Projectcost Management

8/13/2019 Projectcost Management

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Project Co$t

Management

Presenter- R Masilamani([email protected])


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Content Content:

1. Objectives of Presentation(pg3) 2. The presenter(pg4) 3. Project Cost Management(PCM)-a definition &

overview(pgs 5-17) 4. PCM Processes(pg18)

5. Why, What & How of PCM(Pgs19-22) 6. PCM Estimation(pgs23-36) 7. PCM Budgeting(pgs37-57) 8. PCM Control(pgs58-70) 9. Quick Test(pgs71-76)

10.PCMOther e.g's(pgs77-85) 11.PCM Tools-a Summary(pgs 86-88) 12.References(Pg 89) 13.END(pg 90)


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Objectves of PresentationThrough this interaction, participants

will enhance their:

Level of Knowledgeand skillsof project costmanagement

Appreciation of the planning, estimating, budgetingand controllingof project costs

Understanding of the professional cost managementmethodologies, tools and techniques of PMBOK


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The Presenter:

Mr R Masilamani,collated & will lead managethis module

Current Head of PMCE - IPD/OUMHas a Bachelor degree in Economics &Statistics and MBA in Finance and Management

Has worked through employee to employerstatus over 35 years

Has an active working, consulting and managing

presence in industry


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Project Cost Management

PMI definition

Project Cost Management includes theprocesses involved in planning, estimating,budgeting, and controlling costsso that the

project can be completed within theapproved budget:


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Project Cost ManagementKey Words:

project cost management, resource, planning

estimating, budget, control, forecasting

Area of PM Application:Universal

Topic Level:ProcessRelated Topics:Project planning, WBS

Reference:Wideman, R.M. Cost Control of Capital Projects,BiTech Publishers Ltd., 1995

'What is Project Cost Management, why bother and

why is it so important?'


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Project Cost Management (PCM)

What is PCM?

You might think that PCM is managing the"costs" on your project

The reality is that you must manageeverything else that incurs cost

Because if you don't, the costs will just keep

on climbing Whether you like it or not!


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So, what is PCM?

Project Cost Management isThe placing of responsibility on those in charge of any aspect

of the project

E.g. the managers, designers and implementers

To perform their respective roles and responsibilities withinprescribed limits

Specifically, agreed cost allowances or budgets

Then collecting cost data and comparing it to the

corresponding allowancesAnd taking appropriate management action

To contain the final results


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How would you define PCM?

Project Cost Management may be defined as

The process of placing responsibility on the project's designers and implementers

To perform within agreed budget limits

Either under contract

Or, through verbal commitment

The collecting of actual cost data in a suitable

format

Comparing that to corresponding budget data

And taking corrective action as necessary

Throughout, and as appropriate to, the project lifespan


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What does PCM encompass?

As with time management

You have to carefully manage what you dowith the money available

PCM is another vital function of project

management that includes Resource planning

Cost estimating

Cost budgeting Cost control

Change control


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Is it that simple?No, it certainly is not!

Two simple but essential principles must beclearly understood:

1. There must always be a basis forcomparison

2. Only future costs can be controlled

Therefore, PCM involves Careful project planning

Especially a WBS extended to the activity level

Estimating the costs of the planned resources

Converting that estimate to a viable control budget

Monitoring expenditures as work proceeds, and

Modifying the approach if the findings are not satisfactory


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That sounds easy? - 1

Not really. There are a number of challenges, such as: First and foremost, the problem of managing

Project scope

A lack of understanding generally thatestimates are no better than just bestavailable assessments

And only as good as the data they are basedon an unrealistic expectation of accuracy

Hence an estimate should be expressed asarange, not as a single number!


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More challenges . . .

The nature of PCM changes with the projectlife span

As we'll explain later

The historical view of accounting Which is not the primary focus of PCM

The difficulty of getting timely costinformation out of the normal accounting

process The necessary data support facilities for

effective PCM are not available withinthe organization


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Still more challenges. . .

The difficulty of getting people to peer into thefuture, or commit themselves

During progress of the actual work they feel

they have more important things to do likegetting the work done!

Some people think you can control costssimply by turning off the money taps

There is a tendency to ignore risks, and The result of "political interference" to get a

project approved


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Why bother with cost management?

