Project Cost
Management
BOOK 5, PROJECT MANAGEMENT
BY
AMIR MANZOOR
Engr. Dr. Amir
Manzoor
Copyright © 2019 by Amir Manzoor
No part of this book shall be reproduced, stored in retrieval
system, or transmitted by any means, electronic, mechanical,
photocopying, recording, or otherwise, without prior written
permission form the author. No patent liability is assumed with
respect to the use of the information contained herein. While every
precaution has been taken in the preparation of this book, the
publisher and authors assumes no responsibility for errors and
omissions. Neither is any liability assumed for damages resulting
from the use of the information contained herein. All inquiries
should be addressed to the author.
Project Cost Management
ISBN-13: 978-969-709-053-2
All rights reserved under the copyright laws of the United States of
America.
Printed in the United States of America
Trademark Acknowledgements
Full acknowledgement is given of all proprietary trademarks and
registered trademarks that are mentioned in this book. In addition,
terms suspected of being trademarks or series marks have been
appropriately capitalized, author cannot attest to the accuracy of
this information. Use of a term in this book should not be regarded
as affecting the validity of any trademark or service mark.
Engr. Dr, Amir Manzoor
iv
DEDICATION
To the faculty, professionals, and students dedicated to the creation and
dissemination of knowledge about project management.
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Project Cost Management
ABOUT THE AUTHOR
Engr. Dr. Amir Manzoor holds a PhD in
management sciences. He is a graduate of
NED
University,
Pakistan,
Lahore
University of Management Sciences (LUMS),
Pakistan, and Bangor University, United
Kingdom. He has more than 20 years of
diverse professional and teaching experience
working at many renowned national and
international organizations and higher
education institutions. His research interests
include E-commerce, Strategic Management,
Enterprise Resource Planning (ERP), Project Management, Supply
Chain Management, Data Analysis, and Technology applications.
His published research articles/book chapters have received more
than 180 citations. He has published books that have been adopted
as textbook/reference books in curriculum of undergraduate of
graduate programs of more than 20 large and reputed Asian and
European universities. Amir can be contacted at
amir@amirmanzoor.com.
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Engr. Dr, Amir Manzoor
viii
PREFACE
According to the latest statistics, US alone spend approximately
$2.3 trillion annually on projects. Around the globe, nearly $10
trillion is spent on all kinds of projects. Great project management
can deliver success by providing clear objectives, ample resources,
realistic planning, low risk, high quality deliverables, efficient
budget utilization, and on time delivery of product. This book is
part of a series of books titled “Project Management by Amir
Manzoor”. This series focusses on Project Management Body of
Knowledge (PMBOK) 6th Edition of Project Management
Institute (PMI), USA to provide comprehensive coverage of all
aspects of project management. PMBOK contains one of the most
widely used standard terminology, best practices, and process
guidelines around project management. This book series includes
11 books providing coverage of all areas of project management.
This book covers fundamentals of project cost management. The
important topics covered include cost management planning, cost
estimation, budget determination, and cost control. Compared
with available texts on project management, the perspective of this
book is global project management. The book is written in simple
language, provides up-to-date coverage of covered topics. This
book is useful for undergrad and graduate students, professionals,
and anyone looking to gain a solid foundation to continue their
learning of the discipline of project management. The book series
“Project Management by Amir Manzoor” has a dedicated website
http://www.pmbyam.com. A companion Facebook page is also
available.
Engr. Dr. Amir Manzoor
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Engr. Dr, Amir Manzoor
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Project Cost Management
ACKNOWLEDGEMENTS
The final shape of this book would not have been possible without
the contribution of so many people that invested their time and
energy to provide valuable ideas and suggestions. Collective
wisdom, work, and experience of many professors, researchers,
students, and practitioners have enriched the text. All the
references to the published work have been provided in the
bibliography section. I am highly indebted and thankful to all those
people who helped shape the development of this text. My special
thanks and appreciation for all those people helped shape the
development of this text by providing valuable material and
suggestions for this book. I would like to thank my colleagues and
friends at many universities in Pakistan, India, United States,
Canada, Germany, France, Japan, UK, China, Netherlands,
Turkey, Russia, Belgium, Australia, Austria, Denmark, Sweden,
Spain, and New Zealand.
