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PMP Chap 7 - Project Cost Management - Part 1

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PMP Chap 7 - Project Cost Management - Part 1

  1. 1. By: Anand Bobade (nmbobade@gmail.com) Plan Cost management Estimate Cost Determine Budget Control Cost Monitoring & Controlling Learn Project Management & prepare for PMP exam: • Learn visually • Detailed coverage of all PMP concepts • Sample Questions PMBOK Chapter 7 : Project Cost Management (Part 1) Planning
  2. 2. By: Anand Bobade (nmbobade@gmail.com) 7. Project Cost Management L : Lesson Introduction Cost Management Definition Cost Management Processes Cost management related terms Processes in details: Review of all processes Exam Essentials & Tips Self Assessment Additional Resources P1 P2 P3 P4
  3. 3. By: Anand Bobade (nmbobade@gmail.com)By: Anand Bobade (nmbobade@gmail.com) 7. Project Cost Management -> Introduction Provide cost management framework. Develop a cost estimates. Finalize budget including contingency reserves. Prepare cost baseline Control project cost.
  4. 4. By: Anand Bobade (nmbobade@gmail.com) 7. Project Cost Management-> Definition It includes processes involved in estimating, budgeting, & controlling costs, so that project can be completed within approved budget. PM must make sure their projects are well defined, have accurate time, cost estimates & have a realistic budget. within Approved budget Estimating Budgeting Controlling
  5. 5. By: Anand Bobade (nmbobade@gmail.com) 7. Project Cost Management Processes 7.1 Plan Cost Management: Establishes the Policies, procedures, and documentation for planning, managing, expending, controlling project costs. 7.2 Estimate Cost: Developing an APPROXIMATION of the monetary resources needed to complete project activities. 7.3: Determine Budget: AGGREGATING the estimated costs of individual activities or WP to establish cost baseline. 7.4 Control Cost: MONITORING the status to update costs and managing changes to the cost baseline
  6. 6. By: Anand Bobade (nmbobade@gmail.com) 7. Project Cost Management -> Key Terms Direct Cost • Charged directly to the Project Indirect Cost • Company cost incurred across multiple projects Fixed Cost • Do not change Variable cost • Vary depending on the output Opportunity Cost: • The potential cost in choosing one project over another. Sunk cost • Already incurred cost
  7. 7. By: Anand Bobade (nmbobade@gmail.com) 7. Project Cost Management -> Key Terms-> Direct & Indirect cost Costs that can be directly related to producing the deliverable of the project. E.g., Salaries, hardware & software purchased for the project. Direct costs Costs that are not directly related to deliverable of the project, but are indirectly related to performing project. E.g., Rent, Electricity, Internet and office supplies. Indirect costs
  8. 8. By: Anand Bobade (nmbobade@gmail.com) 7. Project Cost Management -> Key Terms-> Variable cost Variable Costs: • Change with the amount of Production. • E.g., cost of input material changes as per volume of production. If you want to increase the production volume, you will need to increase input materials, resulting in increased input cost.
  9. 9. By: Anand Bobade (nmbobade@gmail.com) 7. Project Cost Management -> Key terms -> Fixed Cost Fixed Costs: • Do not change with production. • E.g., Rent, initial setup costs, monthly salary. Initial factory setup cost & machines cost stays same, irrespective of factory is fully used to its potential or not.
  10. 10. By: Anand Bobade (nmbobade@gmail.com) 7. Project Cost Management -> Key terms -> Sunk Cost Sunk cost • Money that has been spent in the past. • When deciding what projects to invest in or continue, you should not include sunk costs. • Sunk costs should be forgotten. E.g., Advertisement , Marketing study & Research
  11. 11. By: Anand Bobade (nmbobade@gmail.com) 7. Project Cost Management -> Key terms -> Opportunity cost Opportunity Cost: • The potential cost in choosing one project over another. • The cost of not chosen initiative/project. Project 1: Build resort Cost: $20 million Project 2: Build a hotel. Cost: $22 million The opportunity cost of not building hotel is $22 million If you decide to build a resort
  12. 12. By: Anand Bobade (nmbobade@gmail.com) • Money that has been spent in the past; • When deciding what projects to invest in or continue, you should not include sunk costs. • Sunk costs should be forgotten Sunk cost The cost given up by selecting one project over another. Opportunity Cost: 7. Project Cost Management -> Sunk Cost Vs. Opportunity cost
  13. 13. By: Anand Bobade (nmbobade@gmail.com) 7. Project Cost Management -> Key Terms-> Cash flow Cash flow: • Refers to the movement of cash into or out of the project. • Can restrict/delay execution of the project. Q1 Q2 Q3 Q4 Money Received 100,000 200,000 200,000 100,000 Expenses Vendor1 Payment 0 100,000 100,000 75,000 Vendor1 Payment 0 150,000 100,000 75,000 Money spent 0 250,000 200,000 150,000 Cash Flow 100K -50K 0 -50K Cash Balance 100K 300K-250K=50K 250K-200K=50K 150K-150K=0
  14. 14. By: Anand Bobade (nmbobade@gmail.com)By: Anand Bobade (nmbobade@gmail.com) To Learn Project Management, Contact Anand Bobade (055 5932004) •nmbobade@gmail.com •https://ae.linkedin.com/in/anandbobade •http://www.slideshare.net/anandbobade •Conduct Online training, Corporate Training, evening & weekend workshops.
