dr. jana jagodick polytechnic of namibia, 2012 project management chapter 10 project cost management
TRANSCRIPT
Dr. Jana Jagodick Polytechnic of Namibia, 2012
Project Management
Chapter 10
Project Cost Management
Dr. Jana Jagodick Polytechnic of Namibia, 2012
Cost management• Cost management
• Resource management
• Methods for cost management
• Other important cost management terms
Dr. Jana Jagodick Polytechnic of Namibia, 2012
Cost management• Costs are one of the critical elements of
project management, and project cost management entails resource planning, cost estimating, cost budgeting, and cost auditing and control.
• Cost management involves predicting the way in which money is spent on the project and to have the cash available at the right time
• You need to know the resources you need to work out a cost estimate
Dr. Jana Jagodick Polytechnic of Namibia, 2012
Resource management• Resource management entails the way
in which resources are optimally and cost-effectively utilised in order to obtain the required project outcome
• Good resource management not only saves time and costs, but it frees up resources to utilise on critical issues as the need arises
Dr. Jana Jagodick Polytechnic of Namibia, 2012
Project resourcesYou need 7 resources in a project…..
What are they?People MoneyEquipmentFacilitiesMaterials & SuppliesInformationTechnology “all means/efforts that go into
producing the outcome of a project”
Dr. Jana Jagodick Polytechnic of Namibia, 2012
Resource management:• resource planning
• resource definition
• resource allocation
• resource aggregation
• resource aggravation
• resource levelling
• resource smoothing
Dr. Jana Jagodick Polytechnic of Namibia, 2012
Resource planningCertain aspects/elements should be considered in
the resource planning process:• WBS as the primary input• Historical records of similar projects and expert
judgement• The project aim (justification & objectives)• Availability of the specified resources• The policies of the performing organisation
regarding staffing, procurement etc.
Dr. Jana Jagodick Polytechnic of Namibia, 2012
Resource definition• After the initial planning phase one has
to decide which resources to use.
• It is impossible to look at all the different resources and therefore only the essential resources, those that can be tracked, should be chosen.
• Often a resource definition includes an estimate of resource availability
Dr. Jana Jagodick Polytechnic of Namibia, 2012
Resource allocation• Resources are allocated to some of
the activities in the WBS
• Each task is taken in isolation and resources are allocated, giving preference to critical (path) activities.
• A resource demand profile can be drawn up covering the whole duration of the project
Dr. Jana Jagodick Polytechnic of Namibia, 2012
Resource aggregation• Through the use of resource aggregation,
the estimated requirement for resources can be compared with availability
What do you
need?What
have you got?
Dr. Jana Jagodick Polytechnic of Namibia, 2012
Resource aggravation• In a situation where the demand for
resources is higher then availability, the PM must, with the help of a resource histogram, resolve this problem by reallocating resources or lengthening the time frame.
Dr. Jana Jagodick Polytechnic of Namibia, 2012
Resource levelling• It is a process by which you should
ensure that the project never demands more resources than you have available
• Using a resource histogram levelling can be done in two ways: a task can be delayed or repositioned
e.g. Move from August to September when the resources
will become available
Sequencing the tasks in order of
priority…….
Dr. Jana Jagodick Polytechnic of Namibia, 2012
Resource hierarcihies• In projects, where the use of one
resource is dependent/linked to the use of another resource, resource hierarchies have to be established, to ensure that the necessary resources are available.
Dr. Jana Jagodick Polytechnic of Namibia, 2012
Resource smoothing• The project manager should try and use
resources optimally and smooth the demand for major resources by:– using subcontractors – peaks & troughs– do critical tasks first– shift resources from task to task– check through the logic of the project
Dr. Jana Jagodick Polytechnic of Namibia, 2012
Resource levelling v smoothing• Levelling – changing the tasks in time or
changing the priority of the tasks – so that peaks and troughs in demand are smoothed out
• Smoothing – managing the resources so that peaks and troughs in resource availability are smoothed out
Dr. Jana Jagodick Polytechnic of Namibia, 2012
Resource calendars• For the management of human
resources it is useful to draw up a resource calendar to see when these resources are available.