I also want to thank you, the reader, for investing the time and
effort to read and study this text. I have put significant energy and
effort to make sure this text provides you the knowledge required
to understand, formulate, implement, and evaluate projects for any
organization with which you become associated. Finally, I want to
welcome and invite your suggestions, ideas, thoughts, comments,
and questions regarding any part of this text or the supplementary
materials. Please contact me at amir@amirmanzoor.com or write
me at the Management Sciences Department, Bahria University,
13, National Stadium Road, Karachi, Pakistan 75260. I sincerely
appreciate and need your input to continually improve this text in
future editions. I will especially appreciate if you are willing to draw
my attention to specific errors or deficiencies in coverage or
exposition.
Thank you for using this text.
Engr. Dr. Amir Manzoor
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Engr. Dr, Amir Manzoor
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Project Cost Management
List of Figures
FIGURE 1: COST AGGREGATION ........................................... 41
FIGURE 2: EVA COMPONENTS: THE S-CURVE ..................... 48
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Engr. Dr, Amir Manzoor
List of Tables
TABLE 1: COMPARISON OF ESTIMATION TECHNIQUES ..... 27
TABLE 2: COMPARISON OF DIFFERENT RESERVES ........... 30
TABLE 3: KEY TERMS OF EVM, THEIR INTERPRETATION,
AND FORMULAS ...................................................................... 55
TABLE 4: INTERPRETING COST AND SCHEDULE
VARIANCE/INDEX..................................................................... 58
TABLE 5: EVM CALCULATION ................................................ 61
xiv
CONTENTS
CHAPTER 1: INTRODUCTION TO PROJECT COST
MANAGEMENT ........................................................................... 1
INTRODUCTION .................................................................................................. 1
KEY PROCESSES OF COST MANAGEMENT ................................................... 1
Plan Cost Management ...................................................................................... 1
Estimate Costs ................................................................................................... 2
Determine Budget ............................................................................................... 2
Control Costs ..................................................................................................... 2
KEY CONCEPTS OF PROJECT COST MANAGEMENT ................................... 2
SIGNIFICANCE OF PROJECT COST MANAGEMENT ..................................... 3
BEST PRACTICES OF PROJECT COST MANAGEMENT.................................. 3
TRENDS AND EMERGING PRACTICES OF PROJECT COST MANAGEMENT
............................................................................................................................... 4
TAILORING CONSIDERATIONS FOR PROJECT COST MANAGEMENT ...... 5
Knowledge Management ...................................................................................... 5
Estimating and Budgeting................................................................................... 5
Earned Value Management ............................................................................... 5
Use of Agile Approach ....................................................................................... 5
Governance ......................................................................................................... 6
CONSIDERATIONS FOR AGILE/ADAPTIVE ENVIRONMENTS ................... 6
CHAPTER 2: PLANNING COST MANAGEMENT ....................... 7
INTRODUCTION ................................................................................................. 7
PLANNING COST MANAGEMENT: INPUTS .................................................... 7
Project Charter ................................................................................................... 7
Project Management Plan ................................................................................. 10
Enterprise Environmental Factors (EEF) ....................................................... 12
Organizational Process Assets (OPA).............................................................. 13
PLANNING COST MANAGEMENT: TOOLS AND TECHNIQUES ................ 14
Expert Judgement............................................................................................. 14
Data Analysis ................................................................................................. 17
Meetings ........................................................................................................... 18
PLANNING COST MANAGEMENT: OUTPUTS .............................................. 18
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Engr. Dr, Amir Manzoor
Cost Management Plan .................................................................................... 18
CHAPTER 3: ESTIMATING PROJECT COSTS ........................ 21
INTRODUCTION ............................................................................................... 21
ESTIMATING COSTS: INPUTS ......................................................................... 22
Project Management Plan ................................................................................. 22
Project Documents ............................................................................................ 22
Enterprise Environmental Factors (EEF) ....................................................... 23
Organizational Process Assets (OPA).............................................................. 23
ESTIMATING COSTS: TOOLS AND TECHNIQUES ....................................... 24
Expert Judgement............................................................................................. 24
Analogous Estimating ...................................................................................... 24
Parametric Estimating...................................................................................... 25
Bottom-up Estimating ...................................................................................... 25
Three-Point Estimating .................................................................................... 25
Data Analysis ................................................................................................. 28
Project Management Information System (PMIS) ............................................. 30
Decision Making .............................................................................................. 31
ESTIMATING COSTS: OUTPUTS ..................................................................... 32
Cost Estimates ................................................................................................. 32
Basis of Estimates ............................................................................................ 33
