Yarmouk University Hijjawi Faculty For Engineering Tech Project Management and Quality Control Fall...

Yarmouk University Hijjawi Faculty For Engineering

Tech

Project Management and Quality Control

Fall 2014

1

COST ANALYSIS

Lecture05

2

Overview

Cost BudgetingPreparing a financial plan for every major

expense category, such as administrative cost, financing cost, production cost.

2Lecture05 Mwaffaq Otoom & Mohammad Al Bataineh

Cost Escalation

Cost Escalation: The amount by which actual costs increase to overrun the initial estimated costs.

Reasons for Cost Escalations:Uncertainty and lack of accurate informationChanges in design or requirementsEconomic and social variables in the

environmentWork inefficiency, poor communication, and

lack of controlEgo involvement of the estimatorKind of project contract Bias and Ambition


Cost Estimating and the Systems Development Life

Cycle

4Time Lecture05 Mwaffaq Otoom

System Life Cycle CostsLife Cycle Costs (LCC)

Are all costs of a system throughout its full cradle-to-grave life cycle.

Purpose of Life Cycle Cost Analysis: To anticipate the realities of

operating, maintaining, and (ultimately) disposing of the end-item system

To establish target costs for operating, maintaining, and disposing of the end-item system.

To design the system so it will meet those target costs.

5Mwaffaq OtoomLecture 05

Estimating ProcessEstimate versus Target or Goal• Estimate: a realistic assessment based

upon known facts about the work, required resources, constraints, and the environment, derived from estimating methods

• Target or goal: a desired outcome, commitment, or promise.

• Don’t confuse estimates with goals. The estimating process is directed at producing good estimates, not restating targets or goals.

6Lecture05 Mwaffaq OtoomLecture 05

Estimating ProcessAccuracy versus Precision• Accuracy: the closeness of the estimated

value to the actual value

• Precision: the number of decimal places in the estimate.

• Accuracy of estimates is more important than precision


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Cost Estimating ProcessEstimated costs are determined using four

basic techniques: 1) Expert opinion

• An expert provides a reasonable cost estimate due to breadth of experience and expertise.

2) Analogy Estimate• developed by reviewing costs from previous,

similar projects.• Adjustments are made due to differences between

the proposed project and those similar projects.

3) Parametric Estimate• Derived from an empirical or mathematical

relationship.• Parametric: Formula or Cost Function, see the

following example

Lecture05 Mwaffaq Otoom & Mohammad Al Bataineh

Cost Estimating Process

Cost, cabling = 150 (total area + 10%) + 300 (number of

rooms) + 125 (number of floors)

4) Cost Engineering• refers to detailed cost analysis of

individual cost categories at the work package or task level.

• provides the most accurate estimate of all the methods.

• is the most time-consuming, requiring considerable work-definition detail and design information—both of which might not be available until later in the project.


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10Lecture05

Cost Engineering Estimate for a Small Project

A, B, …, H: are eight work packages

1,2, and 3: are labor grades (labor classifications that indicates capabilities and sometimes associated pay ranges)

The numbers inside the boxes are the estimated number of labor hours per week

Mwaffaq Otoom & Mohammad Al Bataineh

Lecture 05

11Lecture05

Cost Engineering Estimate for a Small Project (Cont’d)

For each work package Table 9-1 shows estimates the cost of material, equipment and supplies, subcontracting, and other nonlabor expenses such as freight charges and travel.Mwaffaq Otoom & Mohammad Al

Bataineh

Lecture 05


Any of the previous methods for cost estimating can be used in any area of project.

Parametric and cost engineering methods are the best

Rule of Thumb: The smaller the work packages or portion

of the end-item estimated, the better the estimate


Cost Engineering Estimate for Larger Projects

Cost Estimating Process for larger projects include the following steps:

1. PM: Uses WBS to identify work packages

2. FM: Subdivide work packages into identifiable tasks; determine labor, material, facilities, and resources requirements for each

3. Supervisors/team leads: Estimate number of labor hours and quantities of materials needed

13Mwaffaq Otoom & Mohammad Al Bataineh

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14

Procedure for larger projects

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Functional Management

Work team

Project Management

WBS information

2.

3.

1.

