Lecture 10:

Project Cost Management

TM 420 Notes

The Importance of Project Cost Management

Construction projects have a poor track
record for meeting cost goals;
Average cost overrun is over of 100% of
the original estimates (based on a study
conducted in late 1990s);
The main objective by a contractor in a
construction projects is to make profit;
Cost is the most sensitive project
performance parameter.
TM 420 Notes

What is Cost and Project Cost

Management?
Cost is a resource sacrificed or fore-gone
to achieve a specific objective or
something given up in exchange
Costs are usually measured in monetary
units like Tshs, dollars, Euro, etc.
Project cost management includes the
processes required to ensure that the
project is completed within an approved
budget
TM 420 Notes

Project Cost Management Processes

Resource planning: determining what

resources and quantities of them should

be used;
Cost estimating: developing an estimate
of the costs and resources needed to
complete a project;

TM 420 Notes

 Cost budgeting: allocating the overall

cost estimate to timing of individual

work items to establish a baseline for
measuring performance
Cost control: controlling changes to the
project budget

TM 420 Notes

Resource Planning
The nature of the project and the

organization will affect resource planning

Some questions to consider:
How difficult will it be to do specific
tasks on the project?
Is there anything unique in this projects
scope statement that will affect
resources?

TM 420 Notes

 What is the organizations history in

doing similar tasks?
Does the organization have or can they
acquire the human resources,
equipment, and materials that are
capable and available for performing
the work?
At what cost?

TM 420 Notes

Cost Estimating
An important output of project cost

management is a cost estimate.

There are several types of cost estimates
and tools and techniques to help create
them.
It is also important to develop a cost
management plan that describes how
cost variances will be managed on the
project.
TM 420 Notes

Table 10.1 Types of Cost Estimates (for large projects)

Type of Estimate

When Done

Why Done

How Accurate

Rough Order of
Magnitude
(ROM)

Very early in the

project life cycle,
often 35 years
before project
completion

Provides rough
figure of cost for
selection
decisions

25%, +75%

Budgetary

Early, 12 years
out

Puts actual figure

in the budget
plans

10%, +25%

Definitive

Later in the
project, < 1 year
out

Provides details
for tendering,
estimate actual
costs

5%, +10%

TM 420 Notes

Cost Estimation Tools and Techniques

Four basic tools and techniques for cost

estimates:
analogous or top-down: use the actual
cost of a previous, similar project as the
basis for the new estimate;
bottom-up: estimate individual work
items and sum them to get a total
estimate;

TM 420 Notes

10

 parametric: use project characteristics

in a mathematical model to estimate
costs; (cost capacity models; cost as
function of key parameters; and
computerized tools: use spreadsheets,
project management software, or other
software to help estimate costs based on
designs and resources cost database
TM 420 Notes

11

Figure 10.1 Computer Based Cost Estimate Concept

Computerized
design
Analysis of
Items & Costs

Cost Estimate

Cost Data Base

TM 420 Notes

12

Typical Challenges with Construction Cost

Estimates
Developing an estimate for a large project is

a complex task requiring a significant amount

of effort. Remember that estimates are
done at various stages of the project
Many people doing estimates have little
experience doing them. Try to provide
training and mentoring

TM 420 Notes

13

 People have a bias toward underestimation.

Review estimates and ask important

questions to make sure estimates are not
biased
Management wants a number for a bid, not
necessarily a real estimate. Project
managers must negotiate with project
sponsors to create realistic cost estimates
TM 420 Notes

14

Cost Budgeting
Cost budget involves allocating the project cost estimate to individual work items and providing a

cost baseline;
A project budget provides information on the expected expenditure per project planning period;
A typical cumulative cost curve presents the expected cumulative project budget

TM 420 Notes

15

Cost Control
Project cost control includes

monitoring cost performance

ensuring that only appropriate project
changes are included in a revised cost
baseline
informing project stakeholders of
authorized changes to the project that
will affect costs
Earned value analysis is an important
tool for cost control
TM 420 Notes

16

Earned Value Analysis (EVA)

EVA is a project performance

measurement technique that integrates

scope, time, and cost data
Given a baseline (original plan plus
approved changes), you can determine
how well the project is meeting its goals
Actual data and information must be
entered and analysed periodically to use
EVA.

TM 420 Notes

17

Earned Value Analysis Terms

Budgeted cost of work scheduled (BCWS), also

called the BUDGET, is that portion of the

approved total cost estimate planned to be spent
on an activity during a given period
Actual cost of work performed (ACWP), also
called ACTUAL COST, are the total direct and
indirect costs incurred in accomplishing work on
an activity during a given period
Budgeted cost of work performed (BCWP), also
called EARNED VALUE, is the percentage of work
actually completed multiplied by the planned cost
(or BCWS)
TM 420 Notes

18

Table 10-2 Earned Value Calculations for One Activity After Week One
Week 1

Week 2

Site Establishment

10,000

10,000

Weekly Plan

10,000

10,000

Weekly Actual

15,000

5,000

20,000

Cost Variance

-7,500

Schedule Variance

-2,500

Cost Performance
Index

50%

Schedule
Performance Index

75%

Activity

Total

TM 420 Notes

% Complete
after Week 1

Earned Value
after Week 1
(BCWP)

75%

7,500

19

Table 10.3 Earned Value Formulas

Term

Formula

Earned Value

Budgeted Cost of Work Performed (BCWP) =

budgeted cost to date X % complete

Cost Variance

CV=BCWP-ACWP (actual cost of work performed)

Schedule Variance

SV=BCWP-BCWS (budgeted cost of work

scheduled)

Cost Performance Index

CPI=BCWP/ACWP

Schedule Performance
Index

SPI = BCWP/BCWS

To estimate what it will cost to complete a project or how

long it will take based on performance to date, divide the
budgeted cost or time by the appropriate index.
TM 420 Notes

20

Rules of Thumb for EVA Numbers

Negative numbers for cost and schedule

variance indicate problems in those areas.

The project is costing more than planned or
taking longer than planned
CPI and SPI less than 100% indicate problems

TM 420 Notes

21

Figure 10.2 Earned Value Calculations for a One-Year

Project After Five Months

Excel file
TM 420 Notes

22

Figure 10-3. Earned Value Chart for Project After Five

Months
EAC
BAC

100,000
90,000
80,000
70,000

BCWS

60,000
50,000

If BCWP line is below

others, things could be
better!

ACWP

40,000
30,000

BCWP

20,000
10,000
1

10

11

12

Month
BCWS or Cumulative Plan

ACWP or Cumulative Actual

BCWP or Cumulative EV

Excel file
TM 420 Notes

23

Using Software to Assist in Cost Management

Spreadsheets are a common tool for resource

planning, cost estimating, cost budgeting, and cost

control
Many companies use more sophisticated and
centralized financial applications software for cost
information
Project management software has many cost-related
features

TM 420 Notes

24