pmbok 4th edition chapter 7 - project cost management

CHAPTER 7

PROJECT COST MANAGEMENT

Ahmad H. Maharma PMP®

PM Knowledge Areas & Process Groups

PM Process Groups / KnowledgeArea Processes

Initiating Process Group

Planning Process Group Executing Process Group

Monitoring & Controlling Process Group

Closing Process Group

Project Develop Project Charter Develop Project Management Direct and Manage Project Monitor and Control Project Work Close ProjectProject Management Integration

Develop Project Charter Develop Project Management Plan

Direct and Manage Project Execution

Monitor and Control Project WorkIntegrated Change Control

Close Project

Project Scope Management

Collect requirementsDefine ScopeCreate WBS

Verify ScopeControl Scope

Project Time Define Activity Schedule ControlProject Time Management

Define Activity Sequence ActivityEstimating ResourceEstimating Duration Develop Schedule

Schedule Control

Project Cost Management

Estimating CostBudgeting Cost

Control Cost

Project Quality Management

Quality Planning Perform Quality Assurance Perform Quality Control

Project HR Management

Human Resources Planning Acquire Project TeamDevelop Project TeamManage Project Team

ProjectCommunications Management

Identify Stakeholders Plan Communications Distribute Information Manage stakeholders expectations

Performance Reporting

Project Risk Management

Plan Risk ManagementRisk IdentificationQualitative / Quantitative Risk Analysis

Risk Monitoring and Control

yRisk Response Planning

Project Procurement Management

Plan procurement Conduct procurement Administer Contract Close procurement

Project Cost ManagementPlanningProcesses

Monitoring &Controlling Processes

Enter phase/Start project

Exit phase/End project

InitiatingProcesses

ClosingProcesses

ExecutingProcesses

Knowledge Area

Process

I iti ti Pl i E ti Monitoring & Cl iArea Initiating Planning Executing gControl Closing

Cost Cost EstimatingC t B d ti Cost ControlCost Cost Budgeting


Project Cost Management includes the processes involved in estimating, budgeting, and controlling costs so that the project can be completedwithin the approved budget Figure 7 1 provides an overview of the Projectwithin the approved budget. Figure 7‐1 provides an overview of the Project

Cost Management processes which include the following: 7.1 Estimate Costs—The process of developing an approximation of the monetary7.1 Estimate Costs The process of developing an approximation of the monetary resources needed to complete project activities.

7.2 Determine Budget—The process of aggregating the estimated costs of g p gg g gindividual activities or work packages to establish an authorized cost baseline.

7.3 Control Costs—The process of monitoring the status of the project toupdate the project budget and managing changes to the cost baseline.


The cost management plan can establish the following: • Level of accuracy. Activity cost estimates will adhere to a rounding of

the data to a prescribed precision (e g $100 $1 000)the data to a prescribed precision (e.g., $100, $1,000), based on the scope of the activities and magnitude of the project, and may include an amount for contingencies.

Units of measure. Each unit used in measurements (such as staff hours,staff days, weeks, or lump sum) is defined for each of the resources.

• Organizational procedures links. The work breakdown structure (WBS) provides the framework for the cost management plan, allowing for consistency with the estimates, budgets, d t l f t Th WBS t d f th j t tand control of costs. The WBS component used for the project cost

accounting is called the control account (CA).

Each control account is assigned a unique code or account number(s)Each control account is assigned a unique code or account number(s)that links directly to the performing organization’s accounting system.


• Control thresholds: Variance thresholds for monitoring cost performance may be specified to indicate an agreed‐upon amount of variation to be allowed before someti d t b t kaction needs to be taken.

Thresholds are typically expressed as percentage deviations from the baseline plan.

• Rules of performance measurement. Earned value management (EVM) rules of performance measurement are set. For example, the cost management plan could:

Define the WBS and points at which measurement of control accounts will be performed‐ Define the WBS and points at which measurement of control accounts will be performed,

‐ Establish the earned value measurement techniques (e.g., weighted milestones, fixed‐formula, percent complete, etc.) to be employed, and

‐ Specify the earned value management computation equations for determining theprojected estimate at completion (EAC) forecasts and other tracking methodologies.


• Reporting formats: The formats and frequency for the various cost reports are defined.

• Process descriptions. Descriptions of each of the three cost management processes are documented.

All of this information is included in the cost management plan, t f th j t t l ith t t ithi th b da component of the project management plan, either as text within the body

of the plan or as appendices.

The cost management plan may be formal orThe cost management plan may be formal or informal, highly detailed or broadly framed, based upon the needs of the project.

7.1 Cost Estimating

7.1 Cost Estimating7.1 Cost Estimating• Estimate Costs is the process of developing an approximation

of the monetary resources needed to complete y p

• Cost estimates are generally expressed in units of some currency (i.e., dollars, euro, yen, etc.), although in some instances other units of measure, such as staff hours or staff days, are used to facilitate comparisons by eliminating the days, a e used to ac tate co pa so s by e at g t eeffects of currency fluctuations.

• Cost estimates should be refined during the course of the project to reflect additional detail as it becomes available.

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7.1 Cost Estimating7.1 Cost Estimating• The accuracy of a project estimate will increase as the project

progresses through the project life cycle. p g g p j y

• Hence cost estimating is an iterative process from phase to phase. For example, a project in the initiation phase could have a rough order of magnitude (ROM) estimate in the range of ±50%. o 50%

• Later in the project, as more information is known, estimates could narrow to a range of ±10%. In some organizations, there are guidelines for when such refinements can be made and the degree of accuracy that is expected.the degree of accuracy that is expected.