Lecture 05

Cost Engineering Estimate for Larger Projects (Cont’d)

4. FM: check and aggregate time and material

estimates5. FM: convert time estimates into costs6. PM: checks over and approves all

estimates aggregates costs; added in overhead costs:

Project cost = ∑direct costs + ∑ overhead costs


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16


Work team

Project Management

WBS information 6.

4., 5.

Mohammad Al Bataineh

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7) The project manager adds contingency amounts to estimates to offset uncertainty. Base Estimate = Σ (WP Estimates + WP

Contingency) (to handle “known-unknowns”: are sources of cost

increases that experience indicates as possible or highly likely; they include scrap and waste, design changes, increases in the scope, size, or function of the end-item, and delays due to weather.

Final Cost Estimate = Base Estimate + Overheads + Project Contingency

(to handle “unknown unknowns”; PM controls this) “Unknown unknowns” are external factors that affect

project costs but cannot be pinpointed or estimated. Examples include fluctuation in exchange rates, shortages in resources, changes in the market or competitive environment.


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8) The project manager compares bottom-up estimates to top-down targets or goals. Attempt to reconcile differences.– Top-down refers to estimating the cost by looking at the

project as a whole. A top-down estimate is typically based upon an expert opinion or analogy to other, similar projects.

– Bottom-up refers to estimating costs by breaking the project down into elements—individual project work packages and end-item components cost.


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Estimation Process

19

WBS information



Work team

Project Management

WBS information

7., 8..

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20

Elements of Typical Budget

I.Direct Costs Direct Labor (DL) Charges for labor working directly on project 50,000.00

Direct Overhead on Labor (% of DL) E.g., 40% Labor support: benefits, etc.

20,000.00

Direct Nonlabor and Materials (M) Subcontractors, consultants, travel, telephone,

materials, purchased parts, etc.

10,000.00

Direct Overhead on Nonlabor and Materials (% of M)

Shipping, insurance, security, etc. E.g., 33.33%

3,333.33

Direct Total

83,333.33

II. General & Administrative (% of Direct Total) E.g., 20% (Indirect overhead) Corporate overhead: proposals, publicity, president, etc.

16,667.00

Budget Amount 100,000.00


Performance AnalysisThe Planned Value (PV)

• Planned Value (PV): is the approved value of the work to be completed in a given time period; i.e. it is the money that you should have spent as per the schedule.

• As per the PMBOK Guide “Planned Value (PV) is the authorized budget assigned to work to be accomplished for an activity or WBS component. Total planned value for the project is also known as Budget At Completion (BAC).”

• PV = (Planned % Complete) X (BAC)• Planned Value is also known as The Budgeted

Cost of Work Scheduled (BCWS).• PV or BCWS = Hourly Rate * Total Hours

Scheduled (Example: PV = ($100/hr * 8 hr) = $800)

21Mohammad Al Bataineh

Lecture 05

Example on PV

• You have a project to be completed in 12 months and the total cost of the project is $100,000. Six months have passed and the schedule says that 50% of the work should be completed. What is the Planned Value?

• Project duration – 12 monthsProject Cost (BAC) – $100,000Time elapsed – 6 monthsPercent complete – 50% (as per the schedule)

• The definition of Planned Value says that Planned Value is the value of the work that should have been completed so far (as per the schedule). Therefore, in this case we should have completed 50% of the total work. Hence,

• Planned Value = 50% of value of the total work = 50% of BAC

• = (50%) ($100,000)= $50,000.


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Performance AnalysisThe Earned Value (EV)

• The Earned Value (EV) is the value of the work actually completed to date; i.e. it is the value of the project that you have earned so far.

• As per the PMBOK Guide “Earned Value (EV) is the value of work performed expressed in terms of the approved budget assigned to that work for an activity or WBS Component.”

• Earned Value is also known as the Budgeted Cost of Work Performed (BCWP).

• EV or BCWP = Baselined Cost * % Complete Actual

(Example: EV = baseline of $800 * 91.7% complete= $734)

Note: (% Actual Complete = 11 hours spent /12 hours estimated to finish


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Example on EV

• You have a project to be completed in 12 months and the total cost of the project is $100,000. Six months have passed and $60,000 is spent, but on closer review you find that only 40% of the work is completed so far. What is the Earned Value (EV)?

