Inov8Solutions Inc – Quality Educational Services For Professionals

Inov8Solutions Inc – Quality Educational Services For Professionals
Chapter 7 Project Cost Management Keep in mind when going over this chapter, Time Management and Cost Management chapters should be studied together. Remember concepts introduced in the Time Management chapter can be used to answer Cost Management questions, and vice versa. This is especially true for estimation techniques Also keep in mind as a project manager you must keep track of your project cost as well as schedule to ensure you are within budget and schedule to complete your project successfully. With that in mind let’s start with Project Cost Management. PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 7-1

In this chapter we will cover
Cost Management Processes Types of Cost Earned Value Management (EVM) Cost baseline Cost budget Cost estimation tools and techniques Kamran Note: Narration text is to expand on the slide bullets, do not print narration on slide In general each bullet should appear when narrator reads the corresponding bullet In this chapter we will talk about Cost Management Processes You will be introduced to Project Cost Management processes. These processes constitute key steps a project manager takes to plan, track and control costs Types of Cost We will discuss various types of cost You will learn Variable vs Fixed and Direct vs Indirect Costs There could be exam questions testing your knowledge regarding these various types Earned Value Management or EVM EVM is a technique used to keep track of your cost and time These are powerful techniques to help you find out if your project will finish on time and within budget We will discuss how to calculate and use cost baseline Cost Budget calculation and use will also be covered Cost estimation tools and techniques Various cost estimation techniques will be discussed under this heading You can expect 12 questions on earned value with 6 of these requiring earned value calculations. PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 7-2

Cost Management Learning Objectives
By the end of this chapter, you should be able to: Explain the importance of Cost Management Name the Cost Management processes Explain the purpose of and activities involved in each process Describe the different techniques of estimating costs Explain the different types of cost Explain the concept of Earned Value Management and be able to perform EVM calculations By the end of this chapter, you should be able to: 1. Explain the importance of Cost Management 2. Name the Cost Management processes 3. Explain the purpose of and activities involved in each Cost Management process 4. Describe the different techniques of estimating costs 5. Explain the different types of cost 6. Explain the concept of Earned Value Management and be able to perform EVM calculations These objectives are given to make you aware of the knowledge you must gain from the material being presented in the chapter in order to do well on the exam. There will be questions interspersed between different topics, as well as a set of questions at the end of the chapter. The purpose of these questions is to help you strengthen your grasp of key concepts. You are strongly encouraged to answer these questions seriously so that you may assess any gaps you might have in your knowledge and understanding. PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 7-3

Process Group Review Process Groups are: Initiating Planning Executing Monitoring and Controlling Closing Before we delve into Cost Management, let’s review the 5 Process Groups. They are: Initiating Planning Executing Monitoring and Controlling and Closing PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 7-4

Cost Management Processes
Note for Kamran: Can this be animated so that each row is highlighted as it’s being mentioned in the narration? Process Process Group Plan Cost Management Planning Estimate Costs Determine Budget Control Costs Monitoring and Controlling The Cost Management processes are: Plan Cost Management – which is part of Planning Estimate Costs – which is part of Planning Determine Budget – which is part of Planning Control Costs – which is part of Monitoring and Controlling PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 7-5

Review Quiz Which one of the following is not one of the Cost Management Processes? Plan Costs Control Costs Estimate Costs Determine Budget The correct answer is A. Plan Costs is not one of the Cost Management Processes. PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 7-6

Plan Cost Management Define how to: manage costs, expend costs, and control costs Main output: Cost Management Plan * Ability to influence cost is greatest at the early stages of the Project. In Plan Cost Management, you would typically decide on How will costs be documented, managed, expended, and controlled? What estimation technique you will use – Top down or Bottom up? What level of accuracy is required for the estimates? Types of costs you will include on this project, for example direct and indirect costs? Budgeting requirements for example how much to leave aside for Management Reserve Reporting formats to be used How often to create reports and to whom these reports will be sent to? How to measure cost performance? Control thresholds and Cost change control procedures The main output of Plan Cost Management is the Cost Management Plan. The Cost Management Plan. Further details on the Cost Management Plan are provided on the next slide. Keep in mind that the ability to influence cost is greatest at the early stages of the project. As you can surely appreciate changes in the later stages mean undoing what was done until that point and re-doing the tasks again. This means it is critical to define scope at an early stage of the project. Remember: on the exam the “cost management plan” may also be called the “budget management plan” or “budget plan”. Whaterver term is used just remember the exam is referring to “cost management plan” PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 7-7

