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Project Management and Quality Control Fall 2014

Project Management and Quality Control Fall 2014. Cost Analysis. Lecture05. Overview. Cost Budgeting Preparing a financial plan for every major expense category, such as administrative cost, financing cost, production cost. 2. Mwaffaq Otoom & Mohammad Al Bataineh. Lecture05.

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Project Management and Quality Control Fall 2014

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  1. Project Management and Quality ControlFall 2014 Cost Analysis Lecture05

  2. Overview • Cost Budgeting • Preparing a financial plan for every major expense category, such as administrative cost, financing cost, production cost. 2 MwaffaqOtoom & Mohammad Al Bataineh Lecture05

  3. Cost Escalation • Cost Escalation: The amount by which actual costs increase to overrun the initial estimated costs. • Reasons for Cost Escalations: • Uncertainty and lack of accurate information • Changes in design or requirements • Economic and social variables in the environment • Work inefficiency, poor communication, and lack of control • Ego involvement of the estimator • Kind of project contract • Bias and Ambition Mwaffaq Otoom & Mohammad Al Bataineh Lecture05

  4. Cost Estimating and the Systems Development Life Cycle Time Mwaffaq Otoom Lecture05

  5. System Life Cycle Costs • Life Cycle Costs (LCC) • Are all costs of a system throughout its full cradle-to-grave life cycle. • Purpose of Life Cycle Cost Analysis: • To anticipate the realities of operating, maintaining, and (ultimately) disposing of the end-item system • To establish target costs for operating, maintaining, and disposing of the end-item system. • To design the system so it will meet those target costs. Mwaffaq Otoom

  6. Estimating Process Estimate versus Target or Goal • Estimate: a realistic assessment based upon known facts about the work, required resources, constraints, and the environment, derived from estimating methods • Target or goal: a desired outcome, commitment, or promise. • Don’t confuse estimates with goals. The estimating process is directed at producing good estimates, not restating targets or goals. Mwaffaq Otoom Lecture05

  7. Estimating Process Accuracy versus Precision • Accuracy: the closeness of the estimated value to the actual value • Precision: the number of decimal places in the estimate. • Accuracy of estimates is more important than precision Mwaffaq Otoom Lecture05

  8. Cost Estimating Process • Estimated costs are determined using four basic techniques: • Expert opinion • An expert provides a reasonable cost estimate due to breadth of experience and expertise. • Analogy Estimate • developed by reviewing costs from previous, similar projects. • Adjustments are made due to differences between the proposed project and those similar projects. • Parametric Estimate • Derived from an empirical or mathematical relationship. • Parametric: Formula or Cost Function, see the following example Mwaffaq Otoom & Mohammad Al Bataineh Lecture05

  9. Cost Estimating Process Cost, cabling = 150 (total area + 10%) + 300 (number of rooms) + 125 (number of floors) • Cost Engineering • refers to detailed cost analysis of individual cost categories at the work package or task level. • provides the most accurate estimate of all the methods. • is the most time-consuming, requiring considerable work-definition detail and design information—both of which might not be available until later in the project. Mwaffaq Otoom & Mohammad Al Bataineh Lecture05

  10. Cost Engineering Estimate for a Small Project • A, B, …, H: are eight work packages • 1,2, and 3: are labor grades (labor classifications that indicates capabilities and sometimes associated pay ranges) • The numbers inside the boxes are the estimated number of labor hours per week Mwaffaq Otoom & Mohammad Al Bataineh Lecture05

  11. Cost Engineering Estimate for a Small Project (Cont’d) • For each work package Table 9-1 shows estimates the cost of material, equipment and supplies, subcontracting, and other nonlabor expenses such as freight charges and travel. Mwaffaq Otoom & Mohammad Al Bataineh Lecture05

  12. Cost Estimating Process • Any of the previous methods for cost estimating can be used in any area of project. • Parametric and cost engineering methods are the best • Rule of Thumb: The smaller the work packages or portion of the end-item estimated, the better the estimate Mwaffaq Otoom Lecture05

  13. Cost Engineering Estimate for Larger Projects • Cost Estimating Process for larger projects include the following steps: • PM: Uses WBS to identify work packages • FM: Subdivide work packages into identifiable tasks; determine labor, material, facilities, and resources requirements for each • Supervisors/team leads: Estimate number of labor hours and quantities of materials needed Mwaffaq Otoom & Mohammad Al Bataineh

  14. Project Management WBS information 1. Functional Management 2. 3. Work team Cost Estimating Process Procedure for larger projects Mwaffaq Otoom Lecture05

