Project Cost
Management
Sections of this presentation were adapted
from A Guide to the Project Management
Body of Knowledge 4th Edition, Project
Management Institute Inc., © 2009
Project Cost Management
“The processes involved in planning,
estimating, budgeting, and controlling
costs so that the budget can be completed
within the approved budget”
Why Do We Manage Cost?
Part of triple constraint, can’t manage one without
the others (scope, time, and quality)
Plots of cost and scope against plan can help spot
problems early
Today
Actual
Costs (AC)
Planned
Value (PV)
Cumulative
Value
Earned
Value (EV)
Time
Is this project
over/under budget?
Is it ahead of/behind
schedule?
Cost Management Key Terms
PV - Planned Value, estimated value of the planned work
EV – Earned Value, estimated value of work done
AC – Actual Cost, what you paid
BAC – Budget at Completion, the budget for the total job
EAC –Estimate at Completion, what is the total job
expected to cost?
ETC – Estimate to Complete, forecasted costs to complete
job
VAC – Variance at Completion, how much over/under
budget do we expect to be?
How Do We Manage Cost?
Three processes



Estimate Costs
Determine Budget
Control Costs
Estimate
Costs
Determine
Budget
Control
Costs
Estimate Costs
Enterprise
Environmental
Factors
Inputs
Tools & Techniques
Outputs
 Analogous estimating
 Determine resource cost
rates
Organizational
Process Assets
Activity Cost
Estimates
 Bottom up estimating
Project Scope
Statement
 Parametric estimating
Activity Cost
Estimates
Supporting Detail
 Project management
software
Work Breakdown
Structure
Requested Changes
 Vendor bid analysis
WBS Dictionary
 Reserve analysis
Cost Management
Plan Updates
 Cost of quality
Project
Management Plan
•Schedule Mgmt Pln
•Staffing Mgmt Pln
•Risk Register
Estimate
Costs
Determine
Budget
Control
Costs
Estimating Methods
Analogous (Top Down) estimating – Managers
use expert judgment or similar project costs
[quick, less accurate]
Bottom-Up estimating – People doing work
estimate based on WBS, rolled up into project
estimate [slow, most accurate]
Parametric estimating – Use mathematical model
(i.e. cost per sq ft). [accuracy varies] Two types:
Regression analysis – based on analysis of multiple
data points
Learning Curve – The first unit costs more than the
100th, forecasts efficiency gains
Estimating Methods
Vendor Bid Analysis – Estimating using bids +
allowances for gaps in bid scope [slow, accuracy
depends on gaps]
Reserve Analysis – Adding contingency to each
activity cost estimates as zero duration item [slow,
overstates cost]
Determine Budget
Tools & Techniques
Project Scope Statement
 Cost aggregation
Work Breakdown Structure
 Reserve analysis
Cost Baseline
 Parametric estimating
WBS Dictionary
Activity Cost Estimates
Outputs
Inputs
Project Funding
Requirements
 Funding limit reconciliation
Activity Cost Estimates
Supporting Detail
Cost Management
Plan Updates
Project Schedule
Requested Changes
Resource Calendars
Contract
Cost Management Plan
Estimate
Costs
Determine
Budget
Control
Costs
Determine Budget
Budgeting is allocating costs to work packages
to establish a cost baseline to measure project
performance
Remember Contingency items are for unplanned
but required changes it is not to cover things
such as:


Price escalation
Scope & Quality Changes
Funding Limit Reconciliation – Smoothing out
the project spend to meet management
expectations
Control Costs
Inputs
Tools & Techniques
Cost Baseline
 Cost change control system
Project Funding
Requirements
 Performance measurement
analysis
Outputs
Cost Baseline
Updates
Performance
Measurements
 Forecasting
Performance
Reports
 Project performance reviews
Forecasted
Completion
 Project management
software
Work Performance
Information
Requested Changes
 Variance management
Approved Change
Requests
Cost Estimate
Updates
Recommended
Corrective Actions
Organizational
Process Assets
Updates
Project
Management Plan
Project Management
Plan Updates
Estimate
Costs
Determine
Budget
Control
Costs
Earned Value
Progress is compared against the
baseline to determine whether
project is ahead of or behind plan
Percent complete can be difficult
to measure, some managers use
rules



50/50 Rule – Assumed 50%
complete when task started, final
50% at completion
20/80 Rule – 20% at start
0/100 Rule – No credit until complete
Planned Value
(PV) – Budgeted
Cost
Earned Value
(EV) – Actual
work completed
Actual Cost (AC)
– Costs incurred
Estimate to
Complete (ETC)
– What’s Left
Estimate at
Completion
(EAC) – What
final cost will be
Earned
Value
Graph
Variance at
Completion
(VAC)
Target
Cost &
Schedule
Planned
Value (PV)
Schedule
Variance
(Time)
Earned
Value (EV)
Earned Value Formulas
NAME
FORMULA
NOTES
Cost Variance (CV)
EV-AC
Negative = Over budget
Positive = Under budget
Schedule Variance
(SV)
EV-PV
Negative = Behind Schedule
Positive = Ahead of Schedule
Cost Performance
Index (CPI)
EV/AC
How much are we getting for every
dollar we spend?
Schedule Perform
Index (SPI)
EV/PV
Progress as % against plan
Estimate to
Complete (ETC)
EAC-AC
How much more do we have to
spend?
Variance at
Completion (VAC)
BAC-EAC
At the end of the day, how close will
we be to plan?
Estimate at
Completion (EAC)
See following slide
Earned Value Formulas (Cont’d)
NAME
Estimate at
Completion (EAC)
FORMULA
NOTES
BAC/CPI
Use if no variances from
BAC have occurred
AC+ATC
Use when original
estimate was bad. Actuals
+ New estimate
AC+BAC-EV
Use when current
variances are not expected
to be there in the future
AC+(BAC-EV)/CPI
Use when current
variances are expected to
continue
Tricks for Earned Value
EV is always first
Variance = EV minus something
Index = EV divided by something
If the formula relates to cost use AC
If the formula relates to schedule use PV
Interpreting results: negative is bad and positive is good
Interpreting results: greater than one is good, less than
one is bad
Project
Start
PV
AC
Current
Status
BAC
ETC
EAC
Terms to Remember
Present Value
Net Present Value (NPV)
Internal Rate of Return
(IRR)
Payback Period
Benefit Cost Ratio =
BCR>1, Payback is greater
than the cost
Opportunity Cost
Sunk Cost
Working Capital
Straight Line Depreciation
Accelerated Depreciation


Double Declining Balance
Sum of Years Digits
Value Analysis (Value
Engineering)
You won’t be calculating most of these numbers on the test,
just remember the concepts for general questions