  15. 15. By: Anand Bobade (nmbobade@gmail.com) 7.1 Plan Cost Management Plan Cost Management Definition Plan Cost Management : ITTO What are Analytical Techniques? What is inside cost Management plan? What is Life cycle costing? Data flow diagram Review Guidelines for exam questions Self Assessment 6.1 I T&T O
  16. 16. By: Anand Bobade (nmbobade@gmail.com) 7. Project Cost Management Processes 7.1 Plan Cost Management: Establishes the Policies, procedures, and documentation for planning, managing, expending, controlling project costs. 7.2 Estimate Cost: Developing an APPROXIMATION of the monetary resources needed to complete project activities. 7.3: Determine Budget: AGGREGATING the estimated costs of individual activities or WP to establish cost baseline. 7.4 Control Cost: MONITORING the status to update costs and managing changes to the cost baseline
  17. 17. By: Anand Bobade (nmbobade@gmail.com) 7.1 Plan Cost Management How PM will plan and execute the Cost management activities Cost planning is very critical Starts early in the project Involves Estimating, Budgeting & controlling Report cost (Cash flow) to concern stakeholders
  18. 18. By: Anand Bobade (nmbobade@gmail.com) Establishes Policies, procedures & documentation for planning, managing, expending & controlling project costs. It provides guidance and direction on how the project costs will be managed throughout the project. Establishing Planning Managing Expending Controlling 7.1 Plan Cost Management -> Definition
  19. 19. By: Anand Bobade (nmbobade@gmail.com) Inputs (4) • Project management plan • Project charter • Enterprise environmental factors • Organizational process assets Tools & Techniques (3) • Expert judgment • Analytical techniques • Meetings Outputs • Cost management plan 7.1 Plan Cost Management
  20. 20. By: Anand Bobade (nmbobade@gmail.com) 7.1 Plan Cost Management-> Inputs PMP Project Charter EEF OPA
  21. 21. By: Anand Bobade (nmbobade@gmail.com) 7.1 Plan Cost Management->Inputs->PMP PMP • Scope statement and WBS detail. Scope baseline • When the project costs will be incurred. Schedule baseline • Risks (Risk reserves) • Communications (for reporting). Other details
  22. 22. By: Anand Bobade (nmbobade@gmail.com) 7.1 Plan Cost Management->Inputs->Project charter Project Charter Provides the summary budget Approval requirements that will influence the management of the project costs. Measurable objectives & success criteria's High level risks Summary milestone schedule Summary budget Stakeholder list Project approval requirements
  23. 23. By: Anand Bobade (nmbobade@gmail.com) 7.1 Plan Cost Management->Inputs->EEF EEF Market conditions, Currency exchange rates. Published commercial information (resource cost) Project management information system. Organizational culture and structure.
  24. 24. By: Anand Bobade (nmbobade@gmail.com) 7.1 Plan Cost Management->Inputs->OPA OPA Existing cost policies, procedures, and guidelines (e.g., invoicing process) Financial controls procedures. Historical information and lessons learned (e.g., past cost escalation issues) Financial databases (E.g., internal resource rates)
  25. 25. By: Anand Bobade (nmbobade@gmail.com) 7.1 Plan Cost Management -> Tools & Techniques Expert Judgment Analytical Techniques Meetings
  26. 26. By: Anand Bobade (nmbobade@gmail.com) 7.1 Plan Cost Management ->T&T->Expert Judgment Expert Judgment They provides valuable insight on costing methods. Apply experience & information from prior similar projects. Examine & compare different approaches (Cost of Quality, Cost benefit analysis etc). Provide input for financial analytical techniques (ROI, IRR etc)
  27. 27. By: Anand Bobade (nmbobade@gmail.com) 7.1 Plan Cost Management ->T&T->Analytical Techniques Analytical Techniques Analyse ways to finance resources: Make Buy Rent Lease Financial Techniques used for analysis: Payback period Return on Investment(ROI) Internal Rate of Return (IRR) Net Present Value (NPV) Planning may involve choosing strategic options to fund Self-funding Funding with equity Funding with debt PM may not be involved in financial decisions.
  28. 28. By: Anand Bobade (nmbobade@gmail.com) 7.1 Plan Cost Management ->T&T->Meetings Meetings Any one with cost planning, estimation, budgeting related responsibilities should attend meetings. Discuss & analyse ways to finance resourcesDiscuss & agree on funding options Meetings will be used to discuss how to estimate & manage cost. Project Manager Sponsor Key team members Financial experts Key Stakeholde -rs
  29. 29. By: Anand Bobade (nmbobade@gmail.com) 7.1 Plan Cost Management-> Output->Cost Manag. Plan Cost Management Plan
  30. 30. By: Anand Bobade (nmbobade@gmail.com) 7.1 Plan Cost Management-> Output->Cost Manag. Plan Cost Management Plan How the project costs will be planned, structured, and controlled. Units of Measure Level of Precision Level of Accuracy Organizational procedure links Control Thresholds Rules for Perfor. Measurement Reporting Formats Additional Details Guidelines to establish Cost baseline. Cost change control procedures. Details about all three processes. Funding decisions. Guidelines for dealing with fluctuating cost. Roles & responsibilities for cost related activities.