The fact is, cost management

is essential if you want to Keep people on their toes

Highlight misuse or wastage of

resources Track budget change approvals

Finish a project within approved

budgets Avoid unwelcome surprises,

for your corporate or financial sponsor!


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Why is PCM so important?

PCM has a high profile in project management

because management is a way of life in all

organizations

Financially successful organizations depend on strict

financial control and the corporate accounting tosupport it

They are comfortable with the idea of budgeting andexpenditure

Most people understand the consequences of themoney running out

Cost is seen as a major metric of successful projectmanagement


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The most significant aspect of PCM

From a project perspective, it is important to

understand that Cost, or rather money, is simply the common

denominator, or metric, for bringing togetherdisparate types of resources

I.e. accounting for use of labor, materials, equipment

For management and control purposes

However, like time, money itself should not be

considered as a resourceunlike in corporatefinancial managementwhere money is the

central purpose and is treated like a commodity


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.

The Project Cost Management processesinclude the following:

Cost Estimating

Cost budgetingAggregating the estimated costs of individual schedule activities or workpackages to establish a total cost baseline for measuring projectperformance

Cost ControlInfluencing the factors that create changes to the cost baseline

Developing an approximation of the costs of the resources needed

to complete project activities.


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Why Do We Manage Cost?

Part of triple constraint, cant manage one

without the others (scope, time, and quality)

Plots of cost and scope against plan can help

spot problems early

Cumulative

Value

Time

PlannedValue (PV)

ActualCosts (AC)

EarnedValue (EV)

Today

Is this project

over/underbudget?

Is it aheadof/behindschedule?


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What Do We Want to Know by

Managing Cost? through answering three questions,

How did we perform ? How much we differ from plan?

What is the implication for future!


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Cost Management Key Terms

PV- Planned Value, estimatedvalue of the planned work EVEarned Value, estimatedvalue of work done ACActual Cost, what you paid BACBudget at Completion, the budget for the total job EACEstimate at Completion, what is the total job expected to cost? ETCEstimate to Complete, forecasted costs to complete

job VACVariance at Completion, how much over/under budget do we expect to be?


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Cost

Estimating

CostBudgeting

CostControl

Three processes

Cost Estimating

Cost Budgeting

Cost Control

How Do We Manage Cost?


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Cost EstimatingEnterprise

EnvironmentalFactorsOrganizationalProcess Assets

ProjectScopeStatement

Analogous estimating

Determine resource costrates

Bottom up estimating

Parametric estimating

Project managementsoftware

Vendor bid analysis

Reserve analysis

Cost of quality

Inputs

Outputs

Tools & Techniques

WorkBreakdownStructure

WBSDictionary

CostEstimating

CostBudgeting

CostControl

ProjectManagementPlan

Schedule MgmtPln

Staffing MgmtPln

Risk Register

Activity CostEstimates

ActivityCostEstimatesSupporting

Detail

Requested

Changes

CostManagement Plan

Updates


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Work Breakdown structureCompany owners and project managers use the Work Breakdown Structure

(WBS) to make complex projects more manageable. The

WBS is designed to help break down a project into manageable chunks that canbe effectively estimated and supervised.

Some widely used reasons for creating a WBS include:

Assists with accurate project organization

Helps with assigning responsibilities

Shows the control points and project milestones

Allows for more accurate estimation of cost, riskand time

Helps explain the project scope to stakeholders


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Estimating Methods Analogous (Top Down) estimatingManagers

use expert judgment or similar project costs[quick, less accurate]

Bottom-Up estimatingPeople doing workestimate based on WBS, rolled up into project

estimate [slow, most accurate] Parametric estimatingUse mathematical model

(i.e. cost per sq ft). [accuracy varies] Two types: Regression analysisbased on analysis of multiple

data points Learning CurveThe first unit costs more than the

100th, forecasts efficiency gains


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Estimating Methods

Vendor Bid AnalysisEstimating using bids +allowances for gaps in bid scope [slow,

accuracy depends on gaps]

Reserve AnalysisAdding contingency to eachactivity cost estimates as zero duration item

[slow, overstates cost]


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ANALOGOUS COSTING

Analogous cost estimating means using the actual cost of previous, similarprojects as the basis for estimatingthe cost of the current project. Analogous costestimating is frequently used to estimate costs when there is a limited amount of

detailed information about the project (e.g., in the early phases). Analogous costestimating uses expert judgment

