Project Cost Management PMBOK 4th Edition

Agenda Broad Understanding of Project Cost Management. Understand how software estimation is different.

PROCESS GROUPS Estimate Costs Budget Costs Control Costs I Planning E Controlling C Control Costs

Estimate Costs Cost estimating and Pricing: Cost estimating: how much will it cost the performing organization to provide the product or service involved? Pricing: how much will the performing organization charge for the product or service? Business decision. Estimating should be done by the person doing the work.

Estimate Costs Based on the WBS to increase the accuracy. Inputs Tools Outputs WBS Resource requirements Resource rates. Act. duration est. Historical info. Chart of accounts Risks Analogous est. Parametric modeling Bottom-up est. Cost estimates Cost management plan Based on the WBS to increase the accuracy. Project managers should analyze the needs of the project, to compare and reconcile any differences with cost requirements from management.

Estimate Costs Cost estimates for all resources that will be charged to the project. Generally expressed in units of currency to facilitate comparisons both within and across projects. Generally includes appropriate risk response planning. Supporting detail must include: Reference to WBS. How it was developed? Assumptions made. Range of possible results. Cost management plan how cost variances will be managed.

Estimate Costs View the Templates Top Down WBS Experience Based/Analogy Parametric WBS Roll up the numbers

Estimates vs. Accuracy Estimate Accuracy Order of Magnitude (Early) -25% +75% Budget Estimate -10% +25 Definitive Estimate -5% 10% Most difficult to estimate as very little project info is available Used to finalize the Request for Authorization (RFA), and establish commitment Development stage estimate. Needed to predict revised project completion date

Tools for Estimating Top Down Estimating Accuracy depends on experience Fast, but estimates are rough Bottom Up Estimating Slow, but reliable High cost (time) / WBS needed Buy-in from the team Parametric Modeling Mathematical models to predict costs Two types: REGRESSION ANALYSIS, and LEARNING CURVE Delphi Method (analogous) Expert judgment Tasks need not to be identified Considerable experience needed

Influencing Factors Two sets of factors influence the ultimate cost of a system Size Factors Number, and type of functions Project Factors Project parameters that influence project costs.

Control Costs Inputs Tools Outputs Cost Baseline Performance Reports Change Requests Cost Management Plan Cost Change Control System Performance Measurement Earned Value Management Additional Planning Computerized Tools Revised Cost Estimates Budget Updates Corrective Action Estimate at Completion Project Closeout Lessons learned Understand what is driving variances, good and bad, and decide what action to take.

Case Study Simple Case study requires you to master the following: EV = Earned Value PV = Planned Value AC = Actual Cost

Budget Costs The cost baseline will be used to measure and monitor cost performance of the project. Expected Cash Flow Cumulative Values Cost Baseline Time

Control Costs To Control / Report Costs And to Revise Costs and provide a new Estimate At Completion Use Earned Value Method

Example Painting your four walls. Each wall $1000. Total Budget At Completion (BAC) = $1000+$1000+$1000+$1000 Half way through you audit the work. Let us consider two scenarios.

Scenario 1 One Wall is painted Amount Spent is $500

Scenario 2 Two Walls painted Amount Spent is $4000

What is the Revised EAC For Scenario 2.

TCPI What if CPI is consistently low. Can you catch up somehow? How will you know if it is not possible? Read 18.6.1 about TCPI.

Case Study: Project “Book Contract” The “Book Contract” Project: 10 work packages 10 chapters Negotiated to be delivered 1 per month Estimated cost of $100 each

Time to Complete Performance Index (BAC) This is equal to:

Why pick TCPI? The TCPI focuses on the remaining project activities. It reflects what it will take in future performance to recover from a negative actual cost position. Note: It is effectively the mirror opposite of the cumulative CPI.

We’ve all been there. You’re a few months into a project and the first few deliverables have been completed. You diligently calculate the CPI = 0.9. Your customer asks you about your plans for the cost overrun “No problem, we’ll make it up” BUT CAN YOU?

Back to the Case Study.. Planned Value $100 Earned Value Actual Cost Month 1 2 3 Planned Value $100 Earned Value Actual Cost $110 Cumulative Earned Value (EV) $200 $300 Cumulative Actual Cost (AC) $220 $330 CPI = EV/AC 0.89

TCPI calculation: Work Remaining The work remaining is BAC – EV = $1,000 - $300 = $700 This is an estimate of the earned value remaining: The total earned value for the project is $1,000 We have completed 3 deliverables. Work remaining = $700.

TCPI Calculation: Funds Remaining The funds remaining are BAC – AC = $1,000 – $330 = $670. This is the remaining budget if we are to deliver as promised.

Project Moves on 1.04 doesn’t look too bad! We have to achieve a CPI rate of 1.04 times of what we were working on. Yes, We Can!

So Three More Months & Three more Chapters 1 2 3 4 5 6 Planned Value $100 Earned Value Actual Cost $110 Cumulative Earned Value (EV) $200 $300 $400 $500 $600 Cumulative Actual Cost (AC) $220 $330 $440 $550 $660 CPI = EV/AC 0.89

Three More Chapters …

Uphill… To complete the project within budget, we now have to work at a rate 18% greater than we proposed. In fact, we need a 29% improvement in our expenditure rate from 89% to 118%!

TCPI Goes to ∞ in month 8!

Estimates of Cost to Complete The estimate of the final cost at completion is called the estimate at completion (EAC). Next: The PM should calculate the new EAC.

Analysis The TCPI has the remarkable property that if we own up to the cost overrun and use the TCPI with the EAC in the denominator, then we can proceed at our current efficiency (defined by our current CPI) and hit the new cost target.

Conclusion When BAC is no longer attainable, the project manager should calculate a new EAC. This new estimate becomes the goal we will work towards if approved by stakeholders. TCPI = (BAC –EV) / (EAC –AC)

Conclusion TCPI gives us a reality check analysis. PM: Our CPI is 0.9. We will deliver on budget, don’t worry. Auditor: I have TCPI = 1.2, implies 30% increase in productivity. Auditor: Are you Sure?

References Provides a good overview and general guide to the principles of EVM. Shows the EVM role in facilitating effective project management , Project Management Institute, 2005 The Two Most Useful Earned Value Metrics: the CPI and the TCPI By Quentin W. Fleming and Joel M. Koppelman Also Warburton and Kanabar – Several PMI papers and Book