Cost Management

1. INTRODUCTION TO COST
MANAGEMENT &
CONTROL IN
CONSTRUCTION
PROJECTS

2. TYPE OF COSTS
Type of Cost Description
Direct Cost
Direct cost is directly attributable to the project and spent only on
the project work.
Indirect Cost
Indirect cost is cost that is needed for a project but not restricted
to it; it could be used by other projects as well. It is likely there are
other groups or activities benefiting from such items, and your
project pays its part as well.
Fixed Cost
Fixed cost is cost that is consistent on a project regardless of how
many are used.
Variable Cost
Variable cost is one that fluctuates with what is produced. The
more of something you produce, the more of this type of cost you
incur.

3. PROJECT SELECTION TECHNIQUES
Project
Selection
Technique
Name
Also
Kno
wn
As
Option to Select Example
Return On
Investment
ROI
The biggest number or percentage.
Typically the biggest number or
percentage among the projects under
consideration.
$50,000 or 7%
Internal
Rate of
Return
IRR
Select the biggest percentage.
Often used in capital budgeting, interest
rate makes the net present value of all
cash flow equal zero.
15.5%
Net Present
Value
NPV
Select the biggest number (Years are
already factored in)
$47,000 US
Benefit Cost
Ratio
BCR Select the biggest ratio 3.5:1

4. COST BASED PROJECT SELECTION
TECHNIQUES (CONT.)
Project
Selection
Technique
Name
Also
Known
As
Option to Select Example
Opportunity
Cost
The amounts that are not
selected
Choose Project A ($7,000)
over Project B ($5000). The
opportunity cost is $5000 to
select Project A.
Payback
Period
Select the shortest
duration
7 months

5. COST BASED PROJECT SELECTION
DISCUSSIONS
Project Selection
Technique
Discussion
Return On
Investment
(ROI)
Return on Investment (ROI) is a general term. You may calculate
it a variety of ways. Typically, you would choose the biggest
number or percentage among the projects under consideration.
Internal Rate of
Return
(IRR)
Often used in capital budgeting. Interest rate makes the net
present value of all cash flow equal zero. In the case of IRR and
project selection, select the larger number.

6. COST BASED PROJECT SELECTION
DISCUSSIONS (CONT.)
Project Selection
Technique
Discussion
Net Present
Value
(NPV)
Net Present Value (NPV) is used in capital budgeting where the
present value of cash inflows is subtracted for the present value
of cash outflows. NPV compares the value of a dollar today
versus the value of that same dollar in the future after taking
inflation and return into account.
I wouldn’t worry about calculating this, you should know how to
select a project using it. For example, with Project A have a NPV
of $150,000 and 6 months or Project B having a NPV of $295,000
and 1 year, you would select Project B because it has the bigger
number AND the years are already factored into the dollar
amount.

7. COST BASED PROJECT SELECTION
DISCUSSIONS (CONT.)
Project Selection
Technique
Discussion
Benefit Cost
Ratio
(BCR)
Benefit Cost Ratio (BCR) is the project selection and analysis
technique that involves comparing the benefit to the cost of the
initiative. The format is 3.65:1 that means that the benefits of
the project outweighs the costs 3.65:1.
You should not be concerned about profit in this area. That is
simply noise; the benefit, cost, and ratio between them are the
main components. There could also be a project that has a BCR
of less then one (.75:1) for example. This would mean that the
project had a benefit of $.75 for ever $1.00 invested. Typically,
you would not approve such a project unless there was some
underlying factor such as Y2K issues.

8. COST BASED PROJECT SELECTION
DISCUSSIONS (CONT.)
Project Selection
Technique
Discussion
Opportunity
Cost
Opportunity Cost is associated with taking another opportunity.
It is what you give up or leave on the table to take the other
opportunity. For example, if you take a $75,000 a year job over a
$60,000 a year job, then the opportunity cost of taking the
$75,000 is $60,000.
Payback Period
Payback period is the amount of time needed to earn back the
original investment on the project. PMI® suggests that you select
the project with the shortest payback period.

