project cost management 1

8/3/2019 Project Cost Management 1

http://slidepdf.com/reader/full/project-cost-management-1 1/51

PROJECT COST

MANAGEMENT

Project Management



PROJECT COST MANAGEMENT

Introduction

Project¶s cost processes create a reasonable

cost baseline for the project and identify

project resources (i.e. human and material)

as well.

This will create a time-phased budget for

their involvement in the project. It involvesdeveloping monetary value (i.e. resources)

needed to complete project activities.




General Considerations


± Close connection between cost and time

± Estimating should be based on WBS for accuracy

± Estimating should be done by the person doing the work

± Historical information is key to improving estimates

± Costs (and time, scope and resources) should be managed to

estimates

± Cost (and time, scope and resource) baseline should be kept and

not changed except for approved changes ± Plans should be revised as necessary, during execution

± Corrective action should be taken when necessary





General Considerations - VERY IMPORTANT

A project manager should not just accept time or costdirectives or requirements from management. At the

very least he/she should analyze the needs of the

project, come up with their own estimate, and then try to

reconcile any differences.




Definition

The processes required to determine the cost

of resources and to ensure that the project is

completed within the approved budget. Major processes are:

± Estimate Costs

± Determine Budget ± Control Costs




Cost Estimates

Cost estimates are prediction that is based

on known information.

It includes identifying and considering

alternative cost to initiate and complete a

project.




Cost Estimates

The cost estimate for various components of

the project (i.e. work packages and

activities) is developed into a

comprehensive project budgeting document

that allows for ongoing project tracking and

cost control.




Cost Estimates

Cost estimates are expressed in units of

monetary currency (e.g. dollars, euro, cedi,

etc.)

In some instances other units of measures

such as staff hour, or staff days are used to

facilitate comparisons by eliminating theeffect of currency fluctuations.




Cost Estimates

Cost estimation begins at the development

stage of the project proposal by identifying

all possible costs associated with the project

and building them into the initial budget

proposal.




Cost Estimates

Sources of Project Cost

± Labor costs

± Material costs

± Travelling cost

± Equipments and facilities costs




Estimate Techniques

A cost estimate is a quantitative assessment

of the likely costs for resource required to

complete the activity.

Estimating project costs is a challenging

process that can be described as both art and

science.




Estimate Techniques

The two important project management

principles that can be called laws and at

work in cost estimation are

A. The more clearly a project cost is defined

in various costs at the beginning the less

chance there is of making estimating errors.




Estimate Techniques

B. The more accurate the initial cost

estimations, the greater the likelihood of

preparing a project budget that accurately

reflects reality for the project and the

greater the chances of completing the

project within budget estimates.




Estimate Techniques

Accuracy of Estimates

± Order of magnitude estimates

Made during initiation and in the range of ±25% to +75%

± Budget Estimate Made during planning and in the range ±5% to +25%

± Definitive Estimate

Also made during planning and in the range ±5% to

+10%




Definitions

Accounting Standards and Terminology

± Present Value (PV) = FV/(1+r)n

Value today of future cash flow

± Net Present Value (NPV) Present value of the total benefits less costs

± Internal Rate of Return (IRR)

The rate at which project inflows and outflows are equal

± Payback Period

The number of time periods it takes to recover your investment

± Benefit Cost Ratio (BCR)

Comparison of benefits to costs of different projects




Definitions

Accounting Standards and Terminology

± Opportunity Cost

Opportunity given up by selecting one project over another

± Sunk Costs Expended Costs ± not considered when deciding whether to continue

with a troubled project

± Law of Diminishing Returns

The more you put into something, the less you get out of it

± Working Capital

Current assets minus current liabilities




Definitions

Types of Cost

± Variable Cost

Costs which change with the amount of production

± Fixed Cost Costs that do not change as production changes

± Direct Cost

Costs directly attributable to work on the project

± Indirect Cost

Overhead costs or costs incurred for the benefit of more than one

project




Definitions

Straight Line Depreciation

± The same amount of depreciation is taken each year

Accelerated Depreciation

± Double declining balance

± Sum of Years Digits

± Accelerated depreciation depreciates faster than straight line




Definitions

Life Cycle Costing

The total cost of the project including development and

maintenance

Value Analysis or Value Engineering

Finding a less costly way to do the same scope of work




Estimate Costs - Definition

Develop an approximation of the (financial) costs of the

resources needed to complete the activities.