  31. 31. By: Anand Bobade (nmbobade@gmail.com) 7.1 Plan Cost Management->Output->Cost Management Plan Cost Management Plan Units of Measure: • Resources : Staff hours, days or lump sum cost • Road construction project: Kilometer or Miles. Level of Precision: • Degree to which cost estimate will be rounded. • E.g., 100.49 => AED 100 or 99.85 => 100 Level of Accuracy: • Acceptable range (+ or – 10%) • Initial-Rough order of magnitude(–25% to 75%) • later - Definite estimate –5 to +10%. Organizational procedure links: • WBS provide framework for cost management. • Helps maintain consistency in estimations. • Control Account - Code linked to accounting system.
  32. 32. By: Anand Bobade (nmbobade@gmail.com) 7.1 Plan Cost Management->Output->Cost Management Plan Cost Management Plan Control Thresholds: • Agreed amount of variation to be allowed. • 1% Schedule variance to schedule baseline. Rules for Performance Measurement: • Define points in WBS -> Measure Control Accounts performance. • Established EVM techniques (Weighted milestones, fixed formula, % complete) • Specify tracking methodologies (Calculating EAC) • Used in Performance based contracts. Reporting Formats: • Agreed reporting format to share cost reports, Cash-flow’s etc.
  33. 33. By: Anand Bobade (nmbobade@gmail.com) 7.1 Plan Cost Management->Output->Cost Management Plan Cost Management Plan Process Description: • Each of the three cost management Processes are documented. Additional Details: • Details like how the project will be funded. • Description of strategic funding choices. • Procedure to manage currency fluctuation.
  34. 34. By: Anand Bobade (nmbobade@gmail.com) 7.1 Plan Cost Management Life Cycle Costing: • Broader view of Project Cost Management • Consider effect of cost decisions on using, maintaining & supporting the product, service or result of the project. • Life cycle costing together with value engineering can improve decision making • Used to reduce cost and execution time.
  35. 35. By: Anand Bobade (nmbobade@gmail.com) 7.1 Plan Cost Management -> Data Flow Diagram
  36. 36. By: Anand Bobade (nmbobade@gmail.com) 7.1 Plan Cost Management -> Review Cost planning is very critical Starts early in the project Involves estimating, budgeting, and controlling costs T&T-> Expert, analytical techniques & meeting Funding (Self-funding, Funding with equity, Funding with debt) Analyse ways to finance resources (Make or Buy, Rent or Lease)
  37. 37. By: Anand Bobade (nmbobade@gmail.com) 7.1 Plan Cost Management -> Question1 To assist in budget control, it is suggested that an estimate be created at the _____ ____ ______ level of the WBS Answer: B- Lowest Work package is the lowest unit of work to estimate cost and duration. • HighestA • LowestB • Major work effortC • ThirdD
  38. 38. By: Anand Bobade (nmbobade@gmail.com) 7.1 Plan Cost Management -> Question1 Which type of project cost estimate is the most accurate? • PreliminaryA • DefinitiveB • Order of magnitudeC • ConceptualD Answer: B- Definitive Definitive estimates are in range -5% to 10% in accuracy. Page 201, PMBOK 5
  39. 39. By: Anand Bobade (nmbobade@gmail.com) 7.1 Plan Cost Management -> Question1 Which of the following is a direct project cost? • Lighting and heating for the corporate officeA • Workers Compensation insuranceB • Piping for an irrigation projectC • Stationary costD Answer: C - Piping for an irrigation project Cost of resources used in a project. See Page 202, PMBOK 5
  40. 40. By: Anand Bobade (nmbobade@gmail.com)By: Anand Bobade (nmbobade@gmail.com) To Learn Project Management, Contact Anand Bobade (055 5932004) •nmbobade@gmail.com •https://ae.linkedin.com/in/anandbobade •http://www.slideshare.net/anandbobade •Conduct Online training, Corporate Training, evening & weekend workshops.
