1. Project Cost Management
Sections of this presentation were adapted from A Guide to the Project Management Body of Knowledge 3rd Edition, Project Management Institute Inc., © 2004

2. Project Cost Management
“The processes involved in planning, estimating, budgeting, and controlling costs so that the budget can be completed within the approved budget”

3. Why Do We Manage Cost?
Part of triple constraint, can’t manage one without the others (scope, time, and quality)
Plots of cost and scope against plan can help spot problems early
Cumulative Value
Time
Planned Value (PV)
Actual Costs (AC)
Earned Value (EV)
Today
Is this project over/under budget?
Is it ahead of/behind schedule?

4. Cost Management Key Terms
PV - Planned Value, estimated value of the planned work
EV – Earned Value, estimated value of work done
AC – Actual Cost, what you paid
BAC – Budget at Completion, the budget for the total job
EAC –Estimate at Completion, what is the total job expected to cost?
ETC – Estimate to Complete, forecasted costs to complete job
VAC – Variance at Completion, how much over/under budget do we expect to be?

5. How Do We Manage Cost? Three processes Cost Estimating Cost Budgeting
Cost Control
Cost Estimating
Cost Budgeting
Cost Control

6. Cost Estimating Inputs Tools & Techniques Outputs
Enterprise Environmental Factors
Inputs
Tools & Techniques
Outputs
Analogous estimating
Determine resource cost rates
Bottom up estimating
Parametric estimating
Project management software
Vendor bid analysis
Reserve analysis
Cost of quality
Organizational Process Assets
Activity Cost Estimates
Project Scope Statement
Activity Cost Estimates Supporting Detail
Work Breakdown Structure
Requested Changes
WBS Dictionary
Cost Management Plan Updates
Project Management Plan
Schedule Mgmt Pln
Staffing Mgmt Pln
Risk Register
Cost Estimating
Cost Budgeting
Cost Control

7. Estimating Methods
Analogous (Top Down) estimating – Managers use expert judgment or similar project costs [quick, less accurate]
Bottom-Up estimating – People doing work estimate based on WBS, rolled up into project estimate [slow, most accurate]
Parametric estimating – Use mathematical model (i.e. cost per sq ft). [accuracy varies] Two types:
Regression analysis – based on analysis of multiple data points
Learning Curve – The first unit costs more than the 100th, forecasts efficiency gains

8. Estimating Methods
Vendor Bid Analysis – Estimating using bids + allowances for gaps in bid scope [slow, accuracy depends on gaps]
Reserve Analysis – Adding contingency to each activity cost estimates as zero duration item [slow, overstates cost]

9. Cost Budgeting Tools & Techniques Outputs Inputs Cost aggregation
Reserve analysis
Parametric estimating
Funding limit reconciliation
Project Scope Statement
Cost Baseline
Work Breakdown Structure
WBS Dictionary
Project Funding Requirements
Inputs
Activity Cost Estimates
Activity Cost Estimates Supporting Detail
Cost Management Plan Updates
Project Schedule
Requested Changes
Resource Calendars
Contract
Cost Management Plan
Cost Estimating
Cost Budgeting
Cost Control

10. Cost Budgeting
Budgeting is allocating costs to work packages to establish a cost baseline to measure project performance
Remember Contingency items are for unplanned but required changes it is not to cover things such as:
Price escalation
Scope & Quality Changes
Funding Limit Reconciliation – Smoothing out the project spend to meet management expectations

11. Cost Control Inputs Tools & Techniques Outputs Cost Estimate Updates
Cost Baseline
Cost change control system
Performance measurement analysis
Forecasting
Project performance reviews
Project management software
Variance management
Cost Baseline Updates
Project Funding Requirements
Performance Measurements
Performance Reports
Forecasted Completion
Work Performance Information
Requested Changes
Approved Change Requests
Recommended Corrective Actions
Organizational Process Assets Updates
Project Management Plan
Project Management Plan Updates
Cost Estimating
Cost Budgeting
Cost Control

12. Earned Value
Progress is compared against the baseline to determine whether project is ahead of or behind plan
Percent complete can be difficult to measure, some managers use rules
50/50 Rule – Assumed 50% complete when task started, final 50% at completion
20/80 Rule – 20% at start
0/100 Rule – No credit until complete
Planned Value (PV) – Budgeted Cost
Earned Value (EV) – Actual work completed
Actual Cost (AC) – Costs incurred
Estimate to Complete (ETC) – What’s Left
Estimate at Completion (EAC) – What final cost will be

13. Earned Value Graph Planned Value (PV) Earned Value (EV)
Variance at Completion (VAC)
Target Cost & Schedule
Planned Value (PV)
Schedule Variance (Time)
Earned Value (EV)

14. Earned Value Formulas NAME FORMULA NOTES Cost Variance (CV) EV-AC
Negative = Over budget
Positive = Under budget
Schedule Variance (SV)
EV-PV
Negative = Behind Schedule
Positive = Ahead of Schedule
Cost Performance Index (CPI)
EV/AC
How much are we getting for every dollar we spend?
Schedule Perform Index (SPI)
EV/PV
Progress as % against plan
Estimate to Complete (ETC)
EAC-AC
How much more do we have to spend?
Variance at Completion (VAC)
BAC-EAC
At the end of the day, how close will we be to plan?
Estimate at Completion (EAC)
See following slide

15. Earned Value Formulas (Cont’d)
NAME
FORMULA
NOTES
Estimate at Completion (EAC)
BAC/CPI
Use if no variances from BAC have occurred
AC+ATC
Use when original estimate was bad. Actuals + New estimate
AC+BAC-EV
Use when current variances are not expected to be there in the future
AC+(BAC-EV)/CPI
Use when current variances are expected to continue

16. Barn Exercise
You have a project to build a new barn. The specs for building the barn are to construct 4 sides and then an angled roof. Each side of the barn is to take one day to build as is the roof. The budgeted amount is $2,000 per side and $2000 applied to the roof cost. The sides are to be completed one after the other. Today is the end of day four.

17. Tricks for Earned Value
EV is always first
Variance = EV minus something
Index = EV divided by something
If the formula relates to cost use AC
If the formula relates to schedule use PV
Interpreting results: negative is bad and positive is good
Interpreting results: greater than one is good, less than one is bad PV AC
ETC
EAC
BAC
Project Start
Current Status

18. Terms to Remember Present Value Working Capital
Net Present Value (NPV)
Internal Rate of Return (IRR)
Payback Period
Benefit Cost Ratio = BCR>1, Payback is greater than the cost
Opportunity Cost
Sunk Cost
Working Capital
Straight Line Depreciation
Accelerated Depreciation
Double Declining Balance
Sum of Years Digits
Value Analysis (Value Engineering)
You won’t be calculating most of these numbers on the test, just remember the concepts for general questions

19. Answers to Questions
1 – C
2 – D
3 – B
4 – A
5 – C
6 – B
7 – C
8 – A

20. Answers to Questions (Cont’d)