1. BSBPMG504A Manage Project Costs Manage Project Costs Project Cost Processes Diploma of Project Management 17872 Qualification Code BSB51507 Unit Code BSBPMG504A

2. BSBPMG504A Manage Project Costs Project Cost Management Processes PMBOK Project Cost Management Processes - 7.1 Estimate Costs 7.2 Determine Budget 7.3 Control Costs Related processes from Project Integration Management – 4.2 Develop Project Management Plan 4.6 Close Project PMBOK 4 th Edition

3. BSBPMG504A Manage Project Costs Learning Objectives 1.Understand the importance of project cost management. 2.Explain basic project cost management principles, concepts, and terms. 3.Discuss different types of cost estimates and methods for preparing them. 4.Understand the processes involved in cost budgeting and preparing a cost estimate and budget for an information technology project. 5.Understand the basics of earned value management

4. BSBPMG504A Manage Project Costs 4.2 Develop Project Management Plan This is the process of defining and documenting the actions necessary to prepare and integrate all subsidiary plans for each of the 8 key knowledge areas of project management. Good practice dictates that the Project Management Plan is baselined at the end of the Planning Phase, particularly in the areas of scope, cost and time It is progressively updated during project execution via the Perform Integrated Change Control process (PMBOK 4.5) Adapted from PMBOK 4 th Edition InitiationPlanning ExecutionClose Monitor Control

5. BSBPMG504A Manage Project Costs The planning processes for all project management key knowledge areas are normally performed at the same time and during this process, or expanded upon shortly afterwards The relationship to Scope, Time and Cost is slightly different to the other areas of Communication, Risk, Human Resources, Quality and Procurement There are no stand alone Scope, Time or Cost Planning processes, they contained within the Develop Project Management Plan process The other key knowledge areas have discrete processes for planning that are defined in their process groups 4.2 Develop Project Management Plan Adapted from PMBOK 4 th Edition

6. BSBPMG504A Manage Project Costs Cost Management Plan The Cost Management Plan establishes the criteria for planning, structuring, estimating, budgeting and controlling project costs. It is often overlooked on the assumption that all project staff understand and follow internal cost management policies and procedures. This can result in the inability to track specific cost categories or actual costs against planned costs. Common inclusions in the Cost Management Plan – Links to organisational cost management policies and procedures Cost management assumptions and standards Cost tracking and performance procedures Budget templates and reporting formats Delegated authorities for cost management decisions Adapted from PMBOK 4 th Edition InitiationPlanning ExecutionClose Monitor Control

7. BSBPMG504A Manage Project Costs 7.1 Estimate Costs Adapted from PMBOK 4 th Edition InitiationPlanning ExecutionClose Monitor Control The process of developing an approximation of the monetary resources needed to complete project activities Cost estimates are a prediction based on the information known at any point in time Includes the identification and consideration of costing alternatives to initiate and complete the project Cost trade offs and risks need to be considered Occurs during Planning

8. BSBPMG504A Manage Project Costs 7.1 Estimate Costs Inputs to Estimate Costs Scope Baseline Cost Management policies and procedures Project Schedule Human Resource Plan Risk Register Tools and techniques to Estimate Costs Adapted from PMBOK 4 th Edition Reserve Analysis Expert Judgement Analogous Estimating Parametric Estimating Software Three-point Estimates Bottom-up Estimating Vendor Bid Analysis

9. BSBPMG504A Manage Project Costs 7.1 Estimate Costs Analogous Estimating Uses previous similar projects to estimate costs Least costly and least time consuming, also least accurate Accuracy improved when combed with Expert Judgement Most common form of cost estimation Parametric Estimating Uses statistical relationships between historical project data and variables for estimation of time and costs Some industries publish estimating tables, prominent in the construction and engineering industries Standard cost estimates for activities InitiationPlanning ExecutionClose Monitor Control Adapted from PMBOK 4 th Edition

10. BSBPMG504A Manage Project Costs 7.1 Estimate Costs Bottom-up Estimating Starts with the cost of individual activities or work packages and builds a bottom up estimate Detailed costs are rolled up to provide the overall budget Accuracy is influence by the size and complexity of the project Three-Point Estimates - PERT Calculates the Expected activity cost based on the weighted average of the Most Likely, Optimistic and Pessimistic estimates Often more accurate than other methods and quantified range of uncertainty InitiationPlanning ExecutionClose Monitor Control Adapted from PMBOK 4 th Edition

11. BSBPMG504A Manage Project Costs 7.1 Estimate Costs Reserve Analysis Inclusion of contingency Can be calculated for each activity Can be calculated for entire project Often a percentage based on risk or complexity Cost of Quality Estimates cost of quality control and quality assurance activities Enables tracking of these costs More in Project Quality unit InitiationPlanning ExecutionClose Monitor Control Adapted from PMBOK 4 th Edition

