bsbpmg504a manage project costs manage project costs project cost processes diploma of project...

BSBPMG504A Manage Project Costs

Manage Project Costs

Project Cost Processes

Diploma of Project Management 17872Qualification Code BSB51507

Unit Code BSBPMG504A


Project Cost Management Processes

PMBOK Project Cost Management Processes -

7.1 Estimate Costs

7.2 Determine Budget

7.3 Control Costs

Related processes from Project Integration Management –

4.2 Develop Project Management Plan

4.6 Close Project

PMBOK 4th Edition


Learning Objectives

1. Understand the importance of project cost management.

2. Explain basic project cost management principles, concepts, and terms.

3. Discuss different types of cost estimates and methods for preparing them.

4. Understand the processes involved in cost budgeting and preparing a cost estimate and budget for an information technology project.

5. Understand the basics of earned value management



• This is the process of defining and documenting the actions necessary to prepare and integrate all subsidiary plans for each of the 8 key knowledge areas of project management.

• Good practice dictates that the Project Management Plan is baselined at the end of the Planning Phase, particularly in the areas of scope, cost and time

• It is progressively updated during project execution via the Perform Integrated Change Control process (PMBOK 4.5)

Adapted from PMBOK 4th Edition

Initiation Planning Execution Close

Monitor

Control


• The planning processes for all project management key knowledge areas are normally performed at the same time and during this process, or expanded upon shortly afterwards

• The relationship to Scope, Time and Cost is slightly different to the other areas of Communication, Risk, Human Resources, Quality and Procurement

• There are no stand alone Scope, Time or Cost Planning processes, they contained within the Develop Project Management Plan process

• The other key knowledge areas have discrete processes for planning that are defined in their process groups




Cost Management Plan

• The Cost Management Plan establishes the criteria for planning, structuring, estimating, budgeting and controlling project costs.

• It is often overlooked on the assumption that all project staff understand and follow internal cost management policies and procedures. This can result in the inability to track specific cost categories or actual costs against planned costs.

• Common inclusions in the Cost Management Plan –

Links to organisational cost management policies and procedures

Cost management assumptions and standards

Cost tracking and performance procedures

Budget templates and reporting formats

Delegated authorities for cost management decisionsAdapted from PMBOK 4th Edition


Monitor

Control


7.1 Estimate Costs



Monitor

Control

• The process of developing an approximation of the monetary resources needed to complete project activities

• Cost estimates are a prediction based on the information known at any point in time

• Includes the identification and consideration of costing alternatives to initiate and complete the project

• Cost trade offs and risks need to be considered

• Occurs during Planning


7.1 Estimate Costs

• Inputs to Estimate CostsScope Baseline

Cost Management policies and procedures

Project Schedule

Human Resource Plan

Risk Register

• Tools and techniques to Estimate Costs


ReserveAnalysis

ExpertJudgementAnalogous

Estimating

ParametricEstimating

Estimating Software

Three-pointEstimates

Bottom-upEstimating

Vendor BidAnalysis


7.1 Estimate Costs

• Analogous EstimatingUses previous similar projects to estimate costs

Least costly and least time consuming, also least accurate

Accuracy improved when combed with Expert Judgement

Most common form of cost estimation

• Parametric EstimatingUses statistical relationships between historical project data

and variables for estimation of time and costs

Some industries publish estimating tables, prominent in the construction and engineering industries

Standard cost estimates for activitiesInitiation Planning Execution Close

Monitor

Control



7.1 Estimate Costs

• Bottom-up EstimatingStarts with the cost of individual activities or work packages

and builds a bottom up estimate

Detailed costs are rolled up to provide the overall budget

Accuracy is influence by the size and complexity of the project

• Three-Point Estimates - PERTCalculates the Expected activity cost based on the weighted

average of the Most Likely, Optimistic and Pessimistic estimates

Often more accurate than other methods and quantified range of uncertainty


Monitor

Control



7.1 Estimate Costs

• Reserve Analysis

Inclusion of contingency

Can be calculated for each activity

Can be calculated for entire project

Often a percentage based on risk or complexity

• Cost of Quality

Estimates cost of quality control and quality assurance activities

Enables tracking of these costs

More in Project Quality unitInitiation Planning Execution Close

Monitor

Control



7.1 Estimate Costs

• Project Management Estimating Software

Cost estimating applications, spreadsheets and tools

Becoming widely accepted

• Vendor Bid Analysis

Looks at estimates made by vendors for components of the project

Normally only one component of project cost and other methods required to estimate other activities to provide the total cost

