Lecture - 6 Pcm ( PMBOK)I

7/30/2019 Lecture - 6 Pcm ( PMBOK)I

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PROJECT COST

MANAGEMENT


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PROJECT COST MANAGEMENT

Processes involved in planning,estimating, budgeting, financing,

funding, managing and controlling costsso that the project can be completed

within the approved budget


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Plan Cost Management Processes that establishes the policies, procedures and

documentation for planning, managing, expending and controllingproject costs

Estimate Costs Process of developing an approximation of the monetary resources

needed to complete the project activities

Determine Budget The process of aggregating the estimated costs of individual

activities or work packages to establish an authorized cost baseline

Control Costs The process of monitoring the status of the project to update the

project costs and managing changes to the cost baseline

PROJECT COST MANAGEMENT


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Plan Cost Management Processes that establishes the policies, procedures and

documentation for planning, managing, expending andcontrolling project costs

Provides guidance and direction on how the project costs willbe managed throughout the project

Plan Cost Management


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Project Management Plan

Scope Baseline project scope statement, WBS detail

Schedule Baseline defines when the project costs will beincurred

Other Information Cost related scheduling, risk,communications decisions

Project Charter Provides summary budget from which detailed

project costs are developed EEF Culture, structure, market conditions, exchange rates,

published commercial information i.e resource cost rates

OPA Financial control procedures, historical info, financial

databases, policies, procedures & guidelines

Plan Cost Management I/Ps


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Expert Judgment

Analytic Techniques

Developing the project plan may include choosing

strategic options such as self funding, funding withequity, or funding with debt

May also detail ways to finance project resources suchas making, purchasing, renting or leasing

May affect project schedule and/or risk

Payback period, return on investment, IRR, NPV,discounted cash flows

Meetings

Plan Cost Management T/Ts


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Cost Management Plan Can establish the following

Units of Measure Staff hours, staff days, weeks for time measure

Meter, liters, tons, kilometers or cubic yards for quantity

Lump sum in currency form

Level of Precision degree to which activity costestimates will be rounded up (US$100.49 to US$100 orUS$995.59 to US$1000)

Level of Accuracy the acceptable range (e.g., + 10%) usedin determining realistic activity cost estimates

Plan Cost Management O/Ps


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Cost Management Plan Can establish the following Organizational Procedures Links WBS provides the

framework for cost management plan

WBS component used for the project cost accounting is called

control account; assigned a unique code or account numberthat links directly to the performing organizations accountingsystem

Control Thresholds Variance thresholds for monitoring

cost performance may be specified to indicate an agreed-uponamount of variation to be allowed before some action needs tobe taken



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Cost Management Plan Can establish the following Rules of performance Measurement EVM rules of

performance measurement are set. The plan may

Define the points in the WBS at which measurements of controlaccount will be performed

Establish the EVM techniques (e.g, weighted mile stones, fixedformula, percent complete)

Specify tracking methodologies and the EVM computationequations for calculating projected estimate at Completion (EAC)forecasts to provide a validity check on the bottom-up EAC



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Cost Management Plan Can establish the following Reporting formats Formats, Frequency

Process descriptions Descriptions of each of the other cost

management processes are documented

Additional Details strategic funding choices, procedures toaccount for fluctuations in currency exchange rates, procedure forproject cost recording



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Process of developing an approximation of themonetary resources needed to complete projectactivities

Generally expresses in units of some currency ($, etc)

Estimate Costs


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Estimate Costs I/Ps

Cost Management Plan Defines how project cost will be managedand controlled. Includes methods used and level of accuracy required toestimate activity cost

Human Resource Management Plan provides project staffingattributes, personnel rates and related rewards/recognition

Scope base line

Project Scope Statement Provide product description,acceptance criteria, key deliverables, project boundaries,

assumptions and constraints

Work breakdown structure

WBS dictionary


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Estimate Costs I/Ps

Project Schedule The type and quantity of resources andthe amount of time which those resources are applied to complete thework of the project

Risk Register Risk response costs

Enterprise Environmental Factors Market Conditions What products, services and results are

available in market, from whom, and under what terms and conditions.Regional and/or global supply and demand conditions greatly influenceresource costs

Published Commercial Information Provide standard cost formaterial and equipment

Organizational Process Assets Cost estimating policies,

templates, historical information, lessons learned


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Estimate Costs T/Ts

Expert Judgment Analogous Estimating

Uses the values such as scope, cost, budget and duration or measures ofscale such as size, weight and complexity from a previous, similar projectas the basis for estimating the same parameter or measurement for acurrent project

Generally less costly and less time consuming but also less accurate

Parametric Estimating Uses and statistical relationship betweenrelevant historical data and other variables (e.g square footage in

construction) to calculate a cost estimate for project work.

