PROJECT COST MANAGEMENT

Defenition

■ Project Cost Management includes the processes involved in planning, estimating, budgeting, financing, funding, managing, and controlling costs so that the project can be completed within the approved budget

Main Processes

■ 7.1 Plan cost Management—The process that establishes the policies, procedures, and documentation for planning, managing, expending, and controlling project costs.

■ 7.2 Estimate costs—The process of developing an approximation of the monetary resources needed to complete project activities.

■ 7.3 determine Budget—The process of aggregating the estimated costs of individual activities or work packages to establish an authorized cost baseline.

■ 7.4 control costs—The process of monitoring the status of the project to update the project costs and managing changes to the cost baseline.

About Project Cost Management

■ Project Cost Management should consider the stakeholder requirements for managing costs. Different stakeholders will measure project costs in different ways and at different times

■ Project Cost Management is primarily concerned with the cost of the resources needed to complete project activities. Project Cost Management should also consider the effect of project decisions on the subsequent recurring cost of using, maintaining, and supporting the product, service, or result of the project

Cont..

■ In many organizations, predicting and analyzing the prospective financial performance of the project’s product is performed outside of the project. When such predictions and analyses are included, Project Cost Management may address additional processes and numerous general financial management techniques such as return on investment, discounted cash flow, and investment payback analysis.

Process 1: Plan Cost Management■ Plan Cost Management is the process that establishes the policies,

procedures, and documentation for planning, managing, expending, and controlling project costs. The key benefit of this process is that it provides guidance and direction on how the project costs will be managed throughout the project

Project Cost Management: Input

■ Project Mg Plan:Scope Baseline, Schedule Baseline,etc

■ Proj Charter:Summary Budget

■ Enterprise environtment Factor:Culture, Market Condition of Product

■ Organizational Process Assets:Financial Database, Lesson learned doc.

Tools and Technique

■ Expert judgment, guided by historical information, provides valuable insight about the environment and information from prior similar projects. Expert judgment can also suggest whether to combine methods and how to reconcile differences between them.

■ Analytical Technique.Organizational policies and procedures may influence which financial techniques are employed in these decisions. Techniques may include (but are not limited to): payback period, return on investment, internal rate of return, discounted cash flow, and net present value.

■ MeetingsProject teams may hold planning meetings to develop the cost management plan. Attendees at these meetings may include the project manager, the project sponsor, selected project team members, selected stakeholders, anyone with responsibility for project costs, and others as needed

Output

■ Cost Management Plancomponent of the project management plan and describes how the project costs will be planned, structured, and controlled

Process 2:Estimate Cost

■ Estimate Costs is the process of developing an approximation of the monetary resources needed to complete project activities. The key benefit of this process is that it determines the amount of cost required to complete project work

■ Cost estimates are a prediction that is based on the information known at a given point in time. Cost estimates include the identification and consideration of costing alternatives to initiate and complete the project. Cost tradeoffs and risks should be considered, such as make versus buy, buy versus lease, and the sharing of resources in order to achieve optimal costs for the project.

Inputs:

■ cost Management Plan■ Human resource Management Plan■ Scope Baseline

Project scope statement, WBS■ Project Schedule

Gantt Chart■ Risk register

Risks, which can be either threats or opportunities, typically have an impact on both activity and overall project costs

■ Enterprise Environmental FactorsMarket Condition, Published commercial information

■ Organizational Process Assets:Cost estimating policies, Cost estimating templates, Historical information, and Lessons learned.

Tools and Technique

■ Expert JudgmentExpert judgment, guided by historical information, provides valuable insight about the environment and information from prior similar projects. Expert judgment can also be used to determine whether to combine methods of estimating and how to reconcile differences between them.

■ Analogous EstimatingAnalogous cost estimating uses the values such as scope, cost, budget, and duration or measures of scale such as size, weight, and complexity from a previous, similar project as the basis for estimating the same parameter or measurement for a current projec

■ Parametric EstimatingParametric estimating uses a statistical relationship between relevant historical data and other variables

■ Bottom-up EstimatingBottom-up estimating is a method of estimating a component of work. The cost of individual work packages or activities is estimated to the greatest level of specified detail. The detailed cost is then summarized or “rolled up” to higher levels for subsequent reporting and tracking purpose

