02-05 Cost

7/28/2019 02-05 Cost

http://slidepdf.com/reader/full/02-05-cost 1/49

PROJECT COST MANAGEMENT

P11 PMP PREP PROGRAM

Presenter: Leo Flores, PMPDate: February 5, 2008

7/28/2019 02-05 Cost


DevelopProject

Charter

Dev. ProjectScope

Statement

Initiating

Controlling

ContractAdministration

RiskMonitoring& Control

ManageStakeholders

PerformanceReporting

ManageProjectTeam

PerformQualityControl

CostControl

IntegratedChangeControl

M&CProjectWork

ScheduleControl

ScopeControl

ScopeVerification

CloseProject

ContractClosure

Closing

RiskManagement

Planning

CreateWBS

DevelopProject Mgmt.

Plan

ScopeDefinition

ScopePlanning

ActivityResourceEstimating

ActivityDefinition

ActivityDuration

Estimating

Activity

Sequencing

ScheduleDevelopment

RiskIdentification

QualitativeRisk

Analysis

QuantitativeRisk

Analysis

CostEstimating

CostBudgeting

HumanResourcePlanning

PlanPurchasesAcquisitions

QualityPlanning

Commun.Planning

PlanContracting

RiskResponsePlanning

Planning

Direct& Manage

Project Exec.

PerformQuality

Assurance

AcquireProjectTeam

DevelopProjectTeam

RequestSeller

Responses

InformationDistribution

Select

Sellers

Executing

2Chapter 7 - Cost Management

7/28/2019 02-05 Cost


Figure 7.2, PMBOK 160

Note: Also seeFigure 7-1,

PMBOK 159.

Project Cost Management Process Flow


http://mmlviewer.books24x7.com/book/id_9342/viewer.asp?bookid=9342&chunkid=181262363&previd=IMG_102

7/28/2019 02-05 Cost


Project Cost Management

Definition: Project Cost Management includes the processes involvedin planning*, estimating, budgeting and controlling cost so that theproject can be completed within the approved budget.

Processes:

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

2. Cost Budgeting – aggregating the estimated costs of individualactivities or work packages to establish a cost baseline

3. Cost Control – influencing the factors that create cost variances

and controlling changes to the project budget

* Part of Develop Project Management Plan Process (PMBoK Section 4.3)


7/28/2019 02-05 Cost


• Precedes Project Cost Management processes

• Planning effort, part of Develop Project Management Plan

• Sets the format and criteria for planning, structuring, estimating,budgeting, and controlling project costs:

• Precision levels and Contingencies

• Units of Measure

• Organizational procedures links

• Control Thresholds

• Earned Value Rules• Reporting Formats

• Process Descriptions


The Cost Management Plan

7/28/2019 02-05 Cost


Other Concepts to know:*

• Life Cycle Costing – look at the cost of the whole life of a product,not just the cost of the project.

• Value Analysis (Value Engineering) – finding a less costly way toso the same work.

• Cost Risk – Where is it? Who has it?

* RMC P. 200-201


The Cost Management Plan (Cont.)

7/28/2019 02-05 Cost


Cost Estimating - Inputs

● Enterprise Environmental Factors Marketplace conditions, Commercial databases

● Organizational Process Assets Cost estimating policies, Cost estimating templates, Historical

information, Project files, Project team knowledge, Lessons

learned

● Project Scope Statement Constraints, Assumptions, and Requirements Deliverables and Acceptance criteria for project and its

products services and results.

● WBS & WBS Dictionary

● Project Management Plan Schedule management plan, Staffing management plan, Risk

register


7/28/2019 02-05 Cost


Cost Estimating – Tools and Techniques

● Analogous estimating - using actual costs of previous similar projects.Limited amount of detailed info. Less costly, and less accurate. -50% to+100%

● Bottom-up estimating –cost of individual work packages – roll up – usuallymore accurate. -10% to +15%

● Parametric estimating – uses statistical relationship between historicaldata and other variables – can be very accurate – can apply to certainsegments.

● Project management software

● Vendor bid analysis

● Reserve analysis (contingency allowances) – known unknowns.

● Cost of quality – work added to the project to accommodate qualityplanning.