More in Procurement Unit Initiation Planning Execution Close

Monitor

Control



7.1 Estimate Costs

• Outputs of this process include –Activity Cost Estimates

– Quantitative assessments of the probably cost of the project work

Basis of Estimates – Information supporting the cost estimates

– Assumptions and Constraints

– Range of possible estimates

– Level of confidence in estimates

– Recommendations for contingency amounts

Project Document Updates– Most particularly updates to the Risk Register and Risk Management

Plan



Monitor

Control


7.1 Estimate Costs

• Cost estimates often include some form of range of possible results

• Most common form of range is plus or minus - e.g.

$10,000 +/- $500 – the activity could cost between $9,500 and $10,500

$10,000 +/- 20% - the activity could cost between $8,000 and $12,000



Monitor

Control





Monitor

Control

• The process of aggregating the estimated costs of individual activities, deliverables or work packages in order to establish a cost baseline for the project

• Project budgets are the funds authorised to execute the project

• Project cost performance is measured against the authorised budget and the cost baseline

• Simplified by using project management software

• Occurs during Planning




• Inputs to Determine Budget

Activity Cost Estimates

Basis of Estimates

Scope Baseline – Scope Statement and Work Breakdown Structure

Project Schedule

Resource calendars

Contracts

Cost management and budgeting policies and procedures

Cost budgeting tools

Reporting methods and formats




• Tools and techniques to Determine Budget

• Cost Aggregation

Cost estimates for activities and work packages are aggregated to deliverables and then for the entire project

Closely related to the Work Breakdown Structure

ReserveAnalysis

ExpertJudgement

CostAggregation

Funding LimitReconciliation

HistoricalRelationships


• Reserve AnalysisInclusion of contingency

Can be calculated for each activity

Can be calculated for entire project

Often a percentage based on risk or complexity

• Expert JudgementBased on expertise in a specific knowledge area, industry or

discipline

Many sources including –– Consultants– Stakeholders– Professional associations– Industry Groups



Monitor

Control



• Historical Relationships

Uses both parametric and analogous estimates from previous projects with similar characteristics

Often includes mathematical models to assist in cost estimating based on estimating tables published by industry or developed internally for an organisation

• Funding Limit Reconciliation

Relates to funding limits that are set at the beginning of a project and analyses variances to these in order to control cost

Not commonly used as inaccurate

and difficult to enforce



Monitor

Control



Typical Expenditure and Funding Patterns

Time

Cu

mu

lativ

e E

xpe

nd

iture

CostBaseline

ActualExpenditure

ClosureExecutionPlanningInitiation

FundingRequest 1

FundingRequest 4Funding

Request 3

FundingRequest 2

FundingRequest 5

$





Monitor

Control

• Outputs of this process include –

Cost Performance Baseline

– The authorised budget for the entire project

– Budget is calculated and displayed over time

Project Funding Requirements

– Includes both total funding requirements and periodic funding requirements

– Often approved for each phase rather than entire project

Project Document Updates

– Changes to the Risk Register

– Changes to Cost Estimates

– Changes to Project Schedule


7.3 Control Costs

• The process of monitoring the status of project expenditure

• Involves updating the project budget with actuals, comparing performance against baseline and managing any changes

• Any increase to the authorised budget can only be approved through 4.5 Perform Integrated Change Control

• It is critical to monitor both the expenditure and the work performed for that expenditure

