1. Project Cost Management
PMBOK 4th Edition

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

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

4. 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.

5. 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.

6. 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.

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

8. 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

9. 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

10. 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.

11. 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.

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

13. 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

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

15. 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.

16. Scenario 1
One Wall is painted
Amount Spent is $500

17. Scenario 2
Two Walls painted
Amount Spent is $4000

18. What is the Revised EAC
For Scenario 2.

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

20. 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

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

22. 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.

23. 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?

24. 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

25. 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.

26. 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.

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

28. So Three More Months & Three more Chapters1 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

29. Three More Chapters …

30. 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%!

31. TCPI Goes to ∞ in month 8!

32. 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.

33. 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.

34. 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)

35. 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?

36. 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