  15. Cost Engineering Estimate for Larger Projects (Cont’d) • FM: check and aggregate time and material estimates • FM: convert time estimates into costs • PM: checks over and approves all estimates aggregates costs; added in overhead costs: Project cost = ∑direct costs + ∑ overhead costs Mwaffaq Otoom & Mohammad Al Bataineh

  16. Cost Estimating Process Project Management 6. WBS information 4., 5. Functional Management Work team Mohammad Al Bataineh

  17. Cost Engineering Estimate for Larger Projects (Cont’d) • The project manager adds contingency amounts to estimates to offset uncertainty. • Base Estimate = Σ (WP Estimates + WP Contingency) (to handle “known-unknowns”: are sources of cost increases that experience indicates as possible or highly likely; they include scrap and waste, design changes, increases in the scope, size, or function of the end-item, and delays due to weather. • Final Cost Estimate = Base Estimate + Overheads + Project Contingency (to handle “unknown unknowns”; PM controls this) “Unknown unknowns” are external factors that affect project costs but cannot be pinpointed or estimated. Examples include fluctuation in exchange rates, shortages in resources, changes in the market or competitive environment. Mwaffaq Otoom & Mohammad Al Bataineh

  18. Cost Engineering Estimate for Larger Projects (Cont’d) • The project manager compares bottom-up estimates to top-down targets or goals. Attempt to reconcile differences. • Top-down refers to estimating the cost by looking at the project as a whole. A top-down estimate is typically based upon an expert opinion or analogy to other, similar projects. • Bottom-up refers to estimating costs by breaking the project down into elements—individual project work packages and end-item components cost. Mwaffaq Otoom & Mohammad Al Bataineh

  19. Estimation Process Project Management 7., 8.. WBS information WBS information Functional Management Work team Mwaffaq Otoom Lecture05

  20. Elements of Typical Budget MwaffaqOtoom Lecture05

  21. Performance AnalysisThe Planned Value (PV) • Planned Value (PV): is the approved value of the work to be completed in a given time period; i.e. it is the money that you should have spent as per the schedule. • As per the PMBOK Guide “Planned Value (PV)  is the authorized budget assigned to work to be accomplished for an activity or WBS component. Total planned value for the project is also known as Budget At Completion (BAC).” • PV = (Planned % Complete) X (BAC) • Planned Value is also known as The Budgeted Cost of Work Scheduled (BCWS). • PV or BCWS = Hourly Rate * Total Hours Scheduled (Example: PV = ($100/hr * 8 hr) = $800) Mohammad Al Bataineh

  22. Example on PV • You have a project to be completed in 12 months and the total cost of the project is $100,000. Six months have passed and the schedule says that 50% of the work should be completed.What is the Planned Value? • Project duration – 12 monthsProject Cost (BAC) – $100,000Time elapsed – 6 monthsPercent complete – 50% (as per the schedule) • The definition of Planned Value says that Planned Value is the value of the work that should have been completed so far (as per the schedule). Therefore, in this case we should have completed 50% of the total work. Hence, • Planned Value = 50% of value of the total work = 50% of BAC • = (50%) ($100,000)= $50,000. Mohammad Al Bataineh

  23. Performance AnalysisThe Earned Value (EV) • The Earned Value (EV) is the value of the work actually completed to date; i.e. it is the value of the project that you have earned so far. • As per the PMBOK Guide “Earned Value (EV) is the value of work performed expressed in terms of the approved budget assigned to that work for an activity or WBS Component.” • Earned Value is also known as the Budgeted Cost of Work Performed (BCWP). • EV or BCWP = Baselined Cost * % Complete Actual (Example: EV = baseline of $800 * 91.7% complete= $734) Note: (% Actual Complete = 11 hours spent /12 hours estimated to finish Mohammad Al Bataineh

  24. Example on EV • You have a project to be completed in 12 months and the total cost of the project is $100,000. Six months have passed and $60,000 is spent, but on closer review you find that only 40% of the work is completed so far.What is the Earned Value (EV)? • The definition of Earned Value says that it is the value of the project that has been earned. In this case only 40% of the work has been completed. Hence, • Earned Value (EV) = 40% of value of total work = 40 % of BAC = (40%)($100,000) = (0.4)($100,000) = $40,000 Mohammad Al Bataineh

  25. Performance AnalysisThe Actual Cost (AC) • The Actual Cost is the total cost incurred for the actual work completed to date; i.e. it is the amount of money you have spent till now. • As per the PMBOK Guide “Actual Cost (AC) is the total cost actually incurred in accomplishing work performed for an activity or WBS component.” • Actual Cost is also known as the Actual Cost of Work Performed (ACWP). • AC or ACWP = Hourly Rate * Total Hours Spent (Example: AC = $100 * 11 hours= $1100 ) Mohammad Al Bataineh

