15 cost presentation start(2).pdf

Cost Management

Copyright Course

Technology 1999 2

Types of Cost Estimates

Type of Estimate When Done Why Done How Accurate

Rough Order of

Magnitude (ROM)

Very early in the

project life cycle,

often 3–5 years

before project

completion

Provides rough

ballpark of cost for

selection decisions

–25%, +75%

Budgetary Early, 1–2 years out Puts dollars in the

budget plans

–10%, +25%

Definitive Later in the project, <

1 year out

Provides details for

purchases, estimate

actual costs

–5%, +10%

Budget Cost Categories

Work Packages

Planning Packages

Control Accounts

Distributed Budgets Undistributed Budget (UB)

Performance Measurement Baseline (PMB) Management Reserve (MR)

Contract Budget Base (CBB)

Total Contract Cost Profit/Fee

Total Contract Price

Project Cost Components

Undistributed budget (UB) applies to contractually authorized efforts

not yet allocated to WBS elements. The UB consists of a budget for

authorized changes for which there has not been adequate time to

plan the change at the control account level. Undistributed budget

is an element of the Performance Measurement Baseline, but it is not

time-phased.

Direct Costs – Costs applicable to, and identified specifically with,

the program contract Statement of Work.

Examples of Direct Costs: Labor, Travel, Material, Subcontractor

Charges

Indirect Costs – Charges that cannot be consistently or

economically identified against a specific contract. These are

typically calculated by applying rates and factors to the cost base.

A Control Account is an assigned WBS Level used to monitor the

cost and schedule performance of a significant element of the work.

Work Packages (WP) contain a discrete segment of work below the

Control Account level and provide detailed planning for

accomplishing the work within a Control Account.

Planning Packages include efforts that will eventually be identified as

separate work packages within the control account. They represent

far term efforts that cannot be defined in detail at the start of the

control account.

Key Terms

ACME Housing Corporation

1

House Building

Project

1.1

Concrete

1.1.1

Pour Foundation

1.1.1.1

Install Patio

1.1.1.2

Stairway

1.1.1.3

Framing

1.1.2

Frame Exterior

Walls

1.1.2.1

Frame Interior

Walls

1.1.2.2

Install Roofing

Trusses

1.1.2.3

Plumbing

1.1.3

Install Water

Lines

1.1.3.1

Install Gas Lines

1.1.3.2

Install B/K

Fixtures

1.1.3.3

Electrical

1.1.4

Install Wiring

1.1.4.1

Install Outlets/

Switches

1.1.4.2

Install Fixtures

1.1.4.3

Interior

1.1.5

Install Drywall

1.1.5.1

Install Carpets

1.1.5.2

Install Painting

1.1.5.3

Roofing

1.1.6

Install Felt

1.1.6.1

Install Shingles

1.1.6.2

Install Vents

1.1.6.3

Control Account

Levels

Work Package Level

CA

Definition

Reserve Pools

Task Estimating

Scope change

Risk Event

Direct Project Plan

Cost Baseline

Total $165,467 $38,269 $73,412 $49,130 $4,656

Copyright Course

Technology 1999 11

Cost Control

• Project cost control includes – monitoring cost performance

– ensuring that only appropriate project changes are included in a revised cost baseline

– informing project stakeholders of authorized changes to the project that will affect costs

• Earned Value analysis is an important tool for cost control

Labor and material resources are allocated to work packages, which

generates a planned cost for that work package

Total direct project cost is the sum total of all allocated work and

planning packages

Cost management is focused on defined Control Accounts where

actual costs are matched against planned values

Various reserves are defined to handle project dynamics (i,e., risk,

undefined items, possibly future scope changes)

Some budget items may be held in a undistributed account outside of

the project manager’s prerogative to allocate.

Control Account budget allocation may be explicitly managed by a

formal work authorization system. This is designed to control the order of

project execution.

Cost Management Fundamentals

Cost Adjustments

Project Baseline

Contingency Reserves

Basic Cost Management Process

Work Packages

Cost Management

• Cost Estimating – developing an approximation of the costs of the resources needed to complete project activities.

• Cost Budgeting – aggregating the estimated costs of individual activities or work packages to establish a cost baseline.

• Cost Control – influencing the factors that create cost variances and controlling changes to the project budget.

Resource Types

• Humans—Work resources

• Inanimate items—Material resources

• Fixed fee—Setup charges

Cost Types

• Direct—created specifically for the project

• Indirect—overhead items

• Variable—related to allocation levels

• Fixed—usually a one time charge

• Level of effort—allocation based on work that

doesn’t have a volume attribute (i.e., project

management, tech support, etc.)

Cost Estimating

• An important output of project cost

management is a cost estimate

• It is also important to develop a cost

management plan that describes how cost

variances will be managed on the project

• There are several types of cost estimates and

tools and techniques to help create them

Cost Budgeting

• Cost budgeting involves estimating resource

and material allocations to individual WBS

components

• Costs are aggregated upward through the WBS

structure to generate total project cost.

• Sequencing of work units in the Time

Management process allows a time phased

budget to be created.

Budget Components

Work Resources—Project team members

Material Resources

3rd Party Vendor Costs

Other Cost Resources—Travel, Setup, etc.

Computing HR Cost in MSP

Cost = Duration X Resources Allocated

Cost Control

Tracking a dynamic variable

Cost Control is the acid test of

project performance

Project Deviations

• Task overruns--variances

• Approved scope changes

• Risk events occur

• Other unknown events occur

WBS Presentation

Budget Components

• Direct project plan—MS Project

• Reserve pools—task, scope, risk

• Enterprise overhead

• Profit (as required)

Vocabulary

• Cost management plan—defines how to create budget and manage cost

• Cost baseline—time phased budget used to monitor cost performance

• Cost control—influencing factors that create changes to the baseline.

• Cost tracking—using Earned Value parameters

• Value Analysis–finding less costly way to do the same job

1. What are the primary methods for cost estimating

2. What is the most accurate method for cost estimating?

3. Why is this method not used for project initiation?

4. What is the most “valuable” cost and schedule analysis

tool?

5. What is ROM?

6. If a roofer estimates the cost of replacing your roof simply

by measuring its size, he is likely using what method?

7. What is a Contingency Reserve used for?

8. What is a Management Reserve used for?

Concept and Vocabulary Questions