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Notes of ICT Project Management [CT 701]

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.

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


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.

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.

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.

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


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.

Budget Contingency

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

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


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.


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

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

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


CPI = EV / AC = 2x / x = 2

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

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


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?


    SPI = 0.75
    EV = 60


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

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

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


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.


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

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.


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