  26. Example on AC • You have a project to be completed in 12 months and the total cost of the project is $100,000. Six months have passed and $60,000 is spent, but on closer review you find that only 40% of the work is completed so far. • What is the Actual Cost (AC)? • Finding the Actual Cost (AC) is simplest of all. As per the definition of Actual Cost, it is the amount of money that you have been spent so far. And in our question, you have spent $60,000 on the project so far. Hence, Actual Cost is $60,000 Mohammad Al Bataineh

  27. Earned Value Management(EVM) • EVM is a project management technique for measuring project performance and progress in an objective manner. • Because EVM has the ability to combine measurements of : • Scope, • Schedule • and cost, • in a single integrated system, EVM is able to provide accurate forecasts of project performance problems, which is an important contribution for project management. Mohammad Al Bataineh

  28. Project Tracking Without EVM • Figure 1 shows the cumulative budget (cost) for this project as a function of time (the blue line, labeled PV). • It also shows the cumulative actual cost of the project (red line) through week 8. • To those unfamiliar with EVM, it might appear that this project was over budget through week 4 and then under budget from week 6 through week 8. However, what is missing from this chart is any understanding of how much work has been accomplished during the project. • If the project were actually completed at week 8, then the project would actually be well under budget and well ahead of schedule. • If, on the other hand, the project is only 10% complete at week 8, the project is significantly over budget and behind schedule. • A method is needed to measure technical performance objectively and quantitatively, and that is what EVM accomplishes. Mohammad Al Bataineh

  29. Project Tracking With EVM • Figure 2 shows the EV curve (in green) along with the PV curve from Figure 1. • The chart indicates that technical performance (i.e., progress) started more rapidly than planned, but slowed significantly and fell behind schedule at week 7 and 8. • This chart illustrates the schedule performance aspect of EVM. Note: The Project manager identifies every detailed element of work that has been completed, and sums the PV for each of these completed elements. Earned value may be accumulated monthly, weekly, or as progress is made. Mohammad Al Bataineh

  30. Project Tracking With EVM • Figure 3 shows the same EV curve (green) with the actual cost data from Figure 1 (in red). • It can be seen that the project was actually under budget, relative to the amount of work accomplished, since the start of the project. • This is a much better conclusion than might be derived from Figure 1.

  31. Project Tracking With EVM • Figure 4 shows all three curves together – which is a typical EVM line chart. • The best way to read these three-line charts is to identify the EV curve first, then compare it to PV (for schedule performance) and AC (for cost performance). • It can be seen from this illustration that a true understanding of cost performance and schedule performance relies first on measuring technical performance objectively. This is the foundational principle of EVM. Mohammad Al Bataineh

  32. Schedule Performance • The following EVM formulas are for schedule management, and do not require accumulation of actual cost (AC): Scheduled Variance (SV) = EV - PV (Example: SV = $734 - $800 = -$66) • SV > 0 is good (ahead of schedule). • SV = 0 at project completion because then all of the planned • values will have been earned. Schedule Performance Index (SPI) = EV/PV Example: SPI = ($734/$800) = 0.91 [ SPI<1] • SPI > 1 is good (ahead of schedule). • SPI <1 is bad(behind schedule). Mohammad Al Bataineh

  33. Cost Performance • Budget at completion (BAC): The total planned value (PV or BCWS) at the end of the project. Cost Variance (CV) = EV - AC Example: CV = $734 - $1100 = -$366 (indicating a cost overrun)) • CV greater than 0 is good (under budget). Cost Performance Index (CPI) = EV/AC CPI = $734/ $1100= 0.66 [CPI < 1] (indicating over budget) • CPI< 1  that the cost of completing the work is higher than planned (bad); • CPI= 1  that the cost of completing the work is right on plan (good); • CPI> 1 that the cost of completing the work is less than planned (good • (under budget) or sometimes bad - may mean that the plan was too • conservative! The planners tie up available funds for other purposes). Mohammad Al Bataineh

  34. Forecast Cost At Completion FCAC = Forecast Cost At Completion = % by which on schedule x BCAC = (ACWP/BCWP) x BCAC =(AC/EV) x BCAC = BCAC/(EV/AC) = BCAC/CPI where • BCAC = Budgeted Cost At Completion • ACWP = Actual Cost of Work Performed = AC • BCWP = Budgeted Cost of Work Performed = EV Mwaffaq Otoom & Mohammad Al Bataineh Lecture05

  35. Example on FCAC • If the Budgeted Cost at Completion (BCAT) is $990,000. At week 20, BCWP = $432,000 whereas ACWP = $560,000. Calculate the FCAC. • Solution: BCAT = $990,000 BCWP = EV = $432,000 ACWP = AC =$ 560,000 CPI = EV/AC = 432/560=0.77 (CPI<1  (over budget) FCAC = $990,000/(432/560) = $1,283,333 Mwaffaq Otoom & Mohammad Al Bataineh Lecture05

