Project Co$t Managemen t

Presenter- R Masilamani
(misilamani@yahoo.com)

Content Content:

1. Objectives of Presentation(pg3) 2. The presenter(pg4) 3. Project Cost Management(PCM)-a definition & overview(pgs 5-17) 4. PCM Processes(pg18) 5. Why, What & How of PCM(Pgs19-22) 6. PCM Estimation(pgs23-36) 7. PCM Budgeting(pgs37-57) 8. PCM Control(pgs58-70) 9. Quick Test(pgs71-76) 10.PCM Other e.g's(pgs77-85) 11.PCM Tools-a Summary(pgs 86-88) 12.References(Pg 89) 13.END(pg 90)
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Objectves of Presentation
Through this interaction, participants will enhance their: Level of Knowledge and skills of project cost management Appreciation of the planning, estimating, budgeting and controlling of project costs

Understanding of the professional cost management methodologies, tools and techniques of PMBOK

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The Presenter:
Mr R Masilamani, collated & will lead manage this module

Current Head of PMCE - IPD/OUM

Has a Bachelor degree in Economics & Statistics and MBA in Finance and Management

Has worked through employee to employer status over 35 years

Has an active working, consulting and managing presence in industry
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Project Cost Management

PMI definition Project Cost Management includes the processes involved in planning, estimating, budgeting, and controlling costs so that the project can be completed within the approved budget
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Project Cost Management

Key Words:
project cost management, resource, planning estimating, budget, control, forecasting

Area of PM Application: Universal

Topic Level: Process Related Topics: Project planning, WBS Reference: Wideman, R.M. Cost Control of Capital Projects,
BiTech Publishers Ltd., 1995 'What is Project Cost Management, why bother and why is it so important?'
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Project Cost Management (PCM)

What is PCM? You might think that PCM is managing the "costs" on your project The reality is that you must manage everything else that incurs cost Because if you don't, the costs will just keep on climbing Whether you like it or not!

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of the project

So, what is PCM?

Project Cost Management is

The placing of responsibility on those in charge of any aspect E.g. the managers, designers and implementers To perform their respective roles and responsibilities within prescribed limits Specifically, agreed cost allowances or budgets Then collecting cost data and comparing it to the corresponding allowances And taking appropriate management action To contain the final results
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 How would you define PCM?

Project Cost Management may be defined as

The process of placing responsibility on the

project's designers and implementers To perform within agreed budget limits Either under contract Or, through verbal commitment The collecting of actual cost data in a suitable format Comparing that to corresponding budget data And taking corrective action as necessary Throughout, and as appropriate to, the project life span
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What does PCM encompass?

As with time management

You have to carefully manage what you do with the money available PCM is another vital function of project management that includes Resource planning Cost estimating

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Cost budgeting
Cost control Change control
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 Is it that simple?
No, it certainly is not!

Two simple but essential principles must be clearly understood: 1. There must always be a basis for comparison

2. Only future costs can be controlled

Therefore, PCM involves
Careful project planning
Especially a WBS extended to the activity level Estimating the costs of the planned resources Converting that estimate to a viable control budget

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Monitoring expenditures as work proceeds, and

Modifying the approach if the findings are not satisfactory
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That sounds easy? - 1

Not really. There are a number of

challenges, such as:

First and foremost, the problem of managing Project scope A lack of understanding generally that estimates are no better than just best available assessments And only as good as the data they are based on an unrealistic expectation of accuracy Hence an estimate should be expressed as arange, not as a single number!

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That sounds easy? - 2 More challenges . . .

The nature of PCM changes with the project life span As we'll explain later
The historical view of accounting Which is not the primary focus of PCM The difficulty of getting timely cost information out of the normal accounting process The necessary data support facilities for effective PCM are not available within organization
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the
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That sounds easy? - 3 Still more challenges . . .

The difficulty of getting people to peer into the future, or commit themselves

During progress of the actual work they feel they have more important things to do like getting the work done! Some people think you can control costs simply by turning off the money taps
There is a tendency to ignore risks, and

The result of "political interference" to get a project approved

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Why bother with cost management?

The fact is, cost management

is essential if you want to

Keep people on their toes Highlight misuse or wastage of resources Track budget change approvals Finish a project within approved budgets Avoid unwelcome surprises, for your corporate or financial sponsor!
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Why is PCM so important?

PCM has a high profile in project management because

management is a way of life in all organizations Financially successful organizations depend on strict financial control and the corporate accounting to support it

They are comfortable with the idea of budgeting and expenditure

Most people understand the consequences of the money running out

Cost is seen as a major metric of successful project management

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The most significant aspect of PCM

From a project perspective, it is important to understand that
Cost, or rather money, is simply the common denominator, or metric, for bringing together disparate types of resources I.e. accounting for use of labor, materials, equipment For management and control purposes

However, like time, money itself should not be considered as a resource unlike in corporate financial management where money is the central purpose and is treated like a commodity
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The Project Cost Management processes include the following:

Cost Estimating
Developing an approximation of the costs of the resources needed to complete project activities.