PARAMETRIC COSTING

Parametric estimating is a technique that uses a statistical relationship betweenhistorical data and other to calculate a cost estimate for a schedule activity

resource. This technique can produce higher levels of accuracy depending upon thesophistication, as well as the underlying resource quantity and cost data built intothe model

BOTTOM-UP COSTING

This technique involves estimating the cost of individual work packages or individual

schedule activities with the lowest level of detail. This detailed cost is thensummarized or rolled up to higher levels for reporting and tracking purposes. The

cost and accuracy of bottom-up cost estimating is typically motivated by the sizeand complexity of the individual schedule activity or work package. Generally,activities with associated effort increase the accuracy of the schedule activity costestimate


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Determine Resource Cost Rate

The person determining the rates or the group preparing the

estimates must know the unit cost rates, such as staff cost

per hour and bulk material cost per cubic yard, for each

resource to estimate schedule activity costs. Gathering

quotes is one method of obtaining rates. For products,

services, or results to be obtained under contract, standardrates with escalation factors can be included in the contract.

Reserve Analysis

reserves are estimated costs to be used at the discretion ofthe project managerto deal with anticipated, but notcertain, events. These events are known unknowns and

are part of the project scope and cost baselines


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Assigning resources

Availability

SkillsMore experienced peopleLess experienced people

DesireSimilar tasks to one person to use learning curve

Assign critical tasks to most reliable people

Tasks that need interaction or are similar

Same personTwo who communicate

Personality and team communication does matter

and again, Availability


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Resource Loading and Opt imizing

Gantt w i thResou rce Histog ram


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Resource leveling - possiblerescheduling

Gantt w ith Resourc e Histogram

Automatic resource leveling: use only assuggestionManual resource leveling: fast vs good vs

cheap


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ID Task Name Account FixedCost Total Cost Payment

36 Final Submission $0.00 $33,000.00 $0.00

37 Final DesignWork C14 $5,000.00 $25,000.00 $0.0

38 Final Plan C14 $0.00 $8,000.00 $0.0

39 TBSubmission $0.00 $0.00 $0.0

40 EPA $0.00 $0.00 $40,000.0

41 Software (Subcontract 50-B) $0.00 $133,000.00 $0.00

42 SWDesign $12,000.00 $62,000.00 $0.00

43 DoPrelimSWdesign S21 $0.00 $20,000.00 $0.0

44 PDR $0.00 $0.00 $0.0

45 DoFinal SWdesign S22 $0.00 $30,000.00 $0.0

46 CDR $0.00 $0.00 $70,000.0

47 SWConstruction $12,000.00 $71,000.00 $0.00

48 CodeCSCA S31 $0.00 $6,000.00 $0.0

49 CodeCSCB S31 $0.00 $8,000.00 $0.0

50 Integrate&Tst CSCI 1 S32 $0.00 $20,000.00 $0.0

Costed WBSUse Software to roll costs up the WBS


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$100,000.00

$200,000.00

$300,000.00

$400,000.00

CumulativeCost:

Filteredresources Total:

CPM Total:

Q3 Q4 Q1 Q2 Q3 Q4 Q1

1997 1998

$53,920.00 $127,160.00 $274,360.00 $331,440.00 $349,920.00 $368,400.00 $376,500.00

$100,000.00

$200,000.00

$300,000.00

$400,000.00

CumulativeCost:

Filtered resources Total:

CPM Total:

Q3 Q4 Q1 Q2 Q3 Q4 Q1

1997 1998

$53,920.00 $127,160.00 $274,360.00 $331,440.00 $349,920.00 $368,400.00 $376,500.00

Cost Ramp-UpUse Software to report cash

flow


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0

+75%

-25%

25

-10

10

-8

Cost - Sanity checksCost Estimate Error Range same as Time Estimate

PPA - Prel iminary Pro ject Appro val

EPA - Effectiv e

PDR - Prel iminary Design Review

IndicativePPAInit Plan

BudgetEPAFinal Plan

BudgetEPAFinal Plan


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Three processes Cost Estimating