Project Documents Updates .............................................................................. 33
CHAPTER 4: DETERMINING BUDGET .................................... 37
INTRODUCTION ............................................................................................... 37
DETERMINING BUDGET: INPUTS ................................................................. 37
Project Management Plan ................................................................................. 37
Project Documents ............................................................................................ 37
Business Documents.......................................................................................... 38
Agreements ....................................................................................................... 39
Enterprise Environmental Factors (EEF) ....................................................... 39
Organizational Process Assets (OPA).............................................................. 40
DETERMINING BUDGET: TOOLS AND TECHNIQUES ............................... 40
Expert Judgement............................................................................................. 40
Cost Aggregation .............................................................................................. 41
Data Analysis ................................................................................................. 41
Historical Information Review .......................................................................... 41
Funding Limit Reconciliation ........................................................................... 42
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Project Cost Management
Financing ......................................................................................................... 42
DETERMINING BUDGET: OUTPUTS ............................................................. 42
Cost Baseline .................................................................................................... 42
Project Funding Requirements........................................................................... 43
Project Documents Updates .............................................................................. 43
CHAPTER 5: CONTROLLING COSTS ...................................... 45
INTRODUCTION ............................................................................................... 45
CONTROLLING COSTS: INPUTS ..................................................................... 45
Project Management Plan ................................................................................. 45
Project Documents ............................................................................................ 46
Project Funding Requirements........................................................................... 46
Work Performance Data .................................................................................. 46
Organizational Process Assets (OPA).............................................................. 46
CONTROLLING COSTS: TOOLS AND TECHNIQUES ................................... 47
Expert Judgement............................................................................................. 47
Data Analysis ................................................................................................. 48
To-Complete Performance Index (TCPI) .......................................................... 63
Project Management Information System (PMIS) ............................................. 64
CONTROLLING COSTS: OUTPUTS ................................................................. 64
Work Performance Information ........................................................................ 64
Cost Forecasts .................................................................................................. 65
Change Requests............................................................................................... 65
Project Management Plan Updates ................................................................... 66
Project Documents Updates .............................................................................. 67
APPENDICES ............................................................................ 68
APPENDIX 1: CASE STUDY: PROJECT COST MANAGEMENT ................... 70
APPENDIX 2: COST MANAGEMENT PLAN .................................................. 72
APPENDIX 3: COST ESTIMATES SUMMARY ................................................. 86
APPENDIX 4: PROJECT BUDGET ................................................................... 88
APPENDIX 5: BUDGET LOG ........................................................................... 92
APPENDIX 6: ACTIVITY COST ESTIMATES .................................................. 94
APPENDIX 7: VARIANCE ANALYSIS REPORT .............................................. 96
APPENDIX 8: EARNED VALUE STATUS REPORT ...................................... 100
APPENDIX 9: COST ESTIMATION WORKSHEET ....................................... 104
APPENDIX 10: BOTTOM-UP COST ESTIMATION WORKSHEET ............. 106
APPENDIX 11: PROJECT COST BASELINE .................................................. 108
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Engr. Dr, Amir Manzoor
APPENDIX 12: PROJECT BUDGET REQUEST............................................. 110
BIBLIOGRAPHY ...................................................................... 114
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CHAPTER 1: INTRODUCTION TO
PROJECT COST MANAGEMENT
Introduction
The purpose of Project Cost Management is to ensure the project will be
completed within the approved budget. This includes managing planned and
actual expenditures to the appropriated budget categories. Cost Management
is primarily concerned with the cost of the resources (staff, equipment,
hardware, software, facilities, expenses etc.) needed to complete Project
activities. Cost Management should also consider the effect of project
decisions on the cost of completing the entire Project, like scope changes as
well as strategy, requirements, and decisions.
Key Processes of Cost Management
According to PMBOK 6 (PMI, 2018), following are the key processes of
Project Cost Management.
Plan Cost Management
Plan Cost Management is the process used to estimate, budget, manage,
monitor, and control the project costs. This process establishes the policies,
procedures, and documentation for planning, managing, expending, and
controlling project costs. This process guides and direct how the project costs
would be managed throughout the project life cycle.
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Engr. Dr, Amir Manzoor
Estimate Costs
Estimate Costs is the process of developing an approximation of the
monetary resources (budget) needed to complete project work. The estimate
costs process is significant because it helps in creating the project budget.
