PMP CH.6

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GU, PMP Preparatory Course, MODULE 6

MODULE 6Project Cost Management

Module Content:Hot TopicsCost RiskInputs to estimating

Resource planningCost management planCost estimatingProgram reportingEarned value

Accuracy of estimatesAccuracy standardsProject selection methodsTypes of costsDepreciation

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Cost Management (PMBOK Chapter 7)

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Tips

You should realize :Estimating should be based on a WBS to improveaccuracy.Estimating should be done by the person doingthe work.Historical information is a key to improvingestimates.Costs (and time, scope and resources) should be

managed to estimates.A cost (and time, scope and resource) baselineshould be kept and not changed except forapproved project changes.

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Tips(continued)

Plans should be revised, as necessary, duringcompletion of the work.Corrective action should be taken when costproblems (and time, scope and resourceproblems) occur.A project manager should never just accepttime or cost requirements from management,

but rather analyze the needs of the project,come up with his own estimate and reconcileany differences.

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COST RISK

Sometimes a question on the exam willcross boundaries between risk,procurement and cost. Cost risk is best

explained with an example question:

"Who has the cost risk in a fixed pricecontract, the buyer or the seller?"

The answer is the seller.

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INPUTS TO ESTIMATING

you need the following before you begin estimating:

WBS

Network diagram - Costs cannot be estimated untilit is known how the project will flow frombeginning to end.

Schedule - For multi-year projects, the cost of atask is usually different if it is completed in oneyear compared to another.NOTE: This refers to an overall schedule, not a detailed one.The detailed schedule is created after estimating.

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INPUTS TO ESTIMATING

Historical information

Resource pool - An understanding of the availableresources or the resources assigned.

Risk management plan - because it includes abudget for risk.

Risks - An understanding of any risk uncovered todate. Remember, a full risk analysis of the detailsof the project will not have been completed beforecosts are estimated.

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RESOURCE PLANNING (page 85)

The management of resources is asimportant as managing cost, time, qualityand scope.

Resources must be planned andcoordinated in order to avoid commonproblems such as lack of resources andresources being taken away from theproject.

Resource planning may be a moreextensive activity than you do on yourprojects.

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What activities are involved in resourceplanning?

Review WBSIdentify potentially available resourcesReview historical information about the use of

resources on past or similar projectsReview organizational policies on resource useSolicit expert judgment on what resources areneeded and available

Quantify resource requirement by taskDevelop a plan as to what types of resources areneeded, in what numbers, when

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COST MANAGEMENT PLAN (page 89)

Once costs are estimated, the projectmanager can and must put in place a plan foreffectively managing the project to the costbaseline and manage cost variances.This plan is similar to other managementplans (a PMIdD-ism).

The cost management plan can be formal orinformal,but is part of the project plan.

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11GU, PMP Preparatory Course, MODULE 6

COST ESTIMATING (page 86)

ANALOGOUS ESTIMATING (Top-Down, page 88) - Top ormiddle managers use expert judgment or the actualtime and cost of a previous, similar project as the basisfor estimating the current project. Analogous estimatingis a form of expert judgment.

BOTTOM-UP ESTIMATING (page 88) - With thistechnique, the people doing the work create cost andschedule estimates. Estimates, based on the WBS, arerolled up to get a project total.

PARAMETRIC ESTIMATING - Uses a mathematicalmodel to predict project costs. For example, cost perline of code, cost per linear meter or cost perinstallation.

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Advantages & Disadvantagesof Analogous Estimating and Bottom-Up Estimating

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PROGRESS REPORTING(page 122)

50/50 RULE A task is considered 50% complete when it beginsand gets credit for the last 50% only when it iscompleted. 20/80 RULE A task is considered 20% complete when it beginsand gets credit for the last 80% only when it iscompleted. 0/100 RULE A task does not get credit for partial completion,

only full completion

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EARNED VALUE ANALYSIS (page 123

EVA is a method to measure scope, timeand project performance... Here is whatyou need to know.

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EARNED VALUE ANALYSIS Formulas and Interpretations to Memorize

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TRICKS

Make sure you understand and MEMORIZE thefollowing:

1. Notice that EV comes first in every formula. Remembering

this one fact alone should help you get about half the earnedvalue questions right. (Aren't you glad you purchased thisbook?)

2. If it is a variance, the formula is EV minus something.

3. If it is an index, it is EV divided by something.

4. If the formula relates to cost, use AC.

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Tricks(Continued)

5. If the formula relates to schedule, use PV.

6. For interpretation: negative is bad andpositive is good. Thus a -200 costvariance means that you are behind(over) budget.

