6- pmp training - cost management

5. COST MANAGEMENTProject Management Training,

Qais Ur Rehman Rasooli, PMP

Cost Management

• Project cost management includes the processes involved in,

• Planning• Estimating• Budgeting• Financing• Funding• Managing and Controlling cost

So What is Project Cost Management?..cont’d

Financial performance

of the product

Product Life cycle costing

Stakeholder Cost

Management Requirements

Acquisition decision,

Order placed,

Delivered

Actual cost incurred / recorded

Cost of Use – Operating CostMaintenance,Support of the product

RoI, Return on investmentInvestment paybackDiscounted Cash Flow

1. Plan Cost Management2. Estimate costs3. Determine budget4. Control cost

Plan Cost Management

• Establishes policies , procedures and documentation for

planning managing, expending, controlling costs,

• Provides guidance and direction on project cost

management throughout the project,

• Inputs: PMP, Charter,EEF,OPA

Plan Cost Management: InputsProject Management Plan

Scope Baseline – project scope statement + WBS DetailsSchedule baseline

Project CharterSummary BudgetProject Approval Criteria

Enterprise Environmental FactorsMarket ConditionsCurrency Exchange ratesPublished commercial Information

Organizational Process AssetsFinancial control proceduresHistorical Information and lessons learnedExisting formal/Informal cost estimating policies, procedures and guidelines

Plan Cost Management: Tool & Technics

• Tools and technics include

• Expert Judgement

• Analytical Technics• Payback Period,• Return on Investment RoI,• Internal Rate of return,• Net Present Value,

• Meetings

Plan Cost Management: Output• Cost Management Plan

• Units of Measure• Level of accuracy and precision• Control Thresholds• Rules of performance Measurement

• Define control Accounts,• Establish Earned value measurement

technics• Reporting Formats and frequency• Cost change control procedures

CostManagementplan

Cost included in estimates

• Cost of quality efforts,

• Cost of risk efforts,

• Cost of PM Time,

• Cost directly associated with the project,

• Expenses of physical office spaces,

• Profit,

• Overhead costs

Types of Cost

• Variable Cost :

Change with the amount of production or work,

Material , supplies, Wages

• Fixed Cost:

Cost does not change as production changes,

Setup, rent, utilities

• Direct Cost: directly attributable to work of the project

Indirect Costs: cost incurred for the benefit of more than

one project

Estimate Cost: InputsHuman Resource Management Plan

• Project staffing plan,• Personnel Rates,• Reward and recognition

Project Schedule• Type and quantity of resource req• Equipment and material required• Activity durations can impact Costs

Scope baseline• Product description, WBS & Dictionary• Key deliverables and acceptance Criteria,• Project boundaries and assumptions

Risk Register• Risk Response costs,• Threats or Opportunities

Estimate Costs: Tools and Techniques• Includes,

• Expert Judgment

• Analogous Estimating

• Parametric Estimating

• Bottom up estimating

• Three point estimating

• Reserve Analysis

• Cost of Quality

• Project Management Software

• Vendor Bid Analysis

• Group Decision Making

Estimate Costs: Outputs

Activity Cost

EstimatesBasis of Estimates

Project Document

Updates

Accuracy of Estimates

• Rough order of Magnitude:

Done during initiating

Range : -25% to +75%

• Budget Estimate:

Done during Planning

Range:-10% to +25%

• Definitive Estimate:

Done when project progress and more info is available

Range: -5% to 10% from actual

Determine Budget

• Determine the amount of funding required for the project,

• Risk management to be applied to include reserves in

estimates ,

• Inputs include;