See RMC P. 203 for advantages & disadvantages of analogous and bottom-up each


7/28/2019 02-05 Cost


Cost Estimating – Outputs

● Activity Cost Estimates

● Supporting Detail

● Requested Changes

● Cost Management plan (updates)

See RMC P. 204


7/28/2019 02-05 Cost


Profitability & Accounting Standards (General Knowledge)

Measuring Profitability

– Present Value

– Net Present Value (NPV)

– Internal Rate of Return (IRR)

– Payback Period

– Benefit Cost Ratio

– Opportunity Cost– Sunk Cost

– Law of Diminishing Returns

– Working Capital

– Return on Original Investment (ROI)

– Discounted Cash Flow (DCF)

Depreciation– Straight line

– Accelerated

Double Declining Balance

Sum of Years Digits

Project Selection Methods

See RMC P. 213 to 217


7/28/2019 02-05 Cost


Types of Cost

● Variable Cost – Costs that change as production changes, e.g.material, labor costs

● Fixed Cost – Costs that do not change as production changes, e.g.set-up, rental, tools

● Direct Cost – Costs directly attributable to the project, e.g. wages,material, travel

● Indirect Cost – Overhead costs that benefit multiple projects, e.g.taxes, benefits

See RMC P. 201


7/28/2019 02-05 Cost


A project expediter is having difficulty estimating the cost of aproject. Which of the following BEST describes the mostprobable cause of his difficulty?

Cost Question #1

A. Non-availability of desired resources

B. Lack of historical data from previous similar projects

C. Inadequate scope definition

D. Lack of corporate processes


7/28/2019 02-05 Cost


A company is attempting to select the BEST project from alist of choices. If the available information is the followingbenefit cost ratios, which project should be selected?

Cost Question #2

A. 2.1

B. 1.7

C. 0.9

D. 0.7


7/28/2019 02-05 Cost


The PMO is worried about the quality of the company’s projects. They are trying to identify the good projects andthe bad ones. They receive the following information. Whichproject should they be most concerned about.

Cost Question #3

A. Project A with Benefit Cost ratio of 2.1

B. Project B with Benefit Cost ratio of 1.1

C. Project C with Benefit Cost ratio of 0.6

D. Project D with Benefit Cost ratio of 0.9


7/28/2019 02-05 Cost


Cost Budgeting An Iterative Three-step Process

100

40 60

15 25

30

30

3. Allocate Budgets

1. Define the Work

2. Schedule the Work $ PM Baseli ne

Cost Baseli ne

Time

Mgmt Reserve Cost Budget


7/28/2019 02-05 Cost


Cost Budgeting - Inputs

● Project scope statement

Constraints, Assumptions, and Requirements

Deliverables, Acceptance criteria

● WBS & WBS Dictionary

● Activity cost estimates & supporting detail

● Project Schedule

● Resource calendars

● Contract● Cost management plan


7/28/2019 02-05 Cost


Cost Budgeting Tools & Techniques

● Cost Aggregation – activity cost estimates are aggregated by

work packages.

● Reserve Analysis – management reserve and contingency

reserve.

● Parametric Estimating – mathematical models

● Funding Limit Reconciliation – scheduling of work to smooth

or regulate expenditures—funding may not always be available

when it would optimize schedule or cost


7/28/2019 02-05 Cost


Cost Budgeting - Outputs

● Cost baseline – time-phased budget that is used as a basis against which

to measure, monitor and control overall cost performance.

● Project funding requirements - (PMBoK Page 170)

● Cost management plan (updates)

● Requested changes

Project Management Institute, A Guide to the Project Management Body of Knowledge (PMBOK ® Guide) Third

Edition, Project Management Institute, Inc., 2004. Copyright and all rights reserved. Material from this publication

has been reproduced with the permission of PMI.


7/28/2019 02-05 Cost


A PM has completed a detailed WBS and cost estimates foreach work package. To create a cost baseline, the projectmanager would:

Cost Question #4

A. Create analogous estimate and perform sanity check

B. Sum up the work packages and risk contingency reserveestimates

C. Roll up work package estimates and add managementreserve

D. Get project team to validate


7/28/2019 02-05 Cost


The BEST cost control method is to:

Cost Question #5

A. Estimate during initiation and have management approveestimates

B. Estimate during planning and then re-estimate before eachphase

C. Estimate during execution of the project and then manageeach activity to the budget

D. Estimate at the beginning of a project, and then checkagainst the baseline


7/28/2019 02-05 Cost


A project manager needs to analyze the project costs to findways to decrease costs. It would be best if the projectmanager looks at

Cost Question #6

A. Variable costs and fixed costs

B. Fixed costs and indirect costs

C. Indirect costs and direct costs

D. Direct costs and variable costs


7/28/2019 02-05 Cost


You are asked to prepare a budget for completing a projectthat was started last year, then shelved for 8 months. All of the following would be included in the budget EXCEPT?