  41. 41. By: Anand Bobade (nmbobade@gmail.com) 7.2 Estimate Cost Estimate Cost Definition Key terms Estimate Cost : ITTO What are key estimation techniques? What are contingency & management reserves? Data flow diagram Review Guidelines for exam questions Self Assessment 6.1 I T&T O
  42. 42. By: Anand Bobade (nmbobade@gmail.com) 7. Project Cost Management Processes 7.1 Plan Cost Management: Establishes the Policies, procedures, and documentation for planning, managing, expending, controlling project costs. 7.2 Estimate Cost: Developing an APPROXIMATION of the monetary resources needed to complete project activities. 7.3: Determine Budget: AGGREGATING the estimated costs of individual activities or WP to establish cost baseline. 7.4 Control Cost: MONITORING the status to update costs and managing changes to the cost baseline
  43. 43. By: Anand Bobade (nmbobade@gmail.com) 7.2 Estimate Cost -> Key Terms Internal Rate of Return[Discounted Cash flow]: Payback Period: Benefit Cost Ratio(BCR) Cost Benefit ratio (CBR) Straight-Line Depreciation Double Declining Balance
  44. 44. By: Anand Bobade (nmbobade@gmail.com) 7.2 Estimate Cost->Key Terms -> IRR Internal Rate of Return[Discounted Cash flow]: • It is a project selection technique that takes a comparative approach for project selection. • Interest rate received for an investment consisting of payments & income that occur at regular periods. • Select Project with higher IRR. Invest in Call Center •Return 10% per year Invest in Software firm •Return 9% per year Investment of 5 million Invest in Call Center • Return 5% first year • Return 10% next 3 years Invest in Software firm • Return 9% for 4 year Investment of 5 million1 2 10% of 5,000,000 = 500,000 500,000 * 4 = 2,000,000 9% of 5,000,000 = 450,000 450,000 * 4 = 1,800,000 Y1 => 5% of 5,000,000 = 250,000 Y2,3,4 => 10% 5,000,000 = 500,000 250,000 + (500,000 * 3) = 1,750,000 9% of 5,000,000 = 450,000 450,000 * 4 = 1,800,000
  45. 45. By: Anand Bobade (nmbobade@gmail.com) 7.2 Estimate Cost->Key Terms -> Payback period Payback Period: • The time it takes to recover your investment in the project before you start accumulating profit. • Less payback period is better. Plan to buy property worth 1 million Return 200K per year Payback period = 5 years Return 250K per year Payback period = 4 years
  46. 46. By: Anand Bobade (nmbobade@gmail.com) Interest rate received for an investment consisting of payments and income that occur at regular periods Internal Rate of Return: The time it takes to recover your investment in the project before you start accumulating profit. Payback Period: 7.2 Estimate Cost->Key Terms
  47. 47. By: Anand Bobade (nmbobade@gmail.com) 7.2 Estimate Cost->Key Terms -> Questions There are four projects: - Finance System upgrade with IRR of 10% - Upgrading company infrastructure with IRR of 12% - Setting centralized call centre with IRR of 14% - CRM implementation with IRR of 14.5% During Investment review board meeting CEO asked your recommendation to select the project. What is you suggestion? A) Finance System upgrade B) Upgrading company infrastructure C) Setting centralized call centre D) CRM implementation Answer :. D) CRM Implementation Note that, you select project with highest IRR.
  48. 48. By: Anand Bobade (nmbobade@gmail.com) 7.2 Estimate Cost->Key Terms -> Questions During Investment review board meeting CEO asked your recommendation to select the project. What is you suggestion? A) Project A requires an initial investment of $100,000 and will give monthly return of 5,000. B) Project B requires an initial investment of $200,000 and will give monthly return of 8,000 C) Project C requires an initial investment of $100,000 and will give annual return of 40,000 D) Project D requires an initial investment of $200,000 and will give annual return of 60,000 Answer : Lets calculate how much is yearly return of each project. Project A – 60,000, Project B – 96,000, Project C – 40,000 & Project D – 60,000 Project B is giving highest yearly return, however project can not be selected based only on returns. Lets calculate how soon we can recover this investment. Project A – 20month, Project B – 25 months, Project C – 30 months & Project D – 40 months Project A’s investment is recovering very fast…. What to choose A or B??? IRR should always be looked as a barometer to measure project % wise like fixed deposit. Higher the returns the better it is. Project A – 60,000 / 100,000 = 0.6 which is 60%, Project B – 96,000 / 200,000 = 0.48 which is 48% Project C – 40,000 / 100,000 = 0.4 which is 40%, Project D – 60,000 / 200,000 = 0.3 which is 30% For option A it is 60% as compared to the other options. Hence Answer is A ) Project A
  49. 49. By: Anand Bobade (nmbobade@gmail.com) 7.2 Estimate Cost->Key Terms -> Questions Project A has an IRR of 15% and an NPV of 2 Million for a 2 year duration. Project B has an IRR of 14% and an NPV of 3 Million for a 4 year duration. What is the opportunity cost, if you select project A instead of project B? A) 5 Million B) 1 Million C) 2 Million D) 3 Million Answer : The opportunity cost when selecting between two projects is simply the value of the project that is not selected. In this case project B is not selected hence answer is D) 3 Million Note that all other information (IRR, duration) are irrelevant.
