Project Cost Management

 

Cost and Project

Project Cost Management

- It is the knowledge area that consists of processes involved in planning, estimating, budgeting, financing, funding, managing and controlling costs so as to complete the project within budget.

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Cost Estimation; Types of Cost Estimate

Estimate Cost

 

Input	Tools and techniques	Output
Enterprise environmental factor Organization process asset Project scope statement WBS WBS dictionary Project management plan	Analogous estimating Determine resource cost rate Bottom up estimating Parametric estimating Project management software Vender bid analysis Reserve analysis Cost of quality	activity cost estimate Activity cost estimate supporting detail Requested change Cost management plan update

 

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Importance of cost estimation

- It provides standard that can be used to compare and control the expenditures during the course of the project.
- It helps the project manager to allocate scarce resources as the project progresses.

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Classification of Project Cost

1. Direct vs Indirect Cost
- Direct cost is the cost that can be charged against the project. Eg: cost of manpower and materials used.
- Indirect cost is the cost indirectly involved in the project. Eg: overhead cost, selling and administrative cost.

2. Recurring and Non-recurring Cost
- Recurring cost is the cost that are repeatedly incurred throughout the project lie cycle.
- Non recurring cost is the one time cost that are incurred at the beginning or at the end of the project.

3. Fixed vs Variable Cost
- Fixed cost is the cost that do not vary with usage. Eg: Cost incurred in purchase of capital equipment
- Variable cost is the cost that vary directly with the usage. Eg: labor cost.

4. Normal vs Expedited Cost
- Normal cost is the cost incurred when project tasks are completed according to the original planned duration.
- Expedited cost is the crash cost which are unplanned incurred as a result of steps taken to accelerate project completion.

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Cost Estimating Methods

1. Ballpark estimate
- It is done when there is no sufficient information or time available.
- It helps in rough estimate of resources needed for a project in initial phase.
- It should attempt to have 30% accuracy.

2. Feasibility estimate
- It is done after preliminary work is completed.
- It is generally performed when information on material cost is available.
- It should attempt to have 10% accuracy.

3. Definitive estimate
- It is done after completion of design work.
- It requires clear understanding of scope and capabilities of the project.
- It attempts to have 5% error margin.

4. Comparative estimate
- It uses historical data of previous project as a reference for estimating cost of current project.

5. Parametric estimating
- It uses mathematical model for estimation.

6. Vendor bid analysis
- It estimates using bids and allowances for gaps in bid slope.

7.Reserve analysis
- It adds contingency to each activity cost estimate as zero duration item.

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Cost Budgeting; Cost Aggregation; Deriving Budget from Activity Cost

Determine Budget

- Budgeting is the process of plannin. for the cost of project resources.
- Budget implies the level of management support.
- Budget is estimated as:
Materials + Labor + Equipment + Capital + Overhead + Profit = Bid

 

Input	Tools and techniques	Output
Project scope statement WBS WBS dictionary Activity cost estimate Project schedule Resource calender Contract Cost management plan	Cost aggregation Reserve analysis Parametric estimation Funding limit reconciliation	Cost baseline Project funding requirements Cost management plan updates Requested changes

 

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Types of Budgeting

1. Top - down
- Top managers estimate overall budget for the project.
- The estimates are broken down at each lower level.

2. Bottom - up
- Low level managers estimate budget for each work package.
- Overhead and profits are added to develop project budget.

3. Negotiated
- It is the combination of top down and bottom up budgeting.
- Both are prepared and compared.
- Any differences are negotiated.

4. Activity based costing
- Assign cost to activities that uses resources.
- Identify cost drivers associated with activity.
- Compute cost rate per cost deliver unit.
- Multiply cost drive rate times the volume of cost driver units used by the project.

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Budget Contingency

- It is the allocation of extra funds to cover uncertainties.
- It provides protection against unknown and uncertain elements.

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Cost Control Process; Cost Control Methods

Control Costs

 

Input	Tools and techniques	Output
Cost baseline Project funding requirements Performance report Work performance information Approved change requests Project management plan	Cost change control system Performance measurement analysis Forecasting Project performance reviews Project management software Variance management	Cost estimate update Cost baseline update Performance measurement Forecasted completion Requested changes Recommended corrective actions Organizational process asset updates Project management plan update

 

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EV Management and Benefits; Variance Analysis

Earned Value Management (EVM)

- EVM is a project management technique for measuring project performance and progress in an objective manner.
- It helps to find variances in projects based on comparison of work performed and work planned.
- It is used on cost and schedule control.

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Equations

Assumptions:
1. Planned value (PV) = budgeted cost
2. Earned value (EV) = actual work completed
3. Actual cost (AC) = cost incurred
4. Estimate to complete (ETC) = what is left
5. Estimate at completion (EAC) = what final cost will be

Analysis:
1. Cost variance (CV) = EV - AC
- Negative = under budget
- Positive over budget

2. Schedule variance (SV) = EV - PV
- Negative = behind schedule
- Positive = ahead of schedule

3. Cost Performance Index (CPI) = EV / AC
- How much we get for every dollar we spend?

4. Schedule Performance Index (SPI) = EV / PV
- Progress as % against plan

5. ETC = EAC - AC
- How much more we have to spend?

6. Variance at completion (VAC) = BAC - EAC

7. EAC = BAC / CPI

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Q) If EV is twice its AC of the project, calculate CPI and CV. Is the project over or under budget?

 

Let AC = x, then:
EV = 2x

 

Now,
CPI = EV / AC = 2x / x = 2

Also,
CV(%) = (EV - AC) / AC * 100%
= (2x - x) / x * 100%
= 100%

As, EV-AC is positive, the project is under budget.

 

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Q) If SPI is 0.75 with earned value being 60. Calculate planned value and also state whether the project is ahead or behind schedule?

 

Given:
    SPI = 0.75
    EV = 60

 

We know that,
SPI = EV / PV
or, PV = 60 / 0.75
or, PV = 80

Now,
Schedule variance (SV) = EV - PV = 60 - 80 = -20

As, SV is negative, the project is behind schedule.

 

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Q) A project is scheduled for time of 12 months with estimated cost of 400000. After 3 months, evaluation is done and identified that 40% of work is accomplished with cost of 200000. Calculate cost and schedule variance for the project.

 

Given:
Planned schedule = 12 months
Estimated cost = 400000
Planned value = Estimated cost = 400000

 

At the end of 3 months:
PV = 400000/12 *3 = 100000
Project completed = 40%
EV = 40% of 400000 = 160000
AC = Cost incurred = 200000

Now,
Cost variance (CV) = EV - AC = 160000 - 200000 = - 40000
As, CV is negative, the project is over budget.

Schedule variance (SV) = EV - PV = 160000 - 100000 = 60000
As, SV is positive, the project is ahead of schedule.