project cost management
TRANSCRIPT
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Project Cost Management
Sections of this presentation were adapted from A Guide to the Project Management Body of Knowledge 5th Edition, Project Management Institute Inc., © 2013
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Project Cost Management
“The processes involved in planning, estimating, budgeting, and controlling costs so that the budget can be completed within the approved budget”
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Why to Manage Cost?Part of triple constraint, can’t manage one without the others (scope, time, and quality) Plots of cost and scope against plan can help spot problems early
Cumulative Value
Time
Planned Value (PV)
Actual Costs (AC)
Earned Value (EV)
Today
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Cost Management Key Terms
PV - Planned Value, estimated value of the planned workEV – Earned Value, estimated value of work doneAC – Actual Cost, what you paidBAC – Budget at Completion, the budget for the total jobEAC –Estimate at Completion, what is the total job expected to cost?ETC – Estimate to Complete, forecasted costs to complete jobVAC – Variance at Completion, how much over/under budget do we expect to be?
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How to Manage Cost?Three processes1. Estimate Costs2. Determine Budget3. Control Costs
Estimate
Costs
Determine Budget
Control
Costs
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Estimate CostsEnterprise Environmental Factors
Organizational Process Assets
Project Scope Statement
Analogous estimating
Determine resource cost rates
Bottom up estimating
Parametric estimating
Project management software
Vendor bid analysis
Reserve analysis
Cost of quality
Inputs
Outputs
Tools & Techniques
Work Breakdown Structure
WBS Dictionary
Project Management Plan• Schedule Mgmnt
Pln
• Staffing Mgmnt Pln
• Risk Register
Activity Cost Estimates
Activity Cost Estimates Supporting Detail
Requested Changes
Cost Management Plan Updates
Estimate
Costs
Determine Budget
Control
Costs
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Estimating Methods
Analogous (Top Down) estimating – Managers use expert judgment or similar project costs [quick, less accurate]Bottom-Up estimating – People doing work estimate based on WBS, rolled up into project estimate [slow, most accurate]Parametric estimating – Use mathematical model (i.e. cost per sq ft). [accuracy varies] Two types:
– Regression analysis – based on analysis of multiple data points
– Learning Curve – The first unit costs more than the 100th, forecasts efficiency gains
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Estimating Methods
Vendor Bid Analysis – Estimating using bids + allowances for gaps in bid scope [slow, accuracy depends on gaps]Reserve Analysis – Adding contingency to each activity cost estimates as zero duration item [slow, overstates cost]
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Determine Budget
Project Scope Statement Cost aggregation
Reserve analysis
Parametric estimating
Funding limit reconciliationInputs
OutputsTools & Techniques
Cost Baseline
Project Funding Requirements
Cost Management Plan Updates
Requested Changes
Work Breakdown Structure
WBS Dictionary
Activity Cost Estimates
Activity Cost Estimates Supporting Detail
Project Schedule
Resource Calendars
Contract
Cost Management Plan
Estimate
Costs
Determine Budget
Control
Costs
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Determine Budget
Budgeting is allocating costs to work packages to establish a cost baseline to measure project performanceRemember Contingency items are for unplanned but required changes it is not to cover things such as:• Price escalation• Scope & Quality Changes
Funding Limit Reconciliation – Smoothing out the project spend to meet management expectations
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Control Costs
Cost Baseline
Project Funding Requirements
Performance Reports
Cost change control system
Performance measurement analysis
Forecasting
Project performance reviews
Project management software
Variance management
Inputs OutputsTools & Techniques
Work Performance Information
Approved Change Requests
Project Management Plan
Cost Estimate Updates
Cost Baseline UpdatesPerformance Measurements
Forecasted Completion
Requested Changes
Recommended Corrective Actions
Organizational Process Assets Updates
Project Management Plan Updates
Estimate
Costs
Determine Budget
Control
Costs
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The Earned Value Chart
One way of measuring overall performance is by using an aggregate performance measure called earned value
The basic definition of earned value management (EVM) is that the value of a piece of work is equal to the amount of funds budgeted to complete it.