Bottom-up Estimating Method of estimating a component of work. Thecost of individual work packages or activities is estimated to the greatestlevel of specified detail. The detailed cost is then summarized or rolled up tohigher levels for subsequent reporting and tracking purposes.


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Estimate Costs T/Ts

Three-Point Estimating Most Likely (cM)

Optimistic (cO)

Pessimistic (cP)

Triangular Distribution cE= (cM + cO + cP)/3

Beta Distribution cE= (cO + 4cM + cP)/6

Reserve Analysis May include contingency reserves to account for costuncertainty. Contingency reserves are the budget within the cost baseline that isallocated for identified risks, which are accepted and for which contingent ormitigating responses are developed

Cost of Quality Assumptions about COQ may be used to prepare theestimates

Project Management Software

Vendor Bid Analysis

Group Decision Making Techniques Brainstorming, NGT, Delphi


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Estimate Costs O/Ps

Activity Cost Estimates Quantitative assessments of the probable costs required to complete project

work. Presented in summary form or in detail.Costs are estimated for allresources that are applied to the activity cost estimate. This includes, but isnot limited to, direct labour, materials, equipment, services, facilities,information technology and special categories such as cost of financing

(including interest charges, an inflation allowance, exchange rates or a costcontingency reserve)

Basis of Estimate

The supporting documentation providing a clear and complete understandingof how the cost estimate was derived

Documentation of the basis of the estimates Documentation of all assumptions made

Documentation of any known constraints

Indication of the range of possible estimates (e.g $10,000( + 10%) toindicate that the item is expected to cost between a range of values), and

Indication of the confidence level of the final estimates

Project Documents Updates


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Process of aggregating the estimated cost ofindividual activities or work packages to establish anauthorized cost baseline

Determines the cost baseline against which projectsperformance can be monitored and controlled

Determine Budget


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Determine Budget I/Ps

Cost Management Plan How project costs will be managed & controlled Scope Baseline

Project Scope Statement Formal limitations by period for theexpenditure of the project funds can be mandated by the organization, byagreement or by other entities such as Govt agencies. These fundingconstraints are reflected in the project scope statement

Work breakdown structure

WBS dictionary

Activity Cost Estimates

Project Schedule Used to aggregate costs to the calendar periods in which

the costs are planned to be incurred Resource Calendars

Risk Register To aggregate the risk response costs

Agreements

Organizational Process Assets


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Determine Budget T/Ts

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

The work package cost estimates are then aggregated for the highercomponent levels of the WBS (such as control accounts) and ultimately for the

entire project

Reserve Analysis Contingency reserves and the management reserves

Expert Judgment

Historical Relationships

Funding Limits Reconciliation


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Determine Budget O/Ps

Cost Baseline Approved version of the time phased project budget


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Determine Budget O/Ps

Project Funding Requirements Total funding requirements and periodic funding requirements

(quarterly, annually) derived from the cost baseline

Project Document Updates Activity cost estimates

Project schedule

Risk register


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Process of monitoring the status of the project to update the projectcost and managing changes to the cost baseline

Provides the means to recognize variance from the plan in order to takecorrective action and minimize risk.

Includes Influencing the factors that create changes to the authorized cost base line

Ensuring that all change requests are acted on in a timely manner

Managing the actual changes when and as they occur

Ensuring that cost expenditures do not exceed the authorized funding, by period, byWBS components, by activity and in total for the project

Monitoring cost performance to isolate and understand variances from the approvedcost baseline

Monitoring work performance against funds expended

Preventing un approved changes from being included in the reported cost or resourceusage

Informing appropriate stake holders of all approved changes and associated costs

Bringing expected cost overruns within acceptable limits

Control Costs


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Control Costs I/Ps

Project Management Plan Cost Baseline Cost baseline is compared with actual results to

determine if a change, corrective action or preventive action is necessary

Cost Management Plan How the project costs will be managed andcontrolled

Project Funding Requirements Projected expenditures plus anticipatedliabilities

Work Performance Data Includes information about project progress,such as which activity have started, and which deliverable have finished.Information also includes costs that have been authorized and incurred

Organizational Process Assets

Existing formal and informal cost control related policies procedures andguidelines

Cost control tools

Monitoring and reporting methods to be used


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Control Costs T/Ts

Earned Value Management (EVM)

Methodology that combines scope, schedule and resourcemeasurement to access the project performance and progress

