1. Project Cost Management Chapter 7
Organized By Khalid Aljehani & Riyad Bakedo.
Under the supervision of Dr. Naill Al Momani
KAU, EMBA Program PMP Course.
Fall 2010

2. Introduction:
Project Cost Management is the knowledge use for managing costs. Processes in this area help to ensure a project is completed within the approved budget
It includes the processes involving in estimating, budgeting and controlling costs.
These processes interact with each other and with processes in the other knowledge areas as well

3. Project Cost Management Overview :
Control Costs
Determine Budget
Estimate Costs

4. Definitions:
Estimate Costs-The process of developing an approximation of the monetary resources needed to complete project activates.
Determining Budget-The process of aggregating the estimated costs of individual activates or work packages to establish an authorized cost baseline.
Control Costs: The process on monitoring the status of the project to update the project budget and managing changes to the cost baseline.
Each process has specified:
Inputs,
Tools / Techniques
Outputs

5. Estimate Cost: 7.1 Estimate Cost 7.2 Determine Budget 7.3 Control Cost
Inputs
Scope baseline.
Project schedule.
Human Resource plan.
Risk register.
Enterprise environmental factors.
Organizational process assets.
Tools & Techniques
Expert judgment.
Analogous estimating.
Parametric estimating.
Bottom-Up estimating.
Three –point estimates.
Reserve analysis.
Cost of quality.
Project management estimating software.
Vendor bid analysis.
Out puts
Activity cost estimates.
Basis of estimates.
Project document updates.

6. Estimate Cost: Inputs Scope baseline
The scope baseline is the approved project scope statement, WBS, and WBS dictionary. These collectively provide the deliverables, statements of work, constraints, and assumptions that are necessary for accurate cost estimating.
 Project schedule
The project schedule specifies the planned start and finish date for each scheduled activity.
Human resource plan
The human resource plan contains details regarding the how the project will be staffed and the labor rates for estimating costs

7. Estimate Cost: Inputs Enterprise environmental factors
Factors beyond the project’s boundaries impact costs, including marketplace conditions and the pool of available suppliers.
Organizational process assets
Lessons learned, project files, and historical information from the organization are crucial for good estimates.

8. Estimate Cost: Tools & Techniques
Expert judgment, relies on historical experience to assess and adjust estimates.
Analogous estimating uses the costs from similar projects or activities as the basis for the current project.
Parametric estimating uses mathematical formulas to derive estimates.
Bottom-up estimating decomposes activities to the lowest level possible for cost estimating purposes, and then aggregates component costs back up to a summary activity level

9. Estimate Cost: Tools & Techniques
Three-point estimates (PERT analysis), help to remove the uncertainty from estimates by providing a weighted average using the pessimistic, optimistic, and most-likely values. The Formula:
(Optimistic Estimate + (4 x Most-Likely Estimate ) + Pessimistic Estimate) 6
 Example:
Optimistic Most Likely Pessimistic
$ $ $150
Three-point estimate = ($75 + (4 x $100) + $150) / 6
Three-point estimate = $104.17

10. Estimate Cost: Outputs
Activity cost estimates , are a complete accounting of all component costs, such as labor, resources, services, fees, licenses, of a scheduled activity.
Basis of estimates, is the supporting detail to the activity cost estimates including the references for cost estimate, considered assumptions, constraints, range of accuracy, and the confidence level in the estimate.
Project document updates, the process of estimating costs can result in updates to several project documents, including the WBS, and the WBS dictionary.

11. Estimate Cost Data Flow Diagram:

12. Determine Budget: 7.1 Estimate Cost 7.2 Determine Budget
7.3 Control Cost
Inputs
Activity cost estimates.
Basis of estimates.
Scope baseline.
Project schedule.
Resource calendars.
Contracts.
Organizational process assets.
Tools & Techniques
Cost aggregation.
Reserve analysis.
Expert judgment.
Historical relationships.
Funding limit reconciliation.
Out puts
Cost performance baseline.
Project funding requirements.
Project document updates.