■ three-Point EstimatingMost likely (cM). The cost of the activity, based on realistic effort assessment for the required work and any predicted expenses. Optimistic (cO). The activity cost based on analysis of the best-case scenario for the activity. Pessimistic (cP). The activity cost based on analysis of the worst-case scenario for the activityDepending on the assumed distribution of values within the range of the three estimates the expected cost, cE, can be calculated using a formula. Formula:• triangular distribution. cE = (cO + cM + cP) / 3• Beta distribution (from a traditional PERT analysis). cE = (cO + 4cM + cP) /

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■ Resserve analysisCost estimates may include contingency reserves (sometimes called contingency allowances) to account for cost uncertainty

■ Cost of Quality■ Project Management Software

Outputs

■ Activity cost Estimates■ Project documents updates

Process 3:Determine Budget

■ Determine Budget is the process of aggregating the estimated costs of individual activities or work packages to establish an authorized cost baseline. The key benefit of this process is that it determines the cost baseline against which project performance can be monitored and controlled

■ A project budget includes all the funds authorized to execute the project. The cost baseline is the approved version of the time-phased project budget, but excludes management reserves.

Inputs, Tools, Output

Input:

■ Cost Management Plan■ Scope Baseline:

Project scope statement, WBS■ Activity cost Estimates■ Project Schedule■ risk register■ organizational Process Assets:

Cost budgeting-related policies, procedures, and guidelineCost Budgeting toolReporting Method

Tools and Technique

■ Cost AggregationCost estimates are aggregated by work packages in accordance with the WBS. The work package cost estimates are then aggregated for the higher component levels of the WBS (such as control accounts) and ultimately for the entire project.

■ Reserve AnalysisBudget reserve analysis can establish both the contingency reserves and the management reserves for the project

■ Funding Limit reconciliationThe expenditure of funds should be reconciled with any funding limits on the commitment of funds for the project.

Output

■ Cost BaselineThe cost baseline is the approved version of the time-phased project budget, excluding any management reserves, which can only be changed through formal change control procedures and is used as a basis for comparison to actual results

■ Project Funding requirementsTotal funding requirements and periodic funding requirements (e.g., quarterly, annually) are derived from the cost baseline. The cost baseline will include projected expenditures plus anticipated liabilities

■ Project documents updates:Risk register,Activity cost estimates, Project schedule.

Process 4: Control costs■ Control Costs is the process of monitoring the status of the project to

update the project costs and managing changes to the cost baseline. The key benefit of this process is that it provides the means to recognize variance from the plan in order to take corrective action and minimize risk

■ Updating the budget requires knowledge of the actual costs spent to date. Any increase to the authorized budget can only be approved through the Perform Integrated Change Control process

includes

■ Influencing the factors that create changes to the authorized cost baseline; ■ Ensuring that all change requests are acted on in a timely manner■ Managing the actual changes when and as they occur■ Ensuring that cost expenditures do not exceed the authorized funding by period,

by WBS component, by activity, and in total for the project■ Monitoring cost performance to isolate and understand variances from the

approved cost baseline■ Monitoring work performance against funds expended■ Preventing unapproved changes from being included in the reported cost or

resource usage■ Informing appropriate stakeholders of all approved changes and associated cost■ Bringing expected cost overruns within acceptable limits.

Inputs:

■ Project Management Plan:Cost Baseline, Cost Management Plan

■ Project Funding requirements■ Work Performance data

Work performance data includes information about project progress, such as which activities have started, their progress, and which deliverables have finished. Information also includes costs that have been authorized and incurred.

■ Organizational Process Assets: cost control-related policies, procedures, and guidelines;

Tools and Technique

■ Earned Value ManagementEarned value management (EVM) is a methodology that combines scope, schedule, and resource measurements to assess project performance and progress

1. Planned value. Planned value (PV) is the authorized budget assigned to scheduled work. 2. Earned value. Earned value (EV) is a measure of work performed expressed in terms of the budget authorized for that work3. Actual cost. Actual cost (AC) is the realized cost incurred for the work performed on an activity during a specific time period

Outputs:

■ Work Performance InformationThe calculated CV, SV, CPI, SPI, TCPI, and VAC values for WBS components, in particular the work packages and control accounts, are documented and communicated to stakeholders.

■ Ccost Forecasts:Calculated EAC value or a bottom-up EAC value

■ Change requests■ Project Management Plan updates■ Project documents updates:

Cost Estimates, Basis Estimates■ Organizational Process Assets updates:

Cause of variances, Corrective Action, Financial Database