Project Cost Management

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Project Cost Management

• PMBOK Chapter 7

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PROCESS GROUPS
I
Planning
Cost Estimating
E
Cost Budgeting
Controlling
C
Cost Control
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Cost Estimating

• Cost estimating and Pricing
• Cost estimating how much will it cost the
  performing organization to provide the product or
  service involved?
• Pricing how much will the performing
  organization charge for the product or service?
  Business decision.
• Estimating should be done by the person doing the
  work.

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Cost Estimating
Inputs
Tools
Outputs

• WBS
• Resource requirements
• Resource rates.
• Act. duration est.
• Historical info.
• Chart of accounts
• Risks

• Analogous est.
• Parametric modeling
• Bottom-up est.

• Cost estimates
• Cost management plan

• Based on the WBS to increase the accuracy.
• Project managers should analyze the needs of the
  project, to compare and reconcile any differences
  with cost requirements from management.

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Cost Estimating

• Cost estimates for all resources that will be
  charged to the project.
• Generally expressed in units of currency to
  facilitate comparisons both within and across
  projects.
• Generally includes appropriate risk response
  planning.
• Supporting detail must include
• Reference to WBS.
• How it was developed?
• Assumptions made.
• Range of possible results.
• Cost management plan how cost variances will be
  managed.

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Cost Budgeting

• Allocate the overall cost estimates to individual
  activities or work packages to establish a cost
  baseline for measuring project performance.

Inputs
Tools
Outputs

• Cost estimates
• WBS
• Project schedule
• Cost management plan

• Cost budgeting tools and techniques

1. Cost baseline
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Cost Budgeting

• The cost baseline will be used to measure and
  monitor cost performance of the project.

Expected Cash Flow
Cumulative Values
Cost Baseline
Time
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Estimates vs. Accuracy

• Most difficult to estimate as very little project
  info is available

• Used to finalize the Request for Authorization
  (RFA), and establish commitment

• Development stage estimate. Needed to predict
  revised project completion date

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Tools for Estimating (and Budgeting)
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Cost Control

• Monitor Cost Performance
• Detect and understand variances from plan
• Ensure all changes are recorded and agreed upon
• Prevent bogus changes from being included in cost
  baseline
• Inform stakeholders of authorized changes
• Bring costs within acceptable limits

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Cost Control
Inputs
Tools
Outputs

• Cost Baseline
• Performance Reports
• Change Requests
• Cost Management Plan

• Cost Change Control System
• Performance Measurement
• Earned Value Management
• Additional Planning
• Computerized Tools

• Revised Cost Estimates
• Budget Updates
• Corrective Action
• Estimate at Completion
• Project Closeout
• Lessons learned

• Understand what is driving variances, good and
  bad, and decide what action to take.

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Cost Control

• Work completion methods
• 0/100 ? Conservative approach. No work, no money.
• 20/80 ? 20 at start of the project, the rest
  when it is completed.
• 50/50 ? Liberal approach.

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Cost Control Earned Value Management

• Earned Value
• Integrates cost, time and scope. Used to
  forecast future performance and project
  completion dates
• Key concepts
• EV Earned Value (BCWP)
• Estimated value of the work actually accomplished
• PV Planned Value (BCWS)
• Estimated value of the work planned to be done
• AC Actual Cost (ACWP)
• Actual cost incurred for the work accomplished

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Earned Value Management

• BAC Budget At Completion
• Estimated total cost of the project when done
• EAC Estimate At Completion
• Forecast of most likely total project cost based
  on project
• performance and risk quantification
• CPI Cost Performance Index
• Ratio of budgeted costs to actual cost
• SPI Scheduled Performance Index
• Estimated total cost of the project when done

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Earned Value Management

• Key Formulas
• CV Cost Variance EV- AC
• Negative is over budget, Positive is under budget
• SV Schedule Variance EV- PV
• Negative is behind schedule, Positive is ahead
  schedule
• CPI Cost Performance Index EV / AC
• SPI Schedule Performance Index EV / PV
• EAC Estimate At Completion
• BAC / CPI ? Most often used formula
• AC ETC
• AC BAC - EV
• AC (BAC - EV) / CPI
• EAC Estimate At Completion EAC - AC
• VAC Variance At Completion BAC - EAC

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Big Dig

• Started construction on 1991 and planned
  completion by 1997 (6 years), it was to cost 3
  Billion, the project included 6 highways (0.5
  Billion per highway/year)
• At the end of the first year, 1/2 highway was
  completed and the cost was 2 Billion.
• Do the EV analysis

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Big Dig The Numbers

• EV Earned Value 0.25 Billion
• 0.5/2
• PV Planned Value 0.5 Billion
• AC Actual Cost 2 Billion
• BAC Budget At Completion 3 Billion

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Big Dig Performance

• CV EV - AC 0.25 - 2 - 1.75 Billion
• Over Budget by 1.75 Billion
• SV EV - PV 0.25 - 0.5 - 0.25 Billion
• Behind of schedule
• CPI EV / AC 0.25 / 2 0.12
• Getting 0.12 cents out of every dollar budgeted
• SPI EV / PV 0.25 / 0.5 0.50
• 50 of progress planned
• EAC BAC / CPI 3 / 0.50 6 Billion

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EVM Hints

• EV comes first in every formula
• If its variance, the formula is EV something
• If its index, EV / something
• If it relates to cost, use Actual Cost
• If it relates to schedule, use PV
• Negative numbers are bad, positive is good

Ref Rita Mulcahy
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Cost Types

• Direct Costs
• Related Directly to the project
• ex. Labor hours, material, equipment, food,
  travel. . .
• Indirect Costs
• Overhead used for more than one project
• ex. Building rent, taxes, janitorial services