13. Determine Budget: Tools & Techniques
Cost aggregation, Individual costs are aggregated in many different ways for budgeting purposes, including at the work package, deliverable, summary activity, or other classification levels.
Reserve analysis , are time or cost buffers in the project schedule or budget that help the project respond to uncertainties
Expert judgment, is based upon the experience and knowledge of subject matter experts.

14. Determine Budget: Tools & Techniques
Historical relationships, refers to the characteristics of the current and past projects that can be used to develop models that aid in budgeting.
Funding limit reconciliation, matches the project's planned need for funding with the organization's ability to provide that funding

15. Determine Budget: Outputs
Cost performance baseline is a time-phased budget that is used for project cost management, monitoring, and reporting.  It is commonly shown as an S-curve graph.
Project funding requirements, refers to the entire estimated cost of the budget, including any contingency or management reserves.  

16. Determine Budget:
Cost performance baseline

17. Estimate Cost Data Flow Diagram:

18. Control Costs: 7.1 Estimate Cost 7.2 Determine Budget 7.3 Control Cost
Inputs
Project management plan.
Project funding requirements.
Work performance information.
Organizational process assets.
Tools & Techniques
Earned value management.
Forecasting.
To – complete performance index.
Performance reviews.
Variance analysis.
Project management software.
Out puts
Work performance measurement.
Budget forecasts.
Organizational process assets update change requests.
Project management plan updates project document updates.

19. Control Costs:
Inputs
Project management plan , includes the cost management plan which describes how project costs will be managed, reported on, and controlled. The cost performance baseline is also part of the project management plan, and it’s used to compare actual costs to planned costs.
Project funding requirements, refers to the entire estimated cost of the budget, including any contingency or management reserves. It’s used to compare actual costs to planned costs.

20. Control Costs:
Inputs
Work performance information , is any data that related to the work which produces the project deliverables. Examples are schedule and progress status information, budget and cost status, quality status, estimates to complete, resource utilization information, and lessons learned.
Organizational process assets , are the source of existing policies, processes, organizational data and knowledge.  The organization may have cost-related policies, procedures, and reporting methods that must be followed. .

21. Control Costs: Tools & Techniques
Earned value management, measures the performance of the project. It also provides a way to forecast future performance based on what's happened so far with the project.
Forecasting, involves predicting future performance based on historical work performance information and expert judgment.
To-complete performance index (TCPI), is a formula that provides the level of performance that must be achieved to meet either the budget at completion (BAC) or the estimate at completion (EAC).

22. Control Costs: Tools & Techniques
Performance reviews, are assessments that analyze the project’s historical cost performance. It includes earned value measurements, variance analysis, and trend analysis.
Variance analysis, compares expected cost performance to what is actually occurring, and determines the causes of any variance uncovered.
Project management software, automated tools can help in monitoring, tracking, and reporting on earned value measurements.

23. Control Costs: Outputs
Work performance measurements includes work performance information that specifically provides mathematical measurements of performance that is communicated to stakeholders. It may also report on earned value values for WBS components or control accounts within the WBS.
Budget forecasts on the project’s expected completion cost and variances is documented and provided to stakeholders throughout the project.

24. Control Costs: Outputs
Organizational process assets updates for the lessons learned, corrective actions taken and the reasons, and the causes of financial variances.
Change requests to the cost baseline as required

25. Estimate Cost Data Flow Diagram:

26. Control Costs Formulas:
Acronym
Name
Formula AC
Actual Cost
AC = actual cost of the project up to the measurement period
BAC
Budget at Completion
BAC = total budgeted cost of the project EV
Earned Value
EV = Actual % complete x BAC PV
Planned Value
PV = Planned % complete x BAC CV
Cost Variance
CV = EV - AC