Cost Question #7

A. Fixed Costs

B. Variable Costs

C. Direct Costs

D. Sunk Costs


7/28/2019 02-05 Cost


The cost of choosing one project and giving up another iscalled :

Cost Question #8

A. Fixed Cost

B. Sunk Cost

C. Opportunity Cost

D. Net Present Value


7/28/2019 02-05 Cost


Cost Control (EVM)

What is Earned Value Management?

● Process for integrating, controlling and objectivelymeasuring the cost, schedule and technicalperformance of a project.

● Provides managers with valid and timely performance datato support early warning and decisions for risk reduction.

● Approach to assess achievements and forecast the totalEstimate at Completion (EAC) of a project.

Basic Earned Value for Program Manager” no date, PowerPoint Presentation, Eleanor Haupt, ASC/FMCE

Earned Value Management Systems, Executive Primer” November 2001, GEAE EVM Focal point B. Dobbins/J.Merkel, as presented by Nancy Clements


7/28/2019 02-05 Cost


Cost Control (EVM)


Basic Earned Value Data Elements

Question Data Element Acronym

1 How much work should have been done? Planned Value PV

2 How much work was accomplished? Earned Value EV

3 How much did the accomplished work cost? Actual Cost AC

4 What was the job supposed to cost? Budget at Completion BAC

5 What is the total job now expected to cost? Estimate at Completion EAC

7/28/2019 02-05 Cost


Cost Control (EVM)

Schedule Variance (SV)

PV Of the work I planned to have done,how much did I budget for it to cost

EV Of the work I actually earned,

how much did I budget for it to cost?

SCHEDULE VARIANCE is the difference between workplanned and work performed (expressed in terms of budget dollars)

Formula: SV $ = EV - PV

example: SV = EV - PV = $1,000 - $2,000SV= -$1,000 (negative = behind schedule)


7/28/2019 02-05 Cost


Cost Variance (CV)

EV Of the work I actually earned,how much did I budget for it to cost?

AC Of the work I actually performed,

how much did it actually cost?

COST VARIANCE is the difference between

earned valueand actual cost

formula: CV $ = EV - AC

example: CV = EV - AC = $1,000 - $2,400CV= -$1,400 (negative = cost overrun)


Cost Control (EVM)

7/28/2019 02-05 Cost


Cost Control (EVM)

Variance at Completion (VAC)

BAC what the total job is supposed to cost

EAC what the total job is expected to cost

VARIANCE AT COMPLETION is the difference between what

the total job is supposed to cost and what the total job is nowexpected to cost.

FORMULA: VAC = BAC - EAC

Example: VAC = $6,000 - $8,000VAC = - $2,000 (negative = overrun)


7/28/2019 02-05 Cost



Cost Control (EVM)

Integrated Performance Indices

Efficiency Factors:

Schedule Performance Index (SPI)Efficiency of work accomplished vs. plan

Earned Value (EV)Planned Value (PV)

Cost Performance Index (CPI)Efficiency of work accomplished vs. actual cost

Earned Value (EV)Actual Cost (AC)

To Complete Performance Index (TCPI)Efficiency required for remaining work to meet currentEAC

Work Remaining (BAC-EV)Estimate to Complete (EAC-AC)

Percent Complete

Earned Value (EV)

Budget at Completion (BAC)

7/28/2019 02-05 Cost


Everyone thought there was sufficient budget. Three monthsinto the project, the CPI is 0.6. In determining the rootcause, it was discovered that the project budget wasdeveloped analogously. Activity estimates add up to theproject estimate. How could this have been prevented?

Cost Question #9

A. Use estimated costs to calculate CPI

B. Take past history into account when estimating

C. Perform bottom up estimating

D. Calculate SPI


7/28/2019 02-05 Cost


A trend report was given to the project manager, whoreacted to the report by investigating what activity oractivities had not been done to date. What did the reportshow?