Cost Budgeting

Cost Control

Cost

Estimating

Cost

Budgeting

Cost

Control


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Cost Budgeting

Project ScopeStatement

Cost aggregation

Reserve analysis


Funding limit reconciliationInputs

Outputs

Tools & Techniques

CostEstimating

CostBudgeting

CostControl

Cost Baseline

ProjectFundingRequirements

Cost

Management PlanUpdates

RequestedChanges

Work BreakdownStructureWBS Dictionary

Activity CostEstimates

Activity CostEstimatesSupporting Detail

Project Schedule

ResourceCalendars

Contract

CostManagementPlan


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Essential definitionsEnterprise Environmental factors-refer to both internal and external factors

that surround or influence a projects success. These factors may comefrom any or all of the enterprises involved in the project. Enterpriseenvironmental factors may enhance or constrain project managementoptions and may have a positive or negative influence on the outcome.They are considered as inputs to most planning processes

Organisational process Assets- are any or all process related assets, from anyor all of the organizations involved in the project that can be used to influencethe projects success. Examples include: plans, procedures, lessons learned,

historical information, schedules, risk data and earned value data. OrganizationalProcess Assets fall into two broad categoriesProcesses and Procedures, and theCorporate Knowledge Base.WBS Dictionary-The WBS dictionary includes entries for each WBScomponent that briefly defines the scope or statement of the work,

defines deliverables, contains a list of associated activities, and providesa list of recognized milestonesto gage progress

Approved change requests-refers to a change request that has been submittedby the requestors, has been reviewed by the appropriate parties through use ofthe integrated change controlprocess, and has been granted authorization to betake place
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Essential definitions

Risk Register-The risk register or risk log becomes essential as it recordsidentified risks, their severity, and the actions steps to be taken. Itcan be a simple document, spreadsheet, or a database system, butthe most effective format is a table. A table presents a great deal ofinformation in just a few pages

Cost Baseline-ultimately, project management includes a variety ofresponsibilities within ones team in order to achieve maximum

resultsfor their employer. In regards to money and remaining inbusiness, providing a budgetthat is adjusted to time is considered acost baseline.

Performance reports- is filled out by the project manager and submittedon a regular basis to the sponsor, project portfolio managementgroup, Project Management Office or other project oversight person

or groupEarned Value Analysis-report shows specific mathematical metrics that

are designed to reflect the health of the project by integratingscope, schedule, and cost information. Information can be reportedfor the current reporting period and on a cumulative basis
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Essential DefinitionsResource Calendar-Keeping track of schedules and timemanagement is one of the most fundamentally important tasks thatare the responsibility of the project management team and or theproject management team leader. One of the best ways toaccomplish this feat is through the careful and well orchestrateduse of calendars to keep track of the multitude of project related

events, occurrences, and dates that will take place during theprojects life cycle.

Enterprise environmental factorsMarket conditionPublished commercial information

Cost performance baselineAuthorized timephased Budget at Completion(BAC) used to measure, monitor and control

overall cost performance (S shape curve)
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Cost Budgeting

Budgeting is allocating costs to work packages toestablish a cost baseline to measure projectperformance

Remember Contingency items are for unplanned butrequired changes it is not to cover things such as: Price escalation

Scope & Quality Changes

Funding Limit ReconciliationSmoothing out the

project spend to meet management expectations


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Cost Aggregation

Schedule activity cost estimates are aggregated by work packages in accordancewith the WBS. The work package cost estimates are then aggregated for the highercomponent levels of the WBS, such as control accounts, and ultimately for the

entire project. Reserve analysis establishes contingency reserves, such as themanagement contingency reserve, that are allowances for unplanned, butpotentially required, changes. Such changes may result from risks identified in therisk register

Reserve Analysis

Management contingency reserves are budgets reserved for unplanned, butpotentially required, changes to project scope and cost. These are unknownunknowns, and the project manager must obtain approval before obligating orspending this reserve. Management contingency reserves are not a part of theproject cost baseline, but are included in the budget for the project. They are notdistributed as budget and, therefore, are not a part of the earned value calculations


The parametric estimating technique involves using project characteristics(parameters) in a mathematical model to predict total project costs. Models can besimple (e.g., one model of software development costs uses thirteen separateadjustment factors, each of which has five to seven points within it).

).


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COST TYPES

Sunk Costs:A historical or expended cost. Since the cost has been expended,

we no longer have control over the cost. Sunk costs are not included when

considering alternative courses of action.

Costs: Nonrecurring costs that do not change based on the number of units,

like expenses related to equipment required to complete a project.

Variable Costs:Costs that rise directly with the size of the project, like

expenses related to consumable materials used to accomplish the project.

