9-1 Project Management from Simple to Complex

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9-3 Chapter 9 Estimating and Managing Costs

9-4 Learning Objectives Describe methods of estimating costs Identify the effects of project phase and complexity on the choice of estimating method Describe the method of combining cost estimates with a schedule to create a budget Describe methods to manage cash flow Describe the terms and relationships of budget factors used in earned value analysis

9-5 Learning Objectives Calculate and interpret budget and schedule variances Calculate and interpret the schedule performance index and the cost performance index Calculate and interpret estimates to complete the project Calculate the revised final budget

9-6 Estimating Costs to Compare and Select Projects Economic factors are an important consideration when choosing between competing projects To compare the simple paybacks/internal rates of return between projects, an estimate of the cost of each project is made The estimates must be accurate enough so that the comparisons are meaningful

9-7 Estimating Costs to Compare and Select Projects Compared to later phases, the methods of estimating project costs during the selection phase: – Are faster – Consume fewer resources – Rely on expert judgment of experienced managers Expert judgment: Decisions based on incomplete information made by people who have extensive personal experience

9-8 Estimating Costs to Compare and Select Projects Analogous estimate: Budget estimate based on a similar project Parametric estimate: Estimates that are calculated by multiplying measured parameters by cost-per-unit values

9-9 Estimating Costs to Initiate Projects Vendor bid analysis – An RFP is issued and sent to a list of qualified vendors – Vendors respond with a proposal and an estimate of the cost – The project management team reviews the vendor responses – The project selection decision might have to be reconsidered if: Vendors’ estimates are much higher than expected The project cannot be completed for the cost that was used to select the project

9-10 Estimating Costs to Initiate Projects Bottom-up estimating: Sum of estimates of each detail of the activity and project – Very accurate – Time-consuming – On projects with low complexity, the cost estimates can be done on spreadsheet software – On larger projects, software that manages schedules can manage and display costs by activity and category

9-11 Figure Detailed Cost Estimate Click below to view full-size

9-12 Figure Sum of Detailed Costs by Type Click below to view full-size

9-13 Estimating Costs to Initiate Projects Activity-based estimates – An activity can have costs from more than one vendor plus costs for labor and materials from internal sources – Detailed estimates from all sources are reorganized – Costs associated with a particular activity are grouped by adding the activity code to the detailed estimate

9-14 Figure Detailed Costs Associated with Activities Click below to view full-size

9-15 Estimating Costs to Initiate Projects Establishing a Budget – Determine how much money is needed for: Each group of tasks The whole project – Cost aggregation: Sum of component costs – Transfer of money to the project account must be appropriately timed – Reconciliation: Matching funds provided with funds spent

9-16 Figure Fund Transfers and Expenditures Click below to view full-size

9-17 Managing the Budget Funding for the project should be available when it is needed Financial people prefer to keep the company’s money working in other investments before transferring it to the project account The project manager prefers to have as much cash available as possible to use if activities exceed budget expectations

9-18 Managing the Budget Contingency reserve: Money held to pay for predictable but unspecified extra costs – Likely to be spent – Part of the total budget for the project Management reserve: Money available for changing project scope – Not likely to be spent – Not part of the project’s budget baseline – Can be included in the total project budget

9-19 Evaluating the Budget Earned value management (EVM): Method of comparing the budgeted and actual costs of a project during the project – Budgeted cost of work scheduled (BCWS): All the items in the cost estimate – Planned value (PV): Sum of the items in the BCWS that should have been spent by a particular day – Budgeted cost of work performed (BCWP): The budgeted cost of work scheduled that has been done – Earned value (EV): Sum of budgeted expenses up to a particular point in the schedule – Actual cost (AC): Sum of money spent so far

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9-25 Figure Planned Value, Earned Value, and Actual Cost Click below to view full-size

9-26 Evaluating the Budget Schedule variance (SV): Difference between earned value and planned value – SV = EV − PV – A negative schedule variance means the project is behind schedule Cost variance: Difference between earned value and actual cost – CV = EV − AC – A positive CV indicates the project is under budget

Evaluating the Budget Schedule performance index (SPI): Ratio of earned value to planned value – SPI = EV/PV – A SPI value less than one indicates the project is behind schedule Cost performance index (CPI): Ratio of earned value to actual cost – CPI = EV/AC

9-28 Evaluating the Budget Estimate to complete (ETC): Estimate of the amount of money needed to complete the unfinished part of the project Atypical cost variance – ETC = Budget at completion (BAC) − Earned value (EV) Budget at completion: Budget for the entire project Typical cost variance – ETC = (BAC – EV)/CPI CPI: Cost performance index

9-29 Evaluating the Budget Estimate at completion (EAC): Revised project budget based on actual cost to date plus the estimate to complete (ETC) – EAC = AC + ETC

9-30 Figure Summary of Terms and Formulas for Earned Value Analysis Click below to view full-size