Identify costing alternatives

Generally expressed in a currency to assist withcomparisons

May be refined with progressive elaboration




Estimate Costs - Techniques

Analogous Estimating (heuristics)

± Top or middle managers use expert judgment or actual time on

previous projects to estimate

Bottom-up Estimating

± The people doing the work create the estimates

Parametric Estimating

± Uses mathematical model to predict costs (e.g., cost per yard, per

line of code, per installation etc.)

Three-Point Estimates

Reserve Analysis




Estimate Costs - Techniques

Cost of Quality

Computerized Estimating Tools

Vendor Bid Analysis




Estimate Costs - Outputs

Activity Cost Estimates

Basis of Estimates

Project Document Updates




Determine Budget - Definition

A project cost budgeting involves allocating the project cost

estimates or task over time, i.e. the process of aggregating the

estimated costs of individual activity or work package to

establish an authorized cost baseline. A cost baseline is a time-phased budget that project managers

use to measure and monitor cost performance.

The aggregation and allocation of overall cost estimates to

individual activities or work packages to establish a cost

baseline Result is the budget and Cost Baseline

Provides project funding requirements




Determine Budget

It is the total amount of cash of the project

to be calculated in order to determine the

amount of funds that the organization needsfor the project.




Determine Budget

Work Package Costing

The process of developing the actual project

budget in the combination of top down and

bottom up budgeting.

Thus each work package in the WBS is

evaluated for it resource requirements, andthe cost for each resource isestimated




Determine Budget


For example, a work package is estimated

that it requires 25hours of labour by a

technician. If the technician assigned to the

task is paid GHC17.50 per hour, overhead

charges to the project is 84% of directlabour. What is the total cost of the work

package?




Determine Budget


Calculations

25Hrs *GHC17.50*1.84 = GHC805

NB: (1.84 = 84% * GHC437.50+GHC437.50)




Determine Budget - Techniques

Cost Aggregation

Reserve Analysis

Expert Judgment

Historical Relationships

Reconciliation of Funding Limits



Example of Cost Aggregation




Determine Budget - Outputs

Cost Performance Baseline

Project Funding Requirements


± Risk Register

± Cost Estimates

± Project Schedule




Control Costs - Definition

This is the process of monitoring the status

of the project to update the project budget

and changes to the cost baseline.

Updating the project cost budget involves

recording actual cost spend to date.





Monitoring the expenditure of funds

without regard to the value of the work

being done for such expenditure has littlevalue to the project other than allow the

project team to stay within authorized

funding.



`PROJECT COST MANAGEMENT


Much of the effort of cost control involves

analyzing the relationship between the

consumption of project funds to the physical work done for such expenditure.

The key to effective cost control is the

management of the approved cost performance baseline and the changes to

that baseline.





Cost control includes

± Influencing the factors that create change to the cost

baseline

± Monitoring the status of the Cost Baseline to ensure that it isnot exceeded

± Ensure that changes are agreed upon and acted upon in a

timely manner

± Determine that the cost baseline has changed

± Managing the actual changes when they occur

± Keeping the cost baseline updated with approved changes





± Cost control Involves Monitoring cost to detect and understand variances from

baseline

Ensuring that all appropriate changes are recorded in thebaseline

Preventing incorrect, inappropriate or unauthorized

changes from being added to the cost baseline

Informing appropriate stakeholders of authorized

changes

Acting to bring expected costs to within acceptable limits

Generally search for the ³whys´ of both positive and

negative variances





Control Process

Control is the process of comparing actual

performance against plan to identify

deviations, evaluate possible alternative

courses of actions, and take appropriate

corrective action.





