MS4801 Project Management Week 8, Chapter 9 Cost Planning

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MS4801 Project ManagementWeek 8, Chapter 9Cost
Planning Performance
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Project Cost Estimates

• Cost starts when planning begins (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. (see next slide)
• Second, the budget for each work package is
  distributed over the duration of the work package.

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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. (see next slide)

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Allocating Total Budgeted Cost

• Allocating total project costs for the various
  elements establishes a total budgeted cost (TBC)
  for each work package.
• 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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Cumulative Budgeted Cost

• 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. (see next slide)
• 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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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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Project Variance
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Earned Value Comparison

• Budgeted Costs
• Scheduled Costs

• Actual Costs
• Work Performed Costs

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Earned Value Technique

• Cost data or Schedule data alone lead to
  distorted perception of what is happening
• Solution Earned Value Calculation
• BCWS (CBC) Budgeted cost of work scheduled
• ACWP (CAC) Actual cost of work performed
• BCWP Budgeted cost of work performed (earned
  value)

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Example

• Invitations BCWS 500.00, 5 days duration
• Printer Completes Order Day 4
• ACWP Pay Printer 350.00
• BCWP (day 4 of 5 80) 400
• What do these totals tell you? Good / bad news?

Numbers identify slippage of 50
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50/50 Example

• Invitations BCWS 500.00, 5 days duration
• Printer Completes Order Day 4
• ACWP Pay Printer 350.00
• BCWP (50) 250
• What do these totals tell you? Good / bad news?

Numbers identify gain of 150
Value in this approach is realized when you have
many activities. Approximating 50/50 will
provide more realistic portrayal of budget status
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Cost Performance Analysis Four Measures

• TBC (total budgeted cost) BCWS
• CBC (cumulative budgeted cost) ACWP
• CAC (cumulative actual cost) BCWP
• CEV (cumulative earned value) EV

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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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Project Costs

• Total Cost direct indirect costs
• Indirect costs continue for life of project
• Direct costs grow at an increasing rate as
  project duration is reduced from planned duration.

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Crashing

• Shortening an activity is called crashing
• Crash time shortest possible time to complete
• Crash cost direct cost for completing activity
• Both normal and crash data collected from those
  familiar with activity

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Accelerating Completion - TIME

• Add resources
• Outsource project work
• Schedule overtime
• Establish a core team
• Do it twice
• Fast-tracking (move from sequential to parallel
  activities)
• Critical-chain
• Brainstorm
• Reduce scope
• Phase project delivery
• Compromise quality

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Cost Reduction - COST

• Reduce scope
• Have owner take more responsibility
• Outsource
• Brainstorm

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Managing (avoiding) Change

• Establish boundaries for change
• Establish consistent project management practices
  (have a system)
• Approvals
• Common risks (subcontractors, dispersed teams,
  etc.)
• Define, Plan, Execute, Close Out (project life
  cycle)
• Create standard deliverables

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Comparing Changes

• Trade-Off Analysis
• Determine rationale for change (logical or
  political)
• Affirm project goals/objectives
• Determine change effect on project success
• Analyze (hold time and budget constant) to find
  other options
• Zero-Base Budget Approach
• List all the desired project outcomes
• Rewrite the list in priority order
• Write costs for each outcome until you have
  exhausted budget
• Draw line at outcome that exhausts budget
• Activities below line are low priority

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Zero-Base Budget - 20,000

• Beautiful ceremony
• Fabulous food
• Stunning dress
• Close friends involved
• Married by April 22
• Happy bride and groom

• 1 Happy bride and groom (priceless)
• 2 Married by April 22 (2000)
• 3 Stunning dress (8,000)
• 4 Beautiful ceremony (3000)
• 5 Fabulous food (7,000)
• 6 Close friends involved (2500)