Plan Cost Management Class Group Activity – 30 Minutes Divide Class into 3 groups (3 to 4 students in each group) Discuss and brainstorm the inputs/outputs Present your inputs/outputs to the rest of the teams Check and compare your inputs/outputs with PMBOK® Guide 5th edition No notes. Class Activity Slide. PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 4-8

Cost Management Plan Cost Management Plan establishes criteria for Planning Estimating Budgeting Reporting Controlling project costs How cost variances will be managed The Cost Management Plan is the main output of Plan Cost Management. It is the blueprint for how costs will be planned, managed, expended, monitored, and controlled. The Cost Management Plan provides details on such important concepts as: Units of measure Level of precision How accurate the estimates need to be Rules for performance measurement Reporting formats PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 7-9

Cost vs. Time Estimates Kamran note: please animate this slide, can use better graphics. Time Management estimates Cost Management estimates Project A A1 A2 B B1 Project A A1 A2 B B1 The time management chapter talks about the identification of activities as smaller components of work packages. For many projects, activities are used to create cost estimates. On some large projects, however, it might be more practical to estimate and control costs at a different level. This level is called a control account. It is higher than the work package level in the WBS. Work Package level Control account level PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 7-10

Estimate Cost Considerations
Costing alternatives or trade-offs Make Vs. Buy, Buy Vs. Lease, sharing of resources Progressive Elaboration Estimates progressively refined Accuracy of project estimates increases Estimates are an iterative process Estimates include but are not limited to labor, materials, equipment, services and facilities Estimates are a prediction that is based on the information known at a given point in time. These predictions could be the result of a best guess or output of a formal calculation, over the next few slides we will introduce PMI terms for various estimation techniques. Some considerations to keep in mind when estimating costs Consider alternatives to see if there are cost saving opportunities. When adopting alternatives do keep in mind any risks or downstream side effects of your decisions. Trade-offs like Make vs. Buy or Buy vs. Lease could be considered. Can we share resources or equipment between projects? Remember when we said Planning is an iterative process? Estimates are refined during the course of a project, as a project matures accuracy of project estimates also increases. Keep in mind estimates are needed for cost of labor, materials, equipment, services and facilities amongst other things. PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 7-11

Estimate Costs Estimate Costs Cost of quality efforts (COQ) Cost of risk efforts Cost of the Project Manager’s time Cost of Project Management activities Costs directly associated with the project Office expenses Profit, when applicable Overhead costs (management salaries and general office expenses) When estimating costs do not forget to estimate for Cost of quality efforts which are the costs incurred to ensure quality. This covers cost of conformance and cost of non-conformance to quality plan. We will cover this topic in detail in the project quality management chapter. How much will the risk related activities cost us, these includes cost of risk evaluation, risk mitigation or risk acceptance. This topic will be discussed in detail in the project risk management chapter. Cost of the Project Manager’s time. Don’t forget you as a project manager are also a resource allocated to the project, for which budget has to be allocated. Cost of Project Management activities like team meetings and team development. Costs directly associated with the project. Also known as direct costs, examples are team travel, team wages and cost of material used on the project. Office expenses for physical office spaces used directly for the project How much profit we might make during the project and the impact it might have on our funding requirements? Cost of overheads like management salaries and general office expenses PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 7-12

Estimate Costs Class Group Activity – 30 Minutes Divide Class into 3 groups (3 to 4 students in each group) Discuss and brainstorm the inputs/outputs Present your inputs/outputs to the rest of the teams Check and compare your inputs/outputs with PMBOK® Guide 5th edition No notes. Class Activity Slide. PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 4-13

