Presentation on theme: "Project Cost Management Chapter 7"— Presentation transcript:
1 Project Cost Management Chapter 7 Organized By Khalid Aljehani & Riyad Bakedo.Under the supervision of Dr. Naill Al MomaniKAU, EMBA Program PMP Course.Fall 2010
2 Introduction:Project Cost Management is the knowledge use for managing costs. Processes in this area help to ensure a project is completed within the approved budgetIt includes the processes involving in estimating, budgeting and controlling costs.These processes interact with each other and with processes in the other knowledge areas as well
3 Project Cost Management Overview : Control CostsDetermine BudgetEstimate Costs
4 Definitions:Estimate Costs-The process of developing an approximation of the monetary resources needed to complete project activates.Determining Budget-The process of aggregating the estimated costs of individual activates or work packages to establish an authorized cost baseline.Control Costs: The process on monitoring the status of the project to update the project budget and managing changes to the cost baseline.Each process has specified:Inputs,Tools / TechniquesOutputs
6 Estimate Cost: Inputs Scope baseline The scope baseline is the approved project scope statement, WBS, and WBS dictionary. These collectively provide the deliverables, statements of work, constraints, and assumptions that are necessary for accurate cost estimating. Project scheduleThe project schedule specifies the planned start and finish date for each scheduled activity.Human resource planThe human resource plan contains details regarding the how the project will be staffed and the labor rates for estimating costs
7 Estimate Cost: Inputs Enterprise environmental factors Factors beyond the project’s boundaries impact costs, including marketplace conditions and the pool of available suppliers.Organizational process assetsLessons learned, project files, and historical information from the organization are crucial for good estimates.
8 Estimate Cost: Tools & Techniques Expert judgment, relies on historical experience to assess and adjust estimates.Analogous estimating uses the costs from similar projects or activities as the basis for the current project.Parametric estimating uses mathematical formulas to derive estimates.Bottom-up estimating decomposes activities to the lowest level possible for cost estimating purposes, and then aggregates component costs back up to a summary activity level
9 Estimate Cost: Tools & Techniques Three-point estimates (PERT analysis), help to remove the uncertainty from estimates by providing a weighted average using the pessimistic, optimistic, and most-likely values. The Formula:(Optimistic Estimate + (4 x Most-Likely Estimate ) + Pessimistic Estimate)6 Example:Optimistic Most Likely Pessimistic$ $ $150Three-point estimate = ($75 + (4 x $100) + $150) / 6Three-point estimate = $104.17
10 Estimate Cost: Outputs Activity cost estimates , are a complete accounting of all component costs, such as labor, resources, services, fees, licenses, of a scheduled activity.Basis of estimates, is the supporting detail to the activity cost estimates including the references for cost estimate, considered assumptions, constraints, range of accuracy, and the confidence level in the estimate.Project document updates, the process of estimating costs can result in updates to several project documents, including the WBS, and the WBS dictionary.
13 Determine Budget: Tools & Techniques Cost aggregation, Individual costs are aggregated in many different ways for budgeting purposes, including at the work package, deliverable, summary activity, or other classification levels.Reserve analysis , are time or cost buffers in the project schedule or budget that help the project respond to uncertaintiesExpert judgment, is based upon the experience and knowledge of subject matter experts.
14 Determine Budget: Tools & Techniques Historical relationships, refers to the characteristics of the current and past projects that can be used to develop models that aid in budgeting.Funding limit reconciliation, matches the project's planned need for funding with the organization's ability to provide that funding
15 Determine Budget: Outputs Cost performance baseline is a time-phased budget that is used for project cost management, monitoring, and reporting. It is commonly shown as an S-curve graph.Project funding requirements, refers to the entire estimated cost of the budget, including any contingency or management reserves.
18 Control Costs: 7.1 Estimate Cost 7.2 Determine Budget 7.3 Control Cost InputsProject management plan.Project funding requirements.Work performance information.Organizational process assets.Tools & TechniquesEarned value management.Forecasting.To – complete performance index.Performance reviews.Variance analysis.Project management software.Out putsWork performance measurement.Budget forecasts.Organizational process assets update change requests.Project management plan updates project document updates.
19 Control Costs:InputsProject management plan , includes the cost management plan which describes how project costs will be managed, reported on, and controlled. The cost performance baseline is also part of the project management plan, and it’s used to compare actual costs to planned costs.Project funding requirements, refers to the entire estimated cost of the budget, including any contingency or management reserves. It’s used to compare actual costs to planned costs.
