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Project Cost Management

Project Cost Management. Estimating Costs. Not the same as pricing! Builds on Work Breakdown Structure (WBS) Requires predicting what resources are needed and in what quantity (how many units): People Stuff Services Requires knowing how much each resource costs per unit

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Project Cost Management

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  1. Project Cost Management

  2. Estimating Costs • Not the same as pricing! • Builds on Work Breakdown Structure (WBS) • Requires predicting what resources are needed and in what quantity (how many units): • People • Stuff • Services • Requires knowing how much each resource costs per unit • Requires organizing costs into categories

  3. Factors Influencing the Quality of Estimates Planning Horizon Other (Nonproject)Factors ProjectDuration Quality of Estimates OrganizationCulture People PaddingEstimates Project Structure and Organization

  4. Estimating Guidelines for Times, Costs, and Resources • Have people familiar with the tasks make the estimate. • Use several people to make estimates. • Base estimates on normal conditions, efficient methods, and a normal level of resources. • Treat each task as independent, don’t aggregate. • Don’t make allowances for contingencies. • Adding a risk assessment helps avoid surprises to stakeholders.

  5. Four Categories of Costs • Direct costs: Attributed directly to the project work and cannot be shared with other projects or activities, they are clearly chargeable to a specific work package • Indirect costs: Shared costs, some portion of which can be attributed to the project, they are services, and costs, for your entire firm, not just one product. (e.g. use of a training room, also called overhead) • Variable costs: Costs that vary according to some quantifiable condition – number of people, number of days, volume of material, supply/demand, etc. • Fixed costs: Costs that remain the same, regardless of activity level, number of people, volume, etc.

  6. “Value Engineering” • Simply means finding the most efficient way to do the project – balancing cost Vs. quality Vs. time to maximize value. • Can we reduce cost without sacrificing timeliness or quality? • Use less expensive resources? Or more expensive resources but for shorter time?

  7. Sources of Information • Work Breakdown Structure (WBS) • Estimating publications (e.g. State Department published per diems, Expedia.com) • Organizational process assets, like project files, project review reports, team members’ experience, previous contracts, etc. • Others?

  8. Creating a Project Budget Assigning a cost to an individual work package

  9. Budget Overview Budget-At-Completion (BAC) Cost to Date (a.k.a. ‘actual cost’) Variance Project Cost Cost Baseline (a.k.a. ‘budget’) Project Schedule (Time)

  10. Cost Control Focuses on the ability of costs to change and ways of allowing or preventing it from happening

  11. Common Sense Cost Control Where do cost overruns come from? • Mistakes and oversights – wrong or missing formulas or inputs in original budget estimate • Poor planning – inflation, other increases not factored into budget estimates • Lack of communication – staff don’t know ceiling amounts • ‘Do-overs’ – poor quality delivery the first time around • Scope creep – client wants something extra, boss agrees Prevent unauthorized changes to the cost baseline • Other factors?

  12. Measuring Project Performance Measuring the performance of project work against a plan to identify variances

  13. Earned Value Management (EVM) • EVM is concerned with the relationships between the following that reflect project performance • *Planned Value (PV – not ‘present value’!): What the project should be worth at a particular point in the schedule. • Earned Value (EV): Budgeted value of work actually completed at a given point in time. • Actual Cost (AC): Real dollars actually spent to date at a given point in time on the project. Can be (and usually is) different than EV. *also called performance baseline

  14. EV, AC and PV BAC = $100,000 Total Project 25% Complete Month 6 = 50% Earned Value %COMP X BAC $25,000 Actual Costs How Much was actually Spent? $27,000 Planned Value What the project should be worth At this point in the schedule period $50,000

  15. Finding Variances • Cost Variance (CV): Difference between earned value (EV) and actual cost (AC). CV=EV-AC • Remember – a negative variance is expressed with a negative sign (AC is greater than EV) • Describes whether the work done so far has cost more or less than you thought it would. • Schedule Variance (SV): Difference between earned value (EV) and planned value (PV). SV=EV-PV • Remember – a negative variance is expressed with a negative sign (PV is greater than EV) • Describes whether you’ve done as much work at this stage as you thought you would.

  16. Cost Performance Index (CPI) • Measures how much work each dollar of cost ‘buys’. • CPI = Earned Value / Actual Cost. • A CPI of .75 means it costs $1 to generate 75 cents worth of work. Ideally, CPI should be 1. The smaller it is, the worse the project is doing. • What if a CPI is more than 1? • What would cause the CPI for the Sister Cities project to be less than 1? More than 1?

  17. Schedule Performance Index (SPI) • Measures how closely the project is on schedule. • SPI = Earned Value / Planned Value. • A SPI of .75 means the project has only completed 75% of the work we expected to complete by now. • Ideally, SPI should be 1. The smaller it is, the further behind the project is. • What if an SPI is more than 1? • What would cause the SPI for the Sister Cities project to be less than 1? More than 1?

  18. Estimate to Complete (ETC) • Measures how much more money is need to complete the project. Depends on Estimate at Completion (EAC) • EAC is an updated ‘hypothesis’ (guess?) of what the total actual cost of the project is likely to be. • Easiest way (for predictable conditions) is EAC = BAC/CPI. (Dividing by a decimal makes BAC bigger) • Other formulae (p. 268) account for typical variances and anomalies (known and unknown unknowns). • Estimate to Complete is EAC minus AC: Total project cost less the amount spent so far.

  19. Earned Value Management: Tips • Always start with Earned Value (EV). • Variance means subtraction (dollar figure). • Index means division (decimal or percentage). • Negative dollar figures are bad in a variance. • Less than 1 (or 100%) is bad in an index.

  20. Terms to Know

  21. Formulas and Interpretations to Memorize

  22. Don’t bite off more then you can manage Get your ducks in a row Plan for Murphy Don’t put off until tomorrow Delegate, delegate, delegate CYA (Document) Keep your team in the loop Measure success Have a flexible strategy Learn from your mistakes Ten Golden Rules of Project Management

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