Estimate Costs Tools & Techniques
Analogous Estimating (Top-down Estimating) Actual costs from previous project Reliable when previous projects are similar and individuals have expertise Parametric Estimating Mathematical models Reliable when historical information is accurate, parameters are quantifiable and model is scalable 2 types: Regression analysis, Learning curve Bottom-up Estimating Rolling up individual activities into project total Smaller work activities have more accuracy Three-Point Estimates (PERT analysis) Most likely CM Optimistic CO Pessimistic CP In this slide we will discuss various types of estimation techniques, some you might recognize from the time management chapter. Analogous Estimating, also known as top down estimation, is when actual costs from previous projects are used to arrive at estimates for the current project. Top-down technique can only be used if Previous project is very similar and Team members have expertise in the subject area We will review the advantages / disadvantages of analogous estimating in the next slide. Parametric Estimating uses statistical relationships between historic data and other variables to predict cost and time estimates, usually with the help of software tools Estimates using parametric models are reliable when Historic information is accurate Parameters are quantifiable and Model is scalable We will shortly see examples of two types of parametric models, regression analysis and learning curve Bottom-up Estimating as we saw in the time management chapter, each activity at the root level of the WBS is estimated individually. These activity level estimates are rolled up to the account level and then to the Project node level to arrive at the budget of the project. As you can see bottom-up estimation consumes more time but is more accurate We will review the advantages / disadvantages of bottom-up estimating over the next few slides. Three-Point Estimates is a way to improve accuracy of single-point activity cost estimates. Also known as PERT technique uses three estimates (Most likely, Optimistic and Pessimistic estimates) to define an approximate range for an activity’s cost. PERT analysis calculates an expected (CE) activity cost using a weighted average of these three estimates. Memorize this formula, you might get an exam question asking to calculate PERT value given three estimates. You might employ software tools or spreadsheets as aids in estimation, which might use a mix of any or all of the above mention techniques. As the narrator is reading the formula, animation should highlight or change color with arrows pointing to the appropriate formula part PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 7-14

Review Quiz Three point estimates are used in which type of Cost Estimation technique? Top Down Estimating Analogous Estimating PERT analysis Bottom Up Estimating The correct answer is C. Three point estimates are used in PERT analysis. Top Down Estimating is the same as Analogous Estimating. PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 7-15

Analogous Estimating Kamran note: Animate this page, narrator just needs to read the bullets as they appear PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 7-16

Bottom-up Estimating Kamran note: Animate this page, narrator just needs to read the bullets as they appear PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 7-17

Accuracy of Estimates Rough Order of Magnitude (ROM) Estimates Project Initiating phase +/- 50% Budget Estimate Project Planning phase -10 to +25% Definitive Estimate Execution phase +/-10% Make sure you memorize these ranges as they can appear on the exam Rough order of magnitude estimates are made during project initiating phase and are plus minus fifty percent from actual Budget Estimates are made during project planning phase and range from minus 10 to plus 25 percent of actual Lastly Definitive Estimates are made during the final stages of the project and range from plus minus 10 percent from the actual Remember project planning is an iterative process where you are constantly revising your documents and procedures. PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 7-18

Cost Management Inputs and Outputs
Kamran note: Please take text from attached graphic and animate in an Exercise format, where we let students Drag and drop input/output in correct boxes Let’s discuss this on our next call PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 7-19

Review Quiz Pushed to make a high level decision, you are being asked for a quick estimate of the project, which technique will you use? Bottom-up estimate Parametric estimate Three-point estimate Top-down estimate Correct answer d Correct answer d Top-down or analogous estimate is a quick, but less accurate, method to provide estimates PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 7-20

Review Quiz While executing according to project management plan, a key stakeholder questions estimates asking their accuracy? Which of the following is the BEST response +/- 10% +/- 50% +/- 20% +/- 25% Kamran note: correct answer a Correct answer is a +/- 10% Remember estimates are refined during the life of the project here are the numbers you need to memorize Rough Order of Magnitude (ROM) Estimates +/- 50% Calculated during project initiating phase Budget Estimate -10 to +25% Project Planning phase Definitive Estimate +/-10% Execution phase Since we are in execution phase the closest answer is A PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 7-21