Cost Question #10

A. The cost performance index (CPI) was 0.7 and the scheduleperformance index (SPI) was 1.3

B. Actual cost was below planned and schedule progress wasless than planned.

C. Budget at Completion (BAC) was higher than planned.

D. SPI was 1.3 and the estimate at completion (EAC) wasgreater than planned.


7/28/2019 02-05 Cost


Performance Indices

1.0

.9

1.1

“ G O O D

”

“ B A D ”

1.2

.8

COST PERF INDEX (CPI) = EVAC

SCHED PERF INDEX (SPI) = EVPV

CPI

SPI

TIME


Cost Control (EVM)

7/28/2019 02-05 Cost


Status?

● Given:

Total budget = $100,000

10 month project

produce 50 widgets

● Status:

spent to date: $45,000

time elapsed: 4 months

widgets produced: 15● How are you doing, and how do you know how you are

doing?


Cost Control (EVM)

7/28/2019 02-05 Cost


• BAC = $100,000

• PV = 4 mos. * $10,000 = $40,000

• % Complete = 15 widgets/50 widgets = 30%

• Therefore, EV = $30,000

• AC = $45,000

• Schedule Variance = $30,000 - $40,000 = -$10,000

• Cost Variance = $30,000 - $45,000 = -$15,000


Cost Control (EVM)

7/28/2019 02-05 Cost


SPI = $30,000/$40,000 = .75 < 1 = Bad

CPI = $30,000/$45,000 = .67 < 1 = Bad

Calculate EACBAC $100,000 Total work scheduled

CPI .67 Efficiency $149,254 = ==


Cost Control (EVM)

7/28/2019 02-05 Cost


RMC Notes

• Can expect about 12 EV questions;on average, 6 will require a calculation.

• Can expect 5 questions that deal with accounting standards

• As smaller components of work packages are generated,

activity levels are cost estimated.

• In a larger project, costs might be estimated and controlledat the control account. (Ref. Diagram P. 205 RMC)


7/28/2019 02-05 Cost


The project began on January 1 of the current year. It is now theend of October, and the project manager has asked forperformance data from her Earned Value Management staff. Shewas told that the project has a cumulative Planned Value of $240,000, actual costs are $290,000 and the total earned value, so

far, is $250,000. The 1 year project was expected to cost$300,000 when it was initiated.The cost variance for the project is:

EVM Question #1

A. Negative $10,000

B. Positive $10,000

C. Negative $40,000

D. Positive $50,000


7/28/2019 02-05 Cost


EVM Question #2

A. Negative $10,000

B. Positive $10,000

C. Positive $60,000

D. Negative $50,000



far, is $250,000. The 1 year project was expected to cost$300,000 when it was initiated.The schedule variance for the project is:

7/28/2019 02-05 Cost


EVM Question #3

A. Negative $10,000

B. $250,000

C. $300,000

D. The BAC cannot be determined with the given information



far, is $250,000. The 1 year project was expected to cost$300,000 when it was initiated.The Budget at Completion (BAC) for the project is:

7/28/2019 02-05 Cost


The project began on January 1 of the current year. It is now the end of October, and the project manager has asked for performance data from herEarned Value Management staff. She was told that the project has acumulative Planned Value of $240,000, actual costs are $290,000 and thetotal earned value, so far, is $250,000. The 1 year project was expected tocost $300,000 when it was initiated. The PM will be required to give an

assessment of the performance of this project to the stakeholders next week.Based upon the above information, what will she tell them?

EVM Question #4

A. Since the project is currently behind schedule, it looks like it willfinish over budget.

B. The project is complete, and it finished two months early and under

budget.C. The project is running over budget and ahead of schedule

D. The PM will request additional resources to make up the schedulevariance.


7/28/2019 02-05 Cost


The Planned Value for a software development project is $25K permonth. The project is expected to last for 15 months. What is theBudget at Completion?

