1. Project Management – PTM712S
Faculty of Computing and Informatics
14 August 2017
Project Management – PTM712S
Lesson 7 – Project cost management

2. Project cost management
Faculty of Computing and Informatics
Project cost management
Project cost management and processes
Basic principles of cost management
Resource planning
Cost estimating
Cost budgeting
Cost control
Earned value management

3. Project cost management
Faculty of Computing and Informatics
Project cost management
Cost is a resource sacrificed or forgone to achieve a specific objective
Project cost management is a process required to ensure that a project team completes a project within an approved budget

4. Project cost management processes
Faculty of Computing and Informatics
Project cost management processes
Resource planning: people, equipment, materials a project team should use to perform activities and quantities of each resource – Resource list
Cost estimating: approximate cost of resources needed to complete a project – Cost management plan

5. Project cost management processes
Faculty of Computing and Informatics
Project cost management processes
Cost budgeting: involves allocating overall cost estimate to individual work items to establish a baseline for measuring performance – Cost baseline
Cost control involves controlling changes to the project budget – Revised cost estimates

6. Basic principles of cost management
Faculty of Computing and Informatics
Basic principles of cost management
Profits – revenue minus expenses
Profit margin – ratio between revenue and profit, i.e. if N$ 100 generates N$2 in profit, there is a 2% profit margin
Life cycle costing – an accurate projection of a project’s financial benefits. Total cost of ownership or development plus support costs

7. Basic principles of cost management
Faculty of Computing and Informatics
Basic principles of cost management
Cash flow analysis – determining the estimated annual costs and benefits for a project and resulting annual cash flow
Internal rate of return – the discount rate that makes net present value equal to zero. It is also called Time-adjusted-rate –of-return
Tangible costs – costs or benefits that can easily be measured

8. Basic principles of cost management
Faculty of Computing and Informatics
Basic principles of cost management
Tangible costs – costs or benefits that can easily be measured in monetary terms
Intangible costs – costs and benefits that are difficult to measure in monetary terms
Direct costs – costs related to a project that an organisation can trace back in a cost-effective way, e.g. salaries

9. Basic principles of cost management
Faculty of Computing and Informatics
Basic principles of cost management
Indirect costs – costs related to a project that an organisation cannot trace back in a cost-effective way, e.g. electricity costs, paper
Sunk cost – money that has been spent in the past
Learning curve theory – when many items are produced repetitively, the unit cost of these items decreases in a regular pattern as more units are produced

10. Basic principles of cost management
Faculty of Computing and Informatics
Basic principles of cost management
Learning curve theory – when many items are produced repetitively, the unit cost of these items decreases in a regular pattern as more units are produced
Reserves – money included in a cost estimate to mitigate cost risk but allowing for future situations that are difficult to predict

11. People, equipment and materials
Faculty of Computing and Informatics
Resource planning
Resource planning is:
What physical resources and in what quantities are required to complete the project?
People, equipment and materials

12. Types of cost estimates
Faculty of Computing and Informatics
Types of cost estimates
Rough order of magnitude (ROM) estimate – provides a rough idea of what a product will cost
Budgetary estimate – is used to allocate money into an organisation’s budget (10-25% more than budget estimate)
Definitive estimate – an accurate estimate of project costs
Cost management plan – a document that describes how the organisation will manage cost variances on the project

13. Types of cost estimates
Faculty of Computing and Informatics
Types of cost estimates

14. Cost estimation tools and techniques
Faculty of Computing and Informatics
Cost estimation tools and techniques
Analogous estimates / top-down estimates– use the actual cost of a previous similar project as a basis for estimating the cost of current project
Bottom-up estimating– estimating individual work items
Parametric modelling– project characterization (parameters) in a mathematical model to estimate project costs, e.g. $150 for a line of code
Constructive cost model (COCOMO) uses lines of code

15. Typical challenges with IT cost estimates
Faculty of Computing and Informatics
Typical challenges with IT cost estimates
Estimates are done too quickly
Lack of estimating experience
Human beings are biased toward underestimation
Management desires accuracy
Order of Magnitude or Budgetary estimates carried over without thorough review

16. Faculty of Computing and Informatics
Cost budget
Involves allocating the project cost estimate to individual work items.
These items are based on WBS

