1. TK3333 Software Management
Topic 9:
Cost Planning and Performance

2. Contents Prepare a baseline budget Cumulate actual costs
Determine the earned value of work performed
Analyse cost performance
Forecast project cost at completion
Control project costs
Manage cash flow 2 2 2 2 2 2 2 2 2

3. Real World Example Vignette: eBay
eBay understands the importance of analyzing project data to produce performance indicators.
eBay’s mission is to provide a trading platform for people all over the world. They do this by continually improving the user’s experience on the eBay site.
Decisions for change are based on measurable factors like the number of visitors to the site, length of time customers spend on eBay, busiest day of the week for eBay transactions, etc.
Managers regularly collect data from the site to develop new marketing and merchandising techniques. This mentality has helped eBay to continually improve the buy-sell process for eBay customers.
Project managers should understand the value of measurable factors, and apply them to make responsible decisions about their projects. 3 3 3 3 3 3 3 3 3

4. Real World Example Vignette: London Traffic
Ken Livingstone was London’s first directly elected mayor in He created Transport for London to oversee the city’s road and transport services that were previously managed separately. Mission: to upgrade London’s transportation infrastructure with a toll system project.
Traffic congestion is a major problem for central London. Transport for London developed a plan to install a system that would identify and charge car owners that enter defined congestion zones.
Technological risks were identified, and the project was divided into 5 smaller components (to be managed separately, as opposed to purchasing one large system).
Project team worked together in one location on the five components to the system.
The project was successfully implemented by February Transport for London reports that traffic in the congestion zone has decreased by 20%, with a 5% increase during travel times.

5. Project Cost Estimates
Cost planning starts with the proposal.
The cost section may include:
Labor
Materials
Subcontractors and consultants (if used)
Equipment and facilities rental
Travel

6. Project Budgeting: Two Steps
The project cost estimate is allocated to the various work packages in the project work breakdown structure.
The budget for each work package is distributed over the duration of the work package. 5 5 4 5 4 5 4 4 4

7. Step 1: Allocating the Total Budgeted Cost
Allocating total project costs for the various elements to the appropriate work packages will establish a total budgeted cost (TBC) for each work package.
There are two approaches to establishing the TBC for each work package: top-down and bottom-up.
When all budgets are summed, they cannot exceed the TBC. 7 7 5 7 5 6 5 5 5

8. Step 1: Allocating the Total Budgeted Cost
Top-down
Bottom-up
Source: pg. 269 7 7 7 5 5 6 5 5 5

9. Step 2: Developing the Cumulative Budgeted Cost
The second step is to distribute each TBC over the duration of its work package.
A cost is determined for each period.
The cumulative budgeted cost (CBC) is the amount that was budgeted to accomplish the work that was scheduled to be performed up to that point in time.
One uses the CBC as the standard against which actual cost is compared. 8 8 6 8 6 7 6 6 6

10. Developing the Cumulative Budgeted Cost
Source: pg 8 8 6 8 6 7 6 6 6

11. Determining Actual Cost
Track actual cost by establishing a system to collect data on funds actually expended.
Cost that actually is spent.
Periodically assign a portion of the total committed cost (commitments/encumbered costs) to actual cost.
Cost that is allocated although it has not been totally spent (e.g. salary)
Total actual and committed cost by work package for comparison to the CBC.
Cumulative actual cost (CAC) should be calculated. 10 10 7 10 7 8 7 7 7

12. Determining Actual Cost
CBC
CAC
Source: pg

13. Determining the Value of Work Performed
Earned value is the value of the work actually performed.
Determine earned value by collecting data on the percent complete for each work package.
Convert this percentage to a dollar amount by multiplying the TBC of the work package by the percent complete.
EV = % complete x TBC 11 11 8 11 8 9 8 8 8

14. Determining the Value of Work Performed
Cumulative % complete
CEV
Source: pg 11 11 8 11 8 9 8 8 8

15. Cost Performance Analysis
Based on 4 measures:
Total Budgeted Cost (TBC)
Cumulative Budgeted Cost (CBC)
Cumulative Actual Cost (CAC)
Cumulative Earned Value (CEV)
FCAC
General performance
CPI; CV 14 14 9 14 9 10 9 9 9

16. Cost Performance Index (CPI)
A measure of the cost efficiency with which the project is being performed.
The earned value received for every $1 spent.
The index is dimensionless.
Cost performance index (CPI)
= F(Cumulative earned value, Cumulative actual cost)
= CEV/CAC
Ideally CP1 should be 1.0 (i.e. $1 spent = $1 value).
If CPI < 1.0 or gets smaller, corrective action should be taken. 16 16 10 16 10 11 10 10 10