• The definition of Earned Value says that it is the value of the project that has been earned. In this case only 40% of the work has been completed. Hence,

• Earned Value (EV) = 40% of value of total work = 40 % of BAC = (40%)($100,000) = (0.4)($100,000) = $40,000 24Mohammad Al

Bataineh

Lecture 05

Performance AnalysisThe Actual Cost (AC)

• The Actual Cost is the total cost incurred for the actual work completed to date; i.e. it is the amount of money you have spent till now.

• As per the PMBOK Guide “Actual Cost (AC) is the total cost actually incurred in accomplishing work performed for an activity or WBS component.”

• Actual Cost is also known as the Actual Cost of Work Performed (ACWP).

• AC or ACWP = Hourly Rate * Total Hours Spent (Example: AC = $100 * 11 hours= $1100 )


Lecture 05

Example on AC

• You have a project to be completed in 12 months and the total cost of the project is $100,000. Six months have passed and $60,000 is spent, but on closer review you find that only 40% of the work is completed so far.

• What is the Actual Cost (AC)?• Finding the Actual Cost (AC) is simplest of all. As

per the definition of Actual Cost, it is the amount of money that you have been spent so far. And in our question, you have spent $60,000 on the project so far. Hence,

Actual Cost is $60,000 26Mohammad Al Bataineh

Lecture 05

Earned Value Management(EVM)

27

EVM is a project management technique for measuring project performance and progress in an objective manner.

Because EVM has the ability to combine measurements of : Scope, Schedule and cost,

in a single integrated system, EVM is able to provide accurate forecasts of project performance problems, which is an important contribution for project management.


Lecture 05

Project Tracking Without EVM

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Figure 1 shows the cumulative budget (cost) for this project as a function of time (the blue line, labeled PV).

It also shows the cumulative actual cost of the project (red line) through week 8.

To those unfamiliar with EVM, it might appear that this project was over budget through week 4 and then under budget from week 6 through week 8. However, what is missing from this chart is any understanding of how much work has been accomplished during the project.

If the project were actually completed at week 8, then the project would actually be well under budget and well ahead of schedule.

If, on the other hand, the project is only 10% complete at week 8, the project is significantly over budget and behind schedule.

A method is needed to measure technical performance objectively and quantitatively, and that is what EVM accomplishes.


Lecture 05

Project Tracking With EVM

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Figure 2 shows the EV curve (in green) along with the PV curve from Figure 1.

The chart indicates that technical performance (i.e., progress) started more rapidly than planned, but slowed significantly and fell behind schedule at week 7 and 8.

This chart illustrates the schedule performance aspect of EVM.

Note: The Project manager identifies every detailed element of work that has been completed, and sums the PV for each of these completed elements. Earned value may be accumulated monthly, weekly, or as progress is made.Mohammad Al

Bataineh

Lecture 05


30

Figure 3 shows the same EV curve (green) with the actual cost data from Figure 1 (in red).

It can be seen that the project was actually under budget, relative to the amount of work accomplished, since the start of the project.

This is a much better conclusion than might be derived from Figure 1.

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Figure 4 shows all three curves together – which is a typical EVM line chart.

The best way to read these three-line charts is to identify the EV curve first, then compare it to PV (for schedule performance) and AC (for cost performance).

It can be seen from this illustration that a true understanding of cost performance and schedule performance relies first on measuring technical performance objectively. This is the foundational principle of EVM. Mohammad Al

Bataineh

Lecture 05

Schedule Performance

32

The following EVM formulas are for schedule management, and do not require accumulation of actual cost (AC):Scheduled Variance (SV) = EV - PV SV > 0 is good (ahead of schedule). SV = 0 at project completion because then all

of the planned values will have been earned.Schedule Performance Index (SPI) = EV/PV SPI > 1 is good (ahead of schedule). SPI < 1 is bad(behind schedule).

(Example: SV = $734 - $800 = -$66)

Example: SPI = ($734/$800) = 0.91 [ SPI<1]


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Cost Performance

33

Budget at completion (BAC): The total planned value (PV or BCWS) at the end of the project. Cost Variance (CV) = EV - AC

CV greater than 0 is good (under budget).

Cost Performance Index (CPI) = EV/AC

CPI< 1 that the cost of completing the work is higher than planned (bad);

CPI= 1 that the cost of completing the work is right on plan (good);

CPI> 1 that the cost of completing the work is less than planned (good

(under budget) or sometimes bad - may mean that the plan was too conservative! The planners tie up available funds for other purposes).

