Lecture 08

Project Cost Management Determine project Budget

Topics
Project Cost Management Estimate Costs Develop Budget Control Costs

Project Cost Management

Project Cost Management includes the processes involved in estimating, budgeting, and controlling costs so that the project can be completed within the approved budget. Estimate Costs Develop Budget Control Costs

Cost Management Process

Cost Management process answers the following questions:

1: How will I go about planning cost for the project? 2: How will I effectively manage the project to the cost baseline, control costs and manage cost variances?

Cost Management Plan

The cost management plan, is part of the project management plan. The cost management plan requires thinking in advance about how you will manage costs.

Cost Management Plan

The cost management plan describes how cost variances will be managed (e.g., different responses to major problems than to minor ones). A cost management plan may be formal or informal, highly detailed or broadly framed based on the needs of the project stakeholders.

Cost Management Plan

The cost management plan can establish the following:

Level of accuracy Units of measure Whether costs will include both direct costs and indirect costs Control thresholds (Amount of variation allowed

before taking action)

Rules of performance measurement Reporting formats Process descriptions

Value Analysis
Systematic use of techniques to identify the required project functions, assign values to these functions and provide functions at the lowest overall cost without loss of performance. If a team is looking at decreasing project cost but maintaining the same scope, they are performing the value analysis.

Estimate Costs
Estimate Costs is the process of developing an approximation of the monetary resources needed to complete project activities. Cost estimates are a prediction that is based on the information known at a given point in time.

Estimate Costs
Mostly activities are used to create cost estimates. However, on some large projects costs might be more practical to estimate at control account level.

Estimate Costs What is Estimating?

Total costs of all the work needed to complete to the project.

Which includes, But not limited to costs of: Quality efforts, Risk efforts, Project managers time, Project management activities, Costs directly associated with the project, including training for the project, paper, pencils needed, labor etc, office expenses, Overhead costs, such as management salaries and general office expenses.

Types Costs
Direct Costs
Costs directly attributable to the work on the project. Examples are costs of material, equipment and human resources used on the project

Indirect Costs
These costs are overhead items or costs incurred for the benefit of more than one project. Examples included taxes, head office cost and project office develpoment

Types Costs
Variable Costs
Cost which change with the amount of work. Examples: cost of material, supplies and wages

Fixed Costs
Costs which do not change as production changes. Examples: Setup, rental etc

Requirements of Estimating Costs

Scope baseline Project schedule Human resource plan Risk Register Organisational process asset Enterprise environmental factors Project management costs

Modes of Estimating
One Point Estimate Analogous Estimating Parametric Estimating Three-Point Estimates Bottom-Up Estimating Reserve Analysis Vendor Bid Analysis

Analogous Estimating
Analogous estimating, also called top-down estimating, means using the actual cost of a previous, similar project as the basis for estimating the cost of the current project. It is frequently used to estimate total project costs when there is a limited amount of detailed information about the project (e.g., in the early phases). Analogous estimating is a form of expert judgment

Parametric Modeling
Parametric modeling involves using project characteristics (parameters) in a mathematical model to predict project costs. Models may be simple (residential home construction will cost a certain amount per square foot of living space) or complex (one model of software development costs uses 13 separate adjustment factors each of which has 57 points on it).

Parametric modeling Both the cost and accuracy of parametric models varies widely. They are most likely to be reliable when (a) the historical information used to develop the model was accurate, (b) the parameters used in the model are readily quantifiable, and (c) the model is scalable (i.e., it works as well for a very large project as for a very small one).

BottomBottom -up estimating This technique involves estimating the cost of individual work items, then summarizing or rolling-up the individual estimates to get a project total.

Reserve Analysis
To accommodate the cost and time risk in a project estimate through the use of reserves. Risk contingency reserves (known risks) Lump Sum Management Reserve (unknown risks)

Vendor Bid Analysis

Cost estimating methods may include analysis of what the project should cost, based on the responsive bids from qualified vendors.