20 Control Costs:InputsWork performance information , is any data that related to the work which produces the project deliverables. Examples are schedule and progress status information, budget and cost status, quality status, estimates to complete, resource utilization information, and lessons learned.Organizational process assets , are the source of existing policies, processes, organizational data and knowledge. The organization may have cost-related policies, procedures, and reporting methods that must be followed..
21 Control Costs: Tools & Techniques Earned value management, measures the performance of the project. It also provides a way to forecast future performance based on what's happened so far with the project.Forecasting, involves predicting future performance based on historical work performance information and expert judgment.To-complete performance index (TCPI), is a formula that provides the level of performance that must be achieved to meet either the budget at completion (BAC) or the estimate at completion (EAC).
22 Control Costs: Tools & Techniques Performance reviews, are assessments that analyze the project’s historical cost performance. It includes earned value measurements, variance analysis, and trend analysis.Variance analysis, compares expected cost performance to what is actually occurring, and determines the causes of any variance uncovered.Project management software, automated tools can help in monitoring, tracking, and reporting on earned value measurements.
23 Control Costs: Outputs Work performance measurements includes work performance information that specifically provides mathematical measurements of performance that is communicated to stakeholders. It may also report on earned value values for WBS components or control accounts within the WBS.Budget forecasts on the project’s expected completion cost and variances is documented and provided to stakeholders throughout the project.
24 Control Costs: Outputs Organizational process assets updates for the lessons learned, corrective actions taken and the reasons, and the causes of financial variances.Change requests to the cost baseline as required
26 Control Costs Formulas: AcronymNameFormulaACActual CostAC = actual cost of the project up to the measurement periodBACBudget at CompletionBAC = total budgeted cost of the projectEVEarned ValueEV = Actual % complete x BACPVPlanned ValuePV = Planned % complete x BACCVCost VarianceCV = EV - AC
27 Control Costs Formulas: AcronymNameFormulaSVSchedule VarianceSV = EV - PVCPICost Performance IndexCPI = EV / ACSPISchedule Performance IndexSPI = EV / PVEACEstimate at CompletionEAC = BAC / CPIETCEstimate to CompleteETC = EAC - ACVARVariance at CompletionVAR = BAC - EAC
28 Control Costs Formulas: Example:Planned work complete = 80%Actual work complete = 75%4-month project(BAC) =1,000,000M 1M 2M 3M 4 •4-month project: Total budget $1,000,000 = Budget at completion (BAC) •Project cost at end of month three: $950,000 = Actual cost (AC) •Estimated work complete at end of month three: 80% •Actual work complete at end month three: 75%
29 Control Costs Formulas: Planned value PV = Planned % Complete x BACPV = 80% x $1,000,000 = $800,000Earned valueEV = Actual % Complete x BACEV = 75% x $1000,000 = $750,500Cost varianceCV = EV – ACCV = $750,000 - $950,000 = -$200,000 Planned Value (PV) is how much work was expected to be completedEarned Value (EV) is how much work has actually been completedCost Variance (CV) is how the cost of the project is comparing to the value of work completed
30 Control Costs Formulas: Cost performance index CPI = EV / AC CPI = $750,500 / $950,000 = 0.79For every $1 input (cost) , we are earning only $0.8 in work outputCost Performance Index (CPI) shows how much work is being completed for every unit of cost spent (Output/Input)
31 Control Costs Formulas: Schedule performance indexSPI = EV / PVSPI = $750,500 / $800,000 = 0.94 For every hour we planned , we are completing only 0.94 hours.Schedule Performance Index (SPI) shows how close the actual completed work compared to the schedule
32 Control Costs Formulas: Estimate at completionEAC = BAC / CPIEAC = $1000,000 / 0.94 = $1,063,829Based on current performance, the projectwill be completed at cost = $1,063,829.Estimate to completeETC = EAC - ACETC = $1,063, ,000 = $113,829Based on current performance, the projectrequires $113,829 to get it finishedEstimate At Completion (EAC) forecasts the total cost of the project based on current project performanceEstimate To Complete (ETC) forecasts how much more money will be required to finish the project