9. FUTURE VALUE (FV)
• Future value is the value of something such as cash or an investment at
a specific point in the future. For example, if you had $1,000 now and
could get 8% interest over three years, what is the future value?
• The formula is shown below with PV = present value, r = interest rate, n
= number of periods, and FV = future value.

10. PRESENT VALUE
Present value is the value of something today that you need
to create a certain amount of investment in the future. For
example: if you wanted to have $2,500 in three years, what
amount of money do you need today to produce this amount
if the money was earning 8%?

11. PLAN COST MANAGEMENT

12. WHAT IS COST AND PROJECT COST
MANAGEMENT?
• Cost is a resource sacrificed or foregone to achieve a specific
objective or something given up in exchange
• Costs are usually measured in monetary units like dollars
• Project cost management includes the processes required to ensure
that the project is completed within an approved budget

13. ESTIMATE COSTS
• Cost estimates are a prediction that is based on the information known at
a given point in time
• Cost estimates include the identification and consideration of costing
alternatives to initiate and complete the project
• Cost estimates are generally expressed in units of some currency
• The accuracy of a project estimate will increase as the project progresses
through the project life cycle.
– For example, a project in the initiation phase may have a rough order
of magnitude (ROM) estimate in the range of −25% to +75%.
– Later in the project, as more information is known, definitive
estimates could narrow the range of accuracy to -5% to +10%.

14. ESTIMATE COSTS

15. ANALOGOUS ESTIMATES
Method Description Scenarios
Analogous
(Top Down)
This estimate is usually a total time or
cost estimate that has no significant
detail.
Advantage: Can be created quickly.
Disadvantage: It lacks detail or
individual piece estimates.
An executive or someone
who is subject matter
expert (SME) creates a high
level estimate based on
experience or past project
history with the company.

16. PARAMETRIC ESTIMATES
Method Description Scenarios
Parametric
Based on existing parameters, this
method is usually created by industry
standards or past experience.
Advantage: It can be done quickly
and is usually accurate.
A house builder quotes a
house for $75.00 per square
foot. A carpet installer
quotes $2 per square foot
for installation.

17. BOTTOM UP ESTIMATES
Method Description Scenarios
Bottom Up
This is a detailed estimate that usually
involves team input.
Advantage: There is detail and
accuracy associated with it.
Disadvantage: It can take significant
time to create and the team can pad
the estimates to compensate for
unknowns.
A project manager and the
team work together to
create a complete estimate
from the bottom (Activity
level) up and roll it up to
the total estimate.

18. ESTIMATE COSTS METHODS:
MONTE CARLO
Method Description Scenarios
Computerized
/Monte Carlo
This estimate involves using a
computerized program to simulate
different variables associated with
project outcome.
Advantages: (1) Accuracy of the
estimate; (2) The “what-if” analysis
that can be performed
Disadvantages: The ramp-up time
and costs associated with the setup
of the tool.
Variables simulated could
include the overall time and
cost estimates as well as the
confidence levels of the
estimates. Variables could
also include the number of
people needed to achieve
project goals.

19. COST RANGE ESTIMATES

20. DETERMINE BUDGET
• Determine Budget is the process of aggregating the
estimated costs of individual activities or work
packages to establish an authorized cost baseline.
• The key benefit of this process is that it determines
the cost baseline against which project
performance can be monitored and controlled.
• A project budget includes all the funds authorized
to execute the project.
• The cost baseline is the approved version of the
time-phased project budget, but excludes
management reserves.

21. DETERMINE BUDGET

22. DETERMINE BUDGET
Project Funding Requirements
– Total funding requirements and periodic funding
requirements (e.g., quarterly, annually) are derived
from the cost baseline.
– The cost baseline will include projected
expenditures plus anticipated liabilities.
– Funding often occurs in incremental amounts that
are not continuous, and may not be evenly
distributed
– The total funds required are those included in the
cost baseline, plus management reserves, if any.

23. DETERMINE BUDGET
Cost Baseline
– The cost baseline is the approved version of the
time-phased project budget, excluding any
management reserves, which can only be
changed through formal change control
procedures and is used as a basis for
comparison to actual results.
– It is developed as a summation of the approved
budgets for the different schedule activities.

