1. Project Cost Management Time is Money
PM-BOK Chapter 7
Manuel Guzman ■ Carlos Hurtado ■ Matthew Lyberg
Professor Kanabar May 20, 2005

2. PROCESS GROUPS Resource Planning Cost Estimating Cost Budgeting
Controlling C
Cost Control

3. Resource Planning
Determine physical resources, what quantities of each and when they would be needed to perform project activities.
Inputs
Tools
Outputs
WBS
Historical information
Scope statement
Resource pool description
Organizational policies
Activity duration estimates
Alternatives identification
Project management software
1. Resource requirements

4. Cost Estimating
Approximation of the resources needed to complete project activities.
Cost estimating and Pricing:
Cost estimating: how much will it cost the performing organization to provide the product or service involved?
Pricing: how much will the performing organization charge for the product or service? Business decision.
Estimating should be done by the person doing the work.

5. Cost Estimating Based on the WBS to increase the accuracy.
Inputs
Tools
Outputs
WBS
Resource requirements
Resource rates.
Act. duration est.
Historical info.
Chart of accounts
Risks
Analogous est.
Parametric modeling
Bottom-up est.
Cost estimates
Supporting details
Cost management plan
Based on the WBS to increase the accuracy.
Project managers should analyze the needs of the project, to compare and reconcile any differences with cost requirements from management.

6. Cost Estimating
Cost estimates for all resources that will be charged to the project.
Generally expressed in units of currency to facilitate comparisons both within and across projects.
Generally includes appropriate risk response planning.
Supporting detail must include:
Reference to WBS.
How it was developed?
Assumptions made.
Range of possible results.
Cost management plan how cost variances will be managed.

7. Cost Budgeting
Allocate the overall cost estimates to individual activities or work packages to establish a cost baseline for measuring project performance.
Inputs
Tools
Outputs
Cost estimates
WBS
Project schedule
Risk management plan
Cost budgeting tools and techniques
1. Cost baseline

8. Cost Budgeting
The cost baseline will be used to measure and monitor cost performance of the project.
Expected Cash Flow
Cumulative Values
Cost Baseline
Time

9. Estimates vs. Accuracy
Estimate
Accuracy
Order of Magnitude (Early)
-25%
+75%
Budget Estimate
-10%
+25
Definitive Estimate
-5%
10%
Most difficult to estimate as very little project info is available
Used to finalize the Request for Authorization (RFA), and establish commitment
Development stage estimate. Needed to predict revised project completion date

10. Tools for Estimating (and Budgeting)
Top Down Estimating
Accuracy depends on experience
Fast, but estimates are rough
Bottom Up Estimating
Slow, but reliable
High cost (time) / WBS needed
Buy-in from the team
Parametric Modeling
Mathematical models to predict costs
Two types: REGRESSION ANALYSIS, and LEARNING CURVE
Delphi Method (analogous)
Expert judgment
Tasks need not to be identified
Considerable experience needed

11. Cost Control Monitor Cost Performance
Detect and understand variances from plan
Ensure all changes are recorded and agreed upon
Prevent bogus changes from being included in cost baseline
Inform stakeholders of authorized changes
Bring costs within acceptable limits

12. Cost Control
Inputs
Tools
Outputs
Cost Baseline
Performance Reports
Change Requests
Cost Management Plan
Cost Change Control System
Performance Measurement
Earned Value Management
Additional Planning
Computerized Tools
Revised Cost Estimates
Budget Updates
Corrective Action
Estimate at Completion
Project Closeout
Lessons learned
Understand what is driving variances, good and bad, and decide what action to take.

13. Cost Control Work completion methods:
0/100  Conservation approach. No work, no money.
20/80  20% at start of the project, the rest when it is completed.
50/50  Liberal approach.

