bsbpmg504a manage project costs manage project costs project cost processes diploma of project...
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BSBPMG504A Manage Project Costs
Manage Project Costs
Project Cost Processes
Diploma of Project Management 17872Qualification Code BSB51507
Unit Code BSBPMG504A
BSBPMG504A Manage Project Costs
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
BSBPMG504A Manage Project Costs
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
BSBPMG504A Manage Project Costs
4.2 Develop Project Management Plan
• 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
BSBPMG504A Manage Project Costs
• 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
4.2 Develop Project Management Plan
Adapted from PMBOK 4th Edition
BSBPMG504A Manage Project Costs
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
Initiation Planning Execution Close
Monitor
Control
BSBPMG504A Manage Project Costs
7.1 Estimate Costs
Adapted from PMBOK 4th Edition
Initiation Planning Execution Close
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
BSBPMG504A Manage Project Costs
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
Adapted from PMBOK 4th Edition
ReserveAnalysis
ExpertJudgementAnalogous
Estimating
ParametricEstimating
Estimating Software
Three-pointEstimates
Bottom-upEstimating
Vendor BidAnalysis
BSBPMG504A Manage Project Costs
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
Adapted from PMBOK 4th Edition
BSBPMG504A Manage Project Costs
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
Initiation Planning Execution Close
Monitor
Control
Adapted from PMBOK 4th Edition
BSBPMG504A Manage Project Costs
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
Adapted from PMBOK 4th Edition
BSBPMG504A Manage Project Costs
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
Adapted from PMBOK 4th Edition
BSBPMG504A Manage Project Costs
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
Adapted from PMBOK 4th Edition
Initiation Planning Execution Close
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BSBPMG504A Manage Project Costs
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
Adapted from PMBOK 4th Edition
Initiation Planning Execution Close
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BSBPMG504A Manage Project Costs
7.2 Determine Budget
Adapted from PMBOK 4th Edition
Initiation Planning Execution Close
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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
BSBPMG504A Manage Project Costs
7.2 Determine Budget
Adapted from PMBOK 4th Edition
• 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
BSBPMG504A Manage Project Costs
7.2 Determine Budget
Adapted from PMBOK 4th Edition
• 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
BSBPMG504A Manage Project Costs
• 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
7.2 Determine Budget
Initiation Planning Execution Close
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Control
Adapted from PMBOK 4th Edition
BSBPMG504A Manage Project Costs
• 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
7.2 Determine Budget
Initiation Planning Execution Close
Monitor
Control
Adapted from PMBOK 4th Edition
BSBPMG504A Manage Project Costs
Typical Expenditure and Funding Patterns
Time
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xpe
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iture
CostBaseline
ActualExpenditure
ClosureExecutionPlanningInitiation
FundingRequest 1
FundingRequest 4Funding
Request 3
FundingRequest 2
FundingRequest 5
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BSBPMG504A Manage Project Costs
7.2 Determine Budget
Adapted from PMBOK 4th Edition
Initiation Planning Execution Close
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
BSBPMG504A Manage Project Costs
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
Adapted from PMBOK 4th Edition
Initiation Planning Execution Close
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BSBPMG504A Manage Project Costs
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
Adapted from PMBOK 4th Edition
Initiation Planning Execution Close
Monitor
Control
BSBPMG504A Manage Project Costs
7.3 Control Costs
Adapted from PMBOK 4th Edition
• 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
Adapted from PMBOK 4th Edition
Initiation Planning Execution Close
Monitor
Control
BSBPMG504A Manage Project Costs
7.3 Control Costs
Adapted from PMBOK 4th Edition
• Tools and techniques to Control Budget
PerformanceReviewsTo-Complete
EstimatesEarning ValueManagement
Advanced technique
PercentageCompleteEstimates
Forecasting
ProjectManagement
Software
VarianceAnalysis
Adapted from PMBOK 4th Edition
Initiation Planning Execution Close
Monitor
Control
BSBPMG504A Manage Project Costs
• 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
Initiation Planning Execution Close
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BSBPMG504A Manage Project Costs
• 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
Initiation Planning Execution Close
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BSBPMG504A Manage Project Costs
• 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
Adapted from PMBOK 4th Edition
BSBPMG504A Manage Project Costs
7.3 Control Costs
Adapted from PMBOK 4th Edition
• 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
BSBPMG504A Manage Project Costs
7.3 Control Costs
Adapted from PMBOK 4th Edition
Initiation Planning Execution Close
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
BSBPMG504A Manage Project Costs
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
BSBPMG504A Manage Project Costs
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
BSBPMG504A Manage Project Costs
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