7. For interpretation: greater than one isgood, less than one is bad.

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Tricks(Continued)

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Old and New Acronym

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Exercises 1

CPI and SPI can becharted each month toshow the project

trends. Based on thefollowing, what wouldyou be more concernedabout, cost or schedule,if you were taking overthis project fromanother projectmanager?

Answer: The answer isschedule. As of today,SPI is closest to 1.

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Exercises 2

You have a project to build anew fence. The fence is foursided.Each side is to take one dayto build and is budgeted forUS $1,000 per side. . Thesides are planned to becompleted one after theother. Today is the end of daythree. Using the projectstatus chart, calculate EV ,

etc. When completed, checkyour answers on the answersheet on the following page.Interpretation is alsoimportant on the exam. Canyou interpret what eachanswer means?

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Answer to Exercise 2

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ACCURACY OF ESTIMATES

The three levels of estimating accuracy youmust MEMORIZE for the exam are:

1. ORDER OF MAGNITUDE ESTIMATE - This type of estimate is usually made during the initiating phaseand is in the range of-25% to +75% from actual.

2. BUDGET ESTIMATE - This type of estimate is usuallymade during the planning phase and is in the range of-10% to +25% from actual.

3. DEFINITIVE ESTIMATE - This type of estimate is alsomade during the planning phase and is in the range of-5% to +10% from actual.

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ACCOUNTING STANDARDS I

PRESENT VALUE: Present value means thevalue today of future cash flows and can befound by the formula:

NET PRESENT VALUE (NPV) This means the present value of the total benefits

(income or revenue) less the costs

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ACCOUNTING STANDARDS II

INTERNAL RATE OF RETURN (IRR ): The rate (read it as interest rate) at

which the project inflows (revenues) andproject outflows (costs) are equal.

PAYBACK PERIOD: The number of time periods it takes torecover your investment in the projectbefore you start accumulating profit

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ACCOUNTING STANDARDSIII

BENEFIT COST RATIO (BCR):

A BCR of>l means the benefits aregreater than the costs. A BCR of

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Exercise

For each row on the following chart, enter theletter of the project you would select if thefollowing information were provided.

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ACCOUNTING STANDARDSIV

SUNK COSTS : Expended costs .

LAW OF DIMINISHING RETURNS: The more you

put into something, the less you get out of it. Forexample, adding twice as many resources to a taskmay not get the task done in half the time.

WORKING CAPITAL: Current assets minuscurrent liabilities, or the amount of money thecompany has to invest, including investment inprojects.

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PROJECT SELECTION METHODS

Present Value

Net PresentValue

Internal Rate of Return

Payback Period

Benefit CostRatio

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TYPES OF COST

A cost can be either variable or fixed

VARIABLE COST - Any cost thatchanges with the amount of production or the amount of work.Examples include the cost of material,supplies and wages.

FIXED COST - Costs that do notchange as production changes.Examples include set up, rental, etc.

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TYPES OF COST

A cost can be either direct or indirect:

DIRECT COST - Costs that are directly

attributable to the work on the project.Examples are team travel, team wages,recognition and costs of material used on theproject.

INDIRECT COST - Overhead items or costsincurred for the benefit of more than oneproject. Examples include taxes, fringe benefitsand janitorial services.

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DEPRECIATION

Large assets (e.g., equipment) lose value over time. Accountingstandards call this depreciation. Several methods are used toaccount for depreciation

There are two forms of depreciation:

1. STRAIGHT LINE DEPRECIATION - The same amount of depreciation is taken each year

2. ACCELERATED DEPRECIATION There are two forms of accelerated depreciation..

Double Declining BalanceSum of the Years Digits

Accelerated depreciation depreciates faster than straightline.

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New Concepts

LIFE CYCLE COSTING : The project we are working on has a life afterit is completed.

Project manager and the company want theproject costs to be as low as possible.However, if the project manager does notconsider the life cycle costs, project costs

may be low at the expense of greater overallcosts for the rest of the life of the project.For example the operations and maintenancephase.

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New Concepts

VALUE ANALYSIS: (Sometimes referred to as valueengineering in the real world.)

Find a less costly way to do the same scope of work.It requires the systematic use of techniques to identifythe required project functions, assign values to thesefunctions and provide functions at the lowest overallcost without loss of performance.If a team or someone else is looking at decreasingproject cost but maintaining the same scope of work,they are performing value analysis.

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Practice for theCAPM and PMP Exams

Project Cost Management

PMP CH.6

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Transcript of PMP CH.6