Determine Budget Aggregation of estimated costs Activity rolled up to work package Work package rolled up to control account And finally to Project cost level Kamran note: Take picture from next slide, animate this picture from bottom up Please change numbers and labels. Final picture should not look anything like The original Now that we have finished Estimating costs, we are in a position to find out the total budget of our Project. The process of adding up estimates is called aggregation. Starting from the bottom of the WBS Activity estimates are summed to get totals for the work package estimates Work package estimates are summed to get totals for control account estimates Finally control accounts roll up to arrive at the project estimate Contingency reserves are added to this project estimate to arrive at our cost baseline Finally adding Management reserves to the cost base line gives us our final budget PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 7-22

Determine Budget Class Group Activity – 30 Minutes Divide Class into 3 groups (3 to 4 students in each group) Discuss and brainstorm the inputs/outputs Present your inputs/outputs to the rest of the teams Check and compare your inputs/outputs with PMBOK® Guide 5th edition No notes. Class Activity Slide. PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 4-23

Determine Budget PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 7-24

Adding reserves Take project cost totals Add contingency reserve to achieve cost baseline Add management reserve to get the cost budget Establishes authorized baseline Funds authorized to execute the project Project cost performance will be measured against the baseline During execution used to measure if the project coming in over or under budget Once done with aggregation, don’t forget to add on reserves to the totals for the project. There are two types of reserves that need to be accounted for, we will re-visit these in the Risk Management chapter but briefly Contingency reserves and management reserves Contingency reserves: are allowances for unplanned but potentially required changes that can result from realized risks identified in the risk register. Management reserves: are budgets reserved for unplanned changes to project scope and cost. Add contingency reserve to project totals to determine cost baseline. Please note management reserves are not a part of the project cost baseline. Once determined and approved this will be the cost baseline against which project success or failure is measured against. Simply put project spending will be measured against this to determine if we are over or under budget. Finally management reserve may be added to the cost baseline to get the total budget for the project. Management reserves are not included as a part of the earned value measurement calculations. Please note cost baseline includes all authorized budgets, but excludes management reserves. You might be quizzed about this on the exam. PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 7-25

Cost Performance Baseline
Time phased budget to measure and monitor cost performance Developed by summing estimated costs by period (S curve of values Vs time) Larger projects have multiple baselines to measure different aspects of cost performance Kamran: include a nicer version of attached graphics The cost performance baseline is an authorized time-phased budget at completion used to measure, monitor and control overall costs performance on the project. View this as an S curve graph of cumulative cost values verses time. Where cost is the y-axis and time x-axis. So as time progresses the graph represents how much money your project is spending verses how much it should have been spending Keep in mind large projects might have multiple baselines to keep things simple. PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 7-26

Determine Budget Inputs and Outputs

Control Costs Overview
Kamran Note: Show Project Management Process Groups graphic while narrator is on the first few lines. Animate this graphic as was done in chapter 3 Graphic should appear with this source line “Source: PMBOK® Guide 4th edition Page 40” Graphic can disappear or become less significant once slide bullets start to appear Monitoring Costs Update the project budget Manage changes to the cost baseline Control cost process is done during the monitoring and controlling phase in conjunction with project execution. Remember from project management processes chapter, we discussed how project execution and monitoring and controlling are performed together? This is unlike the previous cost processes “estimate costs” and “determine budget” which if you remember were done during the planning phase. Control cost is the process of monitoring the project spending and making adjustments as necessary. Monitoring will be in the form of project spending reports and cost burn rate. Adjustments will be in the form of updates to project budget Keep in mind updates to project budget most probably will require changes to the cost baseline. PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 7-28