24. DETERMINE BUDGET

25. DETERMINE BUDGET

26. CONTROL COSTS
• Control Costs is the process of monitoring the status
of the project to update the project costs and
managing changes to the cost baseline.
• The key benefit of this process is that it provides the
means to recognize variance from the plan in order
to take corrective action and minimize risk.

27. CONTROL COSTS
Project cost control includes:
– Influencing the factors that create changes to the authorized cost
baseline
– 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, by WBS component, by activity, and in total for the project
– Monitoring cost performance to isolate and understand variances
from the approved cost baseline
– Monitoring work performance against funds expended
– Preventing unapproved changes from being included in the reported
cost or resource usage
– Informing appropriate stakeholders of all approved changes and
associated cost
– Bringing expected cost overruns within acceptable limits

28. EARNED VALUE
Earned Value Management (EVM) :
• Is a project management methodology used to track project performance as
well as forecast future performance. EVM integrates the scope baseline,
schedule baseline and cost to provide performance measurements. Results can
be expressed in dollars and/or percentage. EVM can be used to report
current/past project performance, and predict future project performance based
on current/past performance. Variance Analysis Forecasting Current/Past
Performance Future Performance

29. EARNED VALUE

30. EARNED VALUE PARAMETERS

31. EARNED VALUE FORMULAS
CV
Cost Variance
EV – AC
Where:
EV = Earned Value
AC = Actual Cost
SV
Schedule Variance
EV – PV
Where:
EV = Earned Value
PV = Planned
Value
CPI
Cost Performance
Index
EV / AC
Where:
EV = Earned Value
AC = Actual Cost
SPI
Schedule
Performance
Index
EV / PV
Where:
EV = Earned Value
PV = Planned
Value

32. EARNED VALUE FORMULAS
• EV – AC
CV - Cost Variance
• The difference between Earned
Value and Actual CostEV – AC
• Cost Overrun or over budget
Negative
• Under Budget
Positive
• On Budget
Zero

33. EARNED VALUE FORMULAS
• EV – PVSV - Schedule
Variance
• The difference between Earned
Value and Planned Value
EV – AC
• Project performance behind
schedule
Negative
• Project performance ahead
schedule
Positive
• Project Performance on
schedule
Zero

34. EARNED VALUE FORMULAS
• EV /PVSPI - Cost
Performance Index
• The ratio of Earned Value to
Planned Value
EV/PV
• Cost over budget
Value < 1
• Cost below budget
Value > 1
• On Budget
Value= 1

35. EARNED VALUE FORMULAS
• EV /ACCPI - Cost
Performance Index
• The ratio of Earned Value to
Actual Cost
EV/AC
• Project performance behind
schedule
Value < 1
• Project performance ahead
schedule
Value > 1
• Project Performance on
schedule
Value= 1

36. EARNED VALUE ANALYSIS

37. FORECASTS
ESTIMATE AT COMPLETION (EAC) :
• Is a periodic evaluation of the project status, used to estimate what is will cost
to complete the project based on the performance today (CPI) – usually
performed monthly or if significant changes have been identified.
ESTIMATE AT COMPLETION (EAC)

38. FORECASTS
ESTIMATE TO COMPLETE (ETC) :
• The estimate to complete (ETC represents the amount needed to finish the
project based on the current spending efficiency of the project.)
ESTIMATE TO COMPLETE (ETC)

39. FORECASTS
TO COMPLETE PERFORMANCE INDEX (TCPI)
TO COMPLETE PERFORMANCE INDEX (TCPI):
• It is an indicator of how performance needs to improve to close the deviation
between planned values and actual performance, (efficiency level needed from
the remaining resources to meet the cost goals of the project)

40. FORECASTS
VARIANCE AT COMPLETION (VAC)
VARIANCE AT COMPLETION (VAC):
• It is the difference between the budget at completion (BAC) and the estimate at
completion (EAC). This difference tells how much over or under budget the
project finished