Cost budgeting
Aggregating the estimated costs of individual schedule activities or work

packages to establish a total cost baseline for measuring project performance

Cost Control
Influencing the factors that create changes to the cost baseline

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Why Do We Manage Cost?

Part of triple constraint, cant manage one without the others (scope, time, and quality) Plots of cost and scope against plan can help spot problems early
Today Actual Costs (AC) Cumulative Value Earned Value (EV) Time
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Planned Value (PV)

Is this project over/under budget? Is it ahead of/behind schedule?

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What Do We Want to Know by Managing Cost?

through answering three questions, How did we perform ? How much we differ from plan? What is the implication for future!

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Cost Management Key Terms

PV - Planned Value, estimated value of the planned work EV Earned Value, estimated value of work done AC Actual Cost, what you paid BAC Budget at Completion, the budget for the total job EAC Estimate at Completion, what is the total job expected to cost? ETC Estimate to Complete, forecasted costs to complete job VAC Variance at Completion, how much over/under budget do we expect to be?

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How Do We Manage Cost?

Three processes
Cost Estimating Cost Budgeting Cost Control

Cost Estimating

Cost Budgeting

Cost Control

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Cost Estimating
Enterprise Environmental Factors Organizational Process Assets Project Scope Statement Work Breakdown Structure WBS Dictionary Project Management Plan
Schedule Mgmt Pln Staffing Mgmt Pln Risk Register

Inputs

Tools & Techniques

Analogous estimating Determine resource cost rates Bottom up estimating

Outputs
Activity Cost Estimates Activity Cost Estimates Supporting Detail Requested Changes

Parametric estimating
Project management software Vendor bid analysis Reserve analysis Cost of quality

Cost Manageme nt Plan Updates

Cost Estimating

Cost Budgeting

Cost Control

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Work Breakdown structure

Company owners and project managers use the Work Breakdown Structure (WBS) to make complex projects more manageable. The WBS is designed to help break down a project into manageable chunks that can be effectively estimated and supervised. Some widely used reasons for creating a WBS include:

Assists with accurate project organization

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Helps with assigning responsibilities

Shows the control points and project milestones Allows for more accurate estimation of cost, risk and time Helps explain the project scope to stakeholders
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Estimating Methods
Analogous (Top Down) estimating Managers
use expert judgment or similar project costs [quick, less accurate] Bottom-Up estimating People doing work estimate based on WBS, rolled up into project estimate [slow, most accurate] Parametric estimating Use mathematical model (i.e. cost per sq ft). [accuracy varies] Two types:

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Regression analysis based on analysis of multiple data points Learning Curve The first unit costs more than the 100th, forecasts efficiency gains
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Estimating Methods
Vendor Bid Analysis Estimating using bids +
allowances for gaps in bid scope [slow, accuracy depends on gaps]

Reserve Analysis Adding contingency to each

activity cost estimates as zero duration item [slow, overstates cost]

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ANALOGOUS COSTING

Analogous cost estimating means using the actual cost of previous, similar projects as the basis for estimating the cost of the current project. Analogous cost estimating is frequently used to estimate costs when there is a limited amount of detailed information about the project (e.g., in the early phases). Analogous cost estimating uses expert judgment

PARAMETRIC COSTING
Parametric estimating is a technique that uses a statistical relationship between historical data and other to calculate a cost estimate for a schedule activity resource. This technique can produce higher levels of accuracy depending upon the sophistication, as well as the underlying resource quantity and cost data built into the model
BOTTOM-UP COSTING This technique involves estimating the cost of individual work packages or individual schedule activities with the lowest level of detail. This detailed cost is then summarized or rolled up to higher levels for reporting and tracking purposes. The cost and accuracy of bottom-up cost estimating is typically motivated by the size and complexity of the individual schedule activity or work package. Generally, activities with associated effort increase the accuracy of the schedule activity cost estimate
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Determine Resource Cost Rate

The person determining the rates or the group preparing the estimates must know the unit cost rates, such as staff cost per hour and bulk material cost per cubic yard, for each resource to estimate schedule activity costs. Gathering quotes is one method of obtaining rates. For products, services, or results to be obtained under contract, standard

rates with escalation factors can be included in the contract.

