8.project cost management

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CAPITALS

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Project Cost Management

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What is Cost ?

A resource sacrificed or forgone to

achieve a specific objective.

(Measure in monetary amount) ทรัพยากรท่ีเราสูญเสียไป เพ่ือให้บรรลตุามวัตถปุระสงค์ท่ีวางไว้

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Project Cost Management “The processes involved in planning, estimating, budgeting, and controlling costs

so that the budget can be completed within the approved budget”

Allocating overall cost

estimate to individual

work items

“Cost baseline”

Developing an

estimate of costs of

the resources

needed to complete

a project

Controlling change to

project budget

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Why Do We Manage Cost? › 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?

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Cost Management : Project Cost › Labor แรงงาน

–Hiring & paying the various

personnel (workers) involved in

developing the project

–Ex: Salary , Hourly rate , Pension

, Health benefit

› Materials วัตถุดบิ

–Material costs apply to specific

equipment and supplies the

project team will require in order

to complete project tasks.

–Ex : Software package

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Cost Management : Project Cost › Subcontractors แรงงานจ้างข้างนอก

–Ex: marketing communications professional

to design the project’s promotional material

–Consultant / Expertise

› Equipment and facilities อุปกรณ์หรือสถานที่ –Rental of equipment , rental office , etc.

› Travel ค่าใช้จ่ายการเดนิทาง –Business travel (car rental, airfare, hotels,

and meals)

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Cost Management : Project Cost Another way to examine project cost nature of the cost themselves

1) Type of cost : Direct or Indirect

–Direct cost : Clearly assigned to the project

› Labor and material costs

Direct labor rate X Total labor hours = Total direct labor cost

› Material cost : All project purchase orders (PO)

–Indirect cost : › Overhead costs , Administration

› Ex of overhead cost : Indirect materials, utilities , taxes, insurance, property and repairs

etc.

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Cost Management : Project Cost 2) Frequency of occurrence : Recurring or Non recurring

›Non recurring cost

- Charges applied once at the beginning or end of the project

- Ex : Marketing analysis, Training , Outplacement services

›Recurring cost

- Continue to operate over the project’s life cycle

- Ex : Labor, Material , Logistics, Sales costs

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Cost Management : Project Cost 3) Opportunities to be adjusted : Fixed or Variable

›Fixed costs

- Do not vary with respect to their usage

- Ex : Leasing equipment or project hardware

›Variable costs

- Cost that accelerate or increase through usage

- Cost is in direct proportion to the usage level

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Cost Management : Project Cost 4) Schedule : Normal or Expedited Costs

› Normal costs

- Incurred in the routine process of working to complete the project according

to original planned schedule agreed to by all stakeholder at the beginning of

the project.

›Expedited costs

- Unplanned costs incurred when steps are taken to speed up the project’s

completion.

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Cost Management : Project Cost

Costs Direct

Labor

Building Lease Expedite

Costs

Material

Type Direct X X X

Indirect X

Frequency Recurring X X X

Non recurring X

Adjustment Fixed X X

Variable X X

Schedule Normal X X X

Expedited X

Cost Classifications

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Cost Management

› Example

– Project : Install CRM system

COST ?

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Estimate Costs

Input Output Tool & Technique

Enterprise Environmental

Factors

Organizational Process

Assets

Project Scope

Statement

Work Breakdown

Structure

WBS Dictionary

Project Management Plan

•Schedule Mgmt Pln

•Staffing Mgmt Pln

•Risk Register

• Analogous estimating

• Determine resource

cost rates

• Bottom up estimating

• Parametric estimating

• Project management

software

• Vendor bid analysis

• Reserve analysis

• Cost of quality

Activity Cost Estimates


Supporting Detail

Requested Changes

Cost Management Plan

Updates

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Estimating Methods

› 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

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Estimating Methods

› 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]

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Cost Estimating Sample of Maximum Departmental Headcounts by Year

From Northwest Airlines – New Reservation System

Department YR 1 YR2 YR 3 YR4 YR5 Totals

Information System 24 31 35 13 13 116

Marketing System 3 3 3 3 3 15

Reservation 12 29 33 9 7 90

Contractors 2 3 1 0 0 6

Totals 41 66 72 25 23 227

A large percentage of total project costs are often labor costs.

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Cost Estimating Typical problems with IT Cost Estimates

Many IT project cost estimates are still very

inaccurate , especially those involving new

technologies or software development. Tome

Demarco suggests 4 reasons for the inaccuracies :

1. Complex task & estimate done before clear

system requirements

2. Inexperience in cost estimate

3. Underestimation

4. Ask for estimate from management

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Determine Budget

› 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

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Determine Budget


Cost aggregation

Reserve analysis

Parametric estimating

Funding limit reconciliation

Cost Baseline

Project Funding

Requirements


Updates

Requested Changes

Project Scope Statement

Work Breakdown Structure

WBS Dictionary



Supporting Detail

Project Schedule

Resource Calendars

Contract


• Involve allocating the project cost estimate to individual work items over time

The work items are based on the work breakdown structure (WBS) for the project.

