project cost management 1
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PROJECT COST
MANAGEMENT
Project Management
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PROJECT COST MANAGEMENT
Introduction
Project¶s cost processes create a reasonable
cost baseline for the project and identify
project resources (i.e. human and material)
as well.
This will create a time-phased budget for
their involvement in the project. It involvesdeveloping monetary value (i.e. resources)
needed to complete project activities.
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PROJECT COST MANAGEMENT
General Considerations
General Considerations
± Close connection between cost and time
± Estimating should be based on WBS for accuracy
± Estimating should be done by the person doing the work
± Historical information is key to improving estimates
± Costs (and time, scope and resources) should be managed to
estimates
± Cost (and time, scope and resource) baseline should be kept and
not changed except for approved changes ± Plans should be revised as necessary, during execution
± Corrective action should be taken when necessary
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PROJECT COST MANAGEMENT
General Considerations
General Considerations - VERY IMPORTANT
A project manager should not just accept time or costdirectives or requirements from management. At the
very least he/she should analyze the needs of the
project, come up with their own estimate, and then try to
reconcile any differences.
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PROJECT COST MANAGEMENT
Definition
The processes required to determine the cost
of resources and to ensure that the project is
completed within the approved budget. Major processes are:
± Estimate Costs
± Determine Budget ± Control Costs
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PROJECT COST MANAGEMENT
Cost Estimates
Cost estimates are prediction that is based
on known information.
It includes identifying and considering
alternative cost to initiate and complete a
project.
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PROJECT COST MANAGEMENT
Cost Estimates
The cost estimate for various components of
the project (i.e. work packages and
activities) is developed into a
comprehensive project budgeting document
that allows for ongoing project tracking and
cost control.
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PROJECT COST MANAGEMENT
Cost Estimates
Cost estimates are expressed in units of
monetary currency (e.g. dollars, euro, cedi,
etc.)
In some instances other units of measures
such as staff hour, or staff days are used to
facilitate comparisons by eliminating theeffect of currency fluctuations.
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PROJECT COST MANAGEMENT
Cost Estimates
Cost estimation begins at the development
stage of the project proposal by identifying
all possible costs associated with the project
and building them into the initial budget
proposal.
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PROJECT COST MANAGEMENT
Cost Estimates
Sources of Project Cost
± Labor costs
± Material costs
± Travelling cost
± Equipments and facilities costs
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PROJECT COST MANAGEMENT
Estimate Techniques
A cost estimate is a quantitative assessment
of the likely costs for resource required to
complete the activity.
Estimating project costs is a challenging
process that can be described as both art and
science.
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PROJECT COST MANAGEMENT
Estimate Techniques
The two important project management
principles that can be called laws and at
work in cost estimation are
A. The more clearly a project cost is defined
in various costs at the beginning the less
chance there is of making estimating errors.
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PROJECT COST MANAGEMENT
Estimate Techniques
B. The more accurate the initial cost
estimations, the greater the likelihood of
preparing a project budget that accurately
reflects reality for the project and the
greater the chances of completing the
project within budget estimates.
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PROJECT COST MANAGEMENT
Estimate Techniques
Accuracy of Estimates
± Order of magnitude estimates
Made during initiation and in the range of ±25% to +75%
± Budget Estimate Made during planning and in the range ±5% to +25%
± Definitive Estimate
Also made during planning and in the range ±5% to
+10%
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PROJECT COST MANAGEMENT
Definitions
Accounting Standards and Terminology
± Present Value (PV) = FV/(1+r)n
Value today of future cash flow
± Net Present Value (NPV) Present value of the total benefits less costs
± Internal Rate of Return (IRR)
The rate at which project inflows and outflows are equal
± Payback Period
The number of time periods it takes to recover your investment
± Benefit Cost Ratio (BCR)
Comparison of benefits to costs of different projects
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PROJECT COST MANAGEMENT
Definitions
Accounting Standards and Terminology
± Opportunity Cost
Opportunity given up by selecting one project over another
± Sunk Costs Expended Costs ± not considered when deciding whether to continue
with a troubled project
± Law of Diminishing Returns
The more you put into something, the less you get out of it
± Working Capital
Current assets minus current liabilities
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PROJECT COST MANAGEMENT
Definitions
Types of Cost
± Variable Cost
Costs which change with the amount of production
± Fixed Cost Costs that do not change as production changes
± Direct Cost
Costs directly attributable to work on the project
± Indirect Cost
Overhead costs or costs incurred for the benefit of more than one
project
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PROJECT COST MANAGEMENT
Definitions
Straight Line Depreciation
± The same amount of depreciation is taken each year
Accelerated Depreciation
± Double declining balance
± Sum of Years Digits
± Accelerated depreciation depreciates faster than straight line
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PROJECT COST MANAGEMENT
Definitions
Life Cycle Costing
The total cost of the project including development and
maintenance
Value Analysis or Value Engineering
Finding a less costly way to do the same scope of work
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PROJECT COST MANAGEMENT
Estimate Costs - Definition
Develop an approximation of the (financial) costs of the
resources needed to complete the activities.