Reserve Analysis

reserves are estimated costs to be used at the discretion of the project manager to deal with anticipated, but not certain, events. These events are known unknowns and are part of the project scope and cost baselines
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Assigning resources
Availability Skills
More experienced people Less experienced people

Desire Similar tasks to one person to use learning curve Assign critical tasks to most reliable people Tasks that need interaction or are similar
Same person Two who communicate

Personality and team communication does matter and again, Availability

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Resource Loading and Optimizing Gantt withResource Histogram

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Resource leveling - possible rescheduling Gantt with Resource Histogram

Automatic resource leveling: use only as suggestionManual resource leveling: fast vs good vs cheap
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Costed WBS
Use Software to roll costs up the WBS
I D T a s kN a m e 3 6 F i n a lS u b m i s s i o n 3 7 3 8 3 9 4 0 4 1 4 2 4 3 4 4 4 5 4 6 4 7 4 8 4 9 5 0 F i n a lD e s i g n W o r k F i n a lP l a n T B S u b m i s s i o n E P A S o f t w a r e( S u b c o n t r a c t5 0 B ) S W D e s i g n D o P r e l i m S W d e s i g n P D R D o F i n a lS W d e s i g n C D R S W C o n s t r u c t i o n C o d e C S C A C o d e C S C B I n t e g r a t e & T s tC S C I1 S 3 1 S 3 1 S 3 2 S 2 2 S 2 1 A c c o u n t F i x e dC o s t T o t a lC o s t $ 0 . 0 0 $ 3 3 , 0 0 0 . 0 0 $ 5 , 0 0 0 . 0 0 $ 0 . 0 0 $ 0 . 0 0 $ 0 . 0 0 $ 2 5 , 0 0 0 . 0 0 $ 8 , 0 0 0 . 0 0 $ 0 . 0 0 $ 0 . 0 0 P a y m e n t $ 0 . 0 0 $ 0 . 0 0 $ 0 . 0 0 $ 0 . 0 0 $ 4 0 , 0 0 0 . 0 0 $ 0 . 0 0 $ 0 . 0 0 $ 0 . 0 0 $ 0 . 0 0 $ 0 . 0 0 $ 7 0 , 0 0 0 . 0 0 $ 0 . 0 0 $ 0 . 0 0 $ 0 . 0 0 $ 0 . 0 0

C 1 4 C 1 4

$ 0 . 0 0 $ 1 3 3 , 0 0 0 . 0 0 $ 1 2 , 0 0 0 . 0 0 $ 0 . 0 0 $ 0 . 0 0 $ 0 . 0 0 $ 0 . 0 0 $ 1 2 , 0 0 0 . 0 0 $ 0 . 0 0 $ 0 . 0 0 $ 0 . 0 0 $ 6 2 , 0 0 0 . 0 0 $ 2 0 , 0 0 0 . 0 0 $ 0 . 0 0 $ 3 0 , 0 0 0 . 0 0 $ 0 . 0 0 $ 7 1 , 0 0 0 . 0 0 $ 6 , 0 0 0 . 0 0 $ 8 , 0 0 0 . 0 0 $ 2 0 , 0 0 0 . 0 0

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Cost Ramp-Up
Use Software to report cash flow 1 9 9 7 1 9 9 7
Q 3Q 3 Q 4 Q 4 Q 1 1 Q 2 Q 2 3 Q 3Q

1 9 9 8 1 9 9 8 4 Q Q 1 Q 4 Q 1

$ 4 0 0 , 0 0 0 . 0 0 $ 4 0 0 , 0 0 0 . 0 0

$ 3 0 0 , 0 0 0 . 0 0 $ 3 0 0 , 0 0 0 . 0 0

$ 2 0 0 , 0 0 0 . 0 0 $ 2 0 0 , 0 0 0 . 0 0

$ 1 0 0 , 0 0 0 . 0 0 $ 1 0 0 , 0 0 0 . 0 0

C u m u l a t i v e o s t : C u m u l a t i v e C o s t :C $ 5 3 , 9 2 0 . 0 0 $ 1 2 7 , 1 6 0 . 0 0 2 7 4 , 3 6 0 . 0 0$ $ 3 3 1 , 4 4 0 . 0 0 $ 3 4 9 , 9 2 0 . 0 0 $ 3 6 8 , 4 0 0 . 0 0 $ 3 7 6 , 5 0 0 . 0 0 $ 3 7 6 , 5 0 0 . 0 0 $ 5 3 , 9 2 0 . 0 0 $ 1 2 7 , 1 6 . 0 0$ $ 2 7 4 0 . 0 0 3 3 1 , 4 4 0 . 0 0 $ 3 4 9 , 9 2 0 . 0 0 $ 3 6 8 , 4 0 0 . 0 0 $ 3 7 6 , 5 0 0 . 0 0 $ 3 7 6 , 5 0 0 . 0 0

F i l t e r e d r e s o u r c e s F il te r e d r e s o u r c e s C P M C P M

T o t a l : T o t a l T o t a l : T o t a l

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Cost - Sanity checks

Cost Estimate Error Range same as Time Estimate
+75% 25 10 0 -8 -25%
Indicative PPA Init Plan
PPA - Preliminary Project Approval EPA - Effective PDR - Preliminary Design Review
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-10
Budget EPA Final Plan Budget EPA Final Plan

How Do We Manage Cost?

