TK3333Software Management

Topic 9:Topic 9:Cost Planning and PerformanceCost Planning and Performance

ContentsContents

• Prepare a baseline budget• Cumulate actual costs• Determine the earned value of work performed• Analyse cost performance• Forecast project cost at completion• Control project costs• Manage cash flow

Real World ExampleReal World Example• Vignette: eBay • eBay understands the importance of analyzing project data to produce

performance indicators. • eBay’s mission is to provide a trading platform for people all over the

world. They do this by continually improving the user’s experience on the eBay site.

• Decisions for change are based on measurable factors like the number of visitors to the site, length of time customers spend on eBay, busiest day of the week for eBay transactions, etc.

• Managers regularly collect data from the site to develop new marketing and merchandising techniques. This mentality has helped eBay to continually improve the buy-sell process for eBay customers.

• Project managers should understand the value of measurable factors, and apply them to make responsible decisions about their projects.

Real World ExampleReal World Example• Vignette: London Traffic • Ken Livingstone was London’s first directly elected mayor in 2000. He

created Transport for London to oversee the city’s road and transport services that were previously managed separately. Mission: to upgrade London’s transportation infrastructure with a toll system project.

• Traffic congestion is a major problem for central London. Transport for London developed a plan to install a system that would identify and charge car owners that enter defined congestion zones.

• Technological risks were identified, and the project was divided into 5 smaller components (to be managed separately, as opposed to purchasing one large system).

• Project team worked together in one location on the five components to the system.

• The project was successfully implemented by February 2003. Transport for London reports that traffic in the congestion zone has decreased by 20%, with a 5% increase during travel times.

Project Cost EstimatesProject Cost Estimates

• Cost planning starts with the proposal. • The cost section may include:– Labor – Materials – Subcontractors and consultants (if used)– Equipment and facilities rental – Travel

Project Budgeting: Two StepsProject Budgeting: Two Steps

1. The project cost estimate is allocated to the various work packages in the project work breakdown structure.

2. The budget for each work package is distributed over the duration of the work package.

Step 1: Allocating the Step 1: Allocating the Total Budgeted CostTotal Budgeted Cost

• Allocating total project costs for the various elements to the appropriate work packages will establish a total budgeted cost (TBC) for each work package.

• There are two approaches to establishing the TBC for each work package: top-down and bottom-up.

• When all budgets are summed, they cannot exceed the TBC.

Step 1: Allocating the Step 1: Allocating the Total Budgeted CostTotal Budgeted Cost

Source: pg. 269

Top-down

Bottom-up

Step 2: Developing the Step 2: Developing the Cumulative Budgeted CostCumulative Budgeted Cost

• The second step is to distribute each TBC over the duration of its work package.

• A cost is determined for each period.

• The cumulative budgeted cost (CBC) is the amount that was budgeted to accomplish the work that was scheduled to be performed up to that point in time.

• One uses the CBC as the standard against which actual cost is compared.

Developing the Developing the Cumulative Budgeted CostCumulative Budgeted Cost

Source: pg. 270-271

Determining Actual CostDetermining Actual Cost

• Track actual cost by establishing a system to collect data on funds actually expended.– Cost that actually is spent.

• Periodically assign a portion of the total committed cost (commitments/encumbered costs) to actual cost.– Cost that is allocated although it has not been totally spent (e.g.

salary)

• Total actual and committed cost by work package for comparison to the CBC.

• Cumulative actual cost (CAC) should be calculated.

Determining Actual CostDetermining Actual Cost

Source: pg. 273-274

CBC CAC

Determining the Determining the Value of Work PerformedValue of Work Performed

• Earned value is the value of the work actually performed.

• Determine earned value by collecting data on the percent complete for each work package.

• Convert this percentage to a dollar amount by multiplying the TBC of the work package by the percent complete.– EV = % complete x TBC

Determining the Determining the Value of Work PerformedValue of Work Performed

Source: pg. 276-277

CEV

Cumulative % complete

Cost Performance AnalysisCost Performance Analysis

Based on 4 measures:

Total Budgeted Cost (TBC) Cumulative Budgeted Cost (CBC) Cumulative Actual Cost (CAC) Cumulative Earned Value (CEV)

CPI; CV

FCAC

General performance

Cost Performance Index (CPI)Cost Performance Index (CPI)• A measure of the cost efficiency with which the project is

being performed.– The earned value received for every $1 spent.– The index is dimensionless.