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Cost Types

• A cost by any other name, really isnt the same!
• Variable Cost Changes with volume
• Fixed Cost Stay the same, regardless of volume
• COST
• Volume

TC VCFC VC FC
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Cost Types

• Project Costs
• Are incurred while the project is being
  fulfilled.
• Life Cycle Costs
• Includes the costs after project completion.
• There may be temptation to lower project costs at
  the expense of long term costs. Life Cycle
  Costing gives the PM a way to consider costs
  outside of the scope of project fulfillment

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Important Concepts

• Sunk Costs
• Forget em, theyre gone
• Working Capital
• Current Assets (Cash, Inv, AR) Current
  Liabilities (Notes, AP, Accr)

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Cost and Project Selection

• Present Value
• Is 10,000 in your pocket now worth more than the
  10,000 in your pocket one year from now?
• Yes! You can use the money now to make more
  money. The 10,000 in a year from now should be
  discounted to the present, since its not worth
  as much.

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Present Value of Your PMP Consulting Gig

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Net Present Value

• NPV, like Present Value, discounts future cash
  flows to the present
• PV of Revenue PV of Costs

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Net Present Value Your PMP Gig
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Internal Rate of Return

• What is the return on the money invested?
• Expressed as percentage
• Great for comparing between two projects of
  different value
• Project A has an IRR of 21 and Project B has an
  IRR of 14. Which would I choose?

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Payback Period

• How long until we get the money back?
• Quick and Dirty method for project selection
• Does not take into account the Time Value of
  Money
• Your Project costs 50,000, and the cash flow it
  will bring is 11,000 a year.
• The Payback Period is. . . 5 years

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Benefit Cost Ratio

• Compares the revenues to the costs
• Revenue in this is the same as payback
• 1 is the magic number where costs revenue
• Less than 1, costs are greater than benefits
• Greater than 1, and the benefits are greater than
  costs.
• If Project A has a BCR of 2.2 and Project B has a
  BCR of 1.2, pick A.

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PMP Exam Questions

• If Earned Value (EV) 300, Actual Cost (AC)
  450, Planned Value (PV) 275, what is the Cost
  Variance (CV)?
• a. 25
• b.-150
• c. 150
• d. 175

Ref Rita Mulcahy
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PMP Exam Questions

• If Earned Value (EV) 300, Actual Cost (AC)
  450, Planned Value (PV) 275, what is the Cost
  Variance (CV)?
• a. 25
• b.-150
• c. 150
• d. 175

CV EV AC Negative is Over Budget Positive
is Under Budget
Ref Rita Mulcahy
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PMP Exam Questions

• You have 4 projects from which to chose 1.
  Project A is a 5 year project with an NPV of
  80,000. Project B is a 2 year project with an
  NPV of 40,000. Project C is a 4 year period and
  has an NPV of 50,000. Project D is being done
  over 1 year and has an NPV of 70,000.
• Which Project should you chose?

Ref Rita Mulcahy
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PMP Exam Questions

• Project Time NPV
• A 5 yr 80,000
• B 2 yr 40,000
• C 4 yr 50,000
• D 1 yr 70,000

NPV already takes time into account, so you
always pick the project with the highest NPV!
Ref Rita Mulcahy
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PMP Exam Questions

• Early in the project you and your sponsor are
  discussing which estimation should be used. You
  want expert judgment, the sponsor wants analogous
  estimating. The best option is to
• a. Agree to analogous its a form of expert
• b. Determine why the sponsor wants such an
  accurate estimate.
• c. Try to convince the sponsor to allow
  expert judgment since it is usually more
  accurate.
• d. Suggest life cycle as a compromise.

Ref Rita Mulcahy
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PMP Exam Questions

• a. Agree to analogous its a form of expert
• b. Determine why the sponsor wants such an
  accurate estimate.
• c. Try to convince the sponsor to allow
  expert judgment since it is usually more
  accurate.
• d. Suggest life cycle as a compromise.

Trick Question Analogous Estimating is a form
of expert judgment. Choice B seems tempting, but
if you know that analogous estimation is not
accurate, you realize this is a trap. A cruel
and vicious trap, set for you by the PMP.
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PMP Exam Questions

• Cost performance measurement is BEST done
  through
• a. Ask for a percent complete from each team
  member and reporting that.
• b. Calculating the earned value and using the
  indexes and other calculations to report past
  performance and forecast future performance.
• c. Using the 50/50 rule and making sure the
  life cycle cost is less than the project cost.
• d. Focusing on the amount expended last month
  and what will be expended the following month.

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PMP Exam Questions

• Ask for a percent complete from each team member
  and reporting that.
• Inaccurate because based on subjective guess.

b. Calculating the earned value and using the
indexes and other calculations to report past
performance and forecast future performance.
Objective measurements based on performance
that can be applied to the future
c. Using the 50/50 rule and making sure the life
cycle cost is less than the project cost. 50/50
rule isnt always in the progress report, and the
life cycle cost can never be lower than the
project cost, since the life cycle goes on well,
for life.

• Focusing on the amount expended last month and
  what will be expended the following month.
• Rookie Answer usually for inexperienced since
  the past cant always be used to tell the
  future.

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Sources

• PMBOK Guide. PMI, Newton Square, PA. 2000, pp
  83-95
• PMP Exam Prep, Third Edition, Rita Mulcahy PMP.
  RMC publications, 2002. pp. 133-161. Exam
  Questions adapted from pps. 150 3, 153 24, 151
  9, 154, 31.
• Preparing for PMP Exam, Vijay Kanabar. Boston,
  MA, Boston University. 2004, pp 98-110

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PPT Source

• Version 1 Manuel Guzman Carlos Hurtado
  Matthew Lyberg
• May 20, 2005
• Version 2 Vijay Kanabar 12/15/2007