Three processes

Cost Estimating Cost Budgeting Cost Control

Cost Estimatin g

Cost Budgeting

Cost Control

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Cost Budgeting
Tools & Techniques
Project Scope Statement Work Breakdown Structure WBS Dictionary Cost aggregation Reserve analysis Parametric estimating

Outputs
Cost Baseline Project Funding Requireme nts Cost Manageme nt Plan Updates Requested Changes

Inputs

Activity Cost Estimates Activity Cost Estimates Supporting Detail

Project Schedule Resource Calendars Contract Cost Management Cost Plan Estimating

Funding limit reconciliation

Cost Budgeting

Cost Control

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Essential definitions
Enterprise Environmental factors-refer to both internal and external factors that surround or influence a projects success. These factors may come from any or all of the enterprises involved in the project. Enterprise environmental factors may enhance or constrain project management options and may have a positive or negative influence on the outcome. They are considered as inputs to most planning processes

Organisational process Assets- are any or all process related assets, from any
or all of the organizations involved in the project that can be used to influence the projects success. Examples include: plans, procedures, lessons learned, historical information, schedules, risk data and earned value data. Organizational Process Assets fall into two broad categoriesProcesses and Procedures, and the Corporate Knowledge Base.

WBS Dictionary-The WBS dictionary includes entries for each WBS component that briefly defines the scope or statement of the work, defines deliverables, contains a list of associated activities, and provides a list of recognized milestones to gage progress Approved change requests-refers to a change request that has been submitted
by the requestors, has been reviewed by the appropriate parties through use of the integrated change control process, and has been granted authorization to be take place
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Essential definitions
Risk Register-The risk register or risk log becomes essential as it records identified risks, their severity, and the actions steps to be taken. It can be a simple document, spreadsheet, or a database system, but the most effective format is a table. A table presents a great deal of information in just a few pages

Cost Baseline-ultimately, project management includes a variety of responsibilities within ones team in order to achieve maximum results for their employer. In regards to money and remaining in business, providing a budget that is adjusted to time is considered a cost baseline.
Performance reports- is filled out by the project manager and submitted on a regular basis to the sponsor, project portfolio management group, Project Management Office or other project oversight person or group Earned Value Analysis-report shows specific mathematical metrics that are designed to reflect the health of the project by integrating scope, schedule, and cost information. Information can be reported for the current reporting period and on a cumulative basis
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Essential Definitions
Resource Calendar-Keeping track of schedules and time management is one of the most fundamentally important tasks that are the responsibility of the project management team and or the project management team leader. One of the best ways to accomplish this feat is through the careful and well orchestrated use of calendars to keep track of the multitude of project related events, occurrences, and dates that will take place during the projects life cycle.

Enterprise environmental factors

Market condition Published commercial information Cost performance baseline

Authorized timephased Budget at Completion

(BAC) used to measure, monitor and control overall cost performance (S shape curve)
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Cost Budgeting
Budgeting is allocating costs to work packages to
establish a cost baseline to measure project performance Remember Contingency items are for unplanned but required changes it is not to cover things such as:

Price escalation Scope & Quality Changes

Funding Limit Reconciliation Smoothing out the project spend to meet management expectations

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Cost Aggregation
Schedule activity cost estimates are aggregated by work packages in accordance with the WBS. The work package cost estimates are then aggregated for the higher component levels of the WBS, such as control accounts, and ultimately for the entire project. Reserve analysis establishes contingency reserves, such as the management contingency reserve, that are allowances for unplanned, but potentially required, changes. Such changes may result from risks identified in the risk register

Reserve Analysis
Management contingency reserves are budgets reserved for unplanned, but potentially required, changes to project scope and cost. These are unknown unknowns, and the project manager must obtain approval before obligating or spending this reserve. Management contingency reserves are not a part of the project cost baseline, but are included in the budget for the project. They are not distributed as budget and, therefore, are not a part of the earned value calculations

Parametric estimating
).

The parametric estimating technique involves using project characteristics (parameters) in a mathematical model to predict total project costs. Models can be simple (e.g., one model of software development costs uses thirteen separate adjustment factors, each of which has five to seven points within it).
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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 considering alternative courses of action.