Indirect Costs:Costs that are part of the overall organizationscost of doingbusiness and are shared among all the current projects. These include salaries of

corporate executives, administrative expenses, any cost that would be considered

part of overhead.

Opportunity Costs:The cost of choosing one alternative and, therefore, giving

up the potential benefits of another alternative.

Direct Costs:Costs incurred directly by a specific project. These include cost

for materials associated with the project, salary of the project staff, expenses

associated with subcontractors.


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Cost TypesDirect Costs

Related Directly to the projectex. Labor hours, material, equipment, food, travel

Indirect Costs

Overhead used for more than one projectex. Building rent, taxes, janitorial services


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Cost TypesA cost by any other name, really isnt the

same!Variable CostChanges with volume

Fixed CostStays the same, regardless of volume

TC = VC+FC

COST vs VOLUME


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Cost Types

Project CostsAre incurred while the project is being fulfilled.

Life Cycle Costsincludes the costs after project completion.

There may be temptation to lower project costs at theexpense of long term costs. Life Cycle Costing

gives the PM a way to consider costs outside

of the scope of project fulfillment


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Important ConceptsSunk Costs

Forget em, theyre gone

Working Capital

- Current Assets (Cash, Inventories, AccountsReceivable)

- Liabilities (Notes, AP, Accruals)


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Cost and Project SelectionPresent 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 its not worth as much.


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TimeIncome Present Value

1 10,000 10,000

2 10,000 9,090

3 10,000 8,264

4 10,000 7,513

5 10,000 6,830

TOTAL 50,000 41,697

Present Value of Your PMP

Consulting Gig


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Internal Rate of Return

What is the return on the moneyinvested?

Expressed as percentage

Great for comparing between two projects of differentvalue

Project A has an IRR of 21% and Project Bhas an IRR of 14%. Which would I choose?


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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 itwill bring is $11,000 a year.

The Payback Period is. . . 5 years

Discount rate/Interest Rate....10%

Payback Period


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Return

CumulativeInflow(withoutdiscount@10%)

Resulting Value ofcash flow(end ofyear, with discount)

CumulativeInflow(withdiscount@10%)

Note:the two (withor without discountdo not differ toomuch in duration

11,000 11,000 10,891 10,891

11,000 22,000 10,783 21,674

11,000 33,000 10,676 32,347

11,000 44,000 10,571 42,914

11,000 55,000 10,476 53,394

Break Even at50,000

The BE Point is4yrs 7mths

With Discount Pay- Backis Different

Pay-Back Period is4yrs 8 mths.

Payback Period


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Net Present ValueNPV, like Present Value, discounts future

cash flows to the present

PV of RevenuePV of Costs

Net Present Value: Your PMP Gig


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Net Present Value: Your PMP GigTime Revenue Present

ValueCosts PV of Costs NPV

0 10,000 10,000 12,000 12,000 -2,000

1 10,000 9,090 2,000 1,818 7,272

2 10,000 8,264 2,000 1,653 6,611

3 10,000 7,513 2,000 1,502 6,011

4 10,000 6,830 2,000 1,366 5.464

Total 50,000 41,697 20,000 18,339 23,358


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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 flowit will bring is $11,000 a year.

The Payback Period is. . . 5 years

Payback Period


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Benefit Cost Ratio

Compares the revenues to the costsRevenue in this is the same as payback

1 is the magic number where costs = revenueLess 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.


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CostEstimating

CostBudgeting

CostControl

Three processes

Cost Estimating

Cost BudgetingCost Control



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Cost Control

Cost Baseline

Project FundingRequirements

PerformanceReports

Cost change control system

Performance measurementanalysis

Forecasting

Project performance reviews

Project managementsoftware

Variance management

InputsOutputsTools & Techniques

WorkPerformanceInformation

ApprovedChangeRequests

CostEstimating

CostBudgeting

CostControl

ProjectManagementPlan

Cost EstimateUpdates

Cost BaselineUpdates

PerformanceMeasurements

Forecasted

CompletionRequestedChanges

Recommended Corrective

Actions

Organizatio

nal ProcessAssetsUpdates

ProjectManagement PlanUpdates


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Earned Value

Progress is compared against thebaseline to determine whetherproject is ahead of or behind plan

Percent complete can be difficultto measure, some managers userules 50/50 RuleAssumed 50%

complete when task started, final

50% at completion 20/80 Rule20% at start

0/100 RuleNo credit until complete

Planned Value(PV)BudgetedCost

Earned Value(EV)Actual

work completedActual Cost (AC)Costs incurred

Estimate toComplete (ETC)Whats Left

Estimate atCompletion(EAC)Whatfinal cost will be


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The earned value Management involves developing these key values foreach schedule activity, work package, or control account:

Planned value (PV).PV is the budgeted cost for the work scheduled to becompleted on an activity or WBS component up to a given point in time.