Determine Budget
Project manager use Determine Budget process to aggregate the estimated
costs of individual activities or work packages. This aggregate of estimated
costs is used to establish an authorized cost baseline. The primary advantage
of this process is that it establishes the cost baseline. This cost baseline is
used to monitor and control project performance.
Control Costs
Control Costs process is used to monitor the status of the project with
respect to project costs. This process updates project costs and manages any
changes to the project cost baseline. This process is significant for project
management because project team can any variance from project plan. With
this knowledge, project team can take corrective actions to minimize risks.
Key Concepts of Project Cost Management
The focus of project cost management is cost of the resources needed to
complete project activities. Cost management also considers the effects of
various project decisions on recurring project costs. One typical project
decision is the number of design reviews to be undertaken. Minimizing design
reviews can decrease total project cost but increase the operating costs of the
product.
Project cost management also focus on how different project stakeholder
measure and view project costs at different times. For example, how the cost
of an acquired item should be measured? Stakeholders can measure it when
it was acquired or when the item was delivered. Project cost management can
provide various financial management tools and techniques to measure
prospective financial performance of the product of project. Some of these
techniques are return on investment, discounted cash flow, and investment
payback analysis.
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Project Cost Management
Significance of Project Cost Management
Largely, a project’s success depends on how well the project handles its costs.
A project is considered a failure if project costs exceeds project benefits. Cost
performance directly affects project outcome. Project cost management:
Sets the baseline for project costs
Ensures that a project’s budget is on track
Ensures project will be completed according to project scope
A project manager must be proficient in cost calculations and resource
estimation. All information on the need, availability, and consumption and
of project resources can be gathered, filtered, sorted, and managed by project
cost management.
Best Practices of Project Cost Management
Following are some best practices of project cost management.
Set Precise Budget Right from the Beginning
The project’s budgetary estimates are developed during project initiation.
Besides cost estimation, project manager should identify all the possible risks.
It is important that precise project budget should be set right from the
beginning. To do so, project manager should collaborate with stakeholders
and determine the cost categories used in the organization. Project manager
may use project schedule, in conjunction with project’s WBS, for close
monitoring of costs.
Perform Frequent Monitoring and Management of Project Budget
A project manager should monitor and manage the project budget. He/she
should make sure the project team understands where the project stands in
terms of cost. Regular monitoring of project budget would help project
manager to understand budget progress and identify if there are any
deviations.
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Engr. Dr, Amir Manzoor
Choose the Right People
A project manager should know his/her team’s strengths/weaknesses and
familiar with their work habits and attitudes. This way, project manager can
accurately predict how long it will take someone to do a particular task.
Perform Earned Value Analysis
Earned Value Analysis (EVA) uses three factors i.e. cost, schedule, and scope,
in order to predict completion dates, future team performance, and the likely
end cost. Many tools are available that use EVA and automatically generate
reports based on the data provided. EVA analysis provides project manage
with an accurate snapshot of how things stand in terms of project cost and
schedule performance.
Trends
and
Emerging
Practices
of
Project
Cost
Management
The most important trend in Project Cost Management is the expansion of
earned value management (EVM) concept to include the concept of earned
schedule (ES). Earned Schedule analysis uses EVM data to forecast schedule
delays. Traditional EVM metrics (such as Schedule Variance (SV) and SPI)
do not provide project manager the information needed to mitigate the risk
of schedule delays or exhausting project budgets. An SV value of zero or an
SPI value of 1.0 would show that a project is on schedule but do not show
that the project was behind schedule and delivered late. The Earned Schedule
Analysis uses different variances called Schedule (ES) and actual time (AT).
If the amount of earned schedule is greater than zero, then the project is
considered ahead of schedule. When applied on critical path activities, the
earned schedule can show a true schedule status. Earned Schedule Indicators
are cost-based instead of time-based and can be applied to the total program
or critical path work packages to track or validate project performance.
Project team can define schedule-based metrics in time units and cost based
metrics, which is far easier to understand. For example, saying that a project
is $100,000 thousand behind schedule and $40,000 thousand over budget is
less understandable then saying the project is 28 days behind schedule and
$40,000 thousand over budget.
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Project Cost Management
Tailoring Considerations for Project Cost Management
The way cost management may be applied in every project is different. This
is because every project is unique. As such, project managers need to adapt
their approach of cost management in each project they work on. While
doing such tailoring, a project manager needs to consider many things.
