“The processes involved in planning, estimating, budgeting, and controlling costs so that the budget can be completed within the approved budget”

Profits are revenues minus expenses Life cycle costing is estimating the cost

of a project plus the maintenance costs of the products it produces

Cash flow analysis is determining the estimated annual costs and benefits for a project

Benefits and costs can be tangible or intangible, direct or indirect.

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

Is this project over/under budget?

Is it ahead of/behind schedule?

PV - Planned Value, estimated value of the planned work

EV – Earned Value, estimated value of work done AC – Actual Cost, what you paid BAC – Budget at Completion, the budget for the

total job EAC –Estimate at Completion, what is the total job

expected to cost? ETC – Estimate to Complete, forecasted costs to

complete job VAC – Variance at Completion, how much

over/under budget do we expect to be?

Three processes› Estimate Costs› Determine Budget› Control Costs

Estimate

Costs

Determine Budget

Control

Costs

Enterprise 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 OutputsTools & Techniques

Work Breakdown Structure

WBS Dictionary

Project Management Plan

•Schedule Mgmt Pln

•Staffing Mgmt Pln

•Risk Register

Activity Cost Estimates

Activity Cost Estimates Supporting Detail

Requested Changes

Cost Management Plan Updates

Estimate

Costs

Determine Budget

Control

Costs

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

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]

Barry Boehm helped develop the COCOMO models for estimating software development costs

Parameters include source lines of code or function points

COCOMO II is a computerized model available on the Web

Boehm suggests that only parametric models do not suffer from the limits of human decision-making

Project Scope StatementCost 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

Budgeting is allocating costs to work packages to establish a cost baseline to measure project performance

Remember 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

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

Progress is compared against the baseline to determine whether project is ahead of or behind plan

Percent 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

Planned Value Planned Value (PV) – Budgeted (PV) – Budgeted CostCost

Earned Value Earned Value (EV) – Actual (EV) – Actual work completedwork completed

Actual Cost (AC) Actual Cost (AC) – Costs incurred– Costs incurred

Estimate to Estimate to Complete (ETC) Complete (ETC) – What’s Left– What’s Left

Estimate at Estimate at Completion (EAC) Completion (EAC) – What final cost – What final cost will bewill be

Variance at Completion

(VAC)

Target Cost &

Schedule

Schedule Variance (Time)

Planned Value (PV)

Earned Value (EV)

NAMENAME FORMULAFORMULA NOTESNOTESCost Variance (CV)Cost Variance (CV) EV-ACEV-AC Negative = Over budget Negative = Over budget

Positive = Under budgetPositive = Under budget

Schedule Variance Schedule Variance (SV)(SV)

EV-PVEV-PV Negative = Behind Schedule Negative = Behind Schedule

Positive = Ahead of SchedulePositive = Ahead of Schedule

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

EV/ACEV/AC How much are we getting for every How much are we getting for every dollar we spend?dollar we spend?

Schedule Perform Schedule Perform Index (SPI)Index (SPI)

EV/PVEV/PV Progress as % against planProgress as % against plan

Estimate to Complete Estimate to Complete (ETC)(ETC)

EAC-ACEAC-AC How much more do we have to How much more do we have to spend?spend?

Variance at Variance at Completion (VAC)Completion (VAC)

BAC-EACBAC-EAC At the end of the day, how close will At the end of the day, how close will we be to plan?we be to plan?

Estimate at Estimate at Completion (EAC)Completion (EAC)

See following slideSee following slide

NAMENAME FORMULAFORMULA NOTESNOTESEstimate at Estimate at Completion (EAC)Completion (EAC)

BAC/CPIBAC/CPI Use if no variancesUse if no variances from from BAC have occurredBAC have occurred

AC+ATCAC+ATC Use when original Use when original estimate was bad. Actuals estimate was bad. Actuals + New estimate+ New estimate

AC+BAC-EVAC+BAC-EV Use when current Use when current variances are not expected variances are not expected to be there in the futureto be there in the future

AC+(BAC-EV)/CPIAC+(BAC-EV)/CPI Use when current Use when current variances are expected to variances are expected to continuecontinue

Spreadsheets are a common tool for resource planning, cost estimating, cost budgeting, and cost control

Many companies use more sophisticated and centralized financial applications software for cost information

Project management software has many cost-related features