Project Cost Management KEC Dhapakhel, Lalitpur

Outline Cost Management Basics Cost Estimating Cost budgeting Cost & Project Cost Management Cost Estimating Types of cost estimate Cost estimating tools Cost budgeting Cost aggregation Deriving budget from activity cost Cost control process Cost control method Earned value management EVM Benefits Variance analysis Pushpa Thapa

Project Cost Management Basics PCM includes the processes involved in planning, estimating, budgeting and controlling cost so that the project can be completed within the approved budget. Project Cost Management Processes Resource planning - determining what resources and quantities of them should be used. Cost estimating – developing an estimate of the costs and resources needed to complete a project. Cost budgeting – allocating the overall cost estimate to individual work items to establish a baseline for measuring performance. Pushpa Thapa

Cost Types Cost is a resource sacrificed or foregone to achieve a specific objective or something given up in exchange. Costs are usually measured in monetary units like Rupees, Dollars Types of Cost Direct Cost– Cost of Labor, Resource, Machinery related to the production of a product. Overhead Cost– Cost of building, Rent, Maintenance, Insurance, Administrative Cost – Cost due to Management Expenses, HRM & HRD activities Variable Cost – Cost that vary depending on a company’s production volume, they rise as production increases and fall as production decreases. Sunk Cost – Cost that has already been incurred and cannot be recovered. Pushpa Thapa

Product Cost Vs Project Cost Material Cost + Manufacturing Cost + Overhead Cost = Sales Price Where, Overhead Cost = Project other overhead costs + Project Cost + Profit Project Cost = Project’s Labor Cost + Resource Cost + Special Machinery Cost Pushpa Thapa

Basic Principles of Project Cost Management Profits are revenues minus expenses Life cycle costing is estimating the cost of a project plus the maintenance costs of the products it produces Cash flow analysis is determining the estimated annual costs and benefits for a project Benefits and costs can be tangible or intangible Sunk cost should not be a criteria in project costing Pushpa Thapa

Cost Management Plan can establish Precision Level is schedule activity cost estimates will adhere to a rounding of the data to a prescribed precision, based on the scope of the activities and magnitude of the project and may include an amount for contingency. Units of Measure each unit used in measurements is defined, such as staff hours, staff days, week, lump sum, etc for each of the resources. Organizational procedures links the WBS component used for the project cost accounting is called a control account (CA). Control thresholds Variance thresholds for costs or other indicators (e.g. person-days, volume of product) at designated time points over the duration of the project can be defined to indicate the agreed amount of variation allowed. Pushpa Thapa

Cost Management Plan can establish Earned value rules Three examples are 1) Earned value management computation formulas for determining the estimate to complete are defined. 2) Earned value credit criteria are established and 3) Define the WBS level at which earned value technique analysis will be performed. Reporting Formats the formats for the various cost reports are defined. Process Descriptions of each of the three cost management processes are documented. Pushpa Thapa

Three Cost Management Processes Cost Estimating Cost Budgeting Cost Control Cost management processes Cost estimating Cost budgeting Cost control Pushpa Thapa

Cost Estimating Cost estimating is a process of developing an approximation for the cost of the resources necessary to complete the project activities. Cost estimating also includes identifying and considering cost alternatives Cost estimating process is a part of “Project Planning Phase” ESTIMATED COST IS A ACTUAL COST OF THE PROJECT BUT THE BUDGET COST IS THE MONEY WHICH IS ALLOCATED TO THAT PROJECT OR A GUIDE LINE COST TO THAT PROJECT First you make estimate cost to make a decision for any project and than budget will be prepared which includes details of the cost involve to finish the project. Pushpa Thapa

Types of cost estimates Types of Estimates When Done Why Done How Accurate Rough order of Magnitude (ROM) Very early in the project cycle, often 3-5 years before project completion Provides rough ballpark of cost for selecting decisions -25%,+75% Budgetary Early, 1-2 years cost 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% An approximation, made with a degree of knowledge and confidence that the estimated figure falls within a reasonable range of values. Also called Rough Order of Magnitude. Pushpa Thapa

Cost Estimating Tools There are some tools and techniques used by professional project managers that you can use to develop more accurate cost estimates. Analogous Top-down Expert Judgment Comparison with other similar projects Less accurate than other tools Data driven Determine resource cost rates Analogous Estimating Analogous estimating uses historical data from similar projects as a basis for the cost estimate. The estimate can be adjusted for known differences between the projects. This type of estimate is usually used in the early phases of a project and is less accurate than other methods. Parametric Estimating Bottom-up estimating uses the estimates of individual work packages which are then summarized or "rolled up" to determine an overall cost estimate for the project. This type of estimate is generally more accurate than other methods since it is looking at costs from a more granular perspective. Reserve Analysis Reserve analysis is used to determine how much contingency reserve, if any, should be allocated to the project. This funding is used to account for cost uncertainty. Cost of Quality Cost of Quality (COQ) includes money spent during the project to avoid failures and money spent during and after the project due to failures. During cost estimation, assumptions about the COQ can be included in the project cost estimate. Project Management Estimating Software Project management estimating software includes cost estimating software applications, spreadsheets, simulation applications, and statistical software tools. This type of software is especially useful for looking at cost estimation alternatives. Vendor Bid Analysis Vendor analysis can be used to estimate what the project should cost by comparing the bids submitted by multiple vendors. Pushpa Thapa