Costs: Nonrecurring costs that do not change based on the number of units,
like expenses related to equipment required to complete a project. Variable Costs: Costs that rise directly with the size of the project, like expenses related to consumable materials used to accomplish the project.

Indirect Costs: Costs that are part of the overall organizations cost of doing
business and are shared among all the current projects. These include salaries of corporate executives, administrative expenses, any cost that would be considered part of overhead.

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. These include cost for materials associated with the project, salary of the project staff, expenses associated with subcontractors.
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Cost Types
Direct Costs
Related Directly to the project ex. Labor hours, material, equipment, food, travel Indirect Costs Overhead used for more than one project ex. Building rent, taxes, janitorial services

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Cost Types
A cost by any other name, really isnt the same!
Variable Cost Changes with volume

Fixed Cost Stays the same, regardless of volume

TC = VC+FC
COST vs VOLUME
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Cost Types
Project Costs
Are incurred while the project is being fulfilled. Life Cycle Costs includes the costs after project completion.
There may be temptation to lower project costs at the expense of long term costs. Life Cycle Costing gives the PM a way to consider costs outside of the scope of project fulfillment
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Important Concepts
Sunk Costs
Forget em, theyre gone
Working Capital
- Current Assets (Cash, Inventories, Accounts Receivable) - Liabilities (Notes, AP, Accruals)

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Cost and Project Selection

Present Value
Is $10,000 in your pocket now worth more than

the $10,000 in your pocket one year from now?

Yes! You can use the money now to make more money. The 10,000 in a year from now should be discounted to the present, since its not worth as much.

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Present Value of Your PMP Consulting Gig

Time 1 2 3 4

Income
10,000 10,000 10,000 10,000

Present Value
10,000 9,090 8,264 7,513

5
TOTAL
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10,000
50,000

6,830
41,697
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Internal Rate of Return

What is the return on the money invested?
Expressed as percentage

Great for comparing between two projects of different value

Project A has an IRR of 21% and Project B has an IRR of 14%. Which would I choose?
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Payback Period
How long until we get the money back?
Quick and Dirty method for project selection Does not take into account the Time Value of Money

Your Project costs $50,000, and the cash flow it will bring is $11,000 a year. The Payback Period is. . . 5 years Discount rate/Interest Rate....10%
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Payback Period
Return Cumulative Inflow (without discount @10%) Cumulative Inflow (with discount@10%)

Resulting Value of cash flow(end of year, with discount)

Note:the two (with or without discount do not differ too much in duration

11,000 11,000 11,000 11,000 11,000 Break Even at 50,000

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11,000 22,000 33,000 44,000 55,000 The BE Point is 4yrs 7mths

10,891 10,783 10,676 10,571 10,476

10,891 21,674 32,347 42,914 53,394

With Discount Pay- Back Pay-Back Period is is Different 4yrs 8 mths.

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Net Present Value

NPV, like Present Value, discounts future cash flows to the present PV of Revenue PV of Costs

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Net Present Value: Your PMP Gig

Time Revenue Present Value Costs PV of Costs
NPV

10,000

10,000

12,000

12,000

-2,000

10,000

9,090

2,000

1,818

7,272

10,000

8,264

2,000

1,653

6,611

10,000

7,513

2,000

1,502

6,011

10,000

6,830

2,000

1,366

5.464

Total
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50,000

41,697

20,000

18,339

23,358
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Payback Period
How long until we get the money back?
Quick and Dirty method for project selection Does not take into account the Time Value of Money

Your Project costs $50,000, and the cash flow it will bring is $11,000 a year. The Payback Period is. . .
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5 years
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Benefit Cost Ratio

Compares the revenues to the costs
Revenue in this is the same as payback 1 is the magic number where costs = revenue Less than 1, costs are greater than benefits Greater than 1, and the benefits are greater than costs.

If Project A has a BCR of 2.2 and Project B has a BCR of 1.2, pick A.
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How Do We Manage Cost?

Three processes
Cost Estimating Cost Budgeting Cost Control

Cost Estimating

Cost Budgeting

Cost Control

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Cost Control
Inputs
Cost Baseline Project Funding Requirements

Tools & Techniques

Cost change control system Performance measurement analysis Forecasting Project performance reviews Project management software Variance management

Outputs

Cost Estimate Updates Cost Baseline Updates Performance Measurements Forecasted Completion Requested Changes Recommende d Corrective Actions Organizatio nal Process Assets Updates Project Manageme nt Plan Updates

Performance Reports
Work Performance Information Approved Change Requests Project Management Plan

Cost Estimating

Cost Budgeting

Cost Control

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Earned Value
Progress is compared against the
baseline to determine whether project is ahead of or behind plan Percent complete can be difficult to measure, some managers use rules

50/50 Rule Assumed 50% complete when task started, final 50% at completion 20/80 Rule 20% at start 0/100 Rule No credit until complete

Planned Value (PV) Budgeted Cost Earned Value (EV) Actual work completed Actual Cost (AC) Costs incurred Estimate to Complete (ETC) Whats Left Estimate at Completion (EAC) What final cost will be
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The earned value Management involves developing these key values for each schedule activity, work package, or control account: Planned value (PV). PV is the budgeted cost for the work scheduled to be completed on an activity or WBS component up to a given point in time.

