Control process.

Project Management Plan Updates

Cost performance baseline. Cost management plan.

Project Documents Updates

Cost estimates. Basis of estimates.

Question
A cost performance index (CPI) of 0.89 means: A. At this time, we expect the total project to cost 89 percent more than planned. B. When the project is completed we will have spent 89 percent more than planned. C. The project is only progressing at 89 percent of the rate planned. D. The project is only getting 89 cents out of every dollar invested. Answer: D

Question
You provide a project cost estimate for the project to the project sponsor. He is unhappy with the estimate, because he thinks the price should be lower. He asks you to cut 15 percent off the project estimate. What should you do? A. Start the project and constantly look for cost savings. B. Tell all the team members to cut 15 percent from their estimates. C. Inform the sponsor of the activities to be cut. D. Add additional resources with low hourly rates. Answer: C

Question
Your cost forecast shows that you will have a cost overrun at the end of the project. Which of the following should you do? A. Eliminate risks in estimates and re-estimate. B. Meet with the sponsor to find out what work can be done sooner. C. Cut quality. D. Decrease scope. Answer: A

Question
A manufacturing project has a schedule performance index (SPI) of 0.89 and a cost performance index (CPI) of 0.91. Generally what is the BEST explanation for why this occurred? A. The scope was changed. B. A supplier went out of business and a new one needed to be found. C. Additional equipment needed to be purchased. D. A critical path activity took longer and needed more labor hours to complete. Answer: D

Question
Although the stakeholders thought there was enough money in the budget, halfway through the project the cost performance index (CPI) is 0.7. To determine the root cause, several stakeholders audit the project and discover the project cost budget was estimated analogously. Although the activity estimates add up to the project estimate, the stakeholders think something was missing in how the estimates was completed. Which of the following describes what was missing? A. Estimated costs should be used to measure CPI. B. SPI should be used, not CPI. C. Bottom-up estimating should have been used. D. Past history was not taken into account. Answer: C

Question
You are about to take over a project from another project manager and find out the following information about the project. Activity Z has an early start (ES) of day 15 and a late start (LS) of day 20. Activity Z is a difficult activity. The cost performance index (CPI) is 1.1. The schedule performance index (SPI) is 0.8. There are 11 stakeholders on the project. Based on this information, which of the following would you be the MOST concerned about? A. Schedule. B. Float. C. Cost. D. The number of available resources. Answer: A

Question
The difference between the cost baseline and the cost budget can be BEST described as: A. The management reserve. B. The contingency reserve. C. The project cost estimate. D. The cost account. Answer: A

Question
A project manager needs to analyze the project costs to find ways to decrease costs. It would be BEST if the project manager looks at: A. Variable costs and fixed costs. B. Fixed costs and indirect costs. C. Direct costs and variable costs. D. Indirect costs and direct costs. Answer: C

Question
Estimate at completion (EAC) is a periodic evaluation of: A. The cast of work completed. B. The value of work performed. C. The anticipated total cost at project completion. D. What it will cost to finish the job. Answer: C

Question
If earned value (EV) = 350, actual cost (AC) = 400, planned value (PV)= 350, what is cost variance (CV)? A. 350. B. -75. C. 400. D. -50. Answer: D

Question
All the following are outputs of the Estimate Costs process EXCEPT: A. An understanding of the cost risk in the work that has been estimated. B. The prevention of inappropriate changes from being included in the cost baseline. C. An indication of the range of possible costs for the project. D. Documentation of any assumptions made during the Estimate Costs process. Answer: B

Question
The cost contingency reserve should be: A. Hidden to prevent management from disallowing the reserve. B. Added to each activity to provide the customer with a shorter critical path. C. Maintained by management to cover cost overruns. D. Added to the base costs of the project to account for risks. Answer: D

Thank you