Activity Cost estimates, BoE, Scope

baseline, Project schedule, Resource

calendars, OPA, Contracts

• Cost baseline and Cost Budget

Determine Budget: Tools and Techniques

• Cost Aggregation

• Reserve analysis

• Expert judgment

• Historical relationships

• Funding limit reconciliation

-Check cashflow,

-Reconciliation with cost constraints in the project charter

Determine Budget: Output• Includes,

• Cost Baseline• Project Funding Requirements• Project Document updates

Control Costs

• Monitor the status of the project to update project costs,

• Manage changes to the cost baseline,

• Provides the means to recognize variance,

• Influence the root causes of changes to cost baseline,

• Timely processing of change requests,

• Monitor use of funds to physical work completed,

• Prevent unapproved changes from being included,

• Communicate the status of changes to stakeholders

• Bring expected cost overrun within acceptable ranges

Control Costs: Tools & Techniques

• Progress Reporting,

• Reserve Analysis,

• Earned Value Management

Earned Value Management

• Earned value used to measure project performance against

Performance measurement baseline (PMB),

• EV analysis indicates potential deviations from PMB,

• EV measurements

integrate cost time and scope,

used to forecast future performance,

Forecasted project completion date and costs

Terms to know for EVM

Acronym Term Interpretation

PV Planned Value

EV Earned Value

AC Actual Cost

BAC Budget At completion

EAC Estimate at Completion

ETC Estimate to Complete

VAC Variance at Completion

As of today, what is the estimated value of the work planned to be done?

As of today, what is the estimated value of the work actually accomplished?

what is the actual cost incurred for the workaccomplished?How much did we BUDGET for the TOTAL project effort?

What do we currently expect the TOTAL project to cost (a forecast)?

how much MORE do we expect it to costto finish the project (a forecast)?

As of today, how much over or under budget do we expect to be at the end of the project?

Earned Value Management


Name Formula Interpretation

Cost variance EV-AC

Schedule variance EV-PV

Cost Performance Index (CPI)

EV/AC

SchedulePerformance Index (SPI)

EV/PV

Neg is over budget and positive is under budget

Neg is behind schedule, Positive is ahead of schedule

We are getting $X worth of work for every $1 spent. Funds are or are not being used efficiently. Greater than 1 is good and <1 is bad

We are progressing at X% of the rate originally planned. >1 is good and <1 is badHow efficiently are we using time..


Term Formula Interpretation

Estimate at Completion (EAC)

AC+ ETC

BAC/CPI

AC+(BAC-EV)

AC+[ (BAC-EV)/(CPI * SPI)]

TCPI (BAC-EV)/(BAC-AC)

Estimate to Complete(ETC)

ETC= EAC-AC

Actual cost of work plus the budgeted cost of remaining work, used original estimated was flawed

If no variance from BAC have occurred or the same burn rate is expected to continue

Used when current variances are thought to be typicalof future

Remaining budget modified by performance. Current variances typical, influenced by schedule constraint

How efficiently do we need to complete the remaining work, <1 is good and >1 is bad

How much more the project cost?Re-estimate

Test your EVM Knowledge

Exercise - 1

• You have a project to install 12 Telecom Tower in 12 Weeks.

The budget for the project is $10K

each a total of $120K

• We are in the 6th week,

• We have installed four Towers

• We have incurred a cost of $60K to

date

Exercise - EV calculations

Acronym Term Calculation

PV Planned Value

EV Earned Value

AC Actual Cost

BAC Budget At completion

ETC Estimate to Complete

EAC Estimate atCompletion

VAC Variance at Completion

As we are in the 6th week, the PV would be 6*$10K= $60K

We have installed four towers to date EV = 4* $10k= $40k

We have incurred in cost $60K

The total budget for the project is $120K

We still have to install eight more towers to install, ETC= 8*$10K= $80K

AC+ETC= $60k+$80k= $140k

BAC-EAC= $120k - $140k = -$20k , Trending to be over budget by $20K

Exercise EVM Calculations

Name Formula Calculation

Cost variance EV-AC

Schedule variance EV-PV

Cost Performance Index (CPI)

EV/AC

SchedulePerformance Index (SPI)

EV/PV

$40K-$60K = -$20K

$40K-$60K= -$20K

$40K/$60K = 0.66 - CPI is 0.66 meaning for each dollarspent we are earning only 66 cents,

$40K/$60K = 0.66 - SPI is 0.66 meaning We are progressing at 66% of the rate originally planned.

Exercise - 2

• On a project you have the CV= $10,000, your SV is -$3,000

PV is $100,000, What is the SPI?

• What is the AC in this case?

• In an earned value report for your project , you see the CPI

is 1.2 and SPI is 0.8, the PV is $ 600K, and the SV is -

$120K, you couldn’t find CV , How much is it?

The Active PMP Learner

Visit www.projectsatwork.com to get

exposed to information from industry

leaders …

http://www.projectsatwork.com/

PM Quote of the day

We all need people who provide us

feedback, this is how we grow.

~ Bill Gates

6- pmp training - cost management

Leadership & Management