17. Cost budget estimate Faculty of Computing and Informatics
Budget category
Estimated costs
Explanation
Headcount 13
Including 9 programmers, 2 systems analysts and 2 technicians
Remuneration
N$2, 000, 000
Assumes a pay increase of 4% in June
Consultants
N$500,000
To support Project Accounting and auditing; maintenance of infrastructure
Travel
N$25, 000
Incidental travel expenses
Rent /lease
N$100, 000
Lease of computing platforms
Other suppliers
Incidental expenses associated with training and rewards
Total costs
N$2, 725,000

18. Faculty of Computing and Informatics
Cost control
Monitoring cost performance ensuring that only appropriate project changes are included in a revised cost baseline and informing project stakeholders of unauthorized changes to project will affect costs
The tool for measuring cost performance is called:
EARNED VALUE MANAGEMENT (EVM)

19. Earned value management (EVM)
Faculty of Computing and Informatics
Earned value management (EVM)
Earned value management (EVM) is a project performance measurement technique that integrates scope, time and cost data
It calculates 3 values for each activity
- the planned value (PV) – budgeted cost of work scheduled
- the actual cost (AC) – actual cost of work performed
- the earned value (EV) – budgeted cost of work performed

20. Earned value management terms
Faculty of Computing and Informatics
Earned value management terms
The planned value (PV), formerly called the budgeted cost of work scheduled (BCWS), also called the budget, is that portion of the approved total cost estimate planned to be spent on an activity during a given period
Actual cost (AC), formerly called actual cost of work performed (ACWP), is the total of direct and indirect costs incurred in accomplishing work on an activity during a given period
The earned value (EV), formerly called the budgeted cost of work performed (BCWP), is an estimate of the value of the physical work actually completed
EV is based on the original planned costs for the project or activity and the rate at which the team is completing work on the project or activity to date

21. Faculty of Computing and Informatics
Rate of performance
Rate of performance (RP) is the ratio of actual work completed to the percentage of work planned to have been completed at any given time during the life of the project or activity
Approach for estimating earned value is as follows:
For example, suppose the server installation was halfway completed by the end of week 1: the rate of performance would be 50% because by the end of week 1, the planned schedule reflects that the task should be 100 percent complete and only 50 percent of that work has been completed

22. Earned value management calculations
Faculty of Computing and Informatics
Earned value management calculations
Activity
Week 1
Formula
Earned value (EV)
7500
EV=PV to date X performance completed
Planned value (PV)
10,000
CV=EV-AC
Actual cost (AC)
15,000
SV=EV-PV
Cost variance (CV)
-7,500
CPI = AV/AC
Schedule variance (SV)
-2,500
SPI = EV/PV
Cost Performance Index (CPI)
50%
Schedule Performance Index (SPI)
75%
Estimate at completion (EAC) – estimated time to complete
Original time estimate / SPI

23. Earned value management terms
Faculty of Computing and Informatics
Earned value management terms
Cost variance (CV) – the difference between the estimated cost of an activity and the actual cost of that activity. If CV is positive it means performing work cost less than planned
Scheduled variance (SV) – the difference between the scheduled completion of an activity and the actual completion of that activity. A negative CV means it took longer than planned to perform work and a positive CV means it took less time

24. Earned value management terms
Faculty of Computing and Informatics
Earned value management terms
Cost performance index (CPI) – is the ratio of earned value to the actual cost and can be used to estimate the project cost of completing the project.
If CPI = 100% the planned and actual cost are equal and exactly as budgeted;
if CPI is less than 100%, the project is over the budget.
If CPI is more than 100% the project is under the budget

25. Earned value management terms
Faculty of Computing and Informatics
Earned value management terms
Scheduled performance index (SPI) – is the ratio of earned value to the planned value and can be used to estimate the projected time to complete project
SPI of 100% means project is on schedule
SPI greater than 100% means project is ahead of schedule
SPI is less than 100% then project is behind schedule

26. Earned value management terms
Faculty of Computing and Informatics
Earned value management terms
Estimate at completion (EAC) – an estimate of what it will cost to complete the project based on performance to date
Budget at completion (BAC) – the original total budget for project

27. Determining the budget
Faculty of Computing and Informatics
Determining the budget
Cost budgeting involves allocating the project cost estimate to individual work items over time
The WBS is a required input to the cost budgeting process since it defines the work items
Important goal is to produce a cost baseline -
a time-phased budget that project managers use to measure and monitor cost performance

28. Project cost control includes: -Monitoring cost performance
Faculty of Computing and Informatics
Controlling costs
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
Many organizations around the globe have problems with cost control

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