Chapter 6 Project Cost Management

1. Chapter 6Project Cost Management

2. Ch.6 Project Cost Management • Cost Estimating (6.1) • Cost Budgeting (6.2) • Cost Control (6.3)

3. Project Cost Management • Planning, • Estimating, • Budgeting and • Controlling costs so that the project can be completed within the approved budget.

4. Project Cost Management • Precision level: rounding of data to a prescribedprecision (e.g. $100; $1,000) • Unit of measure: unitused in measurementforeach of theresources (e.g. staffhours, weeks, $) • Organizational procedures links: ifcostestimatesareincluded in thecontrolaccount of organization. • Control thresholds: variancethresholdsorotherindicators at predefined time points. • Earned value rules* • Reporting formats: formatsforcostreports • Process descriptions: desciptions of each of thethreecostmanagementprocesses

5. CostEstimating • Approximation of thecosts of the resources needed to complete each schedule activity. • Labor, materials,equipment, services, and facilities, as well as inflationallowance or a contingency cost. • Includes identifying and considering various costingalternatives. • Cost estimates are generally expressed in units of currency (dollars, euro, TL etc.) to enable comparisons between projects.

6. Cost Estimating

7. Cost Estimating: Inputs 1. Enterprise Environmental Factors • Marketplace conditions • Commercial databases 2.Organizational Process Assets • Cost estimating policies • Cost estimating templates • Historical information • Project files • Project team knowledge • Lessons learned 3. Project Scope Statement

8. Cost Estimating: Inputs 4. Work Breakdown Structure 5. WBS Dictionary 6. Project Management Plan • Schedule management plan: Schedule activityresources and their respective durations are used as key inputs to this process. • Staffing management plan: Project staffing attributes and personnel rates • Risk register: information on risk responses is consideredwhen producing cost estimates.

9. Cost Estimating: Tools and Techniques • Analogous Estimating: using the actual cost of previous, similar projects as the basis for estimating the cost of the current project. • Determine Resource Cost Rates • Gatheringquotes • Standardrates • Using commercialdatabasesor seller publishedpricelists • Bottom-up Estimating :estimating the cost of individual work packages orindividual schedule activities with the lowest level of detail.

10. Cost Estimating: Tools and Techniques • Parametric Estimating: uses a statistical relationship betweenhistorical data and other variables . • Project management software: cost estimating software applications, computerized spreadsheets, and simulation and statistical tools • Vendor Bid Analysis • ReseveAnalysis: (alsocalledcontingencyallowances) • Cost of Quality

11. Cost Estimating: Outputs • Activity Cost Estimates: includes labor, materials, equipment, services, and facilities, as well as inflation allowance or a contingency cost. • Activity Cost Estimate Supporting Detail • Description of the schedule activity • Documentation of any assumptions & constraints • Indication of the range of possible estimates (e.g., $10,000 (-10 / +15%) to indicate that the item is expected to cost between $9,000 and $11,500). • Requested Changes • Cost Management Plan (Updates)

12. Cost Budgeting Aggregating the estimated costs of individual schedule activities or work packages to establish a total cost baseline for measuring project performance. The project scope statement provides the summary budget. However,schedule activity or work package cost estimates are prepared prior to the detailed budget requests and work authorization.

13. Cost Budgeting

14. CostBudgeting: ToolsandTechniques • Cost Aggregation: Schedule activity cost estimates are aggregated by work packages. The work package cost estimates are then aggregated for the highercomponent levels of the WBS, and ultimately for theentire project. • Reserve Analysis: establishes contingency reserves, that are allowances for unplanned, butpotentially required, changes. (Contingency reserves are not a part of theproject cost baseline, but are included in the budget for the project. ) • Parametric Estimating: involves using project characteristics(parameters) in a mathematical model to predict total project costs. • Funding Limit Reconciliation: Large variations are undesirable. Therefore, the expenditure of funds is reconciled withthe funding limits set by the customer or performing organization.