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7.1 Cost Estimating7.1 Cost Estimating• Costs are estimated for all resources that will be charged to

the project. p j

• This includes, but is not limited to, labor, materials, equipment, services, and facilities, as well as special categories such as an inflation allowance or contingency costs.

• A cost estimate is a quantitative assessment of the likely costs for resources required to complete the activity.

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Table 7‐3. Types of Cost EstimatesTable 7 3. Types of Cost EstimatesType of Estimate When Done Why Done How Accurate

Rough Order ofMagnitude (ROM)

Very early in theproject life cycle,often 3–5 yearsb f j t

Provides roughballpark of cost forselection decisions

–25%, +75%

before projectcompletion

Budgetary Early, 1–2 years out Puts dollars in thebudget plans

–10%, +25%budget plans

Definitive Later in the project, <1 year out

Provides details forpurchases, estimate

l

–5%, +10%

actual costs

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EstimatesEstimates

P L hCharter

L hPlan

Pre-Launch Approval

Size Estimates (Macro)

Launch Approval

Task-based Estimates

Execute

Project Schedule

+/- 35% range +/- 15% range +/- 10% range

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Quality/Accuracy of Cost Estimation

Estimate Accuracy

Estimation

• Most difficult to estimate as very little project info is available, made during initiating process

Rough Order of Magnitude(ROM)

+/- 50%

Budget E i

-10% • Used to finalize the Request for Authorization (RFA), and establish commitment, made duringEstimate +25%(RFA), and establish commitment, made during planning phase

Definitive Estimate

-5%10%

• During the project and refined

Types of Cost• Variable Costs

– Change with the amount of production/work l l– e.g. material, supplies, wages

• Fixed Costs

– Do not change as production change– e.g. set‐up, rental

• Direct Costs

– Directly attributable to the work of project– e.g. team travel, recognition, team wages

• Indirect Costs• Indirect Costs

– overhead or cost incurred for benefit of more than one project– e.g. taxes, fringe benefit, janitorial services

Project Cost Management• The process involved in estimating, budgeting, and controlling cost

so that the project can be completed within approved budgetp j p pp g• Life cycle costing

– Looking at the cost of whole life of the product (include g p (maintenance)

• Value analysis (value engineering)– Looking at less costly way to do the same work within

the same scope• Law of Diminishing Returns

– E.g. adding twice resource to task may not get the task done in half cost/time

• Time value of money (depreciation)• Cost will also affect the schedule• Cost risk vs Type of contractdone in half cost/time• Cost risk vs. Type of contract

7.1 Cost Estimating ‐ Inputs7.1 Cost Estimating Inputs• 1. Scope Baseline

Scope statement. The scope statement (Section 5.2.3.1) provides the product description, acceptance criteria, key deliverables, project boundaries, assumptions, and constraints about the project

Work breakdown structure. The project WBS (Section 5.3.3.1) provides the relationships among all the components of the project and the project p g p p j p jdeliverables (Section 4.3.3.1).

WBS dictionary The WBS dictionary (Section 5 3 3 2) and related detailedWBS dictionary. The WBS dictionary (Section 5.3.3.2) and related detailed statements of work provide an identification of the deliverables and a description of the work in each WBS component required to produce each deliverable.

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7.1 Cost Estimating ‐ Inputs7.1 Cost Estimating Inputs2. Project Schedule

• The type and quantity of resources and the amount of time which those resources are applied to complete the work of the project are major factors in determining the project cost.

• Schedule activity resources and their respective durations are used as key inputs to this process. p p

• Estimate Activity Resources (Section 6.3) involves determining the availability and quantities required of staff and material needed toavailability and quantities required of staff and material needed to perform schedule activities.

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7.1 Cost Estimating ‐ Inputs7.1 Cost Estimating Inputs3. Human Resource Plan • Project staffing attributes, personnel rates, and related

rewards/recognition (Section 9.1.3.1) are necessary components for developing the project cost estimates.

4. Risk Register

• The risk register (Section 11 2 3 1) should be reviewed to consider riskThe risk register (Section 11.2.3.1) should be reviewed to consider risk mitigation costs.

• Risks, which can be either threats or opportunities, typically have an impact on both activity and overall project costsimpact on both activity and overall project costs.

• As a general rule, when the project experiences a negative risk event, the near‐term cost of the project will usually increase, and there will sometimes be a delay in the project schedulesometimes be a delay in the project schedule.

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7.1 Cost Estimating ‐ Inputs7.1 Cost Estimating Inputs5. Enterprise Environmental Factors

• The enterprise environmental factors that influence the Estimate Costs process include, but are not limited to:

Market conditions. Market conditions describe what products, services, and results are available in the market, from whom, and under what terms and conditions. Regional and/or global supply and demand g / g pp yconditions greatly influence resource costs.

Published commercial information Resource cost rate information is oftenPublished commercial information. Resource cost rate information is often available from commercial databases that track skills and human resource costs, and provide standard costs for material and equipment. Published seller price lists are another source of information. p

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7.1 Cost Estimating ‐ Inputs7.1 Cost Estimating Inputs6. Organizational Process Assets

• The organizational process assets that influence the Estimate Costs process include but are not limited to:

– Cost estimating policies, – Cost estimating templates, – Historical information, and – Lessons learned.