  36. Forecast Cost To Complete • FCTC is the estimate to complete the remaining work of the project. FCAC = FCTC + ACWP FCTC = Forecast Cost To Completion = Forecast Cost At Completion – ACWP = FCAC – ACWP = (BCAC/CPI) – (BCWP/CPI) = (BCAC - BCWP)/CPI =(BCAC-EV)/CPI ACWP =AC BCWP =EV CPI=EV/AC Mwaffaq Otoom & Mohammad Al Bataineh Lecture05

  37. Example on FCTC FCTC = (BCAC - BCWP)/CPI = ($ 990,000 - $ 432,000)/0.77 = $723,333. • Summary: In week 20 we have completed 432,000 (EV) of budgeted work at a cost of 560,000 (AC). • Given the current trend, we expect to complete the project at cost remaining of $723,333 for a final project cost of $1,283,333. (i.e. $723,333 = $1,283,333 - $560,000) Mwaffaq Otoom & Mohammad Al Bataineh Lecture05

  38. Example Status & Forecast 1400 FCAC SD (Status Day) 1200 BCAC 1000 At Week 20: PV = $512,000 EV= $432,000 AC= $560,000 BCWS(PV) 800 FBCWP(EV) Cost ($1,000's) 600 FACWP (AC) 400 200 0 0 10 20 30 40 50 Week Mwaffaq Otoom Lecture05

  39. Example Status & Forecast 1400 FCAC SD 1200 BCAC 1000 At Week 20: PV = $512,000 EV= $432,000 AC= $560,000 BCWS 800 FBCWP Cost ($1,000's) 600 FACWP 400 200 0 0 10 20 30 40 50 Scheduled Completion Revised Completion Week Mwaffaq Otoom Lecture05

  40. Variances • Accounting Variance (AV): • Schedule Variance (SV): • Time Variance (TV): • Cost Variance AV= BCWS – ACWP = PV-AC SV= BCWP – BCWS = EV-PV TV = SD – BCSP SD: Status Date BCSP: date when BCWS = BCWP CV= BCWP – ACWP=EV-AC Mwaffaq Otoom Lecture05

  41. Project Status 600 AV 500 SV 400 BCWS 300 BCWP Cost ($1,000) ACWP 200 100 0 0 5 10 15 20 25 Week Project (Week 20) At Week 20: PV = $512,000 EV= $432,000 AC= $560,000 SV = BCWP - BCWS = EV-PV =-$80,000 Mwaffaq Otoom Lecture05

  42. Performance Indices • SPI = Schedule Performance Index SPI = BCWP/BCWS=EV/PV SPI > 1 work ahead of schedule • CPI = Cost Performance Index CPI = BCWP/ACWP=EV/AC CPI > 1 project under-budget Mwaffaq Otoom Lecture05

  43. Project (Week 20) • SPI = BCWP/BCWS = 432/512 = .84 • CPI = BCWP/ACWP = 432/560 = .77 Project is behind schedule With budget overrun Mwaffaq Otoom Lecture05

  44. SUMMARY

  45. Exercise 1 • You’re managing a project to install 200 windows in a new skyscraper (ناطحة سحاب) and need to figure out your budget. Each week of the project costs the same: your team members are paid a total of $4,000 every week, and you need $1,000 worth of parts each week to do the work. If the project is scheduled to last 16 weeks, what’s the BAC for the project? • What will the Planned % Complete be four weeks into the project? Mohammad Al Bataineh

  46. Exercise 1 • What should the PV be four weeks into the project? • You’ve checked with your team, but they have bad news. The schedule says they were supposed to have installed 50 windows by now, but they only installed 40. Can you figure out the actual % complete? Mohammad Al Bataineh

  47. Exercise 1 • Look at the planned value, and then look at the Earned Value. Are you delivering all the value you planned on delivering? Mohammad Al Bataineh

  48. Exercise 2 • Jeff and Charles have a total budget of $10,000, and they’re currently halfway through the schedule. • So their planned value is? • Uh-oh! On a closer look, it seems they’ve really only gotten 40% of the work done. Mohammad Al Bataineh

  49. Exercise 2 • Now that you have the EV and PV, you can tell Jeff and Charles if they’re getting their money’s worth! • So are we ahead of schedule or behind it? Mohammad Al Bataineh

  50. Exercise 3 • Your project has a total budget of $300,000. You check your records and find that you’ve spent $175,000 so far. The team has completed 40% of the project work, but when you check the schedule it says that they should have completed 50% of the work. Calculate the following: Mohammad Al Bataineh

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