  50. 50. By: Anand Bobade (nmbobade@gmail.com) It is the default method used to gradually reduce the carrying amount of a fixed asset over its useful life. E.g., Server cost= 1 Million & Life span is 4 years Depreciation will be 25% per year Straight-Line Depreciation The double declining balance depreciation method is an accelerated depreciation method that counts twice as much of the asset's book value each year as an expense compared to straight-line depreciation. E.g., Server cost= 1 Million & Life span is 4 years Depreciation will be 40% first year, 30% 2nd year, 20% 3rd year & 10% 4th year Double Declining Balance 7.2 Estimate Cost->Key Terms-> Depreciation methods
  51. 51. By: Anand Bobade (nmbobade@gmail.com) 7.2 Estimate Cost->Key Terms -> Questions Finance team is concern about depreciation rate of project assets which they estimate to be 40%. Asset costs 200,000 & has been used for less than 3 months, however it has an expected life of 5 years. Which of the following depreciation methods is most likely used by finance team? A) Straight-Line Depreciation B) Double Declining Balance. C) Diminishing value depreciation method D) Rapid Declining Balance. Answer : First look at the most important information that is life span which is 5 year & depreciation rate which is 40%. Step1: Calculate straight line depreciation => 100%/life span = 100/5 = 20% Step2: Finance team is depreciating by 40%, which is double, hence answer is B) Double Declining Balance
  52. 52. By: Anand Bobade (nmbobade@gmail.com) • It indicates how much benefit (as %) you will get for each unit of cost that you will invest. • BCR = Benefit / Cost • BCR < 1 is bad. • BCR > 1 is good. • The project with the bigger BCR is the better one. • Also, called as profitability index Benefit Cost Ratio(BCR) • Compares costs to benefits. • CBR = Cost/Benefit • CBR > 1 is bad. • CBR < 1 is good. • The project with the smaller CBR is the better one. Cost Benefit ratio (CBR) 7.2 Estimate Cost->Key Terms
  53. 53. By: Anand Bobade (nmbobade@gmail.com) 7.2 Estimate Cost->Key Terms -> Questions Using the Benefit Cost Ratio, which of the following projects do you select? A) Project A with a BCR of 1.2 B) Project B with a CBR of 0.90 and cost of 100,000 C) Project C with a cost of $100,000 and benefits of 110,000 D) Project D with a BCR of .90 Answer : The higher the BCR the better. Project A has the highest BCR of 1.2, hence answer is A) Project A with a BCR of 1.2 Note: For option B; We cannot compare a CBR to a BCR. We have to first calculate its BCR. Step1: Calculate benefit => CBR = Cost/Benefit; Benefit= cost/CBR = 100,00 / 0.9 = 111,111 Step2: Calculate BCR = Benefit/Cost = 111,111 /100,000 = 1.11. Hence, Project A has higher BCR ‘1.2’ compare to project B ‘1.11’
  54. 54. By: Anand Bobade (nmbobade@gmail.com) 7.2 Estimate Cost->Key Terms • Internal Rate of Return (IRR)Higher • Benefit Cost ration (BCR)Higher • Pay back Period (PBP)Lower Project selection : Select project with
  55. 55. By: Anand Bobade (nmbobade@gmail.com) 7.2 Estimate Cost->Introduction Scope is key for estimating cost. Estimation can be done at activity or work package level. Estimate activity resource is linked to cost estimation. Information is taken from PM has to consider all types costs: Resources (Human, Equipment, Hardware, Software) Facilitates Direct & indirect cost
  56. 56. By: Anand Bobade (nmbobade@gmail.com) 7.2 Estimate Cost->Introduction Estimate activity resource is linked to cost estimation Estimate Activity Resource: • Who will work on the each activities Estimate Activity Duration: • How long activities will take & resource work on project? Estimate Cost • How much Project will cost (By combining all activities) Activity Cost Estimates
  57. 57. By: Anand Bobade (nmbobade@gmail.com) 7.2 Estimate Cost->Introduction Cost estimates are predictions that is based on the information available at that time. Cost trade-offs and risk should be considered (Make or Buy decision) It should be reviewed & refined during course of project to reflect additional details as it become available. Assumptions should be continuously tested.
  58. 58. By: Anand Bobade (nmbobade@gmail.com) 7.2 Estimate Cost->Definition The process of developing an APPROXIMATION of the monetary resources needed to complete project activities. It determines the amount of cost required to complete project work. Project Cost Approximation Time Management processes
  59. 59. By: Anand Bobade (nmbobade@gmail.com) 7.2 Estimate Cost -> ITTO Input (7) • Cost management plan • Human resource management plan • Scope baseline • Project schedule • Risk register • Enterprise environmental factors • Organizational process assets Tools & Techniques (10) • Expert judgment • Analogous estimating • Parametric estimating • Bottom-up estimating • Three-point estimating • Reserve analysis • Cost of quality • Project management software • Vendor bid analysis • Group decision-making Outputs (3) • Activity Cost Estimate • Basis of estimates • Project documents updates
  60. 60. By: Anand Bobade (nmbobade@gmail.com) 7.2 Estimate Cost -> Input Cost Management Plan Human Resource Management Plan Scope Baseline Project Schedule Risk Register EEF OPA
  61. 61. By: Anand Bobade (nmbobade@gmail.com) 7.2 Estimate Cost ->Input->Cost Management Plan Cost Management Plan Define how project costs will be planned, structured, and controlled. Define how each Cost Management Process is executed. Specify preferred method or techniques to be used. Provides below key details. Units of Measure Level of Precision Level of Accuracy Process Description
  62. 62. By: Anand Bobade (nmbobade@gmail.com) 7.2 Estimate Cost ->Input->HR Management Plan Human Resource Management Plan Provides input on Human resource cost, which is key cost to the project. Staffing management plan (Acquisition of staff, staff Calendar's etc) Employee benefits & Rewards.