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7.1 Cost Estimating ‐ Tools and Techniques7.1 Cost Estimating Tools and Techniques1. Expert Judgment

Cost estimates are influenced by numerous variables such as labor rates, material costs, inflation, risk factors, and other variables.

2 Analogo s Estimating “Top do n Estimating”2. Analogous Estimating “Top‐down Estimating”

Analogous cost estimating uses the values of parametersAnalogous cost estimating uses the values of parameters, such as scope, cost, budget, and duration or measures of scale such as size, weight, and complexity, from a previous, similar

j t th b i f ti ti th tproject as the basis for estimating the same parameter or measure for a current project.

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7.1 Cost Estimating ‐ Tools and Techniques7.1 Cost Estimating Tools and Techniques• When estimating costs, this technique relies on the actual

cost of previous, similar projects as the basis for estimating p , p j gthe cost of the current project.

• Analogous cost estimating uses historical information and expert judgment.

• Analogous cost estimating is generally less costly and time consuming than other techniques, but it is also generally less accurate.

• Analogous cost estimates can be applied to a total project or to segments of a project used in conjunction with otherto segments of a project, used in conjunction with other estimating methods.

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7.1 Cost Estimating ‐ Tools and Techniques7.1 Cost Estimating Tools and Techniques3. Parametric Estimating

• Parametric estimating uses a statistical relationship between historical data and other variables (e.g., square footage in construction) to calculate an estimate for activity parameters, such as cost, budget, and duration.

• This technique can produce higher levels of accuracy depending upon the sophistication and underlying data built into the model.

• Parametric cost estimates can be applied to a total project or to segments of a project in conjunction with other estimatingto segments of a project, in conjunction with other estimating methods.

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7.1 Cost Estimating ‐ Tools and Techniques7.1 Cost Estimating Tools and Techniques4. Bottom‐Up Estimating

• Bottom‐up estimating is a method of estimating a component of work.

• The cost of individual work packages or activities is estimated with the greatest level of specified detail.

• The detailed cost is then s mmari ed or “rolled p” to higher• The detailed cost is then summarized or “rolled up” to higher levels for subsequent reporting and tracking purposes.

• The cost and accuracy of bottom‐up cost estimating is y p gtypically influenced by the size and complexity of the individual activity or work package.

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7.1 Cost Estimating ‐ Tools and Techniques7.1 Cost Estimating Tools and Techniques5. Three‐Point Estimates

• The accuracy of single‐point activity cost estimates can be improved by considering estimation uncertainty and risk.

• This concept originated with the program evaluation and re ie techniq e (PERT)review technique (PERT).

• PERT uses three estimates to define an approximate range forPERT uses three estimates to define an approximate range for an activity’s cost.

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7.1 Cost Estimating ‐ Tools and Techniques

PERT analysis calculates an Expected (Te) activity duration using a weighted average of these three estimates:

Te = (To+4Tm+Tp)/ 6Te = (To+4Tm+Tp)/ 6

Duration estimates based on this equation (or even on a q (simple average of the three points) may provide more accuracy, and the three points clarify the range of uncertainty 0f the duration estimates0f the duration estimates.

Points Estimate (PERT)

ExpectedExpectedExpected StandardDeviationStandardDeviationStandardDeviation

VarianceVarianceVariance

6Ο4ΜP ++

6ΟP−

⎥⎦

⎤⎢⎣

⎡ −6ΟP 2

∑= varianceSD ∑ a a ceS

7.1 Cost Estimating ‐ Tools and Techniques7.1 Cost Estimating Tools and Techniques7. Cost of Quality (COQ)

• Assumptions about costs of quality (Section 8.1.2.2) may be used to prepare the activity cost estimate.

8. Project Management Estimating Software

• Project management cost estimating software applications, computerized spreadsheets simulation and statistical toolscomputerized spreadsheets, simulation, and statistical tools are becoming more widely accepted to assist with cost estimating.

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7.1 Cost Estimating ‐ Tools and Techniques7.1 Cost Estimating Tools and Techniques9. Vendor Bid Analysis

• Cost estimating methods may include analysis of what the project should cost, based on the responsive bids from qualified vendors.

• Where projects are awarded to a vendor under competitive processes additional cost estimating work can be required ofprocesses, additional cost estimating work can be required of the project team to examine the price of individual deliverables and to derive a cost that supports the final total

jproject cost.

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7.1 Cost Estimating ‐ output7.1 Cost Estimating output1. Activity Cost Estimates

• Activity cost estimates are quantitative assessments of the probable costs required to complete project work.

• Cost estimates can be presented in summary form or in detail.

• Costs are estimated for all resources that are applied to the activity cost estimateactivity cost estimate.

• This includes, but is not limited to, direct labor, materials, equipment, services, facilities, information technology

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7.1 Cost Estimating ‐ output7.1 Cost Estimating output2. Basis of Estimates

• The amount and type of additional details supporting the cost estimate vary by application area.

• Regardless of the level of detail, the supporting doc mentation sho ld pro ide a clear and completedocumentation should provide a clear and complete

• understanding of how the cost estimate was derived.