EVM Question #5

A. $150K

B. $250K

C. $375K

D. Cannot be determined


7/28/2019 02-05 Cost


The cumulative planned value for the project is $35,000 with atotal budget of $100,000. The project is 30% complete and 40%spent. A new bottoms-up estimate of $120,000 has just beencompleted. The EAC for the project is:

EVM Question #6

A. $120,000

B. $80,000

C. $85,000

D. $90,000


7/28/2019 02-05 Cost


The cumulative planned value for the project is $35,000 witha total budget of $100,000. The project is 30% complete and40% spent. A new bottoms-up estimate of $120,000 has justbeen completed. The project is:

EVM Question #7

A. On schedule, but over budget

B. Behind schedule, and over budget

C. Behind schedule, but on budget

D. Ahead of schedule, and under budget


7/28/2019 02-05 Cost


The cumulative planned value for the project is $35,000 witha total budget of $100,000. The project is 30% complete and40% spent. A new bottoms-up estimate of $120,000 has justbeen completed. The project is expected to show a VAC of:

EVM Question #8

A. -$20,000

B. +$30,000

C. $80,000

D. Not enough data to determine


7/28/2019 02-05 Cost


The cumulative planned value for the project is $35,000 with a totalBudget of $100,000. The project is 30% complete and 40% spent.A new bottoms up estimate of $120,000 has just been completed.The Cost Variance is:

EVM Question #9

A. Negative $20,000

B. Positive $10,000

C. Negative $5,000

D. Negative $10,000


7/28/2019 02-05 Cost


A control account manager is responsible for building the exhaust manifoldfor a reverse thruster widget. His total budget is made up of three parts, APart A is estimated to take 200 hours. Part B is estimated to take 150hours, and Part C is estimated to take 40 hours. He is 20% complete onPart A, 30% complete on Part B and 50% complete on Part C. What is histotal BAC?

EVM Question #10

A. 105 hours

B. 390 hours

C. 200 hours

D. Not enough data to determine


7/28/2019 02-05 Cost


For additional information contact:

[email protected]

or your PMP Prep coach

P11 PMP Prep Program


7/28/2019 02-05 Cost


Cost Management Answer Key

# Answer Reference

1 C Inadequate scope definition is the BEST choice. Other choices makeestimating difficult. Lack of scope definition make it impossible.

Mulcahy 5th Edition, Pg. 199

2 A The higher the BCR, the better. Note, lowest BCR can be used to identifyprojects to be terminated.

Mulcahy 5th Edition, Pgs.215-216

3 C <1 BCR is bad. Project C is worst. Mulcahy 5th Edition, Pgs.214-215

4 B Contingency Reserve is included in cost baseline, Management Reserve is not. Mulcahy 5th Edition, Pg. 205

5 D Question asks how to control costs, not estimating. Checking against baselineis the important part.


6 D These are directly attributable to project or vary with amount of work. Mulcahy 5th Edition, Pg. 201

7 D Sunk costs are never considered when deciding whether to continue with atroubled project.


8 C Opportunity Cost. Mulcahy 5th

Edition, Pg. 216

9 C Scope less likely to be missed with bottom up estimation. Mulcahy 5th Edition, Pg. 203

10 B Indicates that work has not been accomplished. All others indicated costproblems.


7/28/2019 02-05 Cost


Earned Value Management Answer Key

# Answer Reference

1 C EV $250,000 – AC $290,000 = CV -$40,000 Mulcahy 5th Edition, Pg. 206-208

2 B EV $250,000 – PV $240,000 = SV +$10,000 Mulcahy 5th Edition, Pg. 206-208

3 C BAC = Total expected cost of the project at completion Mulcahy 5th Edition, Pg. 206-208

4 C Positive schedule variance ($10,000) and negative cost Variance (-$40,000) Mulcahy 5th

Edition, Pg. 206-208

5 C $25K * 15 months = $375K Mulcahy 5th Edition, Pg. 206-208

6 A A new estimate now constitutes your EAC Mulcahy 5th Edition, Pg. 206-208

7 B Negative schedule variance and negative cost variance. Mulcahy 5th Edition, Pg. 206-208

8 A BAC $100,000 – EAC $120,000 = VAC -$20,000 Mulcahy 5th Edition, Pg. 206-208

9 D EV $30,000 – AC $40,000 = CV -$10,000 Mulcahy 5th Edition, Pg. 206-208

10 B The sum of the budgets for parts A, B and C. No additional informationrequired.

Mulcahy 5th Edition, Pg. 206-208

02-05 Cost

Documents

Transcript of 02-05 Cost