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The Earned Value Chart
The earned value of work performed (value completed) for those tasks in progress is found by multiplying the estimated percent completion for each task by the planned cost for that task
The result is the amount that should have been spent on the task so far
The concept of earned value combines cost reporting and aggregate performance reporting into one comprehensive chart
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Earned Value Chart
Progress is compared against the baseline to determine whether project is ahead of or behind planPercent complete can be difficult to measure, some managers use rules • 50/50 Rule – Assumed 50%
complete when task started, final 50% at completion
• 20/80 Rule – 20% at start• 0/100 Rule – No credit until
complete
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The Earned Value ChartGraph to evaluate cost and performance to date
www.humphreys-assoc.com
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The Earned Value Chart
Variances on the earned value chart follow two primary guidelines:• 1. A negative is means there is a deviation from plan— not good!• 2. The cost variances are calculated as the earned value
minus some other measure
EV - Earned Value: budgeted cost of work performedAC - Actual cost of work performedPV - Planned Value: budgeted cost of work scheduledST - scheduled time for work performedAT - actual time of work performed
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The Earned Value Chart
EV - AC = cost variance (CV, overrun is negative)
EV - PV = schedule variance (SV, late is negative)
ST - AT = time variance (TV, delay is negative)
If the earned value chart shows a cost overrun or performance underrun, the project manager must figure out what to do to get the system back on targetOptions may include borrowing resources, or holding a meeting of project team members to suggest solutions, or notifying the client that the project may be late or over budget
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Schedule and cost variances and performance indicators
Schedule and cost variances and performance indicators are defined mathematically as follows: Schedule variance (SV) = Earned value (EV) – Planned
value (PV) Cost variance (CV) = Earned value (EV) – Actual cost (AC) Time Variance (TV, delay is negative): scheduled time (ST) -
Actual Time ( AT) Schedule performance index (SPI) = Earned value (EV) /
Planned value (PV) Cost performance index (CPI) = Earned value (EV) / Actual
cost (AC)
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If the earned value chart shows a cost overrun or performance underrun, the project manager must figure out what to do to get the system back on target
Options may include borrowing resources, or holding a meeting of project team members to suggest solutions, or notifying the client that the project may be late or over budget
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Assessing Task Performance
The final step when assessing task performance to date is to update what you expect your total expenditures will be upon task completion. Specifically, you want to determine the following:
Estimate at completion (EAC): Your estimate today of the total cost of the task
Estimate to complete (ETC): Your estimate of the amount of funds required to complete all work still remaining to be done on the task
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EAC Calculation: Method 1
Assume that the cost performance for the remainder of the task will revert to what was originally budgeted.EAC = Approved budget for the entire task – Cost variance for the work done to date on the task = Budget at completion (BAC) + Actual cost (AC) – Earned value (EV)
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EAC Calculation: Method 2
Assume that the cost performance for the remainder of the task will be the same as what it has been for the work done to date.EAC = Budget at completion (BAC) / Cumulative cost performance index (CPI)
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ETC Calculation
Whether you use Method 1 or Method 2 to calculate EAC, ETC is determined as follows:ETC = Budget at completion (BAC) – Actual costs to date (AC)
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Example Question
Planned $1800 to complete work package.Scheduled to have been finished today.Actual expenditure to date is $1470.Estimate work is 2/3 complete.What are cost and schedule variances?
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Cost variance
Cost variance = EV – AC= $1800(2/3) - $1470= $1200 - $1470= -$270
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Schedule variance
Schedule variance = EV – PV= $1800(2/3) -
$1800= -$500
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SPI (schedule performance index)
SPI = EV/PV= ($1800(2/3))/$1800= $1200/$1800= 0.67
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CPI (cost performance index)
CPI = EV/AC=($1800/(2/3) / $1470)= 1200/1350= 0.82
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ETC and EAC
Estimate to complete = (BAC-EV)/CPI=(1800-1200)/.82= $732
Estimate at completion = ETC + AC= $732+ $1470 = $2202
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Notice
EV is always first Variance = EV minus something Index = EV divided by something If the formula relates to cost use AC If the formula relates to schedule use PV Interpreting results: negative is bad and
positive is good Interpreting results: greater than one is
good, less than one is bad
PV
AC ETCEAC
BACProject Start
Current Status