• Simplified by project management software

• Occurs during Monitoring and Controlling



Monitor

Control


7.3 Control Costs

• Project Cost Control includes –

Influencing changes to approved cost baseline

Acting on and managing changes requests

Ensuring that expenditure does not exceed approved funding

Understanding the causes of variances

Monitoring work performed against expenditure

Preventing unapproved changes

Taking action to eliminate and manage cost overruns

Seeking approval for cost increases



Monitor

Control


7.3 Control Costs


• Inputs to Control Budget

Project Management Plan

Cost Baseline

Cost Management Plan

Project Funding Requirements

Work Performance Information

Cost management policies and procedures

Cost control tools

Monitoring and reporting standards



Monitor

Control


7.3 Control Costs


• Tools and techniques to Control Budget

PerformanceReviewsTo-Complete

EstimatesEarning ValueManagement

Advanced technique

PercentageCompleteEstimates

Forecasting

ProjectManagement

Software

VarianceAnalysis



Monitor

Control


• Earned Value Management

Common and standard method of project performance measurement in the United States

Can be complex to implement and requires high degree of analytical ability

Monitors three key dimensions – Planned Value, Earned Value and Actual Cost

Considered an “advanced technique” and only found in Australia in organisations with high levels of project management maturity

Requires detailed actuals data

An awareness of the method is useful

7.3 Control Costs

Adapted from PMBOK 4th EditionAdapted from PMBOK 4th Edition


Monitor

Control


• Percentage Complete Estimates

Commonly used in Australia as a simplified and less accurate alternative to Earned Value Management

The Project Manager and project team members estimate the percentage complete on activities and this is compared to what had been planned for completion at that stage

Less accurate as uses estimates based on judgement rather than detailed figures

Less time consuming as relies on estimates of actuals rather than detailed capturing of actuals

7.3 Control Costs

Adapted from PMBOK 4th EditionAdapted from PMBOK 4th Edition


Monitor

Control


• Forecasting

The Project Manager takes input from project team members to estimate the completed cost of the project

If this differs from the approved baseline budget then additional funding is required and a new approval should be sought

Typically based on actual costs incurred for work completed to date, plus and estimate to complete for the remaining work

• To-Complete Estimates

Used to determine improvement in productivity required to recover the project cost and bring it back to baseline

An “advanced technique”

7.3 Control Costs



7.3 Control Costs


• Performance Reviews

More common but less accurate than To-Complete estimation technique

Compares cost performance during the project and estimates funds needed to complete the work

Variance Analysis – compares actual time and cost performance against expected performance

Trend Analysis – determines if performance is improving or deteriorating

Earned value performance – compares baseline plan to actual cost and schedule performance


7.3 Control Costs



Monitor

Control

• Outputs of this process include –

Work Performance Measurements

– Included in status reports which are sent to the Project Sponsor and other stakeholders - causes of variance, corrective action etc

Project Budget Forecasts

Change Requests

Cost Management Plan Updates

Cost Baseline Updates

Project Document Updates

– Changes to the Risk Register

– Changes to Cost Estimates

– Changes to Project Schedule


Cost Variance Analysis

Take some time to reflect on various cost tracking reports that you make have seen for projects and departmental

budgets

Research cost variance analysis within your organisation and online

1. Discuss the differences between positive variances and negative variances and how these are calculated.

2. Do you think that every variance should be explained? If not, why not? Discuss and debate with your classmates.

Research Practice Comment


Project Cost Management

Take some time to research the project cost management policies and procedures within your organisation.

Reflect on these and determine the level of compliance with the policies and procedures in the projects that you

have experienced.

1. Come up with three suggestions to improve both the management of project cost and the application of the related policies and procedures.

2. Your findings will be reviewed in class next week

Research Practice Comment


Next Steps

Please proceed to Tests & Tasks and take

the Project Cost Quiz and

the Project Cost Knowledge Test

Be sure that you have participated in the Forums.

Best of Luck!

These are all due during Weeks 9 and 10 in the Course Delivery Schedule

bsbpmg504a manage project costs manage project costs project cost processes diploma of project...

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