Earned value (EV). EV is the budgeted amount for the work actuallycompleted on the schedule activity or WBS component during a given timeperiod.

Actual cost (AC).AC is the total cost incurred in accomplishing work onthe schedule activity or WBS component during a given time period. This

AC must correspond in definition and coverage to whatever was budgetedfor the PV and the EV (e.g., direct hours only, direct costs only, or all costsincluding indirect costs).

Cost variance (CV). CV equals earned value (EV) minus actual cost (AC).The cost variance at the end of the project will be the difference betweenthe budget at completion (BAC) and the actual amount spent. Formula:CV= EV - AC


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The earned value Management involves developing these key

values for each schedule activity, work package, or control

account:

Schedule variance (SV). SV equals earned value (EV) minus plannedvalue (PV). Schedule variance will ultimately equal zero when theproject is completed because all of the planned values will have beenearned. Formula: SV = EV - PV. These two values, the CV and SV,can be converted to efficiency indicators to reflect the cost and scheduleperformance of any project.

Cost performance index (CPI). A CPI value less than 1.0 indicates acost overrun of the estimates. A CPI value greater than 1.0 indicates acost underrun of the estimates. CPI equals the ratio of the EV to the AC.The CPI is the most commonly used cost-efficiency indicator. Formula:CPI = EV/AC

Schedule performance index (SPI). The SPI is used, in addition to theschedule status to predict the completion date and is sometimes used inconjunction with the CPI to forecast the project completion estimates.SPI equals the ratio of the EV to the PV. Formula: SPI = EV/PV

E d


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EarnedValueGraph

Variance atCompletion

(VAC)

TargetCost &

Schedule

ScheduleVariance(Time)

PlannedValue (PV)

Earned

Value (EV)

Earned Value Formulas


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NAME FORMULA NOTES

Cost Variance (CV) EV-AC Negative = Over budgetPositive = Under budget

Schedule Variance(SV)

EV-PV Negative = BehindSchedulePositive = Ahead ofSchedule

Cost PerformanceIndex (CPI)

EV/AC How much are wegetting for every dollarwe spend?

Schedule PerformIndex (SPI)

EV/PV Progress as % againstplan

Estimate to Complete(ETC)

EAC-AC How much more do wehave to spend?

Variance atCompletion (VAC)

BAC-EAC At the end of the day,how close will we be to

plan?

Estimate atCompletion (EAC)

See the followingpage

Earned Value Formulas (Contd)


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NAME FORMULA NOTES

Estimate atComplrtion (EAC)

BAC/CPIUse if no variancesfromBAC have occurred

AC+ETC Use when originalestimatewas bad. Actuals + Newestimate

AC+BAC-EV

Use when current

variances are notexpected to be there inthe future

AC+(BAC-EV)/CPI

Use when currentvariances are expected to

continue

Earned Value Formulas (Cont d)


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Building A Farm Hut Exercise

You have a project to build a new farm hut(Barn). The specs for building the hut are toconstruct 4 sides and then an angled roof.

Each side of the hut is to take one day to buildas is the roof. The budgeted amount is $2,000per side and $2000 applied to the roof cost.

The sides are to be completed one after the

other. Today is the end of day four.

FORECASTING


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FORECASTING

Forecasting includes making estimates or predictions of conditions in the project's futurebased on information and knowledge available at the time of the forecast.( Forecasts aregenerated, updated, and reissued based on work performance information provided as

the project is executed and progressed).

BAC is equal to the total PV at completion for a schedule activity, work package,control account, or other WBS component. Formula: BAC = total cumulative PV atcompletion.

ETCis the estimate for completing the remaining work for a schedule activity, workpackage, or control account.

ETC based on new estimate. ETC equals the revised estimate for the workremaining, as determined by the performing organization. This more accurate andcomprehensive completion estimate is an independent, non-calculated estimate tocomplete for all the work remaining, and considers the performance or production ofthe resource(s) to date.

