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30 Apr 2010Khalid & Riyad, KAU, EMBA, PMP Course2 Introduction: Project Cost Management is the knowledge use for managing costs. Processes in this area.

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Presentation on theme: "30 Apr 2010Khalid & Riyad, KAU, EMBA, PMP Course2 Introduction: Project Cost Management is the knowledge use for managing costs. Processes in this area."— Presentation transcript:

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2 30 Apr 2010Khalid & Riyad, KAU, EMBA, PMP Course2 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 budget It 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 30 Apr 2010Khalid & Riyad, KAU, EMBA, PMP Course3 Control Costs Determine Budget Estimate Costs

4 30 Apr 2010Khalid & Riyad, KAU, EMBA, PMP Course4 Definitions: 1.Estimate Costs-The process of developing an approximation of the monetary resources needed to complete project activates. 2.Determining Budget-The process of aggregating the estimated costs of individual activates or work packages to establish an authorized cost baseline. 3.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: 1)Inputs, 2)Tools / Techniques 3)Outputs

5 30 Apr 2010Khalid & Riyad, KAU, EMBA, PMP Course5 Inputs Scope baseline. Project schedule. Human Resource plan. Risk register. Enterprise environmental factors. Organizational process assets. Tools & Techniques Expert judgment. Analogous estimating. Parametric estimating. Bottom-Up estimating. Three –point estimates. Reserve analysis. Cost of quality. Project management estimating software. Vendor bid analysis. Out puts Activity cost estimates. Basis of estimates. Project document updates. Estimate Cost: 7.1 Estimate Cost7.2 Determine Budget7.3 Control Cost

6 30 Apr 2010Khalid & Riyad, KAU, EMBA, PMP Course6 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 schedule The project schedule specifies the planned start and finish date for each scheduled activity. Human resource plan The human resource plan contains details regarding the how the project will be staffed and the labor rates for estimating costs Inputs Estimate Cost:

7 30 Apr 2010Khalid & Riyad, KAU, EMBA, PMP Course7 Enterprise environmental factors Factors beyond the project’s boundaries impact costs, including marketplace conditions and the pool of available suppliers. Organizational process assets Lessons learned, project files, and historical information from the organization are crucial for good estimates. Estimate Cost: Inputs

8 30 Apr 2010Khalid & Riyad, KAU, EMBA, PMP Course8 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 Tools & Techniques Estimate Cost:

9 30 Apr 2010Khalid & Riyad, KAU, EMBA, PMP Course9 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 $75 $100 $150 Three-point estimate = ($75 + (4 x $100) + $150) / 6 Three-point estimate = $ Estimate Cost: Tools & Techniques

10 30 Apr 2010Khalid & Riyad, KAU, EMBA, PMP Course10 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. Estimate Cost: Outputs

11 30 Apr 2010Khalid & Riyad, KAU, EMBA, PMP Course11

12 30 Apr 2010Khalid & Riyad, KAU, EMBA, PMP Course12 Inputs Activity cost estimates. Basis of estimates. Scope baseline. Project schedule. Resource calendars. Contracts. Organizational process assets. Tools & Techniques Cost aggregation. Reserve analysis. Expert judgment. Historical relationships. Funding limit reconciliation. Out puts Cost performance baseline. Project funding requirements. Project document updates. Determine Budget: 7.1 Estimate Cost7.2 Determine Budget7.3 Control Cost

13 30 Apr 2010Khalid & Riyad, KAU, EMBA, PMP Course13 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 uncertainties Expert judgment, is based upon the experience and knowledge of subject matter experts. Tools & Techniques Determine Budget:

14 30 Apr 2010Khalid & Riyad, KAU, EMBA, PMP Course14 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 Tools & Techniques Determine Budget:

15 30 Apr 2010Khalid & Riyad, KAU, EMBA, PMP Course15 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. Outputs Determine Budget:

16 30 Apr 2010Khalid & Riyad, KAU, EMBA, PMP Course16 Cost performance baseline Determine Budget:

17 30 Apr 2010Khalid & Riyad, KAU, EMBA, PMP Course17

18 30 Apr 2010Khalid & Riyad, KAU, EMBA, PMP Course18 Inputs Project management plan. Project funding requirements. Work performance information. Organizational process assets. Tools & Techniques Earned value management. Forecasting. To – complete performance index. Performance reviews. Variance analysis. Project management software. Out puts Work performance measurement. Budget forecasts. Organizational process assets update change requests. Project management plan updates project document updates. Control Costs: 7.1 Estimate Cost7.2 Determine Budget7.3 Control Cost