The project control steps for measuring and

evaluating project performance are;

± Setting a baseline plan

± Measuring progress and performance

± Comparing plan against actual

± Taking action




Control Costs - Techniques

\Earned Value Management (EVM)

The EVM recognizes that it is necessary to

jointly consider the impact of cost, time and

project performance on any analysis of

current project status.

EVM reintroduces and stress the importanceof analyzing the time element in the project

status updates.





Earned Value Management (EVM)

Time is important as it provides the basis

for determining how much work to be

completed at certain milestone point.

EVM also allows project team to make

future projections of project status based onits current state.





Earned Value Cost/Schedule System

± An integrated project management

system based on the earned value concept

that uses a time-phased budget baseline

to compare actual and planned schedule

and costs.





Earned Value Management (EVM)

A time-phased budget allows the project

team to identify the correct sequencing of

activity, and also enables the team to

determine in the project when the budget is

likely to be spent in pursuit of thoseactivities.





Earned Value Management

A method to measure scope, time and project

performance

Integrates cost, time and scope

Can be used to forecast future performance

and completion dates

More accurate than simply comparingplanned to actual results




Control Costs - TechniquesEarned Value Management (EVM)

± PV (Planned Value) (BCWS) ± Estimated value of work planned to

be done

± EV (Earned Value) (BCWP) ± Estimated value of work actually

done ± AC (Actual Cost) ± (ACWP) ± Actual cost incurred

± BAC Budget At Completion) ± Total Budget for the Project

± EAC (Estimate At Completion) ± Currently, how much is the project

expected to cost?

± ETC (Estimate To Complete) ± From this point on, how much

MORE do we expect it to cost to complete the project?

± VAC (Variance At completion) How much over or under budget do

we expect to be at the end of the project?




Control Costs ± Techniques

Earned Value Management

± Cost Variance (CV) ± Measure of cost performance on a project .

Equation: CV= EV-AC. A negative CV is non-recoverable.

± Schedule Variance (SV) - Measure of schedule performance on aproject . Equation: SV= EV-PV

± Cost Performance Index (CPI) - Measure of value of work

accomplished compared with actual costs/progress. C onsidered

the most critical EVM metric . Equation: CPI=EV/AC

± Schedule Performance Index (SPI) - Measure of progress

achieved compared with progress planned on a project . Equation:SPI = EV/PV





Forecasting

As the project progresses, the project team can

develop a forecast fro the estimate at complete(EAC) that may differ from budget at complete

(BAC).

Forecasting the EAC involves making estimates or

predictions of conditions and events in the

project¶s future based on information and

knowledge available at the time of the forecast.





Forecasting

Forecast are generated, updated, and

reissued based on work performance

information provided as the project is

executed.

The work performance information coversthe project¶s past performance and any

information that could impact on the project



Forecasting

Forecasting

EAC are based on actual cost incurred for

work completed plus an estimate to

complete (ETC) the remaining work, i.e.

EAC =AC+ETC





Forecasting

± Estimate At Completion (EAC) = BAC/CPI or AC+BAC-EV

± Estimate To Complete (ETC) = EAC-AC

± Variance At Completion (VAC) = BAC-EAC ± How efficiently must we use our remaining resources?

± To Complete Performance Index (TCPI)

TCPI = (BAC-EV)/[(BAC-AC or (EAC - AC)]

(i.e. Work Remaining / Funds Remaining)





Performance Reviews ± Reviews to compare cost, available

funds and schedule over time.

± Variance Analysis ± compare actual to planned/expected results

± Trend Analysis ± examine performance over time i.e. improving or deteriorating

± Earned Value Performance ± comparing the baseline to actual

performance

Project Management Software




Control Costs ± Outputs

Work Performance Measurements

Budget Forecasts

Change Requests

Project Plan Updates


project cost management 1

Documents