Alternatively, to calculate ETC using earned value data, one of two formulas is

typically used:ETC based on atypical variances. This approach is most often used when currentvariances are seen as atypical and the project management team expectations arethat similar variances will not occur in the future. ETC equals the BAC minus the

cumulative earned value to date (EVC). Formula: ETC = (BAC- EVC)


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FORECASTING

ETC based on typical variances.This approach is most often used when current variancesare seen as typical of future variances. ETC equals the BAC minus the cumulative EV C (theremaining PV) divided by the cumulative cost performance index (CPIC). Formula: ETC = (BAC -EVC) / CPIC

EACis the projected or anticipated total final value for a schedule activity, WBS component, orproject when the defined work of the project is completed. One EAC forecasting technique isbased upon the performing organization providing an estimate at completion:

EAC using a new estimate. EAC equals the actual costs to date (ACC) plus a new ETC that isprovided by the performing organization. This approach is most often used when pastperformance shows that the original estimating assumptions were fundamentally flawed or that

they are no longer relevant due to a change in conditions. Formula: EAC = ACC+ ETCThe two most common forecasting techniques for calculating EAC using earned value data aresome variation of:

EAC using remaining budget. EAC equals ACC plus the budget required to complete theremaining work, which is the budget at completion (BAC) minus the earned value (EV). Thisapproach is most often used when current variances are seen as atypical and the projectmanagement team expectations are that similar variances will not occur in the future. Formula:

EAC = ACC+ BAC - EV

EAC using CPIC.EAC equals actual costs to date (ACC) plus the budget required to completethe remaining project work, which is the BAC minus the EV, modified by a performance factor(often the CPIC). This approach is most often used when current variances are seen as typical

of future variances. Formula: EAC = ACC+ ((BAC - EV) /CPIC)


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Tricks for Earned Value

EV is always first Variance = EV minus something Index = EV divided by something If the formula relates to cost use AC If the formula relates to schedule use PV Interpreting results: negative is bad and positive is good Interpreting results: greater than one is good, less than one is

bad

PV

AC ETCEAC

BAC

ProjectStart

CurrentStatus


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Terms to Remember

Present Value Net Present Value (NPV) Internal Rate of Return (IRR) Payback Period Benefit Cost Ratio = BCR>1,

Payback is greater than thecost

Opportunity Cost Sunk Cost

Working CapitalStraight Line DepreciationAccelerated Depreciation

Double Declining Balance Sum of Years Digits

Value Analysis (ValueEngineering)

You wont be calculating most of these numbers on the test,

just remember the concepts for general questions


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QuestionsQ1-project cost management includes all the following functions,

except;

a. resource planning

b. cost estimating

c. resource leveling

d. cost budgeting

d. cost control

Q2-The output from resource planning includes;

a. job descriptions

b. Salary descriptions

c. The types of resources required

d. All of the above

e. None of the above


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QuestionsQ3- Cost estimates may be expressed in;

a. labour

b. materials

c. supplies

d. inflation allowances

e. none of the above

Q4- resource planning must include consideration of the use of;

a. contractors, equipment, materials

b. people, computers, equipmentc. people, equipment, materials

d. contractors, computers, raw materials

E. none of the above.


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QuestionsQ5- In the erarned value system, cost variance is computed as;

a. BCWP less BCWS

b. BCWP less ACWP

c. ACWP less BCWP

d. ACWP less BCWS

e. BCWS less BCWP

Q6- Earned value is;

a. percent complete

b. budgeted cost of work performedc. completed work value

d. all of the above

e. b and c only


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QuestionsQ7- if BCWS=100, BCWP=98, and ACWP=104, the project is,

a. ahead of schedule

b. headed for a cost overrun

c. doing the business

d. a and b only

e. a and c only

Q8- inputs to resource planning are;

a. the WBS

b. the scope statementc. a resource pool description

d. organisational policies

e. all of the above


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QuestionsQ9- Which of the following choices would indicate that your project was 10

percent under budget?