19 30 Apr 2010Khalid & Riyad, KAU, EMBA, PMP Course19 Project 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. Inputs Control Costs:

20 30 Apr 2010Khalid & Riyad, KAU, EMBA, PMP Course20 Work 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.. Inputs Control Costs:

21 30 Apr 2010Khalid & Riyad, KAU, EMBA, PMP Course21 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). Tools & Techniques Control Costs:

22 30 Apr 2010Khalid & Riyad, KAU, EMBA, PMP Course22 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. Tools & Techniques Control Costs:

23 30 Apr 2010Khalid & Riyad, KAU, EMBA, PMP Course23 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. Outputs Control Costs:

24 30 Apr 2010Khalid & Riyad, KAU, EMBA, PMP Course24 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 Outputs Control Costs:

25 30 Apr 2010Khalid & Riyad, KAU, EMBA, PMP Course25

26 30 Apr 2010Khalid & Riyad, KAU, EMBA, PMP Course26 Control Costs Formulas: AcronymNameFormula AC Actual Cost AC = actual cost of the project up to the measurement period BAC Budget at CompletionBAC = total budgeted cost of the project EV Earned ValueEV = Actual % complete x BAC PV Planned ValuePV = Planned % complete x BAC CV Cost VarianceCV = EV - AC

27 30 Apr 2010Khalid & Riyad, KAU, EMBA, PMP Course27 Control Costs Formulas: AcronymNameFormula SV Schedule VarianceSV = EV - PV CPI Cost Performance IndexCPI = EV / AC SPI Schedule Performance IndexSPI = EV / PV EAC Estimate at CompletionEAC = BAC / CPI ETC Estimate to CompleteETC = EAC - AC VAR Variance at CompletionVAR = BAC - EAC

28 30 Apr 2010Khalid & Riyad, KAU, EMBA, PMP Course28 Control Costs Formulas: Example : 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% 4-month project (BAC) = 1,000,000 M 1M 2 M 3 M 4 Planned work complete = 80% Actual work complete = 75%

29 30 Apr 2010Khalid & Riyad, KAU, EMBA, PMP Course29 Control Costs Formulas: Planned value PV = Planned % Complete x BAC PV = 80% x $1,000,000 = $800,000 Earned value EV = Actual % Complete x BAC EV = 75% x $1000,000 = $750,500 Cost variance CV = EV – AC CV = $750,000 - $950,000 = -$200,000 Planned Value (PV) is how much work was expected to be completed Earned Value (EV) is how much work has actually been completed Cost Variance (CV) is how the cost of the project is comparing to the value of work completed

30 30 Apr 2010Khalid & Riyad, KAU, EMBA, PMP Course30 Control Costs Formulas: Cost performance index CPI = EV / AC CPI = $750,500 / $950,000 = 0.79 For every $1 input (cost), we are earning only $0.8 in work output Cost Performance Index (CPI) shows how much work is being completed for every unit of cost spent (Output/Input)

31 30 Apr 2010Khalid & Riyad, KAU, EMBA, PMP Course31 Control Costs Formulas: Schedule performance index SPI = EV / PV SPI = $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 30 Apr 2010Khalid & Riyad, KAU, EMBA, PMP Course32 Control Costs Formulas: Estimate at completion EAC = BAC / CPI EAC = $1000,000 / 0.94 = $1,063,829 Based on current performance, the project will be completed at cost = $1,063,829. Estimate to complete ETC = EAC - AC ETC = $1,063, ,000 = $113,829 Based on current performance, the project requires $113,829 to get it finished Estimate At Completion (EAC) forecasts the total cost of the project based on current project performance Estimate To Complete (ETC) forecasts how much more money will be required to finish the project

33 30 Apr 2010Khalid & Riyad, KAU, EMBA, PMP Course33 Control Costs Formulas: Variance at completion VAR = BAC – EAC VAR = $1,000,000 - $1,063,829 = -$63,829 Based on current performance, the project will run about $63,829 over budget Variance At Completion (VAR) predicts difference between the budgeted and actual project cost at the end of the project

34 30 Apr 2010Khalid & Riyad, KAU, EMBA, PMP Course34 Thank You

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36 30 Apr 2010Khalid & Riyad, KAU, EMBA, PMP Course36 WBS ElementPVEVAC P$1,000$1,100$1,150 Q$2,000$1,800$2,100 R$1,000$1,200$1,050 S$2,000$1,900$1,800 1.Using the table above, the cost performance index (CPI) for WBS Element R is: a b c d b CPI = EV / AC CPI = 1200 / 1050 CPI = 1.14 Q&A:

37 30 Apr 2010Khalid & Riyad, KAU, EMBA, PMP Course37 WBS ElementPVEVAC P$1,000$1,100$1,150 Q$2,000$1,800$2,100 R$1,000$1,200$1,050 S$2,000$1,900$1, Using the table above, which WBS element is over budget and behind schedule? (important) a. Element P b. Element Q c. Element R d. Element S 2.b CV = EV – AC = 1800 – 2100 = -300 (over budget) SV = EV – PV = 1800 – 2000 = -200 (behind schedule) Q&A:

38 30 Apr 2010Khalid & Riyad, KAU, EMBA, PMP Course38 WBS ElementPVEVAC P$1,000$1,100$1,150 Q$2,000$1,800$2,100 R$1,000$1,200$1,050 S$2,000$1,900$1, Using the table above, which WBS element has a favorable cost variance of $150? a. Element P b. Element Q c. Element R d. Element S 3.c CV = EV – AC = 1200 – 1050 = 150 favorable variance Q&A:

39 30 Apr 2010Khalid & Riyad, KAU, EMBA, PMP Course39 4. The work breakdown structure, the work packages, and the company’s accounting system are tied together through the: a. Chart of accounts b. Overhead rates c. Budgeting system d. Capital budgeting process 4.a

40 30 Apr 2010Khalid & Riyad, KAU, EMBA, PMP Course40 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, increase b. Increase, decrease c. Decrease, increase d. Remain the same, be returned to the customer 5.d

41 30 Apr 2010Khalid & Riyad, KAU, EMBA, PMP Course41 6. Which of the following types of cost are not relevant to making project financial decisions: a. Sunk cost b. Opportunity cost c. Material cost d. Labor cost 6.a

42 30 Apr 2010Khalid & Riyad, KAU, EMBA, PMP Course42 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. Baseline b. Budgeted costs c. Estimates upon completion costs d. Scheduled costs 7.a

43 30 Apr 2010Khalid & Riyad, KAU, EMBA, PMP Course43 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 structure b. Using historical data from a non similar project c. Talking to people who have worked on similar projects d. Intuition 8.c

44 30 Apr 2010Khalid & Riyad, KAU, EMBA, PMP Course44 9. Using the table Above, the labor rate cost variance is: 9.d Labor Rate Cost Variance = Planned Cost (BAC) – Actual Cost (AC) Labor Rate Cost Variance = – Labor Rate Cost Variance = Direct LaborDirect Material Planned price/unit$10.50$14.77 Actual units/hour6374 hours5433 units Actual cost$68,329$83,994 Actual price/unit$10.72$15.46 a. $66, b. $68, c. $ d. ($0.22)

45 30 Apr 2010Khalid & Riyad, KAU, EMBA, PMP Course What tool have project managers come to use to identify the costs associated with a project? a. A bill of materials b. A Gantt chart c. An arrow diagram network d. A work breakdown structure 10.d

46 30 Apr 2010Khalid & Riyad, KAU, EMBA, PMP Course 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 B 11.e

47 30 Apr 2010Khalid & Riyad, KAU, EMBA, PMP Course47 12) Which type of project cost estimate is the most accurate? A) Preliminary B)Definitive C)Order of magnitude D)Conceptual 12.B

48 30 Apr 2010Khalid & Riyad, KAU, EMBA, PMP Course48 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 project B) The process of assembling and predicting costs of a project over its life cycle C) The process of establishing budgets, standards, and a monitoring system by which the investment cost of the project can be measured and managed D) The process of gathering, accumulating, analyzing, reporting, and managing the costs on an on-going basis 13.C

49 30 Apr 2010Khalid & Riyad, KAU, EMBA, PMP Course49 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 project B) The process of assembling and predicting costs of a project over its life cycle C) The process of assembling and predicting costs of a project over its life cycle D) The process of gathering, accumulating, analyzing, reporting, and managing the costs on an on-going basis. 14.D

50 30 Apr 2010Khalid & Riyad, KAU, EMBA, PMP Course50 15) ) Three Point Statistical Estimating Formula Group. Expected Value = A) (Optimistic + (4 X Most Likely) + Pessimistic ) x 6 B) (Optimistic + (4 X Most Likely) + Pessimistic ) divided by 6 C) (Optimistic + (4 X Most Likely) x Pessimistic ) divided by 6 D) Optimistic + (4 + Most Likely) + Pessimistic ) divided by 6 15.B

51 30 Apr 2010Khalid & Riyad, KAU, EMBA, PMP Course51 16) ) Which is not a technique used for cost estimation : A) Analogous Estimating B)Bottom-up Estimating C)C) Parametric Estimating D) Vendor Bid Analysis E) Resource Leveling 16.E


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