Control Costs Tools Earned Value Management (EVM) Analyze relationship between consumption and spending of project funds Recording actual costs spent to date Compare with planned spending Analyze variance between actual vs. planned Over or Under budget? Increase to the authorized budget Integrated Change Control Process Key to effective cost control Way to influence factors that create changes to the authorized cost baseline Earned value management is a tool used to control costs, it involves recording actual cost spending. The actual cost is then compared to what was planned to be spent to arrive at cost variance. This variance will indicate if we are over or under budget. We will discuss EVM in detail shortly over the next few slides. As a result of your EVM analysis you might realize your project is over spending and you need to request more money, when doing so remember any increase to the project have to be requested through the integrated change control process. Integrated change control process can be performed by the Integrated change control board who would review all changes and either approve or deny the requested changes. You can appreciate this gate keeper process is key to effective cost control and is a way to influence factors that create changes to the authorized cost base line. Kamran note: please add some animation which goes with the narration. Please suggest some animation ideas on this slide. PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 7-29

Control Costs Class Group Activity – 30 Minutes Divide Class into 3 groups (3 to 4 students in each group) Discuss and brainstorm the inputs/outputs Present your inputs/outputs to the rest of the teams Check and compare your inputs/outputs with PMBOK® Guide 5th edition No notes. Class Activity Slide. PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 4-30

Control Cost Considerations
Change request acted on in a timely manner Managing changes when and as they occur Act to bring expected cost overruns within acceptable limits Isolate and understand variances from approved cost baseline Preventing unapproved changes being included in reported cost resource usage Inform appropriate stakeholders of all approved changes and associated cost Some considerations to keep in mind to allow effectively perform control cost. Change requests as and when they occur have to be acted on in a timely manner as there might be cost implications of delaying your decisions. Changes should be actively managed as close to the source as possible. Aim is to contain cost overruns, bringing these within acceptable limits. If you have not guessed the purpose of control cost is to manage and contain cost overruns, while making sure necessary cost changes are approved and authorized in a timely manner. Last but not least do not forget to communicate approved changes to appropriate stakeholders. Kamran note: please add some animation which goes with the narration. Please suggest some animation ideas on this slide. PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 7-31

Control Costs Inputs and Outputs

Types of Cost Variable Cost Any cost that changes with the amount of production or amount of work E.g., cost of material, supplies, wages Fixed Cost Costs that do not change as production changes. E.g., set up cost, rentals, computers, etc.. Direct Cost Costs that are directly attributable to work on the project E.g., team travel, team wages, costs of material on project Indirect Cost Overhead items or costs incurred for the benefit of more than one project E.g., taxes, fringe benefits, costs of money and janitorial services Sunk Cost Money that has been spent in the past When deciding what projects to invest in or continue, sunk costs are not to be included This slide introduces various types of costs as they relate to project management. Questions from this topic could be as simple as reading a scenario and identifying what type of cost is being discussed Variable costs changes with the amount of work or production for example to produce more of an item you will need to purchase more raw materials. Money spent on raw material is an example of variable cost. Fixed costs on the other hand do not change as production quantities increase or decrease. You would pay the same amount of rent regardless if your factory produces for 5 hours or 12. This might not be true for example when your production levels need to surpass maximum capacity, in this situation your fixed cost might suddenly double. Spend some time comparing Variable vs. Fixed costs and to recognize situations where one type could me more appropriate. Direct costs are items like team wages, cost of material in other words, costs directly attributed to your project. Contrast this with Indirect costs which are costs shared by projects, for example janitorial services. Keep these differences in mind and you should be able to easily answer questions from this topic. Although not directly related to the above, it is worth mentioning Sunk costs since we are discussing types of costs. Sunk cost is the money that has been spent in prototype design or researching a project feasibility for example. Be careful when picking projects do not consider sunk costs. For example in deciding between project A and B, let’s pick A because we spend more money researching project A. Rather you should look at other tangibles like return on investment, market need or business opportunity. PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 7-33

Review Quiz Correct answer is c 6.33 days Remember the PERT formula, substitute appropriate values to calculate the estimate PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 7-34

Review Quiz Analogous estimate is done using which technique? Aggregation Parametric Bottom-up Top-down Correct answer d Correct answer d Top-down or analogous estimate is a quick, but less accurate, method to provide estimates PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 7-35