• Supporting detail for activity cost estimates may include:

• Documentation of the basis of the estimate (i.e., how it was developed), 34

7.1 Cost Estimating ‐ output7.1 Cost Estimating output3. Project Document Updates

• Project documents that may be updated include, but are not limited to, the risk register.

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7.2 Cost Budgeting

7.2 Determine Budget7.2 Determine Budget• Determine Budget is the process of aggregating the estimated

costs of individual activities or work packages to establish an p gauthorized cost baseline.

• This baseline includes all authorized budgets, but excludes management reserves.

• Project budgets constitute the funds authorized to execute the project.

• Project cost performance will be measured against the th i d b d tauthorized budget.

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7.2 Determine Budget ‐ Inputs7.2 Determine Budget Inputs1. Activity Cost Estimates

Cost estimates (Section 7.1.3.1) for each activity within a work package are aggregated to obtain a cost estimate for each work package.

2 Basis of Estimates2. Basis of Estimates

Any basic assumptions dealing with the inclusion or exclusionAny basic assumptions dealing with the inclusion or exclusion of indirect costs in the project budget are specified in the basis of estimates.

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7.2 Determine Budget ‐ Inputs7.2 Determine Budget Inputs3. Scope Baseline

Scope Statement Work breakdown structure WBS dictionaryScope Statement, Work breakdown structure, WBS dictionary.

4. Project Schedule j

• The project schedule (Section 6.5.3.1), as part of the project management plan, includes planned

• start and finish dates for the project’s activities, milestones, work packages planning packages and control accountswork packages, planning packages, and control accounts.

• This information can be used to aggregate costs to the calendar periods in which

• the costs are planned to be incurred. 40

7.2 Determine Budget ‐ Inputs7.2 Determine Budget Inputs5. Resource Calendars

• Resource calendars provide information on which resources are assigned to the project and when they are assigned.

• This information can be used to indicate resource costs over the duration of the project.

6. Contracts

• Applicable contract information and costs relating to products, services, or results that have been

• purchased are included when determining the budget. 41

7.2 Determine Budget ‐ Inputs7.2 Determine Budget Inputs7. Organizational Process Assets

• The organizational process assets that influence the Determine Budget process include, but are not limited to:

– Existing formal and informal cost budgeting‐related policies, procedures, and guidelines,

– Cost budgeting tools, and – Reporting methods.

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7.2 Determine Budget – Tools and techniques7.2 Determine Budget Tools and techniques 1. Cost Aggregation

• Cost estimates are aggregated by work packages in accordance with the WBS.

• The work package cost estimates are then aggregated for the higher component le els of the WBS (s ch as controlhigher component levels of the WBS (such as control accounts) and ultimately for the entire project.

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Cost Aggregation• Reserves & risk management are

important while estimating!Management reserves

Cost Budget

– Contingency reserves: Cost Baseline the cost impacts of the C ti

Management reserves

Cost baseline

the cost impacts of the remaining risk

M t C tProject estimates

Contingency reserves

– Management reserves: Cost Budgetextra fund to cover unforeseen Work package estimates

Control account estimates

risk or changes to the project Activity estimates

Cash Flow, Cost Baseline and Funding, g

7.2 Determine Budget – Tools and techniques7.2 Determine Budget Tools and techniques 2. Reserve Analysis

• Budget reserve analysis can establish both the contingency reserves and the management reserves for the project.

• Contingency reserves are allowances for unplanned but potentiall req ired changes that can res lt from reali ed riskspotentially required changes that can result from realized risks identified in the risk register.

• Management reserves are budgets reserved for unplanned changes to project scope and cost.

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7.2 Determine Budget – Tools and techniques7.2 Determine Budget Tools and techniques 3. Expert Judgment

• Judgment provided based upon expertise in an application area, Knowledge Area, discipline, industry, etc., as appropriate for the activity being performed should be used in determining the budget.

• Such expertise may be provided by any group or person with specialized education, knowledge, skill, experience, or training.

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7.2 Determine Budget – Tools and techniques7.2 Determine Budget Tools and techniques 4. Historical Relationships

• Any historical relationships that result in parametric estimates or analogous estimates involve the use of project characteristics (parameters) to develop mathematical models to predict total project costs.

• Such models can be simple (e.g., residential home construction is based on a certain cost per square foot of space) or complex (e.g., one model of software development costing uses multiple separate adjustment factors, each of which has numerous points within it).which has numerous points within it).

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7.2 Determine Budget – Tools and techniques7.2 Determine Budget Tools and techniques 5. Funding Limit Reconciliation

• The expenditure of funds should be reconciled with any funding limits on the commitment of funds for the project.

• A variance between the funding limits and the planned e pendit res ill sometimes necessitate the resched ling ofexpenditures will sometimes necessitate the rescheduling of work to level out the rate of expenditures.

• This can be accomplished by placing imposed date constraints for work into the project schedule.

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7.2 Determine Budget – Outputs7.2 Determine Budget Outputs1. Cost Performance Baseline

• The cost performance baseline is an authorized time‐phased budget at completion (BAC) used to measure, monitor, and control overall cost performance on the project.

• It is de eloped as a s mmation of the appro ed b dgets b• It is developed as a summation of the approved budgets by time period and is typically displayed in the form of an S‐curve.

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7.2 Determine Budget – Outputs7.2 Determine Budget Outputs2. Project Funding Requirements

• Total funding requirements and periodic funding requirements (e.g., quarterly, annually) are derived from the cost baseline.

