Education Edge PMP Prep Course Office Read – Project Cost Management

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 §  Earned Value Calculation §  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