27. Control Costs Formulas:
Acronym
Name
Formula SV
Schedule Variance
SV = EV - PV
CPI
Cost Performance Index
CPI = EV / AC
SPI
Schedule Performance Index
SPI = EV / PV
EAC
Estimate at Completion
EAC = BAC / CPI
ETC
Estimate to Complete
ETC = EAC - AC
VAR
Variance at Completion
VAR = BAC - EAC

28. Control Costs Formulas:
Example:
Planned work complete = 80%
Actual work complete = 75%
4-month project
(BAC) =
1,000,000
M 1
M 2
M 3
M 4
   •4-month project: Total budget $1,000,000 = Budget at completion (BAC)
   •Project cost at end of month three: $950,000 = Actual cost (AC)
   •Estimated work complete at end of month three: 80%
   •Actual work complete at end month three: 75%

29. Control Costs Formulas:
Planned value
 PV = Planned % Complete x BAC
PV = 80% x $1,000,000 = $800,000
Earned value
EV = Actual % Complete x BAC
EV = 75% x $1000,000 = $750,500
Cost variance
CV = EV – AC
CV = $750,000 - $950,000 = -$200,000 
Planned Value (PV) is how much work was expected to be completed
Earned Value (EV) is how much work has actually been completed
Cost Variance (CV) is how the cost of the project is comparing to the value of work completed

30. Control Costs Formulas:
Cost performance index
 CPI = EV / AC
 CPI = $750,500 / $950,000 = 0.79
For every $1 input (cost) , we are earning only $0.8 in work output
Cost Performance Index (CPI) shows how much work is being completed for every unit of cost spent (Output/Input)

31. Control Costs Formulas:
Schedule performance index
SPI = EV / PV
SPI = $750,500 / $800,000 = 0.94
 For every hour we planned , we are completing only 0.94 hours.
Schedule Performance Index (SPI) shows how close the actual completed work compared to the schedule

32. Control Costs Formulas:
Estimate at completion
EAC = BAC / CPI
EAC = $1000,000 / 0.94 = $1,063,829
Based on current performance, the project
will be completed at cost = $1,063,829.
Estimate to complete
ETC = EAC - AC
ETC = $1,063, ,000 = $113,829
Based on current performance, the project
requires $113,829 to get it finished
Estimate At Completion (EAC) forecasts the total cost of the project based on current project performance
Estimate To Complete (ETC) forecasts how much more money will be required to finish the project

33. Control Costs Formulas:
Variance at completion
VAR = BAC – EAC
VAR = $1,000,000 - $1,063,829 = -$63,829
Based on current performance, the project will
run about $63,829 over budget
Variance At Completion (VAR) predicts difference between the budgeted and actual project cost at the end of the project

34. Thank You
Thank You

35. PMP Preparation Questions
Organized By Khalid & Riyad.
Under the supervision of Dr. Naill Al Momani
KAU, EMBA Program PMP Course.
Fall 2010

36. Q&A: WBS Element PV EV AC P $1,000 $1,100 $1,150 Q $2,000 $1,800
$2,100 R
$1,200
$1,050 S
$1,900
Using the table above, the cost performance index (CPI) for WBS Element R is: a
b. 1.14 c d
1. b
CPI = EV / AC
CPI = 1200 / 1050
CPI = 1.14

37. Q&A: WBS Element PV EV AC P $1,000 $1,100 $1,150 Q $2,000 $1,800
$2,100 R
$1,200
$1,050 S
$1,900
2. Using the table above, which WBS element is over budget and behind schedule? (important)
a. Element P
b. Element Q
c. Element R
d. Element S
2. b
CV = EV – AC = 1800 – 2100 = -300 (over budget)
SV = EV – PV = 1800 – 2000 = -200 (behind schedule)

38. Q&A: WBS Element PV EV AC P $1,000 $1,100 $1,150 Q $2,000 $1,800
$2,100 R
$1,200
$1,050 S
$1,900
3. Using the table above, which WBS element has a favorable cost variance of $150?
a. Element P
b. Element Q
c. Element R
d. Element S
  3. c
CV = EV – AC = 1200 – 1050 = 150 favorable variance