• The cost baseline ill incl de projected e pendit res pl s• The cost baseline will include projected expenditures plus anticipated liabilities.

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7.2 Determine Budget – Outputs7.2 Determine Budget Outputs3. Document Updates • Project documents that may be updated include but are notProject documents that may be updated include but are not

limited to: – Risk register, – Cost estimates, and – Project schedule.

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7.3 Cost Control

7.3 Control Cost7.3 Control Cost• Control Costs is the process of monitoring the status of the

project to update the project budget and managing changes p j p p j g g g gto the cost baseline.

• Project cost control includes:

1 Infl encing the factors that create changes to the a thori ed1. Influencing the factors that create changes to the authorized cost baseline,

2. Ensuring that all change requests are acted on in a timely g g q ymanner,

3. Managing the actual changes when and as they occur, 4. Ensuring that cost expenditures do not exceed the

authorized funding, by period and in total for the project, 55

7.3 Control Cost7.3 Control Cost5. Monitoring cost performance to isolate and understand

variances from the approved cost baseline, pp ,

6. Monitoring work performance against funds expended,

7. Preventing unapproved changes from being included in the reported cost or reso rce sagereported cost or resource usage,

8. Informing appropriate stakeholders of all approved changes and associated cost,,

9. Acting to bring expected cost overruns within acceptable limits.

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7.3 Control Cost ‐ Inputs7.3 Control Cost Inputs1. Project Management Plan

• The project management plan described in Section 4.2.3.1 contains the following information that is used to control cost:

• Cost Performance baseline. The cost performance baseline is compared ith act al res lts to determine if a changecompared with actual results to determine if a change, corrective action or preventive action is necessary.

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7.3 Control Cost ‐ Inputs7.3 Control Cost Inputs2. Project Funding Requirements

• Project funding requirements are described in Section 7.2.3.2.

3. Work Performance Information

• Work performance information includes information about project progress, such as which deliverables

• have started their progress and which deliverables have• have started, their progress and which deliverables have finished.

• Information also includes costs that have been authorized and incurred, and estimates for completing project work.

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7.3 Control Cost ‐ Inputs7.3 Control Cost Inputs4. Organizational Process Assets

• The organizational process assets that can influence the Control Costs process include, but are not limited to: – Existing formal and informal cost control‐related policies, procedures,

and guidelines; – Cost control tools; and – Monitoring and reporting methods to be used.

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7.3 Control Cost – Tools and techniques7.3 Control Cost Tools and techniques 1. Earned Value Management

• Earned value management (EVM) in its various forms is a commonly used method of performance measurement.

• It integrates project scope, cost, and schedule measures to help the project management team assess and meas rehelp the project management team assess and measure project performance and progress.

• It is a project management technique that requires the formation of an integrated baseline against which

f b d f th d ti f th j tperformance can be measured for the duration of the project.

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What Is Earned Value Analysis?What Is Earned Value Analysis?

WBS Formal Reporting System

Project Schedule

Resource Planning/ Cost Estimating

WBS

Early Warning & Detection

Informed Management Decisions

Corrective Actions

Formal Reporting System

Earned Value

ManagementDefine/Assign

Schedule/BudgetEstablish Baseline

Corrective ActionsRecovering PlanningSystem

utho

rizat

ionTim

e SheetW

ork

Aut System

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Planned Value (PV) [was Budgeted Cost of WorkPlanned Value (PV) [was Budgeted Cost of Work Scheduled (BCWS)]

How much work should be done (what you planned to do)How much work should be done (what you planned to do)

JAN FEB MAR APR MAY

Work Package #140 40 40 100 60

Work Package #2100 50 70 20

g

Work Package #340 40 60


PV = 140 180 220 240 180 BAC = 960

Cumulative PV = 540

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Earned Value (EV) [was Budgeted Cost of Work ( ) [ gPerformed (BCWP)]

How much work is done on a budgeted basis (what you’ve actually d )done)Work completed during a given period of time = “Earned Value”

JAN FEB MAR APR MAY

Work Package #140 40 40 100 60

100% Complete (280)


75% Complete (180)


50% Complete (70)

50 70 60 120Work Package #4

50 70 60 12020% Complete (60)

PV = 140 180 220 240 180 BAC = 960

PV = 540

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PV 540EV = 590

Actual Cost (AC) [was Actual Cost of Work Performed (ACWP)]

How much did the “is done” work cost (what you actuallyHow much did the is done work cost (what you actually spent or what it actually cost)

JAN FEB MAR APR MAY

Work Package #140 40 40 100 60

100% Complete (280)

100 50 70 20Work Package #2

100 50 70 2075% Complete (180)


50% Complete (70)


20% Complete (60)

PV = 140 180 220 240 180 BAC = 960

PV = 540EV = 590

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AC = 560 (not calculated here)

Schedule Variance (SV)Schedule Variance (SV)• EV ‐ PV: “Value of Work Performed less value of Work Scheduled”• *A Negative number indicates a “Potential Slip”• Schedule Variance status does:

– indicate the dollar value difference between Example:

$– work that is ahead or behind the plan– reflect a given measurement method

• Schedule Variance status does not:

PV = $250

EV = $200

SV = EV - PV– address impact of work sequence– address importance of work– reflect critical path assessment

i di t t f ti it ill li

SV EV PV

= $200 - $250

= - $50– indicate amount of time it will slip– identify source (labor & material) of difference– indicate the time ahead/behind (or regain) schedule– indicate the cost needed to regain scheduleindicate the cost needed to regain schedule

