Project Cost Management
§ important cost management/calculation terms:
§ sunk cost – cost already incurred in the past and cannot be recovered, do not consider any more
§ opportunity cost – difference in value between one path vs alternative (= 100% of the value of next best alternative)
§ value analysis/ engineering – cost reduction without affecting the scope
§ Benefit-Cost Analysis (BCA) / Cost-Benefit Analysis (CBA) – determine feasibility, bigger benefit/cost ratio (BCR)
§ Payback Period – the length of time to recover the investment
§ Return on Investment (ROI) – the efficiency of investment = (Gain-Cost)/Cost
§ Time Value of Money – Present Value (PV) = value / (1+interest rate)*year, Future Value (FV) = value * (1+interest rate)*year
§ Net Present Value (NPV) = PV of cash inflows – PV of cash outflows (cost)
§ funding for the project: self-fund, funding with equity, funding with debts
§ discount rate – rate used to calculate the present value of expected yearly benefits and costs
Plan Cost Management
§ Inputs: Project Charter, Project Management Plan, EEF, OPA
§ Tools & Techniques: Expert Judgement, Data Analysis, Meetings
§ Outputs: Cost Management Plan
§ The Cost Management Plan establishes
§ level of accuracy and level of precision
§ unit of measurement
§ WBS procedure links (to control account (CA))
§ control threshold
§ earned value rules of performance, reporting, funding and processes
§ Life cycle costing = total cost of ownership: production cost, running and maintenance cost, etc.
§ Data analysis techniques include:
§ alternatives analysis — strategic funding options, ways to acquire project resources
Estimate Costs
§ Inputs: Project Management Plan, Project Documents, EEF, OPA
§ Tools & Techniques: Expert Judgement, Analogous Estimating, Parametric Estimating, Bottom-up Estimating, Three-point Estimating, Data Analysis, Project Management Information System, Decision Making
§ Outputs: Cost Estimates, Basis of Estimates, Project Document Updates
§ look for ways to reduce cost
§ ensure the subject matter experts (SME) to deliver the estimates (which is much more accurate)
§ cost estimate to be based on WBS
§ Cost Types
§ Variable costs – costs change with the amount of work, e.g. hourly consultants
§ Fixed costs – costs that are constant, e.g. equipment leases
§ Direct costs – directly attributed to the project
§ Indirect costs – shared costs like AC, lighting, etc.
§ Data Analysis Techniques
§ Alternatives analysis
§ Reserve analysis
§ Cost of quality – cost of conformance and non-conformance
§ Cost Estimate Tools
§ Analogous Estimating (Top Down Estimate) — compare to a similar project in the past (an estimating heuristic/rule of thumb)
§ Parametric Estimating — use a parameter and repetitive units of identical work
§ Bottom-up Estimating — detailed estimates of each individual activity from historical data, more accurate and time-consuming
§ Three-point Estimating — taking into accounts of the pessimistic, optimistic and most likely estimates
§ Activity Cost Estimates may include indirect cost and contingency reserves
§ usually to be expressed in a range of values
§ Basis of Estimates – detailed analysis on how the cost estimate was derived (assumptions, constraints, possible range (+/-15%), confidence level of final estimate)
Determine Budget
§ Inputs: Project Management Plan, Project Documents, Business Documents (business case, benefits management plan), Agreements, EEF, OPA
§ Tools & Techniques: Expert Judgement, Cost Aggregation, Data Analysis, Historical Relationships, Funding Limit Reconciliation, Financing
§ Outputs: Cost Baseline, Project Funding Requirements, Project Document Updates
§ Budget is more about when to spend money
§ Historical Relationships – analogous/parametric estimation
§ Data Analysis => Reserve Analysis – addresses Management Reserve (unknown unknowns) and Contingency Reserve (known risks) [not included in calculation of earned value management]
§ Funding Limit Reconciliation – addresses variance between funding limit (e.g. monthly or yearly limit) and planned expenditure, may require rescheduling of work to level of the rate of expenditure
§ Value Engineering – to improve quality/shorten schedule without affecting the scope
§ Project Budget = Cost baseline (the approved time-phased budget) + Management Reserve
§ when management reserve is used during project execution, the amount is added to the cost baseline
§ S-curve: total project expenditure over project lifecycle
§ Financing: acquiring funding for projects, may source from internal and/or external sources
Control Costs
§ Inputs: Project Management Plan, Project Documents, Project Funding Requirements, Work Performance Data, OPA
§ Tools & Techniques: Expert Judgement, Data Analysis, To-complete Performance Index, Project Management Information System
§ Outputs: Work Performance Information, Cost Forecasts, Change Requests, Project Management Plan Updates, Project Document Updates
§ Check against the Project Funding Requirements
§ controlling costs including informing stakeholders of all approved changes and their costs
§ perform Control Cost more often during execution where money is spent fastest
§ Data analysis techniques:
§ Earned value analysis
§ Variance analysis — including schedule variance (SV), cost variance (CV), schedule performance index (SPI), and cost performance index (CPI) to check against the baseline for any variance
§ Trend analysis
§ Reserve analysis
§ Estimate at Complete:
§ new estimate required (original flawed)
§ no BAC variance
§ CPI will continue
§ sub-standard cost/schedule will continue
§ TCPI (To-complete Performance Index):
§ >1 not enough funding remain (over budget)
§ <1 more fund available than needed (under budget)
§ Earned Value Accrual
§ Discrete Efforts – describes activities that can be planned/measured for output, including Fixed Formula (activity given a % of budget of work package at start and earn the remaining when completed, e.g. 50/50, 20/80 or 0/100), Weighted Milestone (earn value for milestones of deliverables of the work package), Percentage Complete, Physical Measurement
§ Apportioned Efforts – describes work that has a direct/supporting relationship to discrete work, e.g. testing, pm activities, calculated as % of the discrete work
§ Level of Efforts (LOE) – describes activities without deliverables, e.g. troubleshooting, assigned the earned value as scheduled, without schedule variance but may have cost variance
§ SPI at end of project must be 1
§ SPI is NOT telling much information about whether the project is on schedule as the Critical Path must also be investigated to get a meaningful picture
