Chapter 9 Cost Planning and Performance 1 1 1 1 1 1 1 1 1

Learning Objectives Items to consider when estimating cost Preparing a baseline budget Cumulating actual costs Determining the earned value of work performed Analyzing cost performance Forecasting project cost at completion Controlling project costs Managing cash flow 2 2 2 2 2 2 2 2 2 2 2 2

Real World Example Vignette: eBay eBay understands the importance of analyzing project data to produce performance indicators eBay’s mission is to provide a trading platform for people all over the world. They do this by continually improving the user’s experience on the eBay site Decisions for change are based on measurable factors like the number of visitors to the site, length of time customers spend on eBay, busiest day of the week for eBay transactions, etc. Managers regularly collect data from the site to develop new marketing and merchandising techniques, continually improving the buy-sell process for eBay customers Project managers should understand the valuable of measurable factors, and apply them to make responsible decisions about their projects “If you can’t measure it, you can’t control it.” 3 3 3 3 3 3 3 3 3 3 3 3

Real World Example Vignette: London Traffic Ken Livingstone was London’s first directly elected mayor in 2000. He created Transport for London to oversee the city’s road and transport services that were previously managed separately. Mission: to upgrade London’s transportation infrastructure with a toll system project to reduce crippling congestion Trans. for London developed a plan to install a system (cameras) to identify & charge car owners entering defined congestion zones Technological risks were identified, and the project was divided into 5 smaller components (to be managed separately, as opposed to purchasing one large system) The project team worked together in one location on the five components to the system The project was successfully implemented by February 2003. Transport for London reports that traffic in the congestion zone has decreased by 20%, with a 5% improvement in travel times 4

Project Cost Estimates Cost planning starts with the proposal. The cost section may include: Labor Materials Subcontractors and consultants (if used) Equipment and facilities rental Travel 5

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. 6 5 5 4 5 4 5 4 4 4

Allocating the Total Budgeted Cost Allocating total project costs for the various elements to the appropriate work packages will establish a total budgeted cost (TBC) for each work package. There are 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. 7 7 7 5 7 5 6 5 5 5

Developing the Cumulative Budgeted Cost The second step is to distribute each TBC over the duration of its work package. 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. One uses the CBC as the standard against which actual cost is compared. 8 8 8 6 8 6 7 6 6 6

9

10

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. Funds may be committed but not yet paid Total actual and committed cost by work package for comparison to the CBC. Cumulative actual cost (CAC) should be calculated. 11 10 10 7 10 7 8 7 7 7

12

13

Determining the 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. 14 11 11 8 11 8 9 8 8 8

16

Cost Performance Analysis Four Measures TBC (total budgeted cost) CBC (cumulative budgeted cost) CAC (cumulative actual cost) CEV (cumulative earned value) 17 14 14 9 14 9 10 9 9 9

Cost Performance Index (CPI) A measure of the cost efficiency with which the project is being performed. CPI = Cumulative Earned Val -------------------------- Cumulative Actual Cost 18 1 16 16 10 16 10 11 10 10 10

Cost Variance (CV) The difference between the cumulative earned value of the work performed and the cumulative actual cost. Cost variance = Cum earned value – Cum actual cost 19 17 17 11 17 11 12 11 11 11

Cost Forecasting: Three Methods Three methods for determining forecasted cost at completion (FCAC): FCAC = TBC / CPI Project continues at same rate of efficiency FCAC = CAC + (TBC - CEV) Remaining work performed at CPI = 1 FCAC = CAC + Re-estimate of remaining work New forecast for remaining work 20 18 18 12 18 12 13 12 12 12

Cost Control The key is to analyze cost performance on a regular and timely basis. Identify cost variances and inefficiencies early. 21 19 19 13 19 13 14 13 13 13

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. 22

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. 23 20 20 14 20 14 16 14 14 14

Managing Cash Flow Make sure that sufficient payments are received from the customer in time for you to cover the costs of performing the project. The key to managing cash flow is to ensure that cash comes in faster than it goes out. 24 21 21 15 21 15 17 15 15 15

Project Management Software All costs associated resources can be stored. The software calculates the budget for each work package and for the entire project. The software allows the user to define different rate structures for each resource and when charges for those resources will be accrued. Cost tables and graphs are available to help analyze cost performance. 25 22 22 16 22 16 18 16 16 16