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Cost Variance (CV)Cost Variance (CV)

EV AC: “Value of Work Performed for Each Dollar’sEV - AC: Value of Work Performed for Each Dollar s Worth of Work Scheduled”

*A Negative number indicates an “Overrun”

Example:p

EV = $200

AC = $190

CV = EV - AC

= $200 - $190

= $10

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= $10

Schedule Performance Index (SPI)Schedule Performance Index (SPI)

Is a Measure of Contractor “Schedule Efficiency”Is a Measure of Contractor Schedule Efficiency

Example:SPI = EV/PV Example:

PV = $250

EV = $200

SPI = EV/PV

= $200/$250

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Less Than 1.0 is unfavorable = BEHIND schedule

= .80

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Greater Than 1.0 is favorable = AHEAD of schedule

Cost Performance Index (CPI)Cost Performance Index (CPI)

Is a Measure of Contractor “Cost Efficiency”Is a Measure of Contractor Cost Efficiency

Example:CPI = EV/AC EV = $200

AC = $190

CPI = EV/AC

= $200/$190

= 1 05

Less Than 1.0 is unfavorable = Cost is GREATER than budgeted

= 1.05

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Greater Than 1.0 is favorable = Cost is LESS than budgeted

7.3 Control Cost – Tools and techniques7.3 Control Cost Tools and techniques 2. Forecasting

• As the project progresses, the project team can develop a forecast for the estimate at completion (EAC) that may differ from the budget at completion (BAC) based on the project performance.

• If it becomes obvious that the BAC is no longer viable, the project manager should develop a forecasted EAC.

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Budget at Completion (BAC)Budget at Completion (BAC)

What is Budget at Completion (BAC)• Sum of the total budgets for a projectg p j

BAC = Cum PV (BCWS) for all work packages in the projectp j

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Forecasting ‐ Estimate at Completion (EAC)g p ( )

What is Estimate at Completion (EAC)• Expected total cost for a defined scope of work• Forecast of most likely total project cost

Techniques for developing EAC:

EAC = Actuals to date plus a new estimate for all remaining work (AC + ETC)*What is ETC? Estimate to Complete (ETC) is the cost for all remainingWhat is ETC? Estimate to Complete (ETC) is the cost for all remaining

work.

EAC = BAC/CPI Total project budget divided by the cost performance index

EAC = AC +BAC – EV

EAC = AC + (BAC – EV)/CPI

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( )

Forecasting EAC• Common alternative way to calculate EAC

Table captured from Practice Standard for Earned Value Management, PMI © 2005

Earned Value GraphEarned Value GraphCost

EAC$360M EAC(Forecast)

BAC(Total Budget)

$300M

$360M

Cost Overrun

BCWS (PV)

(Total Budget)

BCWS (PV)(Planned)

ACWP (AC)(Actual)

SpendingVariance

ScheduleCost

VarianceCPI

BCWP (EV)(Accomplishment)

ScheduleVariance Schedule

Slippage

73Time40 Mos.24 Mos. 52 Mos.

Earned Value TechniqueTerms and Formulas Definition

B d t t l ti (BAC) H h did BUDGET f th TOTAL j t ff t?Budget at completion (BAC) How much did we BUDGET for the TOTAL project effort?

Estimate at Completion (EAC) What do we currently expect the TOTAL project cost (a f t)?= BAC / CPI forecast)?

Estimate to Complete (ETC)= EAC - AC

From this point on, how much MORE do we expect it to cost to finish the project (a forecast)?

Variance at Completion (VAC)= BAC – EAC

As of today, how much over or under budget do we expect to be at the end of the project?

• EAC is an important forecasting value.

Earned Value: Graphical RepresentationRepresentation

Estimate at Completion

(EAC)

Projection of schedule delay at completion

TODAY(Reporting day)

EAC ( )

Budget at Completion

(BAC)

Projection of cost variance at completion

(VAC) BAC

AC

COST

CostVariance(CV)

(BAC)

PV

ScheduleVariance (SV)ACTUAL

PLANEV

PV

EARNVALUE

TIMEProject is over budget & behind schedule

Earned Value Management

b d b

Image captured from Practice Standard for Earned Value Management, PMI © 2005

EV can be calculated by (%progress) x (planned man-days)

7.3 Control Cost – Tools and techniques7.3 Control Cost Tools and techniques 4. To‐Complete Performance Index (TCPI)

• The to‐complete performance index (TCPI) is the calculated projection of cost performance that must be achieved on the remaining work to meet a specified management goal, such as the BAC or the EAC.

• If it becomes obvious that the BAC is no longer viable the• If it becomes obvious that the BAC is no longer viable, the project manager develops a forecasted estimate at completion (EAC).

• Once approved, the EAC effectively supersedes the BAC as • the cost performance goal. Equation for the TCPI based on the

BAC: (BAC – EV) / (BAC – AC)BAC: (BAC – EV) / (BAC – AC).