  63. 63. By: Anand Bobade (nmbobade@gmail.com) 7.2 Estimate Cost ->Input->Scope Baseline Scope Baseline • Project Scope (Inclusion & exclusions) • Assumptions and constraints. Scope Statement • Activity groups in to deliverables or work packages. • WBS provide framework for cost management. WBS • Control account. • Deliverable details. • Resources. WBS Dictionary
  64. 64. By: Anand Bobade (nmbobade@gmail.com) 7.2 Estimate Cost->Input->Project schedule Project Schedule Cost estimation is linked to the estimate activity resources process. You can get resources assigned to activities along with it’s quantity & duration from project schedule. Cost is always time bound, hence its important to know when these activities are scheduled. Estimate Activity Resource • Who will work on the each activities Estimate Activity Duration • How long activities will take & resource work on project? Type Quantity
  65. 65. By: Anand Bobade (nmbobade@gmail.com) 7.2 Estimate Cost->Input->Risk Register Risk Register Examine cost & schedule related risks. Reserve should be planned to mitigate & inspect Risks. Potential benefits from the positive risk should be considered.
  66. 66. By: Anand Bobade (nmbobade@gmail.com) 7.2 Estimate Cost->Input->EEF EEF Internal EEF: • Internal Human resource rates. • HR policies - Terms & conditions. • Organizational culture & structure. External EEF: • Market condition. • Published Commercial information databases (Rates, inflation). • Exchange rates.
  67. 67. By: Anand Bobade (nmbobade@gmail.com) 7.2 Estimate Cost->Input->OPA OPA Existing cost policies, procedures, and guidelines (e.g., invoicing process) Financial controls procedures. Historical information and lessons learned (e.g., past cost escalation issues) Financial databases (Old project finance details)
  68. 68. By: Anand Bobade (nmbobade@gmail.com) 7.2 Estimate Cost -> Tools & Techniques Expert Judgment Analogous estimating Parametric estimating Bottom-up estimating Three-point estimating Reserve Analysis Cost of Quality PM Software Vendor bid Analysis Group Decision Making
  69. 69. By: Anand Bobade (nmbobade@gmail.com) 7.2 Estimate Cost -> Tools & Techniques Analogues estimation Parametric estimation Three point estimation Estimation Techniques: Same in Time management & Cost management
  70. 70. By: Anand Bobade (nmbobade@gmail.com) 7.2 Estimate Cost->T&T-> Analogues estimation Analogues Estimation Estimate cost of the activity using historical data from a similar activity or a project. • Something similarThink “Analogy”: • Cost, budget/measures (size, weight) & complexity Uses values: • Actual cost of previous, similar projectsRelies on: • Limited amount of information availableUsed when: • For expert judgment. Uses historical information: • Less costly, less time consuming, less accurate. Everything is less:
  71. 71. By: Anand Bobade (nmbobade@gmail.com) 7.2 Estimate Cost->T&T-> Analogues estimation Analogues Estimation Computer Lab in School A Computer Lab in School B Used when: • Only limited information available. • Similar project information available • Experienced estimator In this scenarios - Information available is • Computer configurations • Computer installation duration - 30 min • No of computer configured - 20 Similar
  72. 72. By: Anand Bobade (nmbobade@gmail.com) 7.2 Estimate Cost->T&T-> Analogues estimation Analogues estimation Door A Door B Similar
  73. 73. By: Anand Bobade (nmbobade@gmail.com) 7.2 Estimate Cost->T&T-> Analogues estimation Advantages Quick No need to identify activities Less costly to create Cost constraints created by management during project initiation gives PM data to evaluate project feasibility Management can put cap on the overall project cost. disadvantages Less accurate Estimation is done based on limited information & high level understanding of the project Require considerable experience Possibility of infighting to gain biggest piece of the budget without being able to justify the need. Extremely difficult to estimate projects with high uncertainty Does not consider difference between projects.
  74. 74. By: Anand Bobade (nmbobade@gmail.com) 7.2 Estimate Cost->T&T-> Parametric estimation Parametric Estimation Sophisticated algorithm are used to calculate Cost based on Historical data & multiple quantifiable parameters. • Between historical data & other variables Uses statistical relationship: • Depending upon the sophistication of algorithm or tools. • Underlying data built into the model. Can produce higher levels of accuracy: • A total project or segments of a project. • In conjunction with other estimating methods. Can be applied to:
  75. 75. By: Anand Bobade (nmbobade@gmail.com) 7.2 Estimate Cost->T&T-> Parametric estimation Parametric Estimation E.g., CCS – Construction Computer Software (CANDY) CANDY Software
  76. 76. By: Anand Bobade (nmbobade@gmail.com) 7.2 Estimate Cost->T&T-> Parametric estimation Parametric Estimation Project A (completed): • Installation of 1,000 meter Cable • Installation type: simple • Resource:1 • Duration taken: 40 hours • Productivity: 25 meter’s per hour’s • Cost: 40*AED 100/hour = 4,000 Project B (New) • Installation of 2,000 meter Cable • Installation type: complex • Resource:1 • Productivity: 20 meter’s per hour’s (by applying complexity factor) • Duration Required: 100 hours (2,000 /20) • Cost: 100 & AED 1000/hour = 10,000 • Function Point Models • COCOMO II (COnstructive COst MOdel ) Model • SLOC (Source lines of code) Model Software Parametric Cost Models Most industries has their own estimation model.
  77. 77. By: Anand Bobade (nmbobade@gmail.com) 7.2 Estimate Cost->T&T-> Three point estimation Three point estimation A technique used to estimate cost by applying an average of optimistic, pessimistic & most likely estimates Used when there is uncertainty with the individual activity estimates. • Based on analysis of the best-case scenario. Optimistic (O): • Based on realistic effort assessment for required work & any predicted expenses (or ML) Most likely (M) : • Based on analysis of the worst-case scenario. Pessimistic (P).