Earned value (EV). EV is the budgeted amount for the work actually completed on the schedule activity or WBS component during a given time period.
Actual cost (AC). AC is the total cost incurred in accomplishing work on the schedule activity or WBS component during a given time period. This AC must correspond in definition and coverage to whatever was budgeted for the PV and the EV (e.g., direct hours only, direct costs only, or all costs including indirect costs). Cost variance (CV). CV equals earned value (EV) minus actual cost (AC). The cost variance at the end of the project will be the difference between the budget at completion (BAC) and the actual amount spent. Formula: CV= EV - AC

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The earned value Management involves developing these key values for each schedule activity, work package, or control account:
Schedule variance (SV). SV equals earned value (EV) minus planned value (PV). Schedule variance will ultimately equal zero when the project is completed because all of the planned values will have been earned. Formula: SV = EV - PV. These two values, the CV and SV, can be converted to efficiency indicators to reflect the cost and schedule performance of any project. Cost performance index (CPI). A CPI value less than 1.0 indicates a cost overrun of the estimates. A CPI value greater than 1.0 indicates a cost underrun of the estimates. CPI equals the ratio of the EV to the AC. The CPI is the most commonly used cost-efficiency indicator. Formula: CPI = EV/AC Schedule performance index (SPI). The SPI is used, in addition to the schedule status to predict the completion date and is sometimes used in conjunction with the CPI to forecast the project completion estimates. SPI equals the ratio of the EV to the PV. Formula: SPI = EV/PV
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Earned Value Graph

Planned Value (PV)

Variance at Completion (VAC)

Target Cost & Schedule

Schedule Variance (Time)

Earned Value (EV)

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NAME

Earned Value Formulas FORMULA NOTES

EV-AC EV-PV

Cost Variance (CV) Schedule Variance (SV) Cost Performance Index (CPI) Schedule Perform Index (SPI) Estimate to Complete (ETC) Variance at Completion (VAC)

EV/AC

EV/PV EAC-AC

Negative = Over budget Positive = Under budget Negative = Behind Schedule Positive = Ahead of Schedule How much are we getting for every dollar we spend? Progress as % against plan How much more do we have to spend? At the end of the day, how close will we be to plan?

BAC-EAC

Estimate at Completion (EAC)

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Earned Value Formulas (Contd)

NAME Estimate at Complrtion (EAC) FORMULA

NOTES

BAC/CPI

Use if no variances from BAC have occurred

AC+ETC

Use when original estimate was bad. Actuals + New estimate

AC+BAC -EV

Use when current variances are not expected to be there in the future

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AC+(BAC -EV)/CPI

Use when current variances are expected to continue

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Building A Farm Hut Exercise

You have a project to build a new farm hut (Barn). The specs for building the hut are to construct 4 sides and then an angled roof. Each side of the hut is to take one day to build as is the roof. The budgeted amount is $2,000 per side and $2000 applied to the roof cost. The sides are to be completed one after the other. Today is the end of day four.

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FORECASTING
Forecasting includes making estimates or predictions of conditions in the project's 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 and progressed).

