1. Project Cost Management
KEC
Dhapakhel, Lalitpur

2. 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
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3. 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.
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4. 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.
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5. 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
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6. 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
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7. 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.
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8. 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.
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9. Three Cost Management Processes
Cost Estimating
Cost Budgeting
Cost Control
Cost management processes
Cost estimating
Cost budgeting
Cost control
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10. 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.
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11. 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.
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12. 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.
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13. 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
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14. 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.
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15. 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
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16. 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
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17. 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)
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18. 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.
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19. 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.
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20. 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
   
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21. 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.
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22. 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 = (Indicating cost overrun)
Schedule variance (SV) = BCWP – BCWS
= – 5000 = (Indicating time overrun)
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23. 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
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24. Since the cost performance is 0.80, the final cost would be:
50 units * Rs 200)/0.80 = Rs (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)
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25. 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.
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26. 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
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27. S Curve
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28. S Curve
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29. 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.
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30. Earned Value Management
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31. 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