1. PM DeepDive
Project Cost Management
- Niraj Agarwal
May 2011
Slide 1

2. Project Cost Management
Definition
Project Cost Management includes the processes involved in planning
planning,
estimating, budgeting, and controlling costs so that the project can be
completed within the approved budget.
• Cost Estimating – developing an approximation of the costs of the
monetary resources needed to complete project activities.
• Cost Budgeting – aggregating the estimated costs of individual
activities or work packages t establish a cost b li
ti iti k k to t bli h t baseline.
• Cost Control – influencing the factors that create cost variances and
controlling changes to the project budget.
May 2011
Slide 2

3. Project Cost Management
Types of Project Costs
• Direct Project Cost - The costs directly attributable to a project
project,
including all personnel, goods and/or services together with all their
associated costs. E.g. team travel, team wages, training,material,etc.
• Indirect Project Cost - All costs which do not form a part of the final
product, but which are none the less required for the orderly
completion of the project and which may include, but not necessarily be
limited to field administration, direct supervision, incidental tools and
equipment, startup costs, contractor’s fees, insurance, taxes, etc.
• Fixed Project Costs - Those costs which do not change with change in
volume of output E g set-up rental etc
output. E.g. set-up, rental, etc.
• Variable Project Costs - Those costs that vary proportionately with
volume of output. E.g. material cost, supplies, wages, etc.
May 2011
Slide 3

4. Project Cost Management
Analogous Estimating
• It means using the actual cost of previous similar projects as the
previous,
basis for estimating the cost of the current project.
• It uses expert judgment.
• This type of estimate is typically done as part of the business case
development or during the early stages of scope planning when there
isn’t a lot of detail on the project.
• An analogous estimate may be done for the project as a whole or for
selected phases or deliverables. It is not typically used to estimate
individual work packages.
• Analogous estimates are the least accurate of all the estimating
techniques but also the least costly.
May 2011
Slide 4

5. Project Cost Management
Parametric Estimating
• Same as the technique used in duration estimating
estimating.
• This technique uses a mathematical model to compute costs, and it
most often uses the quantity of work multiplied by the rate.
• Parametric estimating is dependent on the accuracy of the data used
to create the model.
May 2011
Slide 5

6. Project Cost Management
Bottom - Up Estimating
• Assigns a cost estimate to each work package on the project
project.
• The WBS and the project resource requirements are critical inputs
for a bottom - up estimate.
• The idea is that you start at the work package level of the WBS and
calculate the cost of each activity assigned to that work package.
• The sum of all the work package estimates p
p g provides the estimate of
the total project cost.
• Bottom - up estimates are the most accurate of all the estimating
tec ques,
techniques, but t ey ’re a so t e most t e - consuming to pe o .
they e also the ost time co su g perform.
May 2011
Slide 6

7. Project Time Management
Three Point Estimates
• Three point estimates used:
- Most likely(M) : Most likely cost of the schedule activity
- Optimistic(O) : Activity cost is based on a best-case scenario
- Pessimistic(P) : Activity cost is based on a worst-case scenario
• Estimating based on 3 formulas:
i.
i PERT Activity Cost : C = (P + 4M + O)/6
May 2011
Slide 7

8. Project Cost Management
Sample project cost estimate
May 2011
Slide 8

9. Cost Estimating
ITTO
May 2011
Slide 9

10. Cost Estimating
ITTO
May 2011
Slide 10

11. Project Cost Management
Estimating Tips
• Brainstorm with your project team
• Communicate the type of estimate you are providing & the level of
accuracy they provide.
• Make use of any available templates
• Get estimates from the people doing the work.
• Document any assumptions you have made
May 2011
Slide 11

12. Cost Budgeting
Definition
Cost Budgeting is the process of aggregating all the cost estimates and
establishing a cost baseline for the project.
The cost baseline is the total expected cost for the project. Once
approved, it’s
approved it s used throughout the remainder of the project to measure
the overall cost performance.
May 2011
Slide 12

13. Cost Budgeting
ITTO
May 2011
Slide 13

14. Cost Budgeting
ITTO
May 2011
Slide 14

15. Cost Budgeting
Reserves
Contingency Reserves “A separately planned quantity used to allow for
A
future situations which may be planned for only in part (sometimes
called ‘known unknowns’). For example, rework is certain, the
amount of rework is not. The contingency fund is usually under the
g y y
discretion of the project manager, who controls how these funds are
spent.
Management Reserve “ A separately planned quantity used to allow
l l d i d ll
for future situations which are impossible to predict (sometimes called
“unknown-Unknowns”). Management reserves may involve cost or
schedule.
schedule Management reserves are intended to reduce the risk of
missing cost or schedule objectives. The management fund is usually
controlled by upper management.
May 2011
Slide 15

16. Project Cost Control
Definition
• Project Cost Control is primarily concerned with Controlling Changes
to the project budget
• The processes of gathering, accumulating, analyzing, reporting and
managing the costs on an on going basis
on-going basis.
• Includes project procedures, project cost changes, monitoring actual
versus budget, variance analysis, integrated cost/schedule reporting,
progress analysis and corrective actions.
l i d ti ti
May 2011
Slide 16

17. Project Cost Control
Definition
• Project Cost Control is primarily concerned with Controlling Changes
to the project budget
• The processes of gathering, accumulating, analyzing, reporting and
managing the costs on an on going basis
on-going basis.
• Includes project procedures, project cost changes, monitoring actual
versus budget, variance analysis, integrated cost/schedule reporting,
progress analysis and corrective actions.
l i d ti ti
May 2011
Slide 17