Earned Value Management (EVM)
Are we on schedule? Is the project within budget. Compare planned with actual to calculate variance +ve – ahead of schedule, under budget -ve – behind schedule, over budget Work is Earned or Credited as it is completed We have talked about earned value management (abbreviated EVM) as a tool used in cost control process, over the next few slides we will discuss this topic in detail. You can expect a few questions asking you to use EVM calculations to find out if a project is over or under budget or if it will be delivered ahead of time, on time or delayed. At it’s crux, EVM is used to answer two simple questions Are gong to finish on time? Are we on budget? At it’s simplest this is done by comparing “actuals” with “planned”. In other words once we reach a certain milestone we plan to have finished “X%” of work and spent “Y” amount of dollars. Now that we have achieved the milestone, how much work did we really finish and how much did we end up spending? Any variance shows up as negative or positive, negative being we are behind schedule and over budget and positive being ahead of schedule and under budget. Also it is worth mentioning work is earned or credited as it is completed. So say we were supposed to finish a task in 1 day but we actually finished on day 2, the work is marked completed or earned on day 2 when it actually finished. PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 7-36

Earned Value Definitions
Kamran note: please animate using the attached chart, starting with this comment “Before we show you the EVM formulae, let’s go over definitions of key terms“ PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 7-37

Earned Value Formulae NAME FORMULA INTERPRETATION Cost Variance – CV EV-AC Negative is over budget, Positive is under budget Schedule Variance – SV EV-PV Negative is behind schedule Positive is ahead of schedule Cost Performance Index – CPI EV/AC We are getting __$ out of every $1 Schedule performance Index – SPI EV/PV We are only progressing at __% of the rate originally planned Kamran note: Animate table, each row or column to appear as narrator introduces it. Same for next slide please You will have to memorize the definitions and formulae used in calculating EVM Keeping in mind definitions from previous slide, here are the formulae Cost variance, CV is earned value minus actual cost. This indicates by how much are we over or under budget at a given time during the project? Schedule variance, SV is calculated as earned value minus planned value This indicates if the project is expected to be on time or is behind schedule? Cost performance index, CPI is earned value divided by actual cost This indicates how much return are we getting for each dollar spent on the project Schedule performance index, SPI is earned value divided by planned value Indicates rate of progress as compared to plan PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 7-38

Earned Value Formulae NAME FORMULA INTERPRETATION Estimate at Completion – EAC BAC/CPI AC+ETC AC+(BAC-EV) AC+(BAC-EV)/(CPI*SPI) As of now, how much do we expect the total project to cost Note: For last formula, Rita has a mistake on pg 242 (CPI + SPI) Estimate to Completion – ETC EAC-AC How much more will the project cost Variance At Completion – VAC BAC-EAC How much over budget will we bet at the end of the project To-Complete performance Index - TCPI (BAC – EV) / (BAC – AC) In order to stay within budget, what rate must we meet for the remaining work? Estimate at completion, EAC is a tricky one with four possible ways to calculate. Depending on the values given in the question you will have to decide which formula to use to calculate EAC. So EAC is either Budget at completion, BAC divided by cost performance index, CPI Actual cost, AC plus estimate to completion, ETC Actual cost, AC plus the difference between budget at completion, BAC and earned value, EV Actual cost, AC plus BAC minus EV divided by CPI times SPI Estimate to completion, ETC is calculated as estimate at completion minus actual cost, AC Variance at completion, VAC is calculated as budget at completion, BAC minus estimate at completion, EAC To-complete performance index, TCPI is calculated as BAC minus EV divided by BAC minus AC PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 7-39

Chapter Summary Cost Management processes: Plan Cost Management Estimate Costs Determine Budget Control Costs Techniques for estimating costs Types of costs Earned Value Management (EVM) EVM definitions EVM formulae Here is a summary of the contents of this chapter: The Cost Management processes are: Plan Cost Management Estimate Costs Determine Budget Control Costs The main output of Plan Cost Management is the Cost Management Plan. The Cost Management Plan defines how costs will be planned, managed, expended, monitored, and controlled. In Estimate Costs, the costs that will be incurred in order to complete the activities of the project are estimated. Types of estimation techniques are: Analogous Estimating Parametric Estimating Bottom-Up Estimating Three-Point Estimating The Determine Budget process involves aggregating the estimated costs of individual activities to determine a cost baseline. The project performance related to cost will be determined against this cost baseline. Control Costs deals with monitoring the project with regard to cost, looking for variances from the cost baseline, and determining the actions necessary to bring the cost back in line. Types of costs are: Variable costs Fixed Costs Direct Costs Indirect Costs Sunk Costs Earned Value Management (EVM) is a methodology used to assess the project’s performance with regard to cost. Such measurements as Planned Value, Earned Value, and Actual Cost are used to determine cost performance. There are many formulas used to calculate indexes and variances to assess cost performance. PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 7-40