a. BCWS=100, BCWP=110

b. ACWP=100, BCWP=110

c. BCWS=100, ACWP=110

d. ACWP=110, BCWP=100e. BCWP=100, BCWS=110

Q10- Parametric cost estimating involves;

a. using the WBS as the basis of estimating

b. defining the parameters of the project life cyclec. calculating individual cost estimates for each work package

d. using rates and factors based on historical experience to estimate costs

e. b and c only


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1a 2b

3a 4c

5a

Answers to Questions

6e

7 - d

8 - a 9 - b

10 - a

Q


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EVA Question

Given a lawn to be cleaned up within four days at an estimated budget

Of Rm2,000, and today after three days the status of the project being;

EV=Rm1250, AC-Rm1750 with a daily planned expenditure=Rm500,

calculate the following:

PV EV CV

BAC CV CPI

SV SPI VAC

(BACEAC) EAC(EAC/CPI) ETC(EAC-AC)

Answers to Questions (Contd)


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Answers to Questions (Cont d)What is: Calculation: Answer: Interpretation of Answer:

PV $500+$500+$500 $1,500 We should have completed $1500

EV $500+$500+$250 $1,250We actually completed $1,250worth of work

AC $500+$1000+$250 $1,750 We have actually spent $1,750

BAC $500+$500+$500+$500 $2,000 Our project budget is $2000

CV $1,250 - $1,750 -$500 We are over budget by $500

CPI $1,250/$1,750 0.714We are only getting $0.71 out ofevery dollar that we are spendingon the project

SV $1,250 - $1,500 -$250 We are behind schedule

SPI $1,250/$1,500 0.833We are progressing at 83% of theplanned rate

EAC $2,000/0.714 $2,801We currently estimate the projectwill cost $2,801

ETC $2,801-$1,750 $1,051We need to spend $1,051 to finishthe project

VAC $2,000 - $2,801 -$801We currently expect to be $801over budget when the project iscompleted


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Big Dig

Started construction on 1991 and plannedcompletion 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 wascompleted and the cost was $2 Billion.

Do the EV analysis


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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


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Big Dig: Performance

CV = EV - AC = $0.25 - $2 = - $1.75 BillionOver Budget by $1.75 Billion

SV = EV - PV = $0.25 - $0.5 = - $0.25 BillionBehind of schedule

CPI =EV / AC = $0.25 / $2 = 0.12Getting 0.12 cents out of every dollar budgeted

SPI = EV / PV = $0.25 / $0.5 = 0.5050% of progress planned

EAC = BAC / CPI = $3 / 0.50 = $ 6 Billion


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Big Dig: The Numbers

EV = Earned Value = $3.5 Billion($1.5m*3)

PV = Planned Value = $6.0 Billion($1.5*4)

AC = Actual Cost = $2.5 Billion

BAC = Budget At Completion = $12 Billion

Bi Di P f


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Big Dig: Performance

CV = EV - AC = $3.5 - $2.5 = $1.00 BillionUnder Budget by $1.00 Billion

SV = EV - PV = $3.5 - $6.5 = - $3.00 BillionBehind of schedule

CPI =EV / AC = $3.5 / $2.5 = 1.4Getting 1.14 cents out of every dollar budgeted

SPI = EV / PV = $3.5 / $6.5 = 0.5050% of progress planned

EAC = BAC / CPI = $12 / 0.50 = $ 24 Billion


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Tools and Techniques

Variance analysisCost performance measurements (CV, CPI) are used toassess the magnitude of variation to the original cost

baseline

Cause and degree of variance WRT the costperformance baseline? >corrective/preventive

action?

High acceptable variance range at start, lower as the

project gets closer to complete Project Management softwareMonitoring PV, EV, and AC

O


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Outputs Work performance measurements

Calculated CV, SV, CPI, and SPI values for WBS components, work packages

and control accounts are documented and communicated to stakeholders

Budget forecastsCalculated EAC value or bottomup EAC value is documented andcommunicated to stakeholders

Organizational Process Assets updates

Cause of varianceCorrective actions chosen and the reasonsOther types of lessons learned from project cost control

Change requests(through the Perform Integrated Change Control Process)

Project management plan updatesCost performance baseline (scope, activity resources, cost estimates.Sometimes new cost baseline should be prepared as cost variance is severe)

Cost management plan

Project document planCost estimatesBasis of estimates


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References1. Sections of this presentation were adapted from

A Guide to the Project Management Body of Knowledge, Third & Fourth Editions,

Project Management Institute Inc., 2004/9

2. it is also drawn from various other presentations,publicly uploaded

3. The presenter's expertise and Ingenuity were alsoemployed to upgrade the original presentation


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Now I understand!

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