project Cost management

Project Cost Management

Prepared by Presented by: Engr. Mohamed Eid , PMP® Engr. Tarek Khairy , PMP®

Project Cost Management

Cost management describing the required

processes to Estimate, build up the budget,

control the costs so that the project can be

completed through the required budget


Definitions

What is whole of life cost?

is a means of comparing options and their associated

Cost and income streams over a period of time. Costs to be

taken into account include both initial capital or procurement

costs, opportunity costs and future costs.

Don’t pay less for lower quality then pay more for maintenance.


On some projects, especially those of smaller scope, cost estimating and cost budgeting are

tightly linked

and can be viewed as a single process that can be performed by a single person over a

relatively short period of time.

These are presented here as distinct processes because the tools and techniques for each

are different.

The ability to influence cost is greatest at the early stages of the project, making early scope

definition critical


Direct vs. Indirect Cost

Direct Cost: Directly attributable to project work.

Indirect cost: Such as overhead, benefits, and costs incurred

for more than project like equipments.

Fixed vs. Variable Cost

Fixed cost: Costs that are not changed with production such as setup cost and rental cost

Variable cost: Costs that are changed with production such as material and labors.


Now you need to think first about your plan

1-How you will work to finalize this issue

2-Who will be involved 3-What tool could we need

4-What Process could we follow 5-Do I need to refer to lesson Learned

Many questions will be in mind you need

to answer it


Plan Cost Management is the process that establishes the policies, procedures, and

documentation for planning , managing, expending, and controlling project costs. The key benefit

of this process is that it provides guidance and direction on how the project costs will be managed

throughout the project.


.


Analytical Techniques

Developing the cost management plan may involve choosing strategic options to

fund the project such as:

self-funding, funding with equity, or funding with debt. The cost management plan

may also detail ways to finance project resources such as making, purchasing,

renting, or leasing. These decisions, like other financial decisions affecting the

project, may affect project schedule and/or risks.

Scheduling Management Plan:

It’s a component of the project management plan and shows how you are going to

develop, monitor, and control the cost.

It can establish the following:

Units of measure, Level of precision, Level of accuracy, Organizational procedures

links, Control thresholds, Rules of performance measurement, Reporting formats,

Process descriptions .


NOW Prepare to estimate

Prepared by Presented by: Engr. Mohamed Eid , PMP® Engr. Mohamed Abdulhaq , PMP®

Estimate Costs is the process of developing an approximation of the monetary resources needed to

complete project activities. The key benefit of this process is that it determines the amount of cost required to

complete project work.

Cost estimates are a prediction that is based on the information known at a given point in time. Cost estimates

include the identification and consideration of costing alternatives to initiate and complete the project. Cost

tradeoffs and risks should be considered, such as make versus buy, buy versus lease, and the sharing of

resources in order to achieve optimal costs for the project.

Estimate Costs


Project Management Software

The software referred to here might be any software used for estimating. If a project has

hundreds or thousands of activities, each of which has similar cost components added

like overhead, software can significantly speed up the calculations.

Reserve Analysis

.This involves identifying which activities on the project have significant risks and determining how

much time and money to set aside to account

for the risks if they occur.

contingency reserves are used for known risks, which are specifically identified risks.

management reserve is used to accommodate unknown risks, or unidentified risks.

Prepared by Presented by:

Engr. Mohamed Eid , PMP® Engr. Tarek Khairy , PMP®

Cost of Quality:

• All costs incurred in preventing nonconformance, apprising, or rework.

This will be discussed later in Quality Management.

Vendor Bid Analysis:

• Analysis of cost estimate based on

responsive bids from qualified vendors.



Cost Estimates:Costs are estimated for all resources such as:

• Direct Cost (Labor, materials, equipment, services, facilities, IT)

• Cost of financing (interest), inflation allowance, exchange rates.

• Contingency reserve.,Insurance fees.

• Taxes,Overhead (Site overhead and main office)

Rough Order of Magnitude (ROM) Estimate This type of estimate is usually made

during project initiating. A typical range for ROM estimates is -25 to +75 percent from

actual, but this range can vary depending on how much is known about the project when creating

the estimates.

• Budget Estimate This type of estimate is usually made during project planning and is in the

range of -10 to+25 percent from actual.

• Definitive Estimate As the project progresses, the estimate will become more refined. Some

project managers use the range of + / -10 percent from actual, while others use -5 to + 10 percent

from actual.