Knowledge Management
It is important to know whether there is any formal knowledge management
system and financial database available for project manager use. Financial
databases are used to store a rich set of operational data and performance
ratings related to all completed and active projects. Formal knowledge
management makes it possible to capture, store, share, and utilize the
knowledge and experience of various projects.
Estimating and Budgeting
To prepare project budget, project manager, and team communicates with a
variety of people responsible for managing various aspects of project costs.
Project manager would need to consider various aspects of project such as
WBS of the project, project cost estimates, historical project data, resource
information, and organizational policies. Project manager should look for any
existing formal or informal organizational policies, procedures, and
guidelines related to cost estimating and budgeting. This information can be
very helpful in managing various aspects of project costs.
Earned Value Management
Earned Value Management is a management methodology that integrates
scope, schedule, and resources. EVM is used for objective measurement of
project cost performance and progress. EVM gives project manager better
control over the project constraints.
Use of Agile Approach
In agile projects, it is important to analyze its impact on cost estimation. Agile
methodologies have a positive impact on cost estimation techniques. Agile
methodologies provide a way for project manager to have a very accurate
cost estimation.
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Engr. Dr, Amir Manzoor
Governance
A project manager should look for any formal/informal organizational
policies, procedures, and guidelines related to audit and governance. These
policies, procedures, and guidelines can have positive impact on cost
management. Audits, when done correctly, offer unparalleled opportunity to
learn from mistakes and rescue troubled projects.
Considerations for Agile/Adaptive Environments
In agile environment, project requirements change frequently and project
scope is generally not fully defined. Since these projects involve frequent
changes, detailed cost calculations may not be beneficial. Agile projects
should use techniques to develop fast, high-level forecast of project costs.
These costs can be adjusted as the project progresses and requirements
change. Detailed cost estimates are only used for short-term planning. Agile
projects may be subject to tight budgets. Agile projects require continuous
adjustments in project scope and schedule to stay within project budget.
6
CHAPTER 2: PLANNING COST
MANAGEMENT
Introduction
Plan Cost Management is the process used to estimate, budget, manage,
monitor, and control the project costs. This process establishes the policies,
procedures, and documentation for planning, managing, expending, and
controlling project costs. This process guides and direct how the project costs
would be managed throughout the project life cycle.
This process is performed once or at predefined points in the project. This
process provides a framework for each process of project cost management.
The various cost management processes use this framework to achieve
efficient and coordinated performance.
Planning Cost Management: Inputs
Project Charter
Project charter formally authorizes the existence of a project. A project
charter is developed through a collaborative process and is generally issued
by a project sponsor. This process involves project sponsor, project manager,
and initiating entity. This charter is used to enable a common understanding
by the project stakeholders and project team of the following:
Project purpose
Key project deliverables
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Engr. Dr, Amir Manzoor
Project milestones
Expected benefits
Roles and responsibilities
The project charter provides the project manager with the authority to plan,
execute, and control the project as well as apply organizational resources to
project activities. Every project needs a project charter. Project charter
formally authorizes the existence of a project and provides the project
manager with the authority to apply organizational resources to project
activities. Development of project charter is the first step of project planning.
However, it is important to note that the project charter itself may not be
enough for the project team. The project charter provides high-level
information about project and its product/service/result, which is expanded
in various subsidiary plans of project management plan.
The project charter is the basis of relationship between performing and
requesting organization. The requesting organization is the one, which
requests to complete a project. A performing organization is the one that
provides resources to complete the project. A project may have more than
one performing organization. External projects generally involve a formal
contractual relationship between the requesting and performing organization.
In such cases, project charter is used to create internal agreements within an
organization to ensure proper delivery under the contract. The project is
initiated only when a project charter is approved. It is preferable that a project
manager be identified and assigned to the project while project charter is
being developed. In any case, the project manager must be identified assigned
before the planning of project begins. However, a project charter is not
considered a contract because there is no consideration or money promised
or exchanged in its creation.