Accuracy of Estimates
Rough order of Magnitude (ROM) Estimate
This type of estimate is usually made during the initiating process. A typical range of estimate is +/+/-50 percent from actual, but this range can vary depending on how much is known about the project when creating the estimates.

Budget Estimate
This type of estimate is usually made during the planning phase and is in the range of -10 to +25 +25 percent from actual.

Definitive Estimate
Later during the project the estimate will become more refined. Some project managers use the range of +/+/- 10 percent from actual, while others use -5 to +10 +10 percent from actual.

Determine Budget
Determine Budget is the process of aggregating the estimated costs of individual activities or work packages to establish an authorized cost baseline. This baseline includes all authorized budgets, but excludes management reserves.
Cost Baseline = Contingency reserves + Project cost Cost Budget = Cost Baseline + Management Reserves Cost baseline represents the funds authorized for the project manager to manage and control. The budget is how much money the company should have available for the project.

Process of Budget Development 11 Cost Budget

Management Reserves Cost Baseline Contingency Reserves Project Estimates Control Account Estimates Work Package Estimates Activity Estimates

Cost Baseline:
The cost baseline is a time-phased budget that will be used to measure and monitor cost performance on the project. It is developed by summing estimated costs by period and is usually displayed in the form of an S-curve. Meeting the cost baseline will be a measure of project success.

Cost Performance Baseline

The cost performance baseline is an authorized time-phased budget at completion (BAC) used to measure, monitor, and control overall cost performance on the project. It is developed as a summation of the approved budgets by time period and is typically displayed in the form of an S-curve.

Project Funding Requirements

Total 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. Funding often occurs in incremental amounts that are not continuous, which appear as steps as shown. The total funds required are those included in the cost baseline, plus management reserves, if any.

Control Costs
Control Costs is the process of monitoring the status of the project to update the project budget and managing changes to the cost baseline. Updating the budget involves recording actual costs spent to date. Any increase to the authorized budget can only be approved through the Perform Integrated Change Control process. The key to effective cost control is the management of the approved cost performance baseline and the changes to that baseline.

COST CONTROL
Cost control includes: Monitoring cost performance to detect variances from plan. Ensuring that all appropriate changes are recorded accurately in the cost baseline. Preventing incorrect, inappropriate, or unauthorized changes from being included in the cost baseline. Informing appropriate stakeholders of authorized changes.

COST CONTROL
Cost control includes searching out the whys of both positive and negative variances. It must be thoroughly integrated with the other control processes (scope change control, schedule control, quality control, and others. For example, inappropriate responses to cost variances can cause quality or schedule problems or produce an unacceptable level of risk later in the project.

COST CONTROL
Influencing the factors that create changes to the authorized cost baseline, Managing the actual changes when and as they occur, Ensuring that cost expenditures do not exceed the authorized funding, by period and in total for the project, Monitoring work performance against funds expended, Acting to bring expected cost overruns within acceptable limits.

Variance analysis. Variance analysis involves

comparing actual project performance to planned or expected performance. Cost and schedule variances are the most frequently analyzed, but variances from plan in the areas of project scope, resource, quality, and risk are often of equal or greater importance.

Trend analysis. Trend analysis involves examining

project performance over time to determine if performance is improving or deteriorating.

Earned value technique. The earned value

technique compares planned performance to actual performance.

A method of measuring project performance by comparing the amount of work planned with that actually accomplished, in order to determine if cost and schedule performance are as planned.

Earn Value measurement methodology is used to measure project performance against the scope, schedule and cost baselines. Earn value technique calls the combination of these three baselines the performance measurement baseline. Earn value measurement integrates cost, time, and the work done (scope). EVM can be used to forecast future performance and project completion dates and costs. Earn value will lead to budget forecasts, change requests, and other items that will need to be communicated.

Summary
Project Cost Management Cost Management Plan Estimate Costs Modes of Estimating Estimate Types and Accuracy Determine Budget Cost Performance Baseline Control Costs Project Performance Reviews Earned Value

End