14. Cost Control: Earned Value Management
Integrates cost, time and scope. Used to forecast future performance and project completion dates
Key concepts:
EV = Earned Value (BCWP)
Estimated value of the work actually accomplished
PV = Planned Value (BCWS)
Estimated value of the work planned to be done
AC = Actual Cost (ACWP)
Actual cost incurred for the work accomplished

15. Earned Value Management
BAC = Budget At Completion
Estimated total cost of the project when done
EAC = Estimate At Completion
Forecast of most likely total project cost based on project
performance and risk quantification
CPI = Cost Performance Index
Ratio of budgeted costs to actual cost
SPI = Scheduled Performance Index

16. Earned Value Management
Key Formulas:
CV = Cost Variance = EV- AC
Negative is over budget, Positive is under budget
SV = Schedule Variance = EV- PV
Negative is behind schedule, Positive is ahead schedule
CPI = Cost Performance Index = EV / AC
SPI = Schedule Performance Index = EV / PV
EAC = Estimate At Completion =
BAC / CPI  Most often used formula
AC + ETC
AC + BAC - EV
AC + (BAC - EV) / CPI
EAC = Estimate At Completion = EAC - AC
VAC = Variance At Completion = BAC - EAC

17. Big Dig
Started construction on 1991 and planned completion by 1997 (6 years), it was to cost $3 Billion, the project included 6 highways ($0.5 Billion per highway/year)
At the end of the first year, 1/2 highway was completed and the cost was $2 Billion.
How is the performance of the project?
(Crappy is not a choice)

18. Big Dig: The Numbers EV = Earned Value = $0.25 Billion
$0.5/2
PV = Planned Value = $0.5 Billion
AC = Actual Cost = $2 Billion
BAC = Budget At Completion = $3 Billion

19. Big Dig: Performance CV = EV - AC = $0.25 - $2 = - $1.75 Billion
Over Budget by $1.75 Billion
SV = EV - PV = $ $0.5 = - $0.25 Billion
Behind of schedule
CPI = EV / AC = $0.25 / $2 = 0.12
Getting 0.12 cents out of every dollar budgeted
SPI = EV / PV = $0.25 / $0.5 = 0.50
50% of progress planned
EAC = BAC / CPI = $3 / 0.50 = $ 6 Billion

20. EVM Hints Rita Says: EV comes first in every formula
If it’s variance, the formula is EV – something
If it’s index, EV / something
If it relates to cost, use Actual Cost
If it relates to schedule, use PV
Negative numbers are bad, positive is good

21. Cost Types Direct Costs Related “Directly” to the project
ex. Labor hours, material, equipment, food, travel. . .
Indirect Costs
Overhead used for more than one project
ex. Building rent, taxes, janitorial services

22. Cost Types A cost by any other name, really isn’t the same! COST
Variable Cost – Changes with volume
Fixed Cost – Stay the same, regardless of volume
COST
Volume
TC = VC+FC VC FC

23. Cost Types Project Costs
Are incurred while the project is being fulfilled.
Life Cycle Costs
Includes the costs after project completion.
There may be temptation to lower project costs at the expense of long term costs. Life Cycle Costing gives the PM a way to consider costs outside of the scope of project fulfillment

24. Important Concepts Sunk Costs Forget ‘em, they’re gone
Law of Diminishing Returns
Situation when the more you put in, the less you get out
Working Capital
Current Assets (Cash, Inv, AR) – Current Liabilities (Notes, AP, Accr)

25. Cost and Project Selection
Present Value
Is $10,000 in your pocket now worth more than the $10,000 in your pocket one year from now?
Yes! You can use the money now to make more money. The 10,000 in a year from now should be “discounted” to the present, since it’s not worth as much.
“You do not have to be an accountant to Pass this Exam” Rita Mulcahy, PMP

26. Present Value of Your PMP Consulting Gig
Time
Income
Present Value
10,000 1
9,090 2
8,264 3
7,513 4
6,830
Total
50,000
41,697
“You do not have to calculate the PV, just understand it.” Rita Mulcahy, PMP

27. Net Present Value
NPV, like Present Value, discounts future cash flows to the present
PV of Revenue – PV of Costs

28. Net Present Value: Your PMP Gig
Time
Revenue
Present Value
Costs
PV of Costs
NPV
10,000
12,000
-2000 1
9,090
2,000
1,818
7,272 2
8,264
1,653
6,611 3
7,513
1,502
6,011 4
6,830
1,366
5,464
Total
50,000
41,697
20,000
18,339
23,358

29. Internal Rate of Return
What is the return on the money invested?
Expressed as percentage
Great for comparing between two projects of different value
Project A has an IRR of 21% and Project B has an IRR of 14%. Which would I choose?