39. Q&A:
4. The work breakdown structure, the work packages, and the company’s accounting system are tied together through the:
a. Chart of accounts
b. Overhead rates
c. Budgeting system
d. Capital budgeting process
4. a

40. Q&A:
5. Management reserves are normally defined as a percentage of the total budget. As a project goes through its life cycle phases, the project manager wants the dollar value of the management reserve to ___________, whereas the customer wants the dollar value of the management reserve to ___________.
a. Increase, increase
b. Increase, decrease
c. Decrease, increase
d. Remain the same, be returned to the customer
5. d

41. Q&A:
6. Which of the following types of cost are not relevant to making project financial decisions:
a. Sunk cost
b. Opportunity cost
c. Material cost
d. Labor cost
6. a

42. Q&A:
7. Upon completion of 75% of the project, the original schedule and cost estimate that were submitted at the inception of the project are referred to as the:
a. Baseline
b. Budgeted costs
c. Estimates upon completion costs
d. Scheduled costs
7. a

43. Q&A:
8. Which of the following would increase the accuracy of estimating the project cost?
a. Pricing out the work at higher levels in the work breakdown structure
b. Using historical data from a non similar project
c. Talking to people who have worked on similar projects
d. Intuition
8. c

44. Q&A:
Direct Labor
Direct Material
Planned price/unit
$10.50
$14.77
Actual units/hour
6374 hours
5433 units
Actual cost
$68,329
$83,994
Actual price/unit
$10.72
$15.46
9. Using the table Above, the labor rate cost variance is:
a. $66,927.00
b. $68,329.00
c. $386.00
d. ($0.22)
9. d
Labor Rate Cost Variance = Planned Cost (BAC) – Actual Cost (AC)
Labor Rate Cost Variance = – 10.72
Labor Rate Cost Variance = -0.22

45. Q&A:
10. What tool have project managers come to use to identify the costs associated with a project?
a. A bill of materials
b. A Gantt chart
c. An arrow diagram network
d. A work breakdown structure
10. d

46. Q&A:
11. Cost estimating:
A. Involves developing an estimate of the costs of the resources needed to complete project activities. B. Includes identifying and considering various costing alternatives. C. Involves allocating the overall estimates to individual work items. (cost budgeting) D. A and C E. A and B
11. e

47. Q&A: 12) Which type of project cost estimate is the most accurate?
A) Preliminary
Definitive
Order of magnitude
Conceptual
12. B

48. Q&A:
13) )Cost budgeting can be best described by which of the following?
A) The process of developing the future trends along with the assessment of probabilities, uncertainties, and inflation that could occur during the project
B) The process of assembling and predicting costs of a project over its life cycle
C) The process of establishing budgets, standards, and a monitoring system by which the investment cost of the project can be measured and managed
D) The process of gathering, accumulating, analyzing, reporting, and managing the costs on an on-going basis
13. C

49. Q&A:
14) ) Cost controls can be best described by which of the following?
A) The process of developing the future trends along with the assessment of probabilities, uncertainties, and inflation that could occur during the project
B) The process of assembling and predicting costs of a project over its life cycle
C) The process of assembling and predicting costs of a project over its life cycle
D) The process of gathering, accumulating, analyzing, reporting, and managing the costs on an on-going basis.
14. D

50. Q&A:
15) ) Three Point Statistical Estimating Formula Group. Expected Value =
A) (Optimistic + (4 X Most Likely) + Pessimistic ) x 6
B) (Optimistic + (4 X Most Likely) + Pessimistic ) divided by 6
C) (Optimistic + (4 X Most Likely) x Pessimistic ) divided by 6
D) Optimistic + (4 + Most Likely) + Pessimistic ) divided by 6
15. B

51. Q&A: 16) ) Which is not a technique used for cost estimation :
A) Analogous Estimating
Bottom-up Estimating
C) Parametric Estimating
D) Vendor Bid Analysis
E) Resource Leveling
16. E