1. 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 www.Inov8Solutions.com 7-1 Chapter 7 Project Cost Management

2. 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 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 www.Inov8Solutions.com 7-2

3. 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 www.Inov8Solutions.com 7-3 Process Overview Project Cost Management processes –Estimate Costs –Determine Budget –Control Costs Kamran Note: Animate elements from previous bullets, use better graphics for “}”, as you did in one of the previous chapters Next set of bullets are a recap of previous covered material. To appear when narration talks about them Recap of Project Management process groups Initiation Planning Execution Monitoring & Controlling Closing Planning Monitoring & Controlling

4. 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 www.Inov8Solutions.com 7-4 Project Cost Management Planning Cost Management Plan establishes criteria for Planning Estimating Budgeting Reporting Controlling project costs How cost variances will be managed Main outputs of this process are: –Activity Cost Estimates –Cost Performance Baseline Ability to influence cost is greatest at the early stages of the project

5. Cost vs. Time Estimates Time Management estimates ProjectAA1A2BB1 Cost Management 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 www.Inov8Solutions.com 7-5 ProjectAA1A2BB1 Work Package levelControl account level Kamran note: please animate this slide, can use better graphics.

6. 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 www.Inov8Solutions.com 7-6 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

7. 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) 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 www.Inov8Solutions.com 7-7

8. 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 www.Inov8Solutions.com 7-8 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 C M Optimistic C O Pessimistic C P As the narrator is reading the formula, animation should highlight or change color with arrows pointing to the appropriate formula part

9. 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 www.Inov8Solutions.com 7-9 Kamran note: Animate this page, narrator just needs to read the bullets as they appear

10. Bottom-up 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 www.Inov8Solutions.com 7-10 Kamran note: Animate this page, narrator just needs to read the bullets as they appear

11. 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% 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 www.Inov8Solutions.com 7-11

12. 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 www.Inov8Solutions.com 7-12

13. 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? a)Bottom-up estimate b)Parametric estimate c)Three-point estimate d)Top-down estimate Correct answer 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 www.Inov8Solutions.com 7-13

14. 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 a)+/- 10% b)+/- 50% c)+/- 20% d)+/- 25% Kamran note: correct answer 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 www.Inov8Solutions.com 7-14

15. 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 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 www.Inov8Solutions.com 7-15 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

16. 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 www.Inov8Solutions.com 7-16

17. 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 www.Inov8Solutions.com 7-17 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

18. 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 www.Inov8Solutions.com 7-18 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

19. 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 www.Inov8Solutions.com 7-19 Determine Budget 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

20. 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 www.Inov8Solutions.com 7-20 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 4 th 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

21. 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 www.Inov8Solutions.com 7-21 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 Kamran note: please add some animation which goes with the narration. Please suggest some animation ideas on this slide.

22. 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 www.Inov8Solutions.com 7-22 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 Kamran note: please add some animation which goes with the narration. Please suggest some animation ideas on this slide.

23. 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 www.Inov8Solutions.com 7-23 Control Costs 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

24. 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 www.Inov8Solutions.com 7-24 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

25. Review Quiz 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 www.Inov8Solutions.com 7-25

26. Review Quiz Analogous estimate is done using which technique? a)Aggregation b)Parametric c)Bottom-up d)Top-down Correct answer 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 www.Inov8Solutions.com 7-26

27. 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 www.Inov8Solutions.com 7-27 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

28. Earned Value Definitions 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 www.Inov8Solutions.com 7-28 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“

29. 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 www.Inov8Solutions.com 7-29 Earned Value Formulae NAMEFORMULAINTERPRETATION 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/ACWe 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

30. 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 www.Inov8Solutions.com 7-30 Earned Value Formulae NAMEFORMULAINTERPRETATION 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-ACHow 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?

31. End of Chapter Quiz 1 Project Budget includes all of the following EXCEPT a)Management reserve b)Aggregated estimates c)Contingency reserve d)Activity cost estimate Correct answer 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 www.Inov8Solutions.com 7-31

32. End of Chapter Quiz 2 Given following values CPI = 1.5, SPI = 1.3 Which statement is true a)Project is behind schedule and over budget b)Project is behind schedule and under budget c)Project is ahead of schedule and over budget d)Project is ahead of schedule and under budget Correct answer 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 www.Inov8Solutions.com 7-32

33. End of Chapter Quiz 3 Which of the following is correct definition of EVM? a)Analyze variance between actual vs. planned b)Authorizes budget increases c)Prevent unapproved changes d)Provides work performance measurements Correct answer 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 www.Inov8Solutions.com 7-33

34. End of Chapter Quiz 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? a)Identify other stakeholders who might be interested in the same report b)Send a report on how much money is spent so far? c)Create budget for project d)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 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 www.Inov8Solutions.com 7-34

35. End of Chapter Quiz 5 Control cost is done during which project management phase? a)Initiation phase b)Planning phase c)Execution phase d)Monitoring and controlling phase Correct answer 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 www.Inov8Solutions.com 7-35

36. Cost Management Recap In this chapter we discussed Cost Management processes and tools and techniques Estimate Cost Determine Budget Control Cost Types of costs Earned Value Management (EVM) EVM definitions EVM formulae 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 www.Inov8Solutions.com 7-36