BAC is equal to the total PV at completion for a schedule activity, work package, control account, or other WBS component. Formula: BAC = total cumulative PV at completion. ETC is the estimate for completing the remaining work for a schedule activity, work package, or control account. ETC based on new estimate. ETC equals the revised estimate for the work remaining, as determined by the performing organization. This more accurate and comprehensive completion estimate is an independent, non-calculated estimate to complete for all the work remaining, and considers the performance or production of the resource(s) to date. Alternatively, to calculate ETC using earned value data, one of two formulas is typically used: ETC based on atypical variances. This approach is most often used when current variances are seen as atypical and the project management team expectations are that similar variances will not occur in the future. ETC equals the BAC minus the cumulative earned value to date (EVC). Formula: ETC = (BAC - EVC)
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FORECASTING
ETC based on typical variances. This approach is most often used when current variances are seen as typical of future variances. ETC equals the BAC minus the cumulative EVC (the remaining PV) divided by the cumulative cost performance index (CPIC). Formula: ETC = (BAC EVC) / CPIC EAC is the projected or anticipated total final value for a schedule activity, WBS component, or project when the defined work of the project is completed. One EAC forecasting technique is based upon the performing organization providing an estimate at completion: EAC using a new estimate. EAC equals the actual costs to date (ACC) plus a new ETC that is provided by the performing organization. This approach is most often used when past performance shows that the original estimating assumptions were fundamentally flawed or that they are no longer relevant due to a change in conditions. Formula: EAC = ACC + ETC The two most common forecasting techniques for calculating EAC using earned value data are some variation of: EAC using remaining budget. EAC equals ACC plus the budget required to complete the remaining work, which is the budget at completion (BAC) minus the earned value (EV). This approach is most often used when current variances are seen as atypical and the project management team expectations are that similar variances will not occur in the future. Formula: EAC = ACC + BAC - EV EAC using CPIC. EAC equals actual costs to date (ACC) plus the budget required to complete the remaining project work, which is the BAC minus the EV, modified by a performance factor (often the CPIC). This approach is most often used when current variances are seen as typical of future variances. Formula: EAC = ACC + ((BAC - EV) / CPIC) 12/30/2013 68

Tricks for Earned Value

EV is always first Variance = EV minus something Index = EV divided by something If the formula relates to cost use AC If the formula relates to schedule use PV Interpreting results: negative is bad and positive is good Interpreting results: greater than one is good, less than one is bad
Project Start PV AC
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Current Status

BAC EAC

ETC

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Terms to Remember

Present Value Net Present Value (NPV) Internal Rate of Return (IRR) Payback Period Benefit Cost Ratio = BCR>1, Payback is greater than the cost Opportunity Cost Sunk Cost Working Capital Straight Line Depreciation Accelerated Depreciation

Double Declining Balance Sum of Years Digits

Value Analysis (Value Engineering)

You wont be calculating most of these numbers on the test, just remember the concepts for general questions

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Questions
Q1-project cost management includes all the following functions, except; a. resource planning b. cost estimating c. resource leveling d. cost budgeting d. cost control Q2-The output from resource planning includes; a. job descriptions b. Salary descriptions c. The types of resources required

d. All of the above

e. None 12/30/2013 of the above
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Questions
Q3- Cost estimates may be expressed in; a. labour b. materials c. supplies d. inflation allowances e. none of the above Q4- resource planning must include consideration of the use of;

a. contractors, equipment, materials

b. people, computers, equipment c. people, equipment, materials d. contractors, computers, raw materials E. none of the above.
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Questions
Q5- In the erarned value system, cost variance is computed as; a. BCWP less BCWS b. BCWP less ACWP c. ACWP less BCWP d. ACWP less BCWS e. BCWS less BCWP Q6- Earned value is;

a. percent complete
b. budgeted cost of work performed c. completed work value d. all of the above e. b and c only
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Questions
Q7- if BCWS=100, BCWP=98, and ACWP=104, the project is, a. ahead of schedule b. headed for a cost overrun c. doing the business d. a and b only e. a and c only Q8- inputs to resource planning are;

a. the WBS
b. the scope statement c. a resource pool description d. organisational policies e. all of the above
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Questions
Q9- Which of the following choices would indicate that your project was 10 percent under budget? a. BCWS=100, BCWP=110 b. ACWP=100, BCWP=110

c. BCWS=100, ACWP=110
d. ACWP=110, BCWP=100 e. BCWP=100, BCWS=110 Q10- Parametric cost estimating involves;

a. using the WBS as the basis of estimating

b. defining the parameters of the project life cycle c. calculating individual cost estimates for each work package d. using rates and factors based on historical experience to estimate costs e. b and c only
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Answers to Questions
1a 2b

6e 7-d 8-a 9-b 10 - a

3a
4c 5a

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EVA Question
Given a lawn to be cleaned up within four days at an estimated budget Of Rm2,000, and today after three days the status of the project being; EV=Rm1250, AC-Rm1750 with a daily planned expenditure=Rm500, calculate the following:

PV BAC

EV CV

CV CPI

SV
(BACEAC)

SPI

VAC
EAC(EAC/CPI) ETC(EAC-AC)

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Answers to Questions (Contd)

What is: PV EV AC BAC CV CPI SV SPI EAC ETC VAC Calculation: $500+$500+$500 $500+$500+$250 $500+$1000+$250 $500+$500+$500+$500 $1,250 - $1,750 $1,250/$1,750 $1,250 - $1,500 $1,250/$1,500 $2,000/0.714 $2,801-$1,750 $2,000 - $2,801 Answer: $1,500 $1,250 $1,750 $2,000 -$500 0.714 -$250 0.833 $2,801 $1,051 -$801 Interpretation of Answer: We should have completed $1500 We actually completed $1,250 worth of work We have actually spent $1,750 Our project budget is $2000 We are over budget by $500 We are only getting $0.71 out of every dollar that we are spending on the project We are behind schedule We are progressing at 83% of the planned rate We currently estimate the project will cost $2,801 We need to spend $1,051 to finish the project We currently expect to be $801 over budget when the project is completed