End of Chapter Quiz Question 1: Project Budget includes all of the following EXCEPT Management reserve Aggregated estimates Contingency reserve Activity cost estimate Correct answer a Correct answer a Project budget is calculated by adding the activity cost estimates, this process is also called aggregation. Once aggregation is done contingency reserve is added to account for any risk related activity Management reserve is not included in the budget so a is the correct answer. PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 7-41

End of Chapter Quiz Question 2: Given following values CPI = 1.5, SPI = 1.3 Which statement is true Project is behind schedule and over budget Project is behind schedule and under budget Project is ahead of schedule and over budget Project is ahead of schedule and under budget Correct answer d Both CPI and SPI have favorable values, correct answer is d PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 7-42

End of Chapter Quiz Question 3: Which of the following is correct definition of EVM? Analyze variance between actual vs. planned Authorizes budget increases Prevent unapproved changes Provides work performance measurements Correct answer a Correct answer is a, earned value management is used to analyze variance between actual vs planned cost and schedule Change control process is used to authorize budget increases and prevent unapproved changes. EVM consumes work performance measurements not provide them PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 7-43

End of Chapter Quiz Question 4: We have completed estimating activity for the project when senior management asks how we are doing on cost burn rate and request variance reports. What is the NEXT BEST thing to do? Identify other stakeholders who might be interested in the same report Send a report on how much money is spent so far? Create budget for project Understand reporting format required to report this information Kamran note: Allow user to select one choice and hit submit. After submission show correct answer and read narration Correct answer C Correct answer C – create budget for report This is a trick question, to answer correctly you need to understand cost management processes and dependencies We have just finished estimate cost process and need to create the budget to arrive at the baseline, only after we have this baseline and we are in execution are we able to report on variance. The next best thing to do is create budget. PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 7-44

End of Chapter Quiz Question 5: Control cost is done during which project management phase? Initiation phase Planning phase Execution phase Monitoring and controlling phase Correct answer d Control cost is done during Monitoring and controlling phase, correct answer is d PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 7-45

End of Chapter Quiz Question 6: Given the following values, what is the CPI? EV = 1000, CV = 500 100 -200 2 1.5 The correct answer is C. The formula for CPI is CPI = EV/AC. You have EV, but not AC. To get AC, you can use the formula for CV (Cost Variance) which is CV = EV – AC. Therefore, 500 = 1000 – AC. Therefore, AC = 500. Now you have EV and AC and you can calculate CPI. Therefore CPI = 1000/500, which is CPI = 2. PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 7-46

End of Chapter Quiz Question 7: The ratio that’s used to assess whether a project is on schedule is called: Time Variance Schedule Variance Estimate to Completion Schedule Performance Index The correct answer is D. The Schedule Performance Index is used to assess whether a project is on schedule. PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 7-47

End of Chapter Quiz Question 8: Which one of the following is not an estimation technique? Analogous Definitive Parametric Bottom-Up The correct answer is B. Definitive is not a type of estimation technique. PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 7-48

End of Chapter Quiz Question 9: Costs that change with the amount of work and that are directly attributable to project work would be classified as: Indirect and Fixed Variable and Accurate Fixed and Attributable Variable and Direct The correct answer is D. Costs that change with the amount of work are Variable. Costs that are directly attributable to the project work are Direct. PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 7-49

End of Chapter Quiz Question 10: The process in which costs are aggregated to obtain the overall cost for the project is: Estimate Costs Determine Budget Perform Aggregation Plan Cost Management The correct answer is B. The overall project cost is obtained in the Determine Budget process. PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 7-50

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