• Main goal: to produce a cost baseline for measuring project performance & project

funding requirement

Cost Baseline Time-phased budget that project manager use to measure and monitor cost performance

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Determine Budget Sample Time-based Budget

Activity Months

JAN FEB MAR APR MAY TOTAL

Survey 4,000 4,000

Design 5,000 3,000 8,000

Clear Site 4,000 4,000

Foundation 7,500 7,500

Framing 8,000 2,000 10,000

Plumb and Wire 1,000 4,000 5,000

Monthly Planned 4,000 9,000 10,500 9,000 6,000

Cumulative 4,000 13,000 23,500 32,500 38,500 38,500

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Determine Budget

Sample Cost Budgeting : Survey Pro Project Cost Baseline

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Control Costs


Cost Baseline

Project Funding

Requirements

Performance Reports

Work Performance

Information

Approved Change

Requests


• Cost change control system

• Performance measurement

analysis

• Forecasting

• Project performance reviews

• Project management

software

• Variance management

Cost Estimate Updates

Cost Baseline Updates

Performance Measurements

Forecasted Completion

Requested Changes

Recommended Corrective

Actions

Organizational Process

Assets Updates


Updates

• Monitoring cost performance

• Ensure that changes are included in cost baseline

• Inform stakeholders of authorized changes which impacts to cost

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Cost Management Key Terms

› 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?

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Earned value management (EVM) • Progress is compared against the baseline to

determine whether project is ahead of or behind plan

• Focus on tracking • actual performance VS planned performance

• % of completion data in making calculation

• IT don’t have good planning information so

tracking performance against plan will mislead

information

• Estimate % of completion tasks might mislead

information , 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 (PV) – Budgeted Cost

• Earned Value (EV) – Actual work

completed

• Actual Cost (AC) – Costs incurred

• Estimate to Complete (ETC) – What’s

Left

• Estimate at Completion (EAC) – What

final cost will be

• Cost control technique

• Project performance measurement

technique, integrate scope, time,

cost data

• Project managers and team can

determine how well project is

meeting scope , time and cost goal

by comparing actual information

with base line

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Control Costs : Earned Value Formulas

TERM FORMULA NOTES

Earned Value (EV) EV = PV to date X RP

Cost Variance (CV) CV = EV – AC Negative = Over budget

Positive = Under budget

Schedule Variance (SV) SV = EV – PV Negative = Behind Schedule

Positive = Ahead of Schedule

Cost Performance Index CPI = EV / AC How much are we getting for every dollar we

spend?

Schedule Performance Index SPI – EV / PV Progress as % against plan

Estimated at Completion (EAC) EAC = BAC / CPI How much more do we have to spend?

Estimated Time to Complete Original Time Estimate/SPI How much time will we complete ?

Planed Value (PV) : Budget Cost of Work Schedule

Actual Cost (AC) : Actual Cost of Work Performed

Earned Value (EV) : Budget Cost of Work Performed

Rate of Performance (RP) : Ratio of actual work completed to % of work planned

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Control Costs Sample of Earned Value calculation for one activity after week one

Suppose the server installation was halfway completed by the end of week 1. Plan Cost = 10,000 ,

Actual Cost = 15,000, RP= 50%

Activity FORMULA Week 1

Earned Value (EV) EV = PV to date x RP = 10,000 * 50% = 5,000

Cost Variance (CV) CV = EV – AC = 5,000 – 15,000 = -10,000

Schedule Variance (SV) SV = EV – PV = 5,000-10,000 = -5,000

Cost Performance Index CPI = EV / AC = 5,000 / 15,000 = 0.33 , 33%

Schedule Performance Index SPI = EV / PV = 5,000/10,000 = 0.5 , 50%

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Tricks for Earned Value › EV is always first

› Variance = EV minus something

› Index = EV divided by something

› If the formula relates to cost use AC

› If the formula relates to schedule use PV

› Interpreting results: negative is bad and positive is good

› Interpreting results: greater than one is good, less than one is bad

PV

AC ETC EAC

BAC Project

Start

Current

Status

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Terms to Remember

• Present Value

• Net Present Value (NPV)

• Internal Rate of Return (IRR)

• Payback Period

• Benefit Cost Ratio = BCR>1, Payback is greater than the cost

• Opportunity Cost

• Sunk Cost

• Working Capital

• Straight Line Depreciation

• Accelerated Depreciation • Double Declining Balance

• Sum of Years Digits

• Value Analysis (Value Engineering)

You won’t be calculating most of these numbers on the test, just remember the

concepts for general questions

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Earned Value Graph

Variance at

Completion (VAC)

Target Cost &

Schedule

Schedule Variance

(Time)

Planned Value

(PV)

Earned Value

(EV)

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8.project cost management