Cost Estimating Tools Bottom- up Parametric Modeling Estimate made at the work package of the WBS and then rolled up Relatively more accurate Need sufficient information to make an accurate estimates Parametric Modeling Mathematical modeling Similar to analogous top-down Better to be used with historical info Project Management Software Vender Bid Analysis Pushpa Thapa

COnstructive COst MOdel(COCOMO) Size of software product is dependent upon the attributes of product length, functionality and complexity. Estimating software development costs developed by Barry Boehm (1981) Empirical and parametric modeling, parameters include source lines of code COCOMO II is a computerized model available in the WEB (1995,1997) Such parametric models do not suffer from the limits of human decision-making.  It is a combination of parametric estimation equation and weighting method. Based on the estimated instructions (Delivered Source Instructions DSI), the effort is calculated by taking into consideration both the attempted quality and the productivity factors. Pushpa Thapa

Cost Baseline Cost baseline is a time-phased budget that is used to measure and monitor cost performance in a project. Inputs for cost baseline WBS Task Schedule Cost Estimates Risk Management Plan Pushpa Thapa

Cost Control Measures Influencing the factor that causes changes to the cost baseline Ensuring all requested changes are agreed upon Managing the actual changes when and as they occur Assuring that potential cost overruns do not exceed the authorized funding periodically or in total for the project Monitoring cost performance to detect and understand variances from the cost baseline Recording all appropriate changes accurately against the cost baseline. Acting to bring expected cost overruns within acceptable limits Pushpa Thapa

Earned Value Analysis Any deviation in schedule, performance or cost from the plan or from the set standard is called variance. In order to identify variances, first of all we should understand the following basic terms: Budgeted cost of work scheduled (BCWS) Budgeted cost of work performed (BCWP), which is also called Earned Value Actual cost of work performed (ACWP) Pushpa Thapa

Cost Variance Cost Variance (CV) is the difference of Budgeted Cost of Work Performed (earned value) minus Actual Cost of Work Performed. It can be expressed as: CV = BCWP – ACWP, where negative variance indicates cost overrun. Pushpa Thapa

Schedule Variance Schedule Variance (SV) is the difference of Budgeted Cost of Work Performed (earned value) minus Budgeted Cost of Work Schedule. It can be expressed as: SV = BCWP – BCWS where negative variance indicates time overrun. Pushpa Thapa

Cost & Schedule Performance Cost performance Cost performance can be obtained by dividing earned value (BCWP) by Actual Cost of Work Performed (ACWP), which can be expressed as: Cost performance = BCWP/ACWP    Schedule performance Schedule performance can be obtained by dividing earned value (BCWP) by Budgeted Cost of Work Schedule (BCWS), which can be expressed as:   Schedule performance = BCWP/BCWS       Pushpa Thapa

Example 50 units of plantation have to be done in two weeks period. Per unit cost of plantation is estimated as Rs.200 of which progress monitoring was done one week after the work was started. Only 40 % work was found completed and the account record showed that the actual expenditure (cost) for plantation per unit was Rs. 250. Pushpa Thapa

Cost variance (CV) = BCWP – ACWP Here, BCWS = 25 * 200 = Rs. 5000 BCWP = 20 * 200 = Rs. 4000 ACWP= 20 * 250 = Rs. 5000 Now, Cost variance (CV) = BCWP – ACWP = 4000 – 5000 = - 1000 (Indicating cost overrun) Schedule variance (SV) = BCWP – BCWS = 4000 – 5000 = - 1000 (Indicating time overrun) Pushpa Thapa

One of the key parameters used in variance analysis, said Harold Kerzner, is the “Earned Value” concept, which is the same as BCWP. Earned value is a forecasting variable used to predict whether the project will finish over or under the budget. Cost performance = BCWP/ACWP = 4000/5000 = 0.80 Schedule performance = BCWP/BCWS Pushpa Thapa

Since the cost performance is 0.80, the final cost would be: 50 units * Rs 200)/0.80 = Rs. 12500 (instead of estimated Rs. 10,000) Since the schedule performance is 0.80, the time it requires for completion would be: 2 weeks/0.80 = 2.5 weeks (instead of scheduled time 2 weeks) Pushpa Thapa

S-Curve We can graphically present both the cost and schedule variances by using S–Curve, which is also used as one of the effective tool in project control. A display of cumulative costs, labor hours or other quantities plotted against time. The name derives from the S-like shape of the curve, flatter at the beginning and end and steeper in the middle, which is typical of most projects. The beginning represents a slow, deliberate but accelerating start, while the end represents a deceleration as the work runs out. Pushpa Thapa

Example Activity Cost (Rs.) Duration (Week) BCWS BCWP ACWP A 200 1 B 300 3 500 600 450 C 100 5 800 D 400 8 1000 E 10 1500 F 11 1800 Pushpa Thapa

S Curve Pushpa Thapa

S Curve Pushpa Thapa

Earned Value Management Earned Value Management (EVM) is a project management techniques for measuring project performance and progress in an objective manner. Earned Value Management helps project managers to measure project performance. It is a systematic project management process used to find variances in projects based on the comparison of worked performed and work planned. EVM is used on the cost and schedule control and can be very useful in project forecasting. EVM provides quantitative data for project decision making. Pushpa Thapa

Earned Value Management Pushpa Thapa

Thank You ESTIMATED COST IS A ACTUAL COST OF THE PROJECT BUT THE BUDGET COST IS THE MONEY WHICH IS ALLOCATED TO THAT PROJECT oR A GUIDE LINE COST TO THAT PROJECT First you make estimate cost to make a decision for any project and than budget will be prepared which includes details of the cost involve to finish the project. Pushpa Thapa