  78. 78. By: Anand Bobade (nmbobade@gmail.com) 7.2 Estimate Cost->T&T-> Three point estimation Three point estimation • = (O + M + P) / 3Triangular Distribution • = (O + 4M + P) / 6 Beta Distribution (Weighted average) • = ( P – O ) / 6Standard Deviation (SD) • = SD ^ 2Activity variance Activity O M P Trangular SD PERT Activity1 6 20 30 18.67 4.00 19.333 Activity2 10 20 40 23.33 5.00 21.667 Activity3 13 20 50 27.67 6.17 23.833 This is also called as PERT techniques (Program evaluation and review technique). PERT formulas are as below.
  79. 79. By: Anand Bobade (nmbobade@gmail.com) 7.2 Estimate Cost->T&T-> Bottom up estimate Bottom up estimate Estimating project cost by aggregating the estimates of the lower-level components of the WBS. When an activity cannot be estimated with confidence, the work within activity is decomposed further. These estimates are then aggregated into a total cost for each of the activity (Summarised or Rolled- up to higher level)
  80. 80. By: Anand Bobade (nmbobade@gmail.com) Reserve Analysis 7.2 Estimate Cost->T&T-> Reserve Analysis Project A Baseline: 35 million • Cost: 34 million • Contingency: 1 million Project B Baseline: 35 million • Cost: 34 million • Contingency: 1 million Project C Baseline: 25 million • Cost: 24 million • Contingency: 1 million Projects department get budget of 100 million to start the projects. Initiates projects worth : 95 Million Management reserve: 5 Million
  81. 81. By: Anand Bobade (nmbobade@gmail.com) 7.2 Estimate Cost->T&T-> Reserve Analysis Reserve Analysis Contingency Reserve: It is a budget within cost baseline that is allocated for identified & accepted risks (known-unknowns) Management Reserve: Reserved for unforeseen risks (unknown unknowns) related to the work that is within scope of the project.
  82. 82. By: Anand Bobade (nmbobade@gmail.com) 7.2 Estimate Cost->T&T-> Reserve Analysis 575 25 550 50 500 250 150 50 50 50 100 25 25 50 250 100 100 50 250 Cost Budget Management Reserve Cost Baseline Contingency Reserve Project Estimates Control Account estimate Work Package estimate Activity Estimate Reserve Analysis
  83. 83. By: Anand Bobade (nmbobade@gmail.com) 7.2 Estimate Cost->T&T-> Reserve Analysis Reserve Analysis Contingency Reserve: It is a budget within cost baseline that is allocated for identified & accepted risks (known-unknowns) Allocation can be for specific activity/ Project, or both. Allocation can be % of the estimated cost or a fixed number- Quantitative analysis. Contingency can be reduced, or eliminated. Contingency should be clearly documented. It is a part of the cost baseline & overall funding requirements.
  84. 84. By: Anand Bobade (nmbobade@gmail.com) 7.2 Estimate Cost->T&T-> Reserve Analysis Reserve Analysis Management Reserve: It is project budget withheld for management control purposes. Reserved for unforeseen work that is within scope of the project (unknown unknowns). Not included in the cost baseline. But is part of the overall project budget and funding requirements. When management reserve used, it is added to cost baseline, thus requiring an approved change to cost baseline.
  85. 85. By: Anand Bobade (nmbobade@gmail.com) 7.2 Estimate Cost->T&T-> Cost of Quality Cost of Quality Cost of quality should be included in estimate. Assumptions about costs of quality is used to prepare activity cost estimate.
  86. 86. By: Anand Bobade (nmbobade@gmail.com) 7.2 Estimate Cost->T&T->Project Mang. software Project Management Software Any group or person with specialized knowledge in resource planning and estimating can provide such expertise Can automatically aggregate cost estimates Can help manage & track cashflow Can generate reports Assist , simplify, facilitate estimations & helps in rapid alternative estimations. Plan, organize & manage the resource costs. Develop resource estimates
  87. 87. By: Anand Bobade (nmbobade@gmail.com) 7.2 Estimate Cost->T&T->Vendor Bid Analysis Vendor bid Analysis Analysis of project cost, based on the bids from vendors. Additional cost estimating may be required to examine price of each deliverables & Supports final total project cost. Proposal1 Proposal2 Proposal3 Criteria1 Criteria2 Criteria3 Vendor Bid analysis
  88. 88. By: Anand Bobade (nmbobade@gmail.com) 7.2 Estimate Cost->T&T Group Decision Making Team based estimation approach. Helps to get commitment on emerging estimates. Required to improve estimation accuracy. Brainstorming & Delphi or nominal group techniques.