15. Cost Budgeting: Outputs • Cost Baseline: a time-phased budget that is used as a basis against which tomeasure, monitor, and control overall cost performance on the project. • Project Funding Requirements: Funding requirements, total and periodic (e.g., annual or quarterly), are derived from the cost baseline and can be established to exceed, usually by a margin, to allow for either early progress or cost overruns. • Cost Management Plan (Updates) • RequestedChanges

16. Reserve Cost Budgeting: Outputs Expected Cash Flow Figure 6.1 Cash Flow, Cost Baseline and Funding Display

17. Cost Control • Influencing the factors that create changes to the cost baseline • «Assuring that potential cost overruns do not exceed the authorized funding» • Monitoring cost performance to detect and understand variances from the cost baseline • Recording all appropriate changes against the cost baseline • Preventing incorrect, inappropriate, or unapproved changes from being included in the reported cost or resource usage • Acting to bring expected cost overruns within acceptable limits.

18. Cost Control

19. Cost Control: Tools and Techniques • Cost Change Control System: defines the procedures by which the cost baseline can be changed. • Performance Measurement Analysis: techniques help to assess the magnitude of any variances that will invariably occur. “The Earned Value Technique (EVT) compares the value of the budgeted cost of work performed (earned) at the original allocated budget amount to both the budgeted cost of work scheduled (planned) and to the actual cost of work performed (actual).”

20. Cost Control: Tools and Techniques • Forecasting: making estimates or predictions of conditions in the project’s future based on information and knowledge available at the time of the forecast. • Project Performance Reviews: meetings held to assess schedule activity, work package, or cost account status and progress; • Variance analysis • Trend analysis • Earned Value Technique (EVT) • Project Management Software • Variance management

21. Cost Control: Outputs • Cost Estimates (Updates) • Cost Baseline (Updates) • Performance Measurements: The calculated CV, SV, CPI, and SPI values for WBS components • Forecasted Completion: calculated EAC value • Requested Changes • Recommended Corrective Actions • Organizational Process Assets (Updates):the root causes of variances, the reasoning behind thecorrective action chosen, and other types of lessons learned

22. Cost Management Plan.doc

23. EARNED VALUE TECHNIQUE AND FORECASTING

24. To Evaluate Project Performance, PM asks the following questions; • Where are we according to the Project Schedule? • How efficiently are we using the time? • When will the project be completed? • Are there any cost overruns according to the budget? • How efficiently are we using the resources? • How much we need to complete the rest of the project? • What wasthe total jobsupposedtocost? • What is the cost overruns by the end of the project compared to the budgeted amount?

25. Earned Value Technique • The Earned Value Technique (EVT) is a technique to evaluate project performance. EVT (at a selected project time point); • compares the value of the budgeted cost of work completed(earned) • to both the budgeted cost of work scheduled (plannedvalue) • and to the actual cost of work completed(actualcost).”

26. Earned Value Technique • Variance analysis identifies the real performance of the project which is the deviation from planned schedule dates and/or baseline cost. • EVT, identifies both the performance of the project and if the results satisfy the investments. • EVT uses the cost baseline contained in the project management plan to assess project progress and the magnitude of any variations that occur.

27. Earned Value TechniqueKeyValues EVT involves developing these key values for each schedule activity, work package, or control account: • Planned value (PV): the budgeted cost for the work scheduled to be completed on an activity or WBS component. • Earned value (EV): the budgeted amount for the work actually completed on the schedule activity or WBS component. • Actual cost (AC): the total cost incurred in accomplishing work on the schedule activity or WBS component.

28. Earned Value TechniqueCV & SV The most commonly used measures are cost variance (CV) and schedule variance (SV). • Cost variance (CV); at the end of the project will be the difference between the budget at completion (BAC) and the actual amount spent. (CV= EV – AC) • Schedule variance (SV): will ultimately equal zero when the project is completed because all of the planned values will have been earned. (SV = EV – PV)

29. Earned Value TechniqueCPI, SPI & CSI CV and SV can be converted to efficiency indicators to reflect the cost and schedule performance of any project; • Cost performance index (CPI= EV/AC) • CPI < 1.0 indicates a cost overrun of the estimates. • CPI > 1.0 indicates a cost underrun of the estimates. • Schedule performance index (SPI = EV/ PV). • The SPI is used, in addition to the schedule status to predict the completion date. • Cost – Schedule Index (CSI) CSI = SPI x CPI (<1 : problem)

30. EVT Rules • *The proportionality rule: This rule divides planned (or actual) time-to-date by total scheduled time [or budgeted (or actual) cost-to-date by total budgeted cost] to calculate percent complete. • *The 50 – 50 estimate: 50 % completion is assumed when the task begun and the remaining 50 percent when the work is complete. • The 0-100 percent rule: This rule allows no credit for work until the task is complete. • Critical input use: This rule assigns progress according to the amount of a critical input that has been used.