Identify costing alternatives
Generally expressed in a currency to assist withcomparisons
May be refined with progressive elaboration
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PROJECT COST MANAGEMENT
Estimate Costs - Techniques
Analogous Estimating (heuristics)
± Top or middle managers use expert judgment or actual time on
previous projects to estimate
Bottom-up Estimating
± The people doing the work create the estimates
Parametric Estimating
± Uses mathematical model to predict costs (e.g., cost per yard, per
line of code, per installation etc.)
Three-Point Estimates
Reserve Analysis
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PROJECT COST MANAGEMENT
Estimate Costs - Techniques
Cost of Quality
Computerized Estimating Tools
Vendor Bid Analysis
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PROJECT COST MANAGEMENT
Estimate Costs - Outputs
Activity Cost Estimates
Basis of Estimates
Project Document Updates
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PROJECT COST MANAGEMENT
Determine Budget - Definition
A project cost budgeting involves allocating the project cost
estimates or task over time, i.e. the process of aggregating the
estimated costs of individual activity or work package to
establish an authorized cost baseline. A cost baseline is a time-phased budget that project managers
use to measure and monitor cost performance.
The aggregation and allocation of overall cost estimates to
individual activities or work packages to establish a cost
baseline Result is the budget and Cost Baseline
Provides project funding requirements
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PROJECT COST MANAGEMENT
Determine Budget
It is the total amount of cash of the project
to be calculated in order to determine the
amount of funds that the organization needsfor the project.
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PROJECT COST MANAGEMENT
Determine Budget
Work Package Costing
The process of developing the actual project
budget in the combination of top down and
bottom up budgeting.
Thus each work package in the WBS is
evaluated for it resource requirements, andthe cost for each resource isestimated
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PROJECT COST MANAGEMENT
Determine Budget
Work Package Costing
For example, a work package is estimated
that it requires 25hours of labour by a
technician. If the technician assigned to the
task is paid GHC17.50 per hour, overhead
charges to the project is 84% of directlabour. What is the total cost of the work
package?
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PROJECT COST MANAGEMENT
Determine Budget
Work Package Costing
Calculations
25Hrs *GHC17.50*1.84 = GHC805
NB: (1.84 = 84% * GHC437.50+GHC437.50)
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PROJECT COST MANAGEMENT
Determine Budget - Techniques
Cost Aggregation
Reserve Analysis
Expert Judgment
Historical Relationships
Reconciliation of Funding Limits
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Example of Cost Aggregation
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PROJECT COST MANAGEMENT
Determine Budget - Outputs
Cost Performance Baseline
Project Funding Requirements
Project Document Updates
± Risk Register
± Cost Estimates
± Project Schedule
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PROJECT COST MANAGEMENT
Control Costs - Definition
This is the process of monitoring the status
of the project to update the project budget
and changes to the cost baseline.
Updating the project cost budget involves
recording actual cost spend to date.
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PROJECT COST MANAGEMENT
Control Costs - Definition
Monitoring the expenditure of funds
without regard to the value of the work
being done for such expenditure has littlevalue to the project other than allow the
project team to stay within authorized
funding.
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`PROJECT COST MANAGEMENT
Control Costs - Definition
Much of the effort of cost control involves
analyzing the relationship between the
consumption of project funds to the physical work done for such expenditure.
The key to effective cost control is the
management of the approved cost performance baseline and the changes to
that baseline.
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PROJECT COST MANAGEMENT
Control Costs - Definition
Cost control includes
± Influencing the factors that create change to the cost
baseline
± Monitoring the status of the Cost Baseline to ensure that it isnot exceeded
± Ensure that changes are agreed upon and acted upon in a
timely manner
± Determine that the cost baseline has changed
± Managing the actual changes when they occur
± Keeping the cost baseline updated with approved changes
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PROJECT COST MANAGEMENT
Control Costs - Definition
± Cost control Involves Monitoring cost to detect and understand variances from
baseline
Ensuring that all appropriate changes are recorded in thebaseline
Preventing incorrect, inappropriate or unauthorized
changes from being added to the cost baseline
Informing appropriate stakeholders of authorized
changes
Acting to bring expected costs to within acceptable limits
Generally search for the ³whys´ of both positive and
negative variances
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PROJECT COST MANAGEMENT
Control Costs - Definition
Control Process
Control is the process of comparing actual
performance against plan to identify
deviations, evaluate possible alternative
courses of actions, and take appropriate
corrective action.