18. Earned Value Analysis
• Integrates cost, schedule and scope
• Better that comparing projected vs. actual because time and cost are
analyzed separately
• Terms:
- PV / BCWS – Budgeted Cost of Work Scheduled /Planned Value
- EV / BCWP – Budgeted Cost of Work Performed / Earned Value
- AC /ACWP – Actual Cost of Work Performed / Actual Cost
May 2011
Slide 18

19. Earned Value Analysis
• BAC – Budget at Completion (how much did you budget for the total
job)
• EAC – Estimate at Completion (what do we expect the total project to
cost)
• ETC – Estimate to Completion (how much more do we expect to
spend to finish the job)
• VAC – Variance at Completion (how much over/under budget do we
expect to be)
May 2011
Slide 19

20. Earned Value Analysis
• Variance = (Plan – Actual)
( )
• Cost Variance (CV): EV– AC; -ve is over budget , +ve is under
• Schedule Variance (SV): EV– PV; +ve is behind schedule, +ve is ahead
• Cost Performance Index (CPI): EV/ AC
- I am only getting x¢ out of every $
• Schedule Performance Index (SPI): EV/ PV
- I am only progressing x % of the planned rate
• Estimate at Completion (EAC): BAC / CPI
- As of now we expect the total project to cost x$
• E ti t t C
Estimate to Complete (ETC) EAC – AC
l t (ETC):
- how much will it cost from now to completion
• Variance at Completion: BAC – EAC; when the project is over how much
more or less did we spend
May 2011
Slide 20

21. Earned Value Analysis
Question
Work Actual Today is June 30th. —Data
Budget
Work Unit
Completion
(in $M)
Performed Cost Date
Date (in $M) (in $M)
PV
EV AC 1. What is the Cost Variance
A Jan. 31 10 10 12 2. What is the Schedule
B Feb. 8
F b 28 5 4 5 Variance
C Mar. 31 6 8 8 3. What is the CPI
D 12-May 15 13 12 4. What is the SPI
5
5. What is the EAC
E 30-Jun
30 Jun 20 20 30
6. What is the ETC
F 18-Jul 3 0 0
7. What is the Percent
G Aug. 30 35 0 0
Complete
H Sept.
Sept 22 22 0 0
8. What is the Percent Spent
I Oct. 29 12 0 0
J Nov. 30 9 0 0
May 2011
Slide 21

22. Earned Value Analysis
Question
Work What is the CV ? $55 - $67 =
Budget Actual
Work Unit
Completion
(in $M)
Performed
Cost (in -$12 (EV AC)
$12 (EV-AC)
Date (in $M)
PV
EV
$M) AC 2. What is the SV ? $55 - $56 =
-$1 (EV-PV)
A Jan. 31 10 10 12 3. What is the CPI? 55/67 =
B Feb. 8
F b 28 5 4 5 .82 (EV/AC)
C Mar. 31 6 8 8 4. What is the SPI? 55/56 =
D 12-May 15 13 12 .98 (EV-PV)
E 30-Jun
30 Jun 20 20 30 5.
5 What is the EAC? 137/ 82 =
137/.
F 18-Jul 3 0 0 $167 (BAC/CPI)
6. What is the ETC? $167 - $67 =
G Aug. 30 35 0 0
$100 (EAC-AC)
H Sept.
Sept 22 22 0 0 7. What is the Percent
h h
I Oct. 29 12 0 0 Complete? 55/137 =
J Nov. 30 9 0 0 40% (EV/BAC)
8. What is the Percent Spent?
67/137 = 49% (AC/BAC)
May 2011
Slide 22

23. Pop Quiz
Question 1
You are asked to prepare an estimate for a project business
case to install a new group of servers at a new satellite office.
There is very little detail about this project. What will you use
to compute your estimate?
p y
A. The price the client is willing to pay
B. A sophisticated modeling technique
C. The estimate provided by the project sponsor
D. The actual cost of a similar project
May 2011
Slide 23

24. Pop Quiz
Question 2
A discretionary fund used by the project manager to cover the
cost of possible adverse events during the project is known as
which of the following?
A.
A Management reserve
B. Chart of accounts
C. Contingency fund
g y
D. Cost baseline
May 2011
Slide 24

25. Pop Quiz
Question 3
You are developing a bottom - up estimate for the first phase of your
project. Which of the following is the most important input to complete
this task?
A.
A Historic data from a similar project
B. Schedule
C. The WBS
D. The scope statement
May 2011
Slide 25

26. Pop Quiz
Question 4
What is the most accurate estimate?
A. Analogous estimate
B. Bottom - up estimate
C. Estimates based on expert judgment
D. Parametric estimate
May 2011
Slide 26

27. Pop Quiz
Question 5
You are the project manager for a large IT project. At the time
you performed your cost estimates, the vendor you ’ re
working with provided you with the following estimates:
Programming estimate = 320 hours at $135/hour
$135/hour.
Project management estimate = 320 hours at $155/hour.
Testing estimate = 150 hours at $85/hour.
g /
What type of estimate are these?
A. Analogous
B. Bottom-up
C. Cost benefit
D.
D Parametric
May 2011
Slide 27

28. Thank You!