Example: CV = $734 - $1100 = -$366 (indicating a cost overrun))

CPI = $734/ $1100= 0.66 [CPI < 1] (indicating over budget)


Lecture 05

Forecast Cost At Completion

FCAC = Forecast Cost At Completion = % by which on schedule x BCAC = (ACWP/BCWP) x BCAC =(AC/EV) x BCAC = BCAC/(EV/AC) = BCAC/CPI where

BCAC = Budgeted Cost At CompletionACWP = Actual Cost of Work Performed =

ACBCWP = Budgeted Cost of Work Performed

= EV 34Lecture05 Mwaffaq Otoom & Mohammad Al Bataineh

Example on FCAC

If the Budgeted Cost at Completion (BCAT) is $990,000. At week 20, BCWP = $432,000 whereas ACWP = $560,000. Calculate the FCAC. Solution: BCAT = $990,000

BCWP = EV = $432,000 ACWP = AC =$ 560,000CPI = EV/AC = 432/560=0.77 (CPI<1 (over budget)

FCAC = $990,000/(432/560) = $1,283,333 35Lecture05 Mwaffaq Otoom & Mohammad Al

Bataineh

Lecture 05

Forecast Cost To Complete

FCTC is the estimate to complete the remaining work of the project.

FCAC = FCTC + ACWP

FCTC = Forecast Cost To Completion= Forecast Cost At Completion –

ACWP= FCAC – ACWP= (BCAC/CPI) – (BCWP/CPI)= (BCAC - BCWP)/CPI=(BCAC-EV)/CPI

36Lecture05

ACWP =ACBCWP =EVCPI=EV/AC

Mwaffaq Otoom & Mohammad Al Bataineh

Lecture 05

Example on FCTC

FCTC = (BCAC - BCWP)/CPI

= ($ 990,000 - $ 432,000)/0.77

= $723,333. Summary: In week 20 we have completed 432,000 (EV) of budgeted work at a cost of 560,000 (AC). Given the current trend, we expect to complete the project at cost remaining of $723,333 for a final project cost of $1,283,333. (i.e. $723,333 = $1,283,333 - $560,000) 37Lecture05 Mwaffaq Otoom & Mohammad Al

Bataineh

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Example

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Status & Forecast

0

200

400

600

800

1000

1200

1400

0 10 20 30 40 50

Week

Co

st (

$1,0

00'

s) BCWS(PV)

FBCWP(EV)

FACWP (AC)

SD (Status Day)

BCAC

FCAC


At Week 20:PV = $512,000EV= $432,000AC= $560,000

Lecture 05

40

Example

Status & Forecast

0

200

400

600

800

1000

1200

1400

0 10 20 30 40 50

Week

Co

st (

$1,0

00'

s) BCWS

FBCWP

FACWP

SD

BCAC

FCAC

ScheduledCompletion

Revised Completion


At Week 20:PV = $512,000EV= $432,000AC= $560,000

Lecture 05

Variances Accounting Variance (AV):

Schedule Variance (SV):

Time Variance (TV):

Cost Variance

41Lecture05 Mwaffaq Otoom

AV= BCWS – ACWP = PV-AC

SV= BCWP – BCWS = EV-PV

TV = SD – BCSPSD: Status DateBCSP: date when BCWS = BCWP

CV= BCWP – ACWP=EV-ACLecture 05

43

Project (Week 20)

SV = BCWP - BCWS = EV-PV =-$80,000

Project Status

0

100

200

300

400

500

600

0 5 10 15 20 25

Week

Co

st (

$1,0

00) BCWS

BCWP

ACWP

AV

SV


At Week 20:PV = $512,000EV= $432,000AC= $560,000

Lecture 05

Performance Indices

• SPI = Schedule Performance Index

SPI = BCWP/BCWS=EV/PV

SPI > 1 work ahead of schedule

• CPI = Cost Performance Index

CPI = BCWP/ACWP=EV/AC

CPI > 1 project under-budget 46Lecture05 Mwaffaq OtoomLecture 05

Project (Week 20)

• SPI = BCWP/BCWS= 432/512 = .84

• CPI = BCWP/ACWP= 432/560 = .77

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Project is behind schedule With budget overrun

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48

SUMMARY

Lecture 05

Exercise 1

1) You’re managing a project to install 200 windows in a new skyscraper ( سحاب and need to figure (ناطحةout your budget. Each week of the project costs the same: your team members are paid a total of $4,000 every week, and you need $1,000 worth of parts each week to do the work. If the project is scheduled to last 16 weeks, what’s the BAC for the project?