12. BSBPMG504A Manage Project Costs 7.1 Estimate Costs Project Management Estimating Software Cost estimating applications, spreadsheets and tools Becoming widely accepted Vendor Bid Analysis Looks at estimates made by vendors for components of the project Normally only one component of project cost and other methods required to estimate other activities to provide the total cost More in Procurement Unit InitiationPlanning ExecutionClose Monitor Control Adapted from PMBOK 4 th Edition

13. BSBPMG504A Manage Project Costs 7.1 Estimate Costs Outputs of this process include – Activity Cost Estimates –Quantitative assessments of the probably cost of the project work Basis of Estimates –Information supporting the cost estimates –Assumptions and Constraints –Range of possible estimates –Level of confidence in estimates –Recommendations for contingency amounts Project Document Updates –Most particularly updates to the Risk Register and Risk Management Plan Adapted from PMBOK 4 th Edition InitiationPlanning ExecutionClose Monitor Control

14. BSBPMG504A Manage Project Costs 7.1 Estimate Costs Cost estimates often include some form of range of possible results Most common form of range is plus or minus - e.g. $10,000 +/- $500 – the activity could cost between $9,500 and $10,500 $10,000 +/- 20% - the activity could cost between $8,000 and $12,000 Adapted from PMBOK 4 th Edition InitiationPlanning ExecutionClose Monitor Control

15. BSBPMG504A Manage Project Costs 7.2 Determine Budget Adapted from PMBOK 4 th Edition InitiationPlanning ExecutionClose Monitor Control The process of aggregating the estimated costs of individual activities, deliverables or work packages in order to establish a cost baseline for the project Project budgets are the funds authorised to execute the project Project cost performance is measured against the authorised budget and the cost baseline Simplified by using project management software Occurs during Planning

16. BSBPMG504A Manage Project Costs 7.2 Determine Budget Adapted from PMBOK 4 th Edition Inputs to Determine Budget Activity Cost Estimates Basis of Estimates Scope Baseline – Scope Statement and Work Breakdown Structure Project Schedule Resource calendars Contracts Cost management and budgeting policies and procedures Cost budgeting tools Reporting methods and formats

17. BSBPMG504A Manage Project Costs 7.2 Determine Budget Adapted from PMBOK 4 th Edition Tools and techniques to Determine Budget Cost Aggregation Cost estimates for activities and work packages are aggregated to deliverables and then for the entire project Closely related to the Work Breakdown Structure Reserve Analysis Expert Judgement Cost Aggregation Funding Limit Reconciliation Historical Relationships

18. BSBPMG504A Manage Project Costs Reserve Analysis Inclusion of contingency Can be calculated for each activity Can be calculated for entire project Often a percentage based on risk or complexity Expert Judgement Based on expertise in a specific knowledge area, industry or discipline Many sources including – –Consultants –Stakeholders –Professional associations –Industry Groups 7.2 Determine Budget InitiationPlanning ExecutionClose Monitor Control Adapted from PMBOK 4 th Edition

19. BSBPMG504A Manage Project Costs Historical Relationships Uses both parametric and analogous estimates from previous projects with similar characteristics Often includes mathematical models to assist in cost estimating based on estimating tables published by industry or developed internally for an organisation Funding Limit Reconciliation Relates to funding limits that are set at the beginning of a project and analyses variances to these in order to control cost Not commonly used as inaccurate and difficult to enforce 7.2 Determine Budget InitiationPlanning ExecutionClose Monitor Control Adapted from PMBOK 4 th Edition

20. BSBPMG504A Manage Project Costs Typical Expenditure and Funding Patterns Time Cumulative Expenditure Cost Baseline Actual Expenditure ClosureExecutionPlanningInitiation Funding Request 1 Funding Request 4 Funding Request 3 Funding Request 2 Funding Request 5 $

21. BSBPMG504A Manage Project Costs 7.2 Determine Budget Adapted from PMBOK 4 th Edition InitiationPlanning ExecutionClose Monitor Control Outputs of this process include – Cost Performance Baseline –The authorised budget for the entire project –Budget is calculated and displayed over time Project Funding Requirements –Includes both total funding requirements and periodic funding requirements –Often approved for each phase rather than entire project Project Document Updates –Changes to the Risk Register –Changes to Cost Estimates –Changes to Project Schedule

22. BSBPMG504A Manage Project Costs 7.3 Control Costs The process of monitoring the status of project expenditure Involves updating the project budget with actuals, comparing performance against baseline and managing any changes Any increase to the authorised budget can only be approved through 4.5 Perform Integrated Change Control It is critical to monitor both the expenditure and the work performed for that expenditure Simplified by project management software Occurs during Monitoring and Controlling Adapted from PMBOK 4 th Edition InitiationPlanning ExecutionClose Monitor Control