  89. 89. By: Anand Bobade (nmbobade@gmail.com) 7.2 Estimate Cost -> Output Activity Cost Estimates Basis of Estimates Project doc. Updates
  90. 90. By: Anand Bobade (nmbobade@gmail.com) 7.2 Estimate Cost -> Output->Activity Cost Estimate Activity Cost Estimates Estimation of probable costs required to complete each activity (summary form or in detail) Can be at activity level or Work Package level. Direct Cost Indirect Cost Variable cost Fixed Cost
  91. 91. By: Anand Bobade (nmbobade@gmail.com) 7.2 Estimate Cost -> Output-> Basis of Estimate Basis of Estimates Documentation contain: The basis of estimate All assumptions made Any known constraints Estimation may be indication of : Range of possible estimates: • e.g., AED 1,000 (±10%) Confidence/Accuracy level (as per PMI): • Rough order of magnitude – ROM (–25 to +75%) – During project initiation • Definite (–5 to +10%) – after baseline. Supporting documentation detailing how cost estimate was derived.
  92. 92. By: Anand Bobade (nmbobade@gmail.com) 7.2 Estimate Cost -> Output-> Basis of Estimate Basis of Estimates Rough Order of Magnitude • Low confidence • Early estimates • Analogous estimate • Unknown projects • -25% to +75 % Definitive estimate • High confidence • When scope/requirements are clear • Bottom up estimate • Repetitive project • -5% to +10 % • Do not communicate single number estimate • Give range of estimate mentioning type & degree off confidence. Communicating estimates & setting expectations:
  93. 93. By: Anand Bobade (nmbobade@gmail.com) 7.2 Estimate Cost -> Data Flow Diagram
  94. 94. By: Anand Bobade (nmbobade@gmail.com) 7.2 Estimate Cost -> Review Lot of information gathering need to be done before estimation Cost Estimation is tightly linked to time management Do not communicate single estimate (communicate ROM & definitive) Different type of estimation techniques Contingency & management reserve Cost of quality should be considered in estimation
  95. 95. By: Anand Bobade (nmbobade@gmail.com) 7.1 Plan Cost Management -> Question1 Your company has been hired to install software in 100 computers. All computers need equal time to configure. The contract for the project is set at a fixed cost, and the incentive based on how fast the project work is going to be completed. Management has requested that you study the work method to determine a faster, less costly, and a better method to complete the project. This scenario is an example of _________. • Time ConstraintA • Schedule ConstraintB • Value Analysis/EngineeringC • Learning CurveD C – Value Analysis/EngineeringValue Analysis is a systematic approach to find less costly ways to complete the same work. A and B are incorrect, as this situation does not describe a specific time or cost constraint. D is incorrect: the learning curve happens as the project team completes the work.
  96. 96. By: Anand Bobade (nmbobade@gmail.com) 7.1 Plan Cost Management -> Question1 Your portfolio team is currently analysing 3 new projects waiting for selection. They are Project Diamond with an NPV of Rs.15,00,000, Project Gold with an NPV of Rs 17,00,000 and Project Silver with an NPV of Rs.13,00,000. You present these 3 projects at the monthly project selection board meeting. After initial discussion it was immediately decided that Project Silver will not be pursued at all. At this point a lengthy discussion begins about the benefits of both Project Diamond and Project Gold. After about an hour, the CEO asks you: “What is the opportunity cost of selecting Project Diamond instead of Project Gold?” What should be your answer • 17,000A • 15,000B • 20,000C • 25,000D A – 17,000 The opportunity cost when selecting between two projects is simply the value of the project that is not selected. Project Gold has an NPV of Rs.17,00,000. If this project is not done, then the lost opportunity is Rs.17,00,000.
  97. 97. By: Anand Bobade (nmbobade@gmail.com) 7.1 Plan Cost Management -> Question2 You have two possible projects to manage, but you can only choose one. Project Contact Centre upgrade is worth 23Million, while Project CRM system implementation is worth 25Million. Management elects to choose CRM. Which one of the following is the opportunity cost of this choice? A– 23 Million The opportunity cost is the amount of the project that was not chosen. • 23 MillionA • 27 MillionB • 4 MillionC • 50 MillionD
  98. 98. By: Anand Bobade (nmbobade@gmail.com) 7.1 Plan Cost Management -> Question3 One of the types of cost estimation is Rough Order of Magnitude. This estimate: • is performed when detailed information is availableA • is performed after the scope is clearly definedB • is a near perfect estimateC • Usually made before project is designed, & must therefore rely on cost data of similar projects built in the past. D D - Usually made before the project is designed, and must therefore rely on cost data of similar projects built in the past. Page 201, PMBOK 5
  99. 99. By: Anand Bobade (nmbobade@gmail.com) 7.1 Plan Cost Management -> Question4 The process that establishes the policies, procedures and documentation for planning, managing, expending, and controlling project costs is known as • Control CostsA • Estimate CostsB • Plan Cost ManagementC • Determine Budget.D C- Plan cost management Page 193, PMBOK 5
  100. 100. By: Anand Bobade (nmbobade@gmail.com) To Learn Project Management, Contact Anand Bobade (055 5932004) •nmbobade@gmail.com •https://ae.linkedin.com/in/anandbobade •http://www.slideshare.net/anandbobade •Conduct Online training, Corporate Training, evening & weekend workshops.
  101. 101. By: Anand Bobade (nmbobade@gmail.com) To Learn Project Management, Contact Anand Bobade (055 5932004) •nmbobade@gmail.com •https://ae.linkedin.com/in/anandbobade •http://www.slideshare.net/anandbobade •Conduct Online training, Corporate Training, evening & weekend workshops. Free learning resources

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