17. Cost Variance (CV)
The difference between the cumulative earned value of the work performed and the cumulative actual cost.
Similar as CPI, except that it is expressed in $.
Cost Variance (CV) = Cumulative Earned Value (CEV) – Cumulative Actual Cost (CAC)
Ideally CV should be positive values (i.e. value >= cost).
If CV is negative, corrective action should be taken.
But, don’t be too happy with positive values => maintain that way! 17 17 11 17 11 12 11 11 11

18. Cost Forecasting
Three methods for determining forecasted cost at completion (FCAC):
FCAC = Total Budgeted Cost /Cost Performance Index
FCAC = Cumulative Actual Cost + (Total Budgeted Cost – Cumulative Earned Value)
FCAC = Cumulative Actual Cost + Re-estimate of remaining work to be performed 18 18 12 18 12 13 12 12 12

19. Cost Forecasting FCAC = Total Budgeted Cost /Cost Performance Index
The value is based on the current efficiency rate (i.e. remain the current performance).
FCAC = Cumulative Actual Cost + (Total Budgeted Cost – Cumulative Earned Value)
The value ignores the past/current efficiency rate. Focus on the remaining, which will be performed at an efficiency rate of 1.0 (i.e. maximum performance to meet the budget).
FCAC = Cumulative Actual Cost + Re-estimate of remaining work to be performed
Redo the estimation of the remaining activities. Time consuming. Only use this when the project has deviated far from the actual plan. 18 18 12 18 12 13 12 12 12

20. Cost Forecasting CEV CAC TBC
(1) FCAC = TBC/CPI = TBC/(CEV/CAC) = /(54000/68000) = $126,582
(2) FCAC = CAC + (TBC – CEV) = ( ) = $114,000
(3) FCAC = CAC + $$$$ 18 18 12 18 12 13 12 12 12

21. Cost Control
The key is to analyse cost performance on a regular and timely basis (e.g. every 30th day of the month).
Identify cost variances and inefficiencies early (i.e. CV negative) .
Involves analysing cost performance to determine which work packages may require corrective action (i.e. CPI < 1.0).
Deciding what corrective action should be taken
Revising the project plan 19 19 13 19 13 14 13 13 13

22. Cost Control When a project is offtrack, we can: Ignore the deviation.
When the deviation is smaller than the tolerance we can hold. If not, do option 2 or 3 below.
Take corrective actions to get back on target.
Revise the plan to reflect the deviation.
Adjust schedule, scope or performance requirements.
Cancel the project altogether.
When the project has slipped too much that it is no longer viable (i.e. too late, too expensive or non-functional). 19 19 13 19 13 14 13 13 13

23. Cost Control Taking corrective actions to reduce the costs:
Activities that will be performed in the near future.
Do not procrastinate! The more you wait, the lesser time you have to do anything.
Activities that have a large cost estimate.
Reduce large cost better than eliminate small tasks.
The larger estimated cost, the greater the opportunity for cost reduction. 19 19 13 19 13 14 13 13 13

24. Ways to Reduce Costs of Activities
Substitute less expensive materials.
But, the quality may be jeopardised.
Assign a person with greater expertise to perform or help with the activity.
But, his/her pay may be higher.
Reduce the scope or requirements.
This will makes customers unhappy.
Increase productivity through improved methods or technology.
Cost may be higher; learning curve etc. 20 20 14 20 14 16 14 14 14

25. Managing Cash Flow
Make sure that sufficient payments are received from the customer in time for you to cover the costs of performing the project.
The key to managing cash flow is to ensure that cash comes in faster than it goes out.
Some guidelines:
Ask customer to pay early (e.g. downpayment; frequent and equal monthly/weekly payment)
Invest any excess cash and earn interest.
Avoid customer from paying only at the end of the project.
Delay payment to suppliers as possible. 21 21 15 21 15 17 15 15 15

26. Project Management Software
All costs associated resources can be stored. The software calculates the budget for each work package and for the entire project.
The software allows the user to define different rate structures for each resource and when charges for those resources will be accrued.
Cost tables and graphs are available to help analyse cost performance. 22 22 16 22 16 18 16 16 16

27. Thank You Question? Next (11/5) : Mid Sem (20%)
Tue 11/5 8.15pm; Topic 1-8