23. BSBPMG504A Manage Project Costs 7.3 Control Costs Project Cost Control includes – Influencing changes to approved cost baseline Acting on and managing changes requests Ensuring that expenditure does not exceed approved funding Understanding the causes of variances Monitoring work performed against expenditure Preventing unapproved changes Taking action to eliminate and manage cost overruns Seeking approval for cost increases Adapted from PMBOK 4 th Edition InitiationPlanning ExecutionClose Monitor Control

24. BSBPMG504A Manage Project Costs 7.3 Control Costs Adapted from PMBOK 4 th Edition Inputs to Control Budget Project Management Plan Cost Baseline Cost Management Plan Project Funding Requirements Work Performance Information Cost management policies and procedures Cost control tools Monitoring and reporting standards Adapted from PMBOK 4 th Edition InitiationPlanning ExecutionClose Monitor Control

25. BSBPMG504A Manage Project Costs 7.3 Control Costs Adapted from PMBOK 4 th Edition Tools and techniques to Control Budget Performance Reviews To-Complete Estimates Earning Value Management Advanced technique Percentage Complete Estimates Forecasting Project Management Software Variance Analysis Adapted from PMBOK 4 th Edition InitiationPlanning ExecutionClose Monitor Control

26. BSBPMG504A Manage Project Costs Earned Value Management Common and standard method of project performance measurement in the United States Can be complex to implement and requires high degree of analytical ability Monitors three key dimensions – Planned Value, Earned Value and Actual Cost Considered an “advanced technique” and only found in Australia in organisations with high levels of project management maturity Requires detailed actuals data An awareness of the method is useful 7.3 Control Costs Adapted from PMBOK 4 th Edition InitiationPlanning ExecutionClose Monitor Control

27. BSBPMG504A Manage Project Costs Percentage Complete Estimates Commonly used in Australia as a simplified and less accurate alternative to Earned Value Management The Project Manager and project team members estimate the percentage complete on activities and this is compared to what had been planned for completion at that stage Less accurate as uses estimates based on judgement rather than detailed figures Less time consuming as relies on estimates of actuals rather than detailed capturing of actuals 7.3 Control Costs Adapted from PMBOK 4 th Edition InitiationPlanning ExecutionClose Monitor Control

28. BSBPMG504A Manage Project Costs Forecasting The Project Manager takes input from project team members to estimate the completed cost of the project If this differs from the approved baseline budget then additional funding is required and a new approval should be sought Typically based on actual costs incurred for work completed to date, plus and estimate to complete for the remaining work To-Complete Estimates Used to determine improvement in productivity required to recover the project cost and bring it back to baseline An “advanced technique” 7.3 Control Costs Adapted from PMBOK 4 th Edition

29. BSBPMG504A Manage Project Costs 7.3 Control Costs Adapted from PMBOK 4 th Edition Performance Reviews More common but less accurate than To-Complete estimation technique Compares cost performance during the project and estimates funds needed to complete the work Variance Analysis – compares actual time and cost performance against expected performance Trend Analysis – determines if performance is improving or deteriorating Earned value performance – compares baseline plan to actual cost and schedule performance

30. BSBPMG504A Manage Project Costs 7.3 Control Costs Adapted from PMBOK 4 th Edition InitiationPlanning ExecutionClose Monitor Control Outputs of this process include – Work Performance Measurements –Included in status reports which are sent to the Project Sponsor and other stakeholders - causes of variance, corrective action etc Project Budget Forecasts Change Requests Cost Management Plan Updates Cost Baseline Updates Project Document Updates –Changes to the Risk Register –Changes to Cost Estimates –Changes to Project Schedule

31. BSBPMG504A Manage Project Costs Cost Variance Analysis Take some time to reflect on various cost tracking reports that you make have seen for projects and departmental budgets Research cost variance analysis within your organisation and online 1.Discuss the differences between positive variances and negative variances and how these are calculated. 2.Do you think that every variance should be explained? If not, why not? Discuss and debate with your classmates. Research PracticeComment

32. BSBPMG504A Manage Project Costs Project Cost Management Take some time to research the project cost management policies and procedures within your organisation. Reflect on these and determine the level of compliance with the policies and procedures in the projects that you have experienced. 1.Come up with three suggestions to improve both the management of project cost and the application of the related policies and procedures. 2.Your findings will be reviewed in class next week Research PracticeComment

33. BSBPMG504A Manage Project Costs Next Steps Please proceed to Tests & Tasks and take the Project Cost Quiz and the Project Cost Knowledge Test Be sure that you have participated in the Forums. Best of Luck! These are all due during Weeks 9 and 10 in the Course Delivery Schedule