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**Project Cost Management**

Sections of this presentation were adapted from A Guide to the Project Management Body of Knowledge 3rd Edition, Project Management Institute Inc., © 2004

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**Project Cost Management**

“The processes involved in planning, estimating, budgeting, and controlling costs so that the budget can be completed within the approved budget”

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Why Do We Manage Cost? Part of triple constraint, can’t manage one without the others (scope, time, and quality) Plots of cost and scope against plan can help spot problems early Cumulative Value Time Planned Value (PV) Actual Costs (AC) Earned Value (EV) Today Is this project over/under budget? Is it ahead of/behind schedule?

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**Cost Management Key Terms**

PV - Planned Value, estimated value of the planned work EV – Earned Value, estimated value of work done AC – Actual Cost, what you paid BAC – Budget at Completion, the budget for the total job EAC –Estimate at Completion, what is the total job expected to cost? ETC – Estimate to Complete, forecasted costs to complete job VAC – Variance at Completion, how much over/under budget do we expect to be?

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**How Do We Manage Cost? Three processes Cost Estimating Cost Budgeting**

Cost Control Cost Estimating Cost Budgeting Cost Control

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**Cost Estimating Inputs Tools & Techniques Outputs**

Enterprise Environmental Factors Inputs Tools & Techniques Outputs Analogous estimating Determine resource cost rates Bottom up estimating Parametric estimating Project management software Vendor bid analysis Reserve analysis Cost of quality Organizational Process Assets Activity Cost Estimates Project Scope Statement Activity Cost Estimates Supporting Detail Work Breakdown Structure Requested Changes WBS Dictionary Cost Management Plan Updates Project Management Plan Schedule Mgmt Pln Staffing Mgmt Pln Risk Register Cost Estimating Cost Budgeting Cost Control

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Estimating Methods Analogous (Top Down) estimating – Managers use expert judgment or similar project costs [quick, less accurate] Bottom-Up estimating – People doing work estimate based on WBS, rolled up into project estimate [slow, most accurate] Parametric estimating – Use mathematical model (i.e. cost per sq ft). [accuracy varies] Two types: Regression analysis – based on analysis of multiple data points Learning Curve – The first unit costs more than the 100th, forecasts efficiency gains

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Estimating Methods Vendor Bid Analysis – Estimating using bids + allowances for gaps in bid scope [slow, accuracy depends on gaps] Reserve Analysis – Adding contingency to each activity cost estimates as zero duration item [slow, overstates cost]

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**Cost Budgeting Tools & Techniques Outputs Inputs Cost aggregation**

Reserve analysis Parametric estimating Funding limit reconciliation Project Scope Statement Cost Baseline Work Breakdown Structure WBS Dictionary Project Funding Requirements Inputs Activity Cost Estimates Activity Cost Estimates Supporting Detail Cost Management Plan Updates Project Schedule Requested Changes Resource Calendars Contract Cost Management Plan Cost Estimating Cost Budgeting Cost Control

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Cost Budgeting Budgeting is allocating costs to work packages to establish a cost baseline to measure project performance Remember Contingency items are for unplanned but required changes it is not to cover things such as: Price escalation Scope & Quality Changes Funding Limit Reconciliation – Smoothing out the project spend to meet management expectations

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**Cost Control Inputs Tools & Techniques Outputs Cost Estimate Updates**

Cost Baseline Cost change control system Performance measurement analysis Forecasting Project performance reviews Project management software Variance management Cost Baseline Updates Project Funding Requirements Performance Measurements Performance Reports Forecasted Completion Work Performance Information Requested Changes Approved Change Requests Recommended Corrective Actions Organizational Process Assets Updates Project Management Plan Project Management Plan Updates Cost Estimating Cost Budgeting Cost Control

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Earned Value Progress is compared against the baseline to determine whether project is ahead of or behind plan Percent complete can be difficult to measure, some managers use rules 50/50 Rule – Assumed 50% complete when task started, final 50% at completion 20/80 Rule – 20% at start 0/100 Rule – No credit until complete Planned Value (PV) – Budgeted Cost Earned Value (EV) – Actual work completed Actual Cost (AC) – Costs incurred Estimate to Complete (ETC) – What’s Left Estimate at Completion (EAC) – What final cost will be

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**Earned Value Graph Planned Value (PV) Earned Value (EV)**

Variance at Completion (VAC) Target Cost & Schedule Planned Value (PV) Schedule Variance (Time) Earned Value (EV)

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**Earned Value Formulas NAME FORMULA NOTES Cost Variance (CV) EV-AC**

Negative = Over budget Positive = Under budget Schedule Variance (SV) EV-PV Negative = Behind Schedule Positive = Ahead of Schedule Cost Performance Index (CPI) EV/AC How much are we getting for every dollar we spend? Schedule Perform Index (SPI) EV/PV Progress as % against plan Estimate to Complete (ETC) EAC-AC How much more do we have to spend? Variance at Completion (VAC) BAC-EAC At the end of the day, how close will we be to plan? Estimate at Completion (EAC) See following slide

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**Earned Value Formulas (Cont’d)**

NAME FORMULA NOTES Estimate at Completion (EAC) BAC/CPI Use if no variances from BAC have occurred AC+ATC Use when original estimate was bad. Actuals + New estimate AC+BAC-EV Use when current variances are not expected to be there in the future AC+(BAC-EV)/CPI Use when current variances are expected to continue

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Barn Exercise You have a project to build a new barn. The specs for building the barn are to construct 4 sides and then an angled roof. Each side of the barn is to take one day to build as is the roof. The budgeted amount is $2,000 per side and $2000 applied to the roof cost. The sides are to be completed one after the other. Today is the end of day four.

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**Tricks for Earned Value**

EV is always first Variance = EV minus something Index = EV divided by something If the formula relates to cost use AC If the formula relates to schedule use PV Interpreting results: negative is bad and positive is good Interpreting results: greater than one is good, less than one is bad PV AC ETC EAC BAC Project Start Current Status

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**Terms to Remember Present Value Working Capital**

Net Present Value (NPV) Internal Rate of Return (IRR) Payback Period Benefit Cost Ratio = BCR>1, Payback is greater than the cost Opportunity Cost Sunk Cost Working Capital Straight Line Depreciation Accelerated Depreciation Double Declining Balance Sum of Years Digits Value Analysis (Value Engineering) You won’t be calculating most of these numbers on the test, just remember the concepts for general questions

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Answers to Questions 1 – C 2 – D 3 – B 4 – A 5 – C 6 – B 7 – C 8 – A

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**Answers to Questions (Cont’d)**

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