31. Earned Value Technique Formulas; CV= EV – AC SV = EV – PV CPI = EV/AC SPI = EV/PV Figure 6.2 Illustrative Graphic Performance Report

32. Earned Value Technique EAC = AC + ETC (AC) (PV) (EV)

33. Forecasting Forecasting includes making estimates or predictions of conditions in the project‘s future based on information and knowledge available at the time of the forecast.

34. Forecasting • Assess the EAC; Estimate at completion (EAC): cost or amount of work tocomplete schedule activities. • Determine the ETC; Estimate to complete (ETC): estimate for completing the remainingwork for a schedule activity, work package. The earned value technique parameters of BAC (Budget at completion), actual cost (AC) todate,and the CPI efficiency indicator are used to calculate ETC and EAC.

35. Calculating ETC & EAC Two formulasis typically usedtocalculate ETC; • ETC based on atypical variances. This approach is most often used whensimilar variances will not occur in the future. ETC = (BAC - EV) • ETC based on typical variances. This approach is most often used whencurrent variances are seen as typical of future variances. (CPI). ETC = (BAC - EV) / CPI • EAC = AC + ETC

36. Calculating TCCPI & TCSPI • To Complete CPI: How muchcosteffectiveshould be tocompletewiththeCostBaseline (BAC)? TCCPI = (BAC - EV) / (BAC – AC) • To Complete SPI: How much time effectiveshould be tofinish on planned time? TCSPI = (BAC – EV) / (BAC – PV)

37. Earned Value Technique EV EV AC AC

38. Earned Value Technique AC AC EV EV

39. Earned Value Technique AC EV EV AC

41. Example 1 The BTA project is budgeted for $ 10.000 and scheduled for 4 weeks in the PM Plan. By the end of week 3 following data is obtained for the accomplished amount of the project; • 50 % of the project is completed. • $ 9.000 spent for the accomplished work. Using EVT evaluate the project performance.

42. Example 1 - Solution Planned Value (PV) = $ 7.500 Earned Value (EV)= $ 5.000 Actual Cost (AC) = $ 9.000 Schedule Variance (SV) = EV – PV = 5.000 – 7.500 = - 2.500 Cost Variance (CV) = EV – AC = 5.000 – 9.000 = - 4.000 Schedule Performance Index (SPI)= EV/PV = 5.000 / 7.500 = 0,66 Cost Performance Index (CPI)= EV/AC = 5,000 / 9,000 =0,55

43. Example 1 – Solution (Forecasts) ETC= (BAC - EV) / CPI = (10.000 – 5000) / 0,55 = $ 9.090 EAC = AC + ETC = 9.000 + 9.090 = $ 18.090 TCCPI = (BAC - EV) / (BAC – AC) = ( 10.000-5.000) / (10.000-9.000) TCCPI = 5 TCSPI = (BAC – EV) / (BAC – PV) = (10.000-5.000) / (10.000-7.500) TCSPI = 2

44. Example 2 Assume that operations on a work package were expected to cost $ 1.500 to complete the package. They were originally scheduled to be finished today. At this point, however, we have actually expended $ 1.350, and we estimate that we have completed two-thirds (2/3) of the work. What are the cost and schedule variances?

45. Example 3 Apply EVT forthebelow data, assumingtoday is the 7th day of theproject. Activity a is 1 daylate!!

46. Ex.3. AON Diagram

47. Ex.3. Baselinebudgetusing 50-50 rule;

48. Ex.3. Status at day 7 Cum. AC

49. Ex.3. EV Chart at day 7 EV AC