Project Cost Management

Sections of this presentation were adapted from A Guide to the Project Management Body of Knowledge 5th Edition, Project Management Institute Inc., © 2013

Project Cost Management

“The processes involved in planning, estimating, budgeting, and controlling costs so that the budget can be completed within the approved budget”

Why to Manage Cost?Part of triple constraint, can’t manage one without the others (scope, time, and quality) Plots of cost and scope against plan can help spot problems early

Cumulative Value

Time

Planned Value (PV)

Actual Costs (AC)

Earned Value (EV)

Today

Cost Management Key Terms

PV - Planned Value, estimated value of the planned workEV – Earned Value, estimated value of work doneAC – Actual Cost, what you paidBAC – Budget at Completion, the budget for the total jobEAC –Estimate at Completion, what is the total job expected to cost?ETC – Estimate to Complete, forecasted costs to complete jobVAC – Variance at Completion, how much over/under budget do we expect to be?

How to Manage Cost?Three processes1. Estimate Costs2. Determine Budget3. Control Costs

Estimate

Costs

Determine Budget

Control

Costs

Estimate CostsEnterprise Environmental Factors

Organizational Process Assets

Project Scope Statement

Analogous estimating

Determine resource cost rates

Bottom up estimating

Parametric estimating

Project management software

Vendor bid analysis

Reserve analysis

Cost of quality

Inputs

Outputs

Tools & Techniques

Work Breakdown Structure

WBS Dictionary

Project Management Plan• Schedule Mgmnt

Pln

• Staffing Mgmnt Pln

• Risk Register

Activity Cost Estimates

Activity Cost Estimates Supporting Detail

Requested Changes

Cost Management Plan Updates

Estimate

Costs

Determine Budget

Control

Costs

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:

– Regression analysis – based on analysis of multiple data points

– Learning Curve – The first unit costs more than the 100th, forecasts efficiency gains

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]

Determine Budget

Project Scope Statement Cost aggregation

Reserve analysis

Parametric estimating

Funding limit reconciliationInputs

OutputsTools & Techniques

Cost Baseline

Project Funding Requirements

Cost Management Plan Updates

Requested Changes

Work Breakdown Structure

WBS Dictionary

Activity Cost Estimates

Activity Cost Estimates Supporting Detail

Project Schedule

Resource Calendars

Contract

Cost Management Plan

Estimate

Costs

Determine Budget

Control

Costs

Determine Budget

Budgeting is allocating costs to work packages to establish a cost baseline to measure project performanceRemember 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

Control Costs

Cost Baseline

Project Funding Requirements

Performance Reports

Cost change control system

Performance measurement analysis

Forecasting

Project performance reviews

Project management software

Variance management

Inputs OutputsTools & Techniques

Work Performance Information

Approved Change Requests

Project Management Plan

Cost Estimate Updates

Cost Baseline UpdatesPerformance Measurements

Forecasted Completion

Requested Changes

Recommended Corrective Actions

Organizational Process Assets Updates

Project Management Plan Updates

Estimate

Costs

Determine Budget

Control

Costs

The Earned Value Chart

One way of measuring overall performance is by using an aggregate performance measure called earned value

The basic definition of earned value management (EVM) is that the value of a piece of work is equal to the amount of funds budgeted to complete it.

The Earned Value Chart

The earned value of work performed (value completed) for those tasks in progress is found by multiplying the estimated percent completion for each task by the planned cost for that task

The result is the amount that should have been spent on the task so far

The concept of earned value combines cost reporting and aggregate performance reporting into one comprehensive chart

Earned Value Chart

Progress is compared against the baseline to determine whether project is ahead of or behind planPercent 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

The Earned Value ChartGraph to evaluate cost and performance to date

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The Earned Value Chart

Variances on the earned value chart follow two primary guidelines:• 1. A negative is means there is a deviation from plan— not good!• 2. The cost variances are calculated as the earned value

minus some other measure

EV - Earned Value: budgeted cost of work performedAC - Actual cost of work performedPV - Planned Value: budgeted cost of work scheduledST - scheduled time for work performedAT - actual time of work performed

The Earned Value Chart

EV - AC = cost variance (CV, overrun is negative)

EV - PV = schedule variance (SV, late is negative)

ST - AT = time variance (TV, delay is negative)

If the earned value chart shows a cost overrun or performance underrun, the project manager must figure out what to do to get the system back on targetOptions may include borrowing resources, or holding a meeting of project team members to suggest solutions, or notifying the client that the project may be late or over budget

Schedule and cost variances and performance indicators

Schedule and cost variances and performance indicators are defined mathematically as follows: Schedule variance (SV) = Earned value (EV) – Planned

value (PV) Cost variance (CV) = Earned value (EV) – Actual cost (AC) Time Variance (TV, delay is negative): scheduled time (ST) -

Actual Time ( AT) Schedule performance index (SPI) = Earned value (EV) /

Planned value (PV) Cost performance index (CPI) = Earned value (EV) / Actual

cost (AC)

If the earned value chart shows a cost overrun or performance underrun, the project manager must figure out what to do to get the system back on target

Options may include borrowing resources, or holding a meeting of project team members to suggest solutions, or notifying the client that the project may be late or over budget

Assessing Task Performance

The final step when assessing task performance to date is to update what you expect your total expenditures will be upon task completion. Specifically, you want to determine the following:

Estimate at completion (EAC): Your estimate today of the total cost of the task

Estimate to complete (ETC): Your estimate of the amount of funds required to complete all work still remaining to be done on the task

EAC Calculation: Method 1

Assume that the cost performance for the remainder of the task will revert to what was originally budgeted.EAC = Approved budget for the entire task – Cost variance for the work done to date on the task       = Budget at completion (BAC) + Actual cost (AC) – Earned value (EV)

EAC Calculation: Method 2

Assume that the cost performance for the remainder of the task will be the same as what it has been for the work done to date.EAC = Budget at completion (BAC) / Cumulative cost performance index (CPI)

ETC Calculation

Whether you use Method 1 or Method 2 to calculate EAC, ETC is determined as follows:ETC = Budget at completion (BAC) – Actual costs to date (AC)

Example Question

Planned $1800 to complete work package.Scheduled to have been finished today.Actual expenditure to date is $1470.Estimate work is 2/3 complete.What are cost and schedule variances?

Cost variance

Cost variance = EV – AC= $1800(2/3) - $1470= $1200 - $1470= -$270

Schedule variance

Schedule variance = EV – PV= $1800(2/3) -

$1800= -$500

SPI (schedule performance index)

SPI = EV/PV= ($1800(2/3))/$1800= $1200/$1800= 0.67

CPI (cost performance index)

CPI = EV/AC=($1800/(2/3) / $1470)= 1200/1350= 0.82

ETC and EAC

Estimate to complete = (BAC-EV)/CPI=(1800-1200)/.82= $732

Estimate at completion = ETC + AC= $732+ $1470 = $2202

Notice

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

PV

AC ETCEAC

BACProject Start

Current Status