• Cost performance index (CPI)= F(Cumulative earned value, Cumulative actual cost) = CEV/CAC

• Ideally CP1 should be 1.0 (i.e. $1 spent = $1 value).– If CPI < 1.0 or gets smaller, corrective action should be taken.

Cost Variance (CV)Cost Variance (CV)• The difference between the cumulative earned value

of the work performed and the cumulative actual cost.– Similar as CPI, except that it is expressed in $.

Cost Variance (CV) = Cumulative Earned Value (CEV) – Cumulative Actual Cost (CAC)

• Ideally CV should be positive values (i.e. value >= cost).– If CV is negative, corrective action should be taken.– But, don’t be too happy with positive values => maintain that

way!

Cost Forecasting Cost Forecasting

• Three methods for determining forecasted cost at completion (FCAC):

– FCAC = Total Budgeted Cost /Cost Performance Index

– FCAC = Cumulative Actual Cost + (Total Budgeted Cost – Cumulative Earned Value)

– FCAC = Cumulative Actual Cost + Re-estimate of remaining work to be performed

Cost Forecasting Cost Forecasting 1. FCAC = Total Budgeted Cost /Cost Performance Index

– The value is based on the current efficiency rate (i.e. remain the current performance).

2. FCAC = Cumulative Actual Cost + (Total Budgeted Cost – Cumulative Earned Value)– The value ignores the past/current efficiency rate. Focus on the

remaining, which will be performed at an efficiency rate of 1.0 (i.e. maximum performance to meet the budget).

3. FCAC = Cumulative Actual Cost + Re-estimate of remaining work to be performed– Redo the estimation of the remaining activities. Time consuming. Only

use this when the project has deviated far from the actual plan.

Cost Forecasting Cost Forecasting

CEV CACTBC

(1) FCAC = TBC/CPI = TBC/(CEV/CAC) = 100000/(54000/68000) = $126,582(2) FCAC = CAC + (TBC – CEV) = 68000 + (100000 - 54000) = $114,000 (3) FCAC = CAC + $$$$

Cost ControlCost Control• The key is to analyse cost performance on a regular and

timely basis (e.g. every 30th day of the month).

• Identify cost variances and inefficiencies early (i.e. CV negative) .

• Involves analysing cost performance to determine which work packages may require corrective action (i.e. CPI < 1.0).

– Deciding what corrective action should be taken– Revising the project plan

Cost ControlCost Control• When a project is offtrack, we can:

1. Ignore the deviation.– When the deviation is smaller than the tolerance we can hold. If not, do

option 2 or 3 below.

2. Take corrective actions to get back on target.

3. Revise the plan to reflect the deviation.– Adjust schedule, scope or performance requirements.

4. Cancel the project altogether.– When the project has slipped too much that it is no longer viable (i.e. too

late, too expensive or non-functional).

Cost ControlCost Control• Taking corrective actions to reduce the costs:

– Activities that will be performed in the near future.• Do not procrastinate! The more you wait, the lesser

time you have to do anything.

– Activities that have a large cost estimate.• Reduce large cost better than eliminate small tasks.• The larger estimated cost, the greater the opportunity

for cost reduction.

Ways to Reduce Ways to Reduce Costs of ActivitiesCosts of Activities

Substitute less expensive materials.– But, the quality may be jeopardised.

Assign a person with greater expertise to perform or help with the activity.– But, his/her pay may be higher.

Reduce the scope or requirements. – This will makes customers unhappy.

• Increase productivity through improved methods or technology.– Cost may be higher; learning curve etc.

Managing Cash FlowManaging Cash Flow• Make sure that sufficient payments are received from the

customer in time for you to cover the costs of performing the project.

• The key to managing cash flow is to ensure that cash comes in faster than it goes out.

• Some guidelines:

– Ask customer to pay early (e.g. downpayment; frequent and equal monthly/weekly payment)

– Invest any excess cash and earn interest.– Avoid customer from paying only at the end of the project.– Delay payment to suppliers as possible.

Project Management SoftwareProject Management Software

• All costs associated resources can be stored. The software calculates the budget for each work package and for the entire project.

• The software allows the user to define different rate structures for each resource and when charges for those resources will be accrued.

• Cost tables and graphs are available to help analyse cost performance.

Thank YouThank You

• Question?

• Next (11/5) :– Mid Sem (20%)– Tue 11/5 8.15pm; Topic 1-8