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PROJECT COST MANAGEMENT
Control Costs - Definition
The project control steps for measuring and
evaluating project performance are;
± Setting a baseline plan
± Measuring progress and performance
± Comparing plan against actual
± Taking action
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PROJECT COST MANAGEMENT
Control Costs - Techniques
\Earned Value Management (EVM)
The EVM recognizes that it is necessary to
jointly consider the impact of cost, time and
project performance on any analysis of
current project status.
EVM reintroduces and stress the importanceof analyzing the time element in the project
status updates.
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PROJECT COST MANAGEMENT
Control Costs - Techniques
Earned Value Management (EVM)
Time is important as it provides the basis
for determining how much work to be
completed at certain milestone point.
EVM also allows project team to make
future projections of project status based onits current state.
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PROJECT COST MANAGEMENT
Control Costs - Techniques
Earned Value Cost/Schedule System
± An integrated project management
system based on the earned value concept
that uses a time-phased budget baseline
to compare actual and planned schedule
and costs.
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PROJECT COST MANAGEMENT
Control Costs - Techniques
Earned Value Management (EVM)
A time-phased budget allows the project
team to identify the correct sequencing of
activity, and also enables the team to
determine in the project when the budget is
likely to be spent in pursuit of thoseactivities.
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PROJECT COST MANAGEMENT
Control Costs - Techniques
Earned Value Management
A method to measure scope, time and project
performance
Integrates cost, time and scope
Can be used to forecast future performance
and completion dates
More accurate than simply comparingplanned to actual results
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PROJECT COST MANAGEMENT
Control Costs - TechniquesEarned Value Management (EVM)
± PV (Planned Value) (BCWS) ± Estimated value of work planned to
be done
± EV (Earned Value) (BCWP) ± Estimated value of work actually
done ± AC (Actual Cost) ± (ACWP) ± Actual cost incurred
± BAC Budget At Completion) ± Total Budget for the Project
± EAC (Estimate At Completion) ± Currently, how much is the project
expected to cost?
± ETC (Estimate To Complete) ± From this point on, how much
MORE do we expect it to cost to complete the project?
± VAC (Variance At completion) How much over or under budget do
we expect to be at the end of the project?
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PROJECT COST MANAGEMENT
Control Costs ± Techniques
Earned Value Management
± Cost Variance (CV) ± Measure of cost performance on a project .
Equation: CV= EV-AC. A negative CV is non-recoverable.
± Schedule Variance (SV) - Measure of schedule performance on aproject . Equation: SV= EV-PV
± Cost Performance Index (CPI) - Measure of value of work
accomplished compared with actual costs/progress. C onsidered
the most critical EVM metric . Equation: CPI=EV/AC
± Schedule Performance Index (SPI) - Measure of progress
achieved compared with progress planned on a project . Equation:SPI = EV/PV
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PROJECT COST MANAGEMENT
Control Costs ± Techniques
Forecasting
As the project progresses, the project team can
develop a forecast fro the estimate at complete(EAC) that may differ from budget at complete
(BAC).
Forecasting the EAC involves making estimates or
predictions of conditions and events in the
project¶s future based on information and
knowledge available at the time of the forecast.
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PROJECT COST MANAGEMENT
Control Costs ± Techniques
Forecasting
Forecast are generated, updated, and
reissued based on work performance
information provided as the project is
executed.
The work performance information coversthe project¶s past performance and any
information that could impact on the project
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Forecasting
Forecasting
EAC are based on actual cost incurred for
work completed plus an estimate to
complete (ETC) the remaining work, i.e.
EAC =AC+ETC
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PROJECT COST MANAGEMENT
Control Costs ± Techniques
Forecasting
± Estimate At Completion (EAC) = BAC/CPI or AC+BAC-EV
± Estimate To Complete (ETC) = EAC-AC
± Variance At Completion (VAC) = BAC-EAC ± How efficiently must we use our remaining resources?
± To Complete Performance Index (TCPI)
TCPI = (BAC-EV)/[(BAC-AC or (EAC - AC)]
(i.e. Work Remaining / Funds Remaining)
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PROJECT COST MANAGEMENT
Control Costs ± Techniques
Performance Reviews ± Reviews to compare cost, available
funds and schedule over time.
± Variance Analysis ± compare actual to planned/expected results
± Trend Analysis ± examine performance over time i.e. improving or deteriorating
± Earned Value Performance ± comparing the baseline to actual
performance
Project Management Software
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PROJECT COST MANAGEMENT
Control Costs ± Outputs
Work Performance Measurements
Budget Forecasts
Change Requests
Project Plan Updates
Project Document Updates