Chapter 9 Cost Planning and Performance

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Chapter 9Cost Planning and Performance
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Learning Objectives

• Items to consider when estimating cost
• Preparing a baseline budget
• Cumulating actual costs
• Determining the earned value of work performed
• Analyzing cost performance
• Forecasting project cost at completion
• Controlling project costs
• Managing cash flow

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Real World Example

• Vignette eBay
• eBay understands the importance of analyzing
  project data to produce performance indicators
• eBays mission is to provide a trading platform
  for people all over the world. They do this by
  continually improving the users experience on
  the eBay site
• Decisions for change are based on measurable
  factors like the number of visitors to the site,
  length of time customers spend on eBay, busiest
  day of the week for eBay transactions etc.
• Managers regularly collect data from the site to
  develop new marketing and merchandising
  techniques. This mentality has helped eBay to
  continually improve the buy-sell process for eBay
  customers
• Project managers should understand the valuable
  of measurable factors, and apply them to make
  responsible decisions about their projects

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Real World Example

• Vignette London Traffic
• Ken Livingstone was Londons first directly
  elected mayor in 2000. He created Transport for
  London to oversee the citys road and transport
  services that were previously managed separately.
  Mission to upgrade Londons transportation
  infrastructure with a toll system project
• Traffic congestion is a major problem for central
  London. Transport for London developed a plan to
  install a system that would identify and charge
  car owners that enter defined congestion zones
• Technological risks were identified, and the
  project was divided into 5 smaller components (to
  be managed separately, as opposed to purchasing
  one large system)
• Project team worked together in one location on
  the five components to the system
• The project was successfully implemented by
  February 2003. Transport for London reports that
  traffic in the congestion zone has decreased by
  20, with a 5 increase during travel times

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Project Cost Estimates

• Cost planning starts with the proposal.
• The cost section may include
• Labor
• Materials
• Subcontractors and consultants (if used)
• Equipment and facilities rental
• Travel

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Project Budgeting Two Steps

• First, the project cost estimate is allocated to
  the various work packages in the project work
  breakdown structure.
• Second, the budget for each work package is
  distributed over the duration of the work package.

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Allocating the Total Budgeted Cost

• Allocating total project costs for the various
  elements to the appropriate work packages will
  establish a total budgeted cost (TBC) for each
  work package.
• There are two approaches to establishing the TBC
  for each work package top-down and bottom-up.
• When all budgets are summed, they cannot exceed
  the TBC.

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Developing the Cumulative Budgeted Cost

• The second step is to distribute each TBC over
  the duration of its work package.
• A cost is determined for each period.
• The cumulative budgeted cost (CBC) is the amount
  that was budgeted to accomplish the work that was
  scheduled to be performed up to that point in
  time.
• One uses the CBC as the standard against which
  actual cost is compared.

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Determining Actual Cost

• Track actual cost by establishing a system to
  collect data on funds actually expended.
• Periodically assign a portion of the total
  committed cost to actual cost.
• Total actual and committed cost by work package
  for comparison to the CBC.
• Cumulative actual cost (CAC) should be
  calculated.

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Determining the Value of Work Performed

• Earned value is the value of the work actually
  performed.
• Determine earned value by collecting data on the
  percent complete for each work package.
• Convert this percentage to a dollar amount by
  multiplying the TBC of the work package by the
  percent complete.

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Cost Performance Analysis Four Measures

• TBC (total budgeted cost)
• CBC (cumulative budgeted cost)
• CAC (cumulative actual cost)
• CEV (cumulative earned value)

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Cost Performance Index (CPI)

• A measure of the cost efficiency with which the
  project is being performed.
• Cost performance index F(Cumulative earned
  value,Cumulative actual cost)
• CPI F(CEV,CAC)

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Cost Variance (CV)

• The difference between the cumulative earned
  value of the work performed and the cumulative
  actual cost.
• Cost variance Cumulative earned value
  Cumulative actual cost
• CV CEV CAC

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Cost Forcasting Three Methods

• Three methods for determining forecasted cost at
  completion (FCAC)
• FCAC F(Total budgeted cost,Cost performance
  index)
• FCAC Cumulative actual cost (Total budgeted
  cost Cumulative earned value)
• FCAC CAC Re-estimate of remaining work to be
  performed

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Cost Control

• The key is to analyze cost performance on a
  regular and timely basis.
• Identify cost variances and inefficiencies early.

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Cost Control (Cont.)

• Involves the following
• Analyzing cost performance to determine which
  work packages may require corrective action.
• Deciding what corrective action should be taken
• Revising the project plan.

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Ways to Reduce Costs of Activities

• Substitute less expensive materials.
• Assign a person with greater expertise to perform
  or help with the activity.
• Reduce the scope or requirements.
• Increase productivity through improved methods or
  technology.

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Managing Cash Flow

• Make sure that sufficient payments are received
  from the customer in time for you to cover the
  costs of performing the project.
• The key to managing cash flow is to ensure that
  cash comes in faster than it goes out.

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Project Management Software

• All costs associated resources can be stored. The
  software calculates the budget for each work
  package and for the entire project.
• The software allows the user to define different
  rate structures for each resource and when
  charges for those resources will be accrued.
• Cost tables and graphs are available to help
  analyze cost performance.

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