Develops and monitors three key dimensions for each work packageand control account

Planned Value

Earned Value

Actual Cost


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Control Costs T/Ts

Earned Value Management (EVM) Planned Value (PV)

Authorized budget assigned to scheduled work

To be accomplished for an activity or WBS component

Total of the PV is also performance measurement baseline (PMB)

Total planned value is also known as budget at completion (BAC)

Earned Value (EV) Measure of work performed, expressed in terms of the budget

authorized for the work

EV measured cannot be greater than the authorized PV budgetfor a component

Often used to calculate the percent complete of a project

EV is monitored both incrementally to determine current statusand cumulatively to determine the long term performance trends


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Control Costs T/Ts


Actual Cost (AC)

Is the realized cost incurred for the work performed on an

activity during the specified time period

It is the total cost incurred in accomplishing the work that theEV measured

Will have no upper limit; what ever is spent to achieve the EV willbe measured


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Control Costs T/Ts

Earned Value Management (EVM) Schedule Variance

Measure of schedule performance expressed as the differencebetween EV and PV

Amount by which the project is ahead of behind the planneddelivery date at a given point in time

Measure of schedule performance on a project

EVM schedule variance will ultimately equal zero when theproject is completed because all of the planned values will havebeen earned

SV=EV-PV


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Control Costs T/Ts


Cost Variance

Amount of budget deficit or surplus at a given point in time,

expressed as the difference between EV and AV

Measure of cost performance on a project

CV = EV-AC


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Control Costs T/Ts


Schedule Performance Index (SPI)

Measure of schedule efficiency expressed as the ratio of EV to

PV

Measures how efficiently the project team is using its time

SPI = EV/PV

SPI > 1.0 indicates more work was completed than was planned

SPI < 1.0 indicates less work was completed than was planned


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Control Costs T/Ts


Cost Performance Index (CPI)

Measure of the cost efficiency of budgeted resources,

expressed as a ratio of EV to AC

CPI = EV/AC

CPI > 1.0 indicates a cost underrun of performance to date

CPI < 1.0 indicates a cost overrun of performance for workcompleted


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Control Costs T/Ts

Forecasting

Project team may develop a forecast for the estimate at completion(EAC) that may differ from the budget at completion (BAC)

If it becomes obvious that the BAC is no longer viable, the PM shouldconsider the forecasted EAC

Involves making projections of conditions and events in the projectsfuture based on current performance information and otherknowledge available at the time of the forecast

EACs are based on the actual cost incurred for work completed, plusan estimate to complete (ETC the remaining work)

EAC = AC + Bottom-up ETC


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Control Costs T/Ts

Forecasting EAC Forecast for ETC work performed at the budget rate

It accepts the actual project performance todate as represented by theactual cost and predicts that all future ETC work will be accomplished atthe budgeted rate

EAC = AC + (BAC EV)

EAC Forecast for ETC work performed at the present CPI It assumes what the project has experienced todate can be accepted to

continue in the future

EAC = BAC/CPI

EAC Forecast for ETC work considering both SPI and CPI factors In this the ETC work will be performed at an efficiency rate that

considers both the cost and schedule performance indices

EAC = AC + [(BAC EV)/(CPI x SPI)]


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Control Costs T/Ts

To-Complete Performance Index (TCPI) It is a measure of the costperformance that is required to be achieved with the remaining resources in orderto meet a specified management goal, expressed as the ratio of the cost to finishthe outstanding work to the remaining budget

TCPI = Work remaining (BAC EV)/Funds remaining (BAC AC) or (EAC AC)

Performance Reviews

Variance Analysis It is the explanation (cause, impact andcorrective actions) for

Cost CV = EV AC

Schedule SV = EV PV Variance at completion VAC = BAC EAC

Trend Analysis It examine project performance overtime to determine ifperformance is improving or deteriorating. Graphical analysis techniques areused


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Control Costs T/Ts

Performance Reviews

Earned Value Performance It compares the performance measurementbaseline to actual schedule and cost performance. If EVM is not used thenthe analysis of the cost baseline against actual costs for the work performedis used for cost performance comparison

Project Management Software

Reserve Analysis


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Control Costs O/Ps

Work Performance Information CV, SV, CPI, SPI, TCPI, VAC Cost Forecasts EAC or a bottom-up EAC

Change Requests

Project Management Plan Updates

Cost Baseline Cost Management Plan

Project Documents Updates Cost estimates

Basis of estimates

Organizational Process Assets Updates Causes of variances

Corrective action chosen and the reasons

Financial data basis

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