BASIC OF ESTIMATE



BASIC OF ESTIMATE

Supporting documentation which provides understanding of how the cost estimate

was derived.

This may includes:

Assumptions.

Constraints.

Ranges of accuracy (ex: 5%).

Confidence level of the final cost estimate.



Determine Budget is the process of aggregating the estimated costs of individual activities or work

packages to establish an authorized cost baseline. The key benefit of this process is that it

determines the cost baseline against which project performance can be monitored and controlled.



Cost Aggregation :

• Cost Estimates are aggregated within activities and rolled up to work package then rolled up to control accounts then rolled up

to entire project.



Reserve Analysis :

1. Contingency Reserve : Allowances for unplanned changes result from identified risks.

2. Management Reserve : Budgets reserved for unplanned changes to scope and cost.

Historical Relationships:

Historical Relationships involve the use of project characteristics (parameters) to develop mathematical

models to predict total project costs.

This results in parametric estimates or analogous estimates.



Funding limit reconciliation

addresses the variance between funding limit and the planned expenditures for the project. This will occasionally

require the rescheduling of work to level out the rate of expenditure.

Example : Project Funds will be available on two batches :

$30 millions today and $25 millions after 6 months



Determine Budget: Outputs

Cost Baseline

The cost baseline is the approved version of the time-phased project budget, excluding any management

reserves, which can only be changed through formal change control procedures and is used as a basis for

comparison to actual results.



Project Funding Requirements :

• It can be derived from cost baseline. Funding often occurs in incremental amounts.



Control Costs is the process of monitoring the status of the project to update the project costs and managing

changes to the cost baseline. The key benefit of this process is that it provides the means to recognize variance

from the plan in order to take corrective action and minimize risk



PV - used to be called BCWS (budgeted cost of the work scheduled)

EV - used to be called BCWP (budgeted cost of the work performed)

AC - used to be called ACWP ( actual cost of the work performed)



PV (planned value) is a schedule

reference. It refers to how much

money you were planning to

spend on a project at some point

in the project schedule.

BAC (budget at completion)

refers to how much you planned

to spend for the entire project.

This is an output of the planning

phase.

Earned value. Earned value (EV)

is a measure of work performed

expressed in terms of the budget

authorized for that work. It is the

budget associated with the

authorized work that has been

completed.

Schedule Variance (SV) = EV – PV Cost Variance (CV) = EV – AC

Schedule Performance Index (SPI) = EV / PV Cost Performance Index (CPI) = EV / AC



Behind Schedule SV < 0

On Schedule SV = 0

Ahead of Schedule SV > 0

Over Budget CV < 0

On Budget CV = 0

Under Budget CV > 0

Behind Schedule SPI < 1

On Schedule SPI = 1

Ahead of Schedule SPI > 1

Over Budget CPI < 1

On Budget CPI = 1

Under Budget CPI > 1



Key:

1 – Use if a new estimate was

required (the original was flawed)

2 – Use if spending will continue at

the budgeted rate: no BAC

variance

3 – Use if current variances are

typical of the future

(current CPI will continue)

4 – Use if sub-standard cost and

schedule performance will

continue, impacting the ETC

TCPI

to-complete performance index (TCPI) is calculated for projection of cost performance that must

be achieved on the remaining work to meet a specified management goal, such as the BAC or EAC. If it becomes obvious that the

BAC is no longer viable, project manager develops a forecasted estimate at completion. Once approved, the EAC effectively

supersedes the BAC as the cost performance goal.

• The equation for the TCPI based on the BAC: (BAC-EV)/ (BAC-AC)

• The equation for the TCPI based on the EAC: (BAC-EV)/ (EAC-AC)

• If TCPI is < 1, work remaining is less than the funds needed to accomplish the work.

• If TCPI is > 1, work remaining is more than the funds needed to accomplish the work.

• Ex :

BAC = 600,000.00 , EV = 200,000.00, AC= 250,000.00

TCPI = (400,000.00 ) / (350,000.00) = 1.14



Level of Effort (LOE)

An activity that does not produce definitive end products and is

measured by the passage of time.

Note: Level of effort is one of three earned valued management

(EVM) types of activities used to measure work performance.

Performance Reviews and Variance Analysis

Performance reviews are used to compare actuals to the plan. As such, they compare cost performance

and schedule performance to their respective baselines and use variance analysis, trend analysis and

earned value to compare actual performance to the plan.

The variance analysis is a key tool used to track any cost or schedule actual and compare it to the

baseline.



project Cost management

Education

Transcript of project Cost management