2) What will the Planned % Complete be four weeks

into the project?

49Mohammad Al Bataineh Lecture 05

Exercise 1

3) What should the PV be four weeks into the project?

4) You’ve checked with your team, but they have bad news. The schedule says they were supposed to have installed 50 windows by now, but they only installed 40. Can you figure out the actual % complete?


Exercise 1

5) Look at the planned value, and then look at the Earned Value. Are you delivering all the value you planned on delivering?


Exercise 2• Jeff and Charles have a total budget of $10,000, and

they’re currently halfway through the schedule.

• So their planned value is?

• Uh-oh! On a closer look, it seems they’ve really only gotten 40% of the work done.


Exercise 2• Now that you have the EV and PV, you can tell Jeff

and Charles if they’re getting their money’s worth!

• So are we ahead of schedule or behind it?


Exercise 3• Your project has a total budget of $300,000. You

check your records and find that you’ve spent $175,000 so far. The team has completed 40% of the project work, but when you check the schedule it says that they should have completed 50% of the work. Calculate the following:


Lecture 05

Exercise 4• You’re managing a highway construction project.

Your total budget is $650,000, and there are a total of 7,500 hours of work scheduled on the project. You check with your accounting department, and they tell you that you’ve spent a total of $400,000. According to the schedule, your crew should have worked 4,500 hours, but your foreman says that the crew was allowed to work some overtime, and they’ve actually put in 5,100 hours of work. Calculate these Earned Value numbers:


Lecture 05

Exercise 5• You are the project manager at an industrial design firm. You

expect to spend a total of $55,000 on your current project. Your plan calls for six people working on the project eight hours a day, five days a week for four weeks. According to the schedule, your team should have just finished the third week of the project. When you review what the team has done so far, you find that they have completed 50% of the work, at a cost of $25,000. Based on this information, calculate the Earned Value numbers:


Lecture 05

Exercise 6• Your current project is an $800,000 software

development effort, with two teams of programmers that will work for six months, at a total of 10,000 hours. According to the project schedule, your team should be done with 38% of the work. You find that the project is currently 40% complete. You’ve spent 50% of the budget so far. Calculate


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• Estimate at Completion (EAC). The same as (FCAC)• Estimate to Complete (ETC). The same as (FCTC)• Variance at Completion (VAC).

58Lecture 05

Exercise 7• You’re a project manager working on a large project scheduled to

last for two years. You’ve got six different teams working on five major functional areas. Some teams are ahead of schedule, and others are falling behind. That means that you have cost overruns in some areas, but you’ve saved costs in others—and that’s making it very hard to get an intuitive grasp on whether your project is over or under budget! It’s nine months into your project. The total budget for your project is $4,200,000. You’ve spent $1,650,000 so far, and you’ve got a CPI of .875. Use the Earned Value Management formulas from forecasting to figure out where things stand.


Lecture 05

Exercise 7• Now it’s six months later, and your project looks very different. You

need to work out a new forecast for what your budget situation will be like at project completion. You’ve now spent a total of $2,625,000. You look at all of the activities done by the team, and you find that the project is 70% complete. Can you come up with a new forecast for your project?


Lecture 05

Exercise 7• If EV is $93,406 and SPI is 0.91, what is the planned value?

• If PV is $252,000 and BAC is $350,000, what is the planned percent complete?


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Exercise 7• Now try one on your own. If BAC is $126,500 and EAC is $115,000,

what is the CPI?


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Exercise 8• BAC is $40,000 and EAC is $30,000, EV is $17,000, and AC is

$15,000. What is the BAC-based TCPI?

• BAC is $100,000 and EAC is $107,000, EV is $68,000, and AC is $70,000. What is the EAC-based TCPI?

• BAC is $20,000 and EAC is $20,000, AC is $15,000 and the project is 75% complete. What is the EAC-based TCPI?


Lecture 05

Questions


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