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Big Dig
Started construction on 1991 and planned completion by 1997 (6 years), it was to cost $3 Billion, the project included 6 highways ($0.5 Billion per highway/year) At the end of the first year, 1/2 highway was completed and the cost was $2 Billion. Do the EV analysis

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Big Dig: The Numbers

EV = Earned Value = $0.25 Billion ($0.5/2) PV = Planned Value = $0.5 Billion AC = Actual Cost = $2 Billion

BAC = Budget At Completion = $3 Billion

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Big Dig: Performance

CV = EV - AC = $0.25 - $2 = - $1.75 Billion
Over Budget by $1.75 Billion

SV = EV - PV = $0.25 - $0.5 = - $0.25 Billion

Behind of schedule

CPI =EV / AC = $0.25 / $2 = 0.12

Getting 0.12 cents out of every dollar budgeted

SPI = EV / PV = $0.25 / $0.5 = 0.50

50% of progress planned

EAC = BAC / CPI = $3 / 0.50 = $ 6 Billion

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Big Dig: Performance

CV = EV - AC = $0.25 - $2 = - $1.75 Billion
Over Budget by $1.75 Billion

SV = EV - PV = $0.25 - $0.5 = - $0.25 Billion

Behind of schedule

CPI =EV / AC = $0.25 / $2 = 0.12

Getting 0.12 cents out of every dollar budgeted

SPI = EV / PV = $0.25 / $0.5 = 0.50

50% of progress planned

EAC = BAC / CPI = $3 / 0.50 = $ 6 Billion

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Big Dig

Megabina Sdn Bhd Started construction of skybridges in 2001 and planned completion by 2008 (8 years).They were to cost $12 Billion, the project included 8 sky-bridges ($1.5 Billion per bridge/year) At the end of the year 4 three were completed and the cost was $2.5Billion. Do the EV analysis

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Big Dig: The Numbers

EV = Earned Value = $3.5 Billion($1.5m*3) PV = Planned Value = $6.0 Billion($1.5*4) AC = Actual Cost = $2.5 Billion

BAC = Budget At Completion = $12 Billion

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Big Dig: Performance

CV = EV - AC = $3.5 - $2.5 = $1.00 Billion
Under Budget by $1.00 Billion

SV = EV - PV = $3.5 - $6.5 = - $3.00 Billion

Behind of schedule

CPI =EV / AC = $3.5 / $2.5 = 1.4

Getting 1.14 cents out of every dollar budgeted

SPI = EV / PV = $3.5 / $6.5 = 0.50

50% of progress planned

EAC = BAC / CPI = $12 / 0.50 = $ 24 Billion

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Tools and Techniques

Performance reviews
Compare cost performance over time, schedule activities or work packages overrunning and under running the budget, and the estimated funds needed to complete work in progress In EVM:
Variance analysis: compares actual project (cost or schedule) performance to planned or expected performance Trend analysis: examines project performance over time to determine if performance is improving or deteriorating. Graphical comparison of BAC versus EAC and completion dates Earned value performance: compares the baseline plan to actual schedule and cost performance
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Tools and Techniques

Variance analysis
Cost performance measurements (CV, CPI) are used to assess the magnitude of variation to the original cost baseline Cause and degree of variance WRT the cost performance baseline? >corrective/preventive action? High acceptable variance range at start, lower as the project gets closer to complete

Project Management software

Monitoring PV, EV, and AC
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Outputs
Work performance measurements
Calculated CV, SV, CPI, and SPI values for WBS components, work packages and control accounts are documented and communicated to stakeholders

Budget forecasts
Calculated EAC value or bottomup EAC value is documented and communicated to stakeholders

Organizational Process Assets updates

Cause of variance Corrective actions chosen and the reasons Other types of lessons learned from project cost control

Change requests (through the Perform Integrated Change Control Process) Project management plan updates
Cost performance baseline (scope, activity resources, cost estimates. Sometimes new cost baseline should be prepared as cost variance is severe) Cost management plan

Project document plan

Cost estimates Basis of estimates
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References
1. Sections of this presentation were adapted from A Guide to the Project Management Body of Knowledge , Third & Fourth Editions, Project Management Institute Inc., 2004/9 2. it is also drawn from various other presentations, publicly uploaded 3. The presenter's expertise and Ingenuity were also employed to upgrade the original presentation

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Now I understand!

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