33 Control Costs Formulas: Variance at completionVAR = BAC – EACVAR = $1,000,000 - $1,063,829 = -$63,829Based on current performance, the project willrun about $63,829 over budgetVariance At Completion (VAR) predicts difference between the budgeted and actual project cost at the end of the project
35 PMP Preparation Questions Organized By Khalid & Riyad.Under the supervision of Dr. Naill Al MomaniKAU, EMBA Program PMP Course.Fall 2010
36 Q&A: WBS Element PV EV AC P $1,000 $1,100 $1,150 Q $2,000 $1,800 $2,100R$1,200$1,050S$1,900Using the table above, the cost performance index (CPI) for WBS Element R is:ab. 1.14cd1. bCPI = EV / ACCPI = 1200 / 1050CPI = 1.14
37 Q&A: WBS Element PV EV AC P $1,000 $1,100 $1,150 Q $2,000 $1,800 $2,100R$1,200$1,050S$1,9002. Using the table above, which WBS element is over budget and behind schedule? (important)a. Element Pb. Element Qc. Element Rd. Element S2. bCV = EV – AC = 1800 – 2100 = -300 (over budget)SV = EV – PV = 1800 – 2000 = -200 (behind schedule)
38 Q&A: WBS Element PV EV AC P $1,000 $1,100 $1,150 Q $2,000 $1,800 $2,100R$1,200$1,050S$1,9003. Using the table above, which WBS element has a favorable cost variance of $150?a. Element Pb. Element Qc. Element Rd. Element S 3. cCV = EV – AC = 1200 – 1050 = 150 favorable variance
39 Q&A:4. The work breakdown structure, the work packages, and the company’s accounting system are tied together through the:a. Chart of accountsb. Overhead ratesc. Budgeting systemd. Capital budgeting process4. a
40 Q&A:5. Management reserves are normally defined as a percentage of the total budget. As a project goes through its life cycle phases, the project manager wants the dollar value of the management reserve to ___________, whereas the customer wants the dollar value of the management reserve to ___________.a. Increase, increaseb. Increase, decreasec. Decrease, increased. Remain the same, be returned to the customer5. d
41 Q&A:6. Which of the following types of cost are not relevant to making project financial decisions:a. Sunk costb. Opportunity costc. Material costd. Labor cost6. a
42 Q&A:7. Upon completion of 75% of the project, the original schedule and cost estimate that were submitted at the inception of the project are referred to as the:a. Baselineb. Budgeted costsc. Estimates upon completion costsd. Scheduled costs7. a
43 Q&A:8. Which of the following would increase the accuracy of estimating the project cost?a. Pricing out the work at higher levels in the work breakdown structureb. Using historical data from a non similar projectc. Talking to people who have worked on similar projectsd. Intuition8. c
45 Q&A:10. What tool have project managers come to use to identify the costs associated with a project?a. A bill of materialsb. A Gantt chartc. An arrow diagram networkd. A work breakdown structure10. d
46 Q&A:11. Cost estimating:A. Involves developing an estimate of the costs of the resources needed to complete project activities. B. Includes identifying and considering various costing alternatives. C. Involves allocating the overall estimates to individual work items. (cost budgeting) D. A and C E. A and B11. e
47 Q&A: 12) Which type of project cost estimate is the most accurate? A) PreliminaryDefinitiveOrder of magnitudeConceptual12. B
48 Q&A:13) )Cost budgeting can be best described by which of the following?A) The process of developing the future trends along with the assessment of probabilities, uncertainties, and inflation that could occur during the projectB) The process of assembling and predicting costs of a project over its life cycleC) The process of establishing budgets, standards, and a monitoring system by which the investment cost of the project can be measured and managedD) The process of gathering, accumulating, analyzing, reporting, and managing the costs on an on-going basis13. C
49 Q&A:14) ) Cost controls can be best described by which of the following?A) The process of developing the future trends along with the assessment of probabilities, uncertainties, and inflation that could occur during the projectB) The process of assembling and predicting costs of a project over its life cycleC) The process of assembling and predicting costs of a project over its life cycleD) The process of gathering, accumulating, analyzing, reporting, and managing the costs on an on-going basis.14. D
50 Q&A:15) ) Three Point Statistical Estimating Formula Group. Expected Value =A) (Optimistic + (4 X Most Likely) + Pessimistic ) x 6B) (Optimistic + (4 X Most Likely) + Pessimistic ) divided by 6C) (Optimistic + (4 X Most Likely) x Pessimistic ) divided by 6D) Optimistic + (4 + Most Likely) + Pessimistic ) divided by 615. B
51 Q&A: 16) ) Which is not a technique used for cost estimation : A) Analogous EstimatingBottom-up EstimatingC) Parametric EstimatingD) Vendor Bid AnalysisE) Resource Leveling16. E