30. Payback Period How long until we get the money back?
“Quick and Dirty” method for project selection
Does not take into account the Time Value of Money
Your Project costs $50,000, and the cash flow it will bring is $11,000 a year.
The Payback Period is years

31. Benefit Cost Ratio Compares the revenues to the costs
Revenue in this is the same as “payback”
1 is the magic number where costs = revenue
Less than 1, costs are greater than benefits
Greater than 1, and the benefits are greater than costs.
If Project A has a BCR of 2.2 and Project B has a BCR of 1.2, pick A.

32. PMP Exam Questions
If Earned Value (EV) = 300, Actual Cost (AC) = 450, Planned Value (PV) = 275, what is the Cost Variance (CV)?
a. 25
b.-150
c. 150
d. 175

33. PMP Exam Questions
If Earned Value (EV) = 300, Actual Cost (AC) = 450, Planned Value (PV) = 275, what is the Cost Variance (CV)?
a. 25
b.-150
c. 150
d. 175
CV = EV – AC
Negative is Over Budget
Positive is Under Budget

34. PMP Exam Questions
You have 4 projects from which to chose 1. Project A is a 5 year project with an NPV of $80,000. Project B is a 2 year project with an NPV of $40,000. Project C is a 4 year period and has an NPV of $50,000. Project D is being done over 1 year and has an NPV of $70,000.
Which Project should you chose?

35. PMP Exam Questions Project Time NPV A 5 yr $80,000 B 2 yr $40,000
C 4 yr $50,000
D yr $70,000
NPV already takes time into account, so you always pick the project with the highest NPV!

36. PMP Exam Questions
Early in the project you and your sponsor are discussing which estimation should be used. You want expert judgment, the sponsor wants analogous estimating. The best option is to
a. Agree to analogous – it’s a form of expert
b. Determine why the sponsor wants such an accurate estimate.
c. Try to convince the sponsor to allow expert judgment since it is usually more accurate.
d. Suggest life cycle as a compromise.

37. PMP Exam Questions a. Agree to analogous – it’s a form of expert
b. Determine why the sponsor wants such an accurate estimate.
c. Try to convince the sponsor to allow expert judgment since it is usually more accurate.
d. Suggest life cycle as a compromise.
Trick Question – Analogous Estimating is a form of expert judgment. Choice B seems tempting, but if you know that analogous estimation is not accurate, you realize this is a trap. A cruel and vicious trap, set for you by the PMP.

38. PMP Exam Questions Cost performance measurement is BEST done through:
a. Ask for a percent complete from each team member and reporting that.
b. Calculating the earned value and using the indexes and other calculations to report past performance and forecast future performance.
c. Using the 50/50 rule and making sure the life cycle cost is less than the project cost.
d. Focusing on the amount expended last month and what will be expended the following month.

39. PMP Exam Questions
Ask for a percent complete from each team member and reporting that.
Inaccurate because based on subjective guess.
b. Calculating the earned value and using the indexes and other calculations to report past performance and forecast future performance.
Objective measurements based on performance that can be applied to the future
c. Using the 50/50 rule and making sure the life cycle cost is less than the project cost.
50/50 rule isn’t always in the progress report, and the life cycle cost can never be lower than the project cost, since the life cycle goes on well, for life.
Focusing on the amount expended last month and what will be expended the following month.
Rookie Answer – usually for inexperienced since the past can’t always be used to tell the future.

40. Sources PMBOK Guide. PMI, Newton Square, PA. 2000, pp 83-95
PMP Exam Prep, Third Edition, Rita Mulcahy PMP. RMC publications, pp Exam Questions adapted from pps. 150 #3, 153 #24, 151 #9, 154, #31.
Preparing for PMP Exam, Vijay Kanabar. Boston, MA, Boston University. 2004, pp