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To‐Complete Performance Index (TCPI)

• Helps the team determine the efficiency that must be achieved on • Helps the team determine the efficiency that must be achieved on the remaining work for a project to meet a specified endpoint, such as BAC or the team’s revised EAC

EV)–(BACRemainingWork• TCPI AC)- (EAC or – AC)(BAC Remaining Funds

EV)– (BACRemainingWork=

7.3 Control Cost – Tools and techniques7.3 Control Cost Tools and techniques

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7.3 Control Cost – Tools and techniques7.3 Control Cost Tools and techniques 4. Performance Reviews

• Performance reviews compare cost performance over time, schedule activities or work packages overrunning and under running the budget, and estimated funds needed to complete work in progress.

• If EVM is being used, the following information is determined:

• Variance analysis. Variance analysis as used in EVM compares actual project performance to

• planned or expected performance. Cost and schedule variances are the most frequently analyzed.

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7.3 Control Cost – Tools and techniques7.3 Control Cost Tools and techniques 5. Variance analysis.

• Variance analysis as used in EVM compares actual project performance to planned or expected performance.

• Cost and schedule variances are the most frequently analyzed.

• Trend analysis. Trend analysis examines project performance over time to determine if performance is improving or p p gdeteriorating.

• Graphical analysis techniques are valuable for understanding f t d t d f i t f tperformance to date and for comparison to future

performance goals in the form 81

7.3 Control Cost – Tools and techniques7.3 Control Cost Tools and techniques 6. Project Management Software

• Project management software is often used to monitor the three EVM dimensions (PV, EV, and AC), to display graphical trends, and to forecast a range of possible final project results.

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7.3 Control Cost – Outputs7.3 Control Cost Outputs1. Work Performance Measurements

• The calculated CV, SV, CPI, and SPI values for WBS components, in particular the work packages and control accounts, are documented and communicated to stakeholders.

2. Budget Forecasts

• Either a calculated EAC value or a bottom‐up EAC value is documented and communicated to stakeholders.

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7.3 Control Cost – Outputs7.3 Control Cost Outputs3. Organizational Process Assets Updates

• Organizational process assets that may be updated include, but are not limited to: – Causes of variances, – Corrective action chosen and the reasons, and – Other types of lessons learned from project cost control.Other types of lessons learned from project cost control.

4. Change Requests

• Analysis of project performance can result in a change request to the cost performance baseline or other components of theto the cost performance baseline or other components of the project management plan.

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7.3 Control Cost – Outputs7.3 Control Cost Outputs5. Project Management Plan Updates

• Elements of the project management plan that may be updated include, but are not limited to: – Cost performance baseline. Changes to the cost performance baseline

are incorporated in – response to approved changes in scope, activity resources, or cost

estimates. In some cases, – cost variances can be so severe that a revised cost baseline is needed

to provide a realistic – basis for performance measurement.

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7.3 Control Cost – Outputs7.3 Control Cost Outputs6. Project Document Updates

Project documents that may be updated include but are notProject documents that may be updated include, but are not limited to: – Cost estimates, and – Basis of estimates.

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Summary of Terms and FormulasSummary of Terms and Formulas

TERM DESCRIPTION INTERPRETATION

PV Planned Value How much work should be done (What you planned to do)planned to do)

EV Earned Value How much work is done on a budgeted basis (What you’ve actually done)

AC Actual Cost How much did the “is done” work cost (What you Actually spent)Actually spent)

BAC Budget at Completion How much you budgeted for the total project.EAC Estimate at Completion What you currently expect the total project to cost

ETC Estimate to Complete From a given point in time, what you currently expect the remaining cost to bep g

VAC Variance at Completion How much over or under budget you expect to be

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Summary of Terms and FormulasSummary of Terms and Formulas

NAME FORMULA INTERPRETATIONCost Variance (CV) EV-AC Negative means over budget, Positive means under budget

Schedule V i (SV) EV-PV Negative means behind schedule, Positive means ahead of scheduleVariance (SV) EV PV Negative means behind schedule, Positive means ahead of schedule

Cost Performance Index (CPI)

EV/AC You are getting X cents out of every $1

Schedule Performance EV/PV You progressing at X% of the rate originally plannedPerformance Index (SPI)

EV/PV You progressing at X% of the rate originally planned

Estimate at Completion (EAC)

BAC/CPI or AC + ETC What, at this time, you expect the total project to cost

Estimate toEstimate to Completion (ETC)

EAC - AC What, at this time, you expect the remaining scope to cost

Variance at Completion (VAC)

BAC - EAC What, at this time, you expect the final project cost to be more or less then budgeted.

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(VAC)

Present Value (PV) andNet Present Value (NPV)

Present Value (PV) means the value today of future cash flows orPresent Value (PV) - means the value today of future cash flows or costs

PV = FV/(1 + r)n Note: FV = Future valuePV = FV/(1 + r) Note: FV = Future value, r = interest raten = number of time periods

Net Present Value (NPV) - means the total benefits less the costs. NPV is done by calculating the present value of all benefits and costs, then subtracting the total benefits from the total cost.then subtracting the total benefits from the total cost.

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Internal Rate of Return (IRR): Payback Period and B fi C R i (BCR)Benefit Cost Ratio (BCR)

• Payback Period• Payback Period– number of time periods it takes to recover your investment. The shorter time the better.

• Benefit Cost Ratio (BCR)– Compares the cost to the benefits on a project. When dealing with multiple project options, you would select the project with the greatest BCR. BCR > 1 means benefits are greater than costs, BCR < 1 meansmeans benefits are greater than costs, BCR < 1 means costs are greater than benefits, and BCR = 1 means they are the same.