Dr. Jana Jagodick Polytechnic of Namibia, 2012
Cost Estimates• Cost estimates - quantitative
assessment of the likely costs of the resources required to complete project activities and are normally expressed in units of currency (N$) or units manpower (hours/days)
Dr. Jana Jagodick Polytechnic of Namibia, 2012
Developing Cost Estimates
• A number of methods/techniques can be used for cost estimation, by using information from these WBS, resource rates, activity duration estimates, historical information and a chart of accounts
Dr. Jana Jagodick Polytechnic of Namibia, 2012
Developing Cost EstimatesActivity Duration Resource Cost per
unit/ resource
Total costs
Compile business plan
10 days Gerson $100 per day $1000
Do risk analysis 15 days Rudolph/
Esther
£100 per day per resource
$3000
Buy 2000 bricks 2 weeks Susan (temp) $1.00 per brick
$2000
Pay weekly wages for temps
1 day Sylvia $300 per week (1 temp)
$300
Dr. Jana Jagodick Polytechnic of Namibia, 2012
Methods for Cost Estimating
• top-down estimating (analogous)
• parametric modelling
• activity-based costing
• bottom-up estimating
• Earned Value
Dr. Jana Jagodick Polytechnic of Namibia, 2012
Top down estimating• Uses rules of thumb or cost estimating
relationships
• Can use the actual cost of a similar project as the basis for estimating the cost of a current project
• Good where there is limited information on a current project
• But many projects are different
Dr. Jana Jagodick Polytechnic of Namibia, 2012
Parametric Modelling• Uses project characteristics in a
mathematical model
• Models may be simple (e.g. building a house can be estimated by cost per m2 of space) or can be complex
• Can be expensive to run (uses costly software) and can be highly inaccurate because the factors may not be scaleable
Dr. Jana Jagodick Polytechnic of Namibia, 2012
Activity based costing (ABC)
• Cost based on how much it costs to do certain activities
• Can be fairly accurate compared with other costing models
Manufacture garments
12 hours $100 per hour $1200
Pack garments
3 hours $50 per hour $150
Ship garments
24 hours $150 per hour $3600
Dr. Jana Jagodick Polytechnic of Namibia, 2012
Bottom up estimating
• Uses a detailed WBS and needs pricing of each activity that make up the project
• Time consuming and can be costly – especially if there are many small work items to be costed
• Usually good accuracy
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Dr. Jana Jagodick Polytechnic of Namibia, 2012
Earned Value
• Earned value – estimating task cost• Growing in popularity as one of the best
ways to estimate cost• Start using a cost method of the type shown
previously – ABC, parametric etc• Next, when tasks are completed, compare
estimate to actual costs• Work out cost variance• Build in to future cost estimates
Dr. Jana Jagodick Polytechnic of Namibia, 2012
Cost estimate considerations• Most cost estimates turn out to be too
low!• A contingency factor should be built
into any cost estimate to allow for a change of scope and/or planning, technical considerations and changing assumptions
• With the help of a spread sheet (available in most PM software), changes can be accommodated and implemented and various sensitivities can be run
Dr. Jana Jagodick Polytechnic of Namibia, 2012
Project Budgets - Steps• determine and set clear objectives
• accurate costs must be attached to each objective
• the expected income must be estimated
• income v expenditure (feasibility)
• produce the final budget
Dr. Jana Jagodick Polytechnic of Namibia, 2012
Cost Management Plan• The cost management plan
describes how cost variances will be managed, can be formal or informal, and is part of the overall project or business plan
Dr. Jana Jagodick Polytechnic of Namibia, 2012
Cost estimating• Cost estimating - an estimate of the
costs of the resources by adding individual project elements into a project total
• This estimate is known as the benchmark or baseline
Dr. Jana Jagodick Polytechnic of Namibia, 2012
Project Selection• Important cost or money factors
which will finally influence the selection of a project are:– cash flow– risk– resources
Dr. Jana Jagodick Polytechnic of Namibia, 2012
Business Plan• A business plan is a crucial element in
project management in order to secure support or funds for a project.
• An important part of the business plan are cost estimates which are essential to secure funding