2 Project Cost Management “The processes involved in planning, estimating, budgeting, and controlling costs so that the budget can be completed within the approved budget”
3 Why Do We Manage Cost?Part of triple constraint, can’t manage one without the others (scope, time, and quality)Plots of cost and scope against plan can help spot problems earlyCumulative ValueTimePlanned Value (PV)Actual Costs (AC)Earned Value (EV)TodayIs this project over/under budget?Is it ahead of/behind schedule?
4 Cost Management Key Terms PV - Planned Value, estimated value of the planned workEV – Earned Value, estimated value of work doneAC – Actual Cost, what you paidBAC – Budget at Completion, the budget for the total jobEAC –Estimate at Completion, what is the total job expected to cost?ETC – Estimate to Complete, forecasted costs to complete jobVAC – Variance at Completion, how much over/under budget do we expect to be?
5 How Do We Manage Cost? Three processes Cost Estimating Cost Budgeting Cost ControlCost EstimatingCost BudgetingCost Control
7 Estimating MethodsAnalogous (Top Down) estimating – Managers use expert judgment or similar project costs [quick, less accurate]Bottom-Up estimating – People doing work estimate based on WBS, rolled up into project estimate [slow, most accurate]Parametric estimating – Use mathematical model (i.e. cost per sq ft). [accuracy varies] Two types:Regression analysis – based on analysis of multiple data pointsLearning Curve – The first unit costs more than the 100th, forecasts efficiency gains
8 Estimating MethodsVendor Bid Analysis – Estimating using bids + allowances for gaps in bid scope [slow, accuracy depends on gaps]Reserve Analysis – Adding contingency to each activity cost estimates as zero duration item [slow, overstates cost]
10 Cost BudgetingBudgeting is allocating costs to work packages to establish a cost baseline to measure project performanceRemember Contingency items are for unplanned but required changes it is not to cover things such as:Price escalationScope & Quality ChangesFunding Limit Reconciliation – Smoothing out the project spend to meet management expectations
11 Cost Control Inputs Tools & Techniques Outputs Cost Estimate Updates Cost BaselineCost change control systemPerformance measurement analysisForecastingProject performance reviewsProject management softwareVariance managementCost Baseline UpdatesProject Funding RequirementsPerformance MeasurementsPerformance ReportsForecasted CompletionWork Performance InformationRequested ChangesApproved Change RequestsRecommended Corrective ActionsOrganizational Process Assets UpdatesProject Management PlanProject Management Plan UpdatesCost EstimatingCost BudgetingCost Control
12 Earned ValueProgress is compared against the baseline to determine whether project is ahead of or behind planPercent complete can be difficult to measure, some managers use rules50/50 Rule – Assumed 50% complete when task started, final 50% at completion20/80 Rule – 20% at start0/100 Rule – No credit until completePlanned Value (PV) – Budgeted CostEarned Value (EV) – Actual work completedActual Cost (AC) – Costs incurredEstimate to Complete (ETC) – What’s LeftEstimate at Completion (EAC) – What final cost will be
13 Earned Value Graph Planned Value (PV) Earned Value (EV) Variance at Completion (VAC)Target Cost & SchedulePlanned Value (PV)Schedule Variance (Time)Earned Value (EV)
14 Earned Value Formulas NAME FORMULA NOTES Cost Variance (CV) EV-AC Negative = Over budgetPositive = Under budgetSchedule Variance (SV)EV-PVNegative = Behind SchedulePositive = Ahead of ScheduleCost Performance Index (CPI)EV/ACHow much are we getting for every dollar we spend?Schedule Perform Index (SPI)EV/PVProgress as % against planEstimate to Complete (ETC)EAC-ACHow much more do we have to spend?Variance at Completion (VAC)BAC-EACAt the end of the day, how close will we be to plan?Estimate at Completion (EAC)See following slide
15 Earned Value Formulas (Cont’d) NAMEFORMULANOTESEstimate at Completion (EAC)BAC/CPIUse if no variances from BAC have occurredAC+ATCUse when original estimate was bad. Actuals + New estimateAC+BAC-EVUse when current variances are not expected to be there in the futureAC+(BAC-EV)/CPIUse when current variances are expected to continue
16 Barn ExerciseYou have a project to build a new barn. The specs for building the barn are to construct 4 sides and then an angled roof. Each side of the barn is to take one day to build as is the roof. The budgeted amount is $2,000 per side and $2000 applied to the roof cost. The sides are to be completed one after the other. Today is the end of day four.
17 Tricks for Earned Value EV is always firstVariance = EV minus somethingIndex = EV divided by somethingIf the formula relates to cost use ACIf the formula relates to schedule use PVInterpreting results: negative is bad and positive is goodInterpreting results: greater than one is good, less than one is badPVACETCEACBACProject StartCurrent Status
18 Terms to Remember Present Value Working Capital Net Present Value (NPV)Internal Rate of Return (IRR)Payback PeriodBenefit Cost Ratio = BCR>1, Payback is greater than the costOpportunity CostSunk CostWorking CapitalStraight Line DepreciationAccelerated DepreciationDouble Declining BalanceSum of Years DigitsValue Analysis (Value Engineering)You won’t be calculating most of these numbers on the test, just remember the concepts for general questions
19 Answers to Questions1 – C2 – D3 – B4 – A5 – C6 – B7 – C8 – A