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Earned Value Management• Method to measure project performance against scope, schedule

and cost baseline (performance measurement baseline)

• Interpretation of basic EVM performance measures– Cost Performance Index (CPI)Cost Performance Index (CPI)– Schedule Performance Index (SPI)

Earned Value TechniqueExample:Project Budget: $400KProject Schedule: 4

At the 3 month checkpoint:Spent: $200K

Terms and Formulas Definition Example

jmonths Work completed: $100K

Earned Value (EV) As of today, what is the estimated value of the work actually accomplished?

Actual Cost (AC) As of today, what is the actual cost incurred for th k li h d?

$100K

$200Kthe work accomplished?

Planned Value (PV) As of today, what is the estimated value of work planned to be done?

Cost Variance (CV) Negative is over budget

$200K

$300K

Cost Variance (CV)= EV - AC

Negative is over budgetPositive is under budget

Schedule Variance (SV)= EV - PV

Negative is behind schedulePositive is ahead schedule

$100K – $200K = ($100K)

$100K - $300K= ($200K)

Cost Performance Index (CPI) = EV/AC

We are getting $__ worth of work out of every $1 spent. Are funds being used efficiently?

Schedule Performance I d (SPI) EV/PV

We are (only) progressing at __ percent of the rate originally planed

$100K/$200K= 0.5 i.e. 50%

$100K/$300K= 0 33 i e 33%Index (SPI) = EV/PV rate originally planed = 0.33 i.e 33%

Revised Total Duration Baseline Duration/Schedule Performance Index 4/0.33= 12 months

Exercise• You have a project to build a box. The box is six sided. Each side is to take one

day to build and is budgeted for $1000 per side. The sides are planned to be completed one after the other. Today is the end of day three.

• Using the following project status chart, calculate PV, EV, AC, BAC, CV, CPI, SV, SPI, EAC, ETC, VAC.

Task Progress Cost spent

, , , ,• Describe your interpretation based on the calculation!

g p

Side 1 ||||||||||||||||||||||||||||||||||||||||100% $1,200

Side 2 ||||||||||||||||||||||||||||||||||||||||100% $1,000

Sid 3 ||||||||||||||||||||||||||||||75% $750Side 3 ||||||||||||||||||||||||||||||75% $750

Side 4 ||||||||||||||||||||50% $500

Side 5 0% $0

Side 6 0% $0

Exercise SolutionParameter Calculation Result

PV

EV

AC

BAC

CVCV

CPI

SV

SPI

EAC

ETC

VAC

Project is below/over budget?Project is late/ahead schedule?H h d?How much more money we need?

Exercise SolutionParameter Calculation ResultParameter Calculation Result

PV 1000 + + 1000 1000 3000

EV (%100 x ) + 1000 (%100 x ) + 1000 (%75 x ) + 1000 (%50 x ) 1000 3025

AC + + +1200 1000 750 500 3450

BAC x6 1000 6000

CV 3025 - 3450 - 425

CPI /3025 3450 .0 88

SV 3025 - 3000 25

SPI /3025 3000 .1 01

EAC / .6000 0 88 .6818 18

ETC .6818 18 - 3450 .3368 18

VAC 6000 - .6818 18 -.818 18

• over budget, getting 0.88 dollar for every dollar we spent, • ahead schedule, progressing 101% of the rate planned, • probably will spend $6818 at the end (estimation), • need $3368 to complete, • over budget at the end for about $818 (estimation)

Earned Schedule ‐ An emerging EVM practiceEVM practice

• SPI($) – At project start SPI is reliable– At some point SPI accuracy diminishes– Toward the project end it is useless (SPI = 1 at project end)– Doest not show weeks/months of schedule variance

• SPI(t)– Time based schedule measures

Create a SPI that is accurate to the of the project– Create a SPI that is accurate to the of the project

SV(t) = ES – ATSPI(t) = ES / AT

• ES = Earned Schedule (Planned time)• AT = Actual time

See more resources about earned schedule at http://www.earnedschedule.com

EVM – Hints to remember

• EV comes first in every formulaIf it’ i th f l i EV thi• If it’s variance, the formula is EV – something

• If it’s index, EV / something• If it relates to cost use Actual Cost• If it relates to cost, use Actual Cost• If it relates to schedule, use PV• Negative numbers are bad, positive is goodg , p g

Copied from Rita’s book

Earned Value Chart

98

Basic Principles of Cost ManagementBasic Principles of Cost Management

• Most members of an executive board have a better understanding and are more interested in financial terms than IT terms, so IT project managers must speak their language.

– Profits are revenues minus expenses.

– Life cycle costing considers the total cost of ownership, or development plus support costs, for a project.

– Cash flow analysis determines the estimated annual costs and benefits for a project and the resulting annual cash flow.

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Cash Flow, Cost Baseline and Funding, gs

Extra reserve at end of project

e Va

lues

Cost baseline

end of project

mul

ativ

e

Funding

Cum Expected Cash Flow

100Time

For more information do not hesitate to contact me.

Ahmad H. Maharma ‐ PMP®

• Ramallah, Palestine • Phone: + (972) (2) 2968644• Mobile: + (972) (599) 001155

E‐Mail: [email protected]

pmbok 4th edition chapter 7 - project cost management

Education

total project

practice standard

total benefits

updated include

cost variance

bac ac

work cost

bac ev