Each project charter is different with respect to the amount and types of
information each charter provides. The amount and type of information in
every charter depends on the complexity of the project and information
available when the charter was developed. Following are some important
information that a project charter may include:
Purpose of Project
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Project Cost Management
Measurable project objectives
Measurable project success criteria
High-level project requirements
High-level project assumptions and constraints
High-level description, boundaries, and key deliverables of project
Overall project risk
Milestone schedule
Pre-approved financial resources from which the detailed project
costs are developed
Project approval requirements that will influence the management
of the project costs
List of key stakeholders
Requirements for approval of project (This may include clear
description project success criteria, project approval requirements,
the name of person who would decide the project is successful, and
name of person who would sign off on the project)
Exit criteria of project (It includes conditions to be satisfied for
closing or cancelling the project or phase)
The name, responsibility, and authority level of the project manager
assigned to the project
Name and authority of the project sponsor
Project teams working on agile projects needs a clear project vision and
agreements. The project charter of agile project contains information such
as:
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Engr. Dr, Amir Manzoor
Project vision i.e. why this project exist?
Who will benefit from project and how?
Project release criteria
Flow of work (mechanism of team work)
Project Management Plan
The Project Management Plan is a central, consistent, and coherent
document. The project management plan includes all actions necessary to
execute, monitor, control, and close the project. For small projects, the
project management plan may contain all subsidiary management plans. On
large projects, these subsidiary plans may be separate from the Project
Management Plan in order to capture the necessary detail required for a large
project. The size of the project management plan and subsidiary plans should
be proportionate to the size of the project.
The project management plan describes how the project will be managed.
However, it does not describe the product, service or other project result
details. For example, the plan describes how the project will be managed
describes how the project team will manage project scope, but it does not
describe the project scope itself. The expected product, service, and related
details are captured in other project tools.
The project management plan is drafted by project manager who works in
collaboration with project team. The focus of the process of projectmanagement plan is on defining, integrating, and coordinating all subsidiary
plans into a single, cohesive project management plan. Key to developing the
project management plan is to define how project integration management
will be performed when there is interaction among the various project
processes. One example is cost estimation that not only involves process of
cost management but also integrates other processes (e.g. time, risk, and
scope). As the project environment changes, changes are also made to the
project management plan and its subsidiary plans. The length of project
management plan depends on project complexity. Large, complex projects
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Project Cost Management
will require a significant effort to develop a comprehensive project
management plan.
The intended audience for the project management plan is the Project
Sponsor(s), Project Manager, project team members, and essential
Stakeholders as they join the project. Once completed, the Project Manager
presents the project management plan to the Project Sponsor(s) for approval.
The project management is the commitment as how the project will be
conducted. As such, it is agreed to and signed by the performing organization
and stakeholders. This plan serves as a baseline against which project status
can be measured. Once developed, the project management plan is placed
under configuration management and only approved changes can be made.
The project management plan includes many components:
Requirements management plan: The requirement management plan is a
plan to manage the project requirements.
Schedule management plan: This plan details the criteria and various
activities used to develop, monitor, and control the schedule. This
plan provides processes and controls that will impact cost estimation
and management.
Cost management plan: The Cost Management Plan is used to establish
costs and track costs against work performed from the project
management perspective, in accordance with best practices.
Quality management plan: Quality management plan describes how an
organization’s quality policies, procedures, methodologies,
standards, and guidelines will be implemented to achieve the quality
objectives in the project.
Resource management plan: Project manager and team develop resource
management plan to how to identify, categorize, acquired, allocate,
manage, and release project resources.
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Engr. Dr, Amir Manzoor
Risk management plan: This plan details the mechanisms used to
identify and address project risks. This plan provides processes and
controls that will impact cost estimation and management.
Scope baseline: The scope baseline consists of three documents:
approved scope statement, work breakdown structure (WBS), and
WBS dictionary.
Schedule baseline: When the schedule model is approved, it becomes
the schedule baseline.
Cost baseline: When the time-phased project budget is approved, it
becomes the cost baseline.
Enterprise Environmental Factors (EEF)
Enterprise Environmental Factors (EEF) are any or all environmental factors
which are either internal or external to the project and have the potential to
influence success of the project. The EEFs are conditions not under the
control of the project team. EEFs can influence a project and can be either
internal or external to the organization. Some important factors include
organizational culture, environmental conditions, conditions imposed by
regulatory and legislative bodies, political environment, environment of the
market etc. These factors are usually out of project team’s control.
The EEFs that can influence this process are:
Organizational Culture and Structure
Organizational culture and structure are significant contributing factors in the
project cost management. The culture and structure of an organization may
have a high impact on a project’s ability to meet its goals. A project manager
should know the different organizational styles and cultures that can affect a
project. He/she also needs to know which person in the organization is the
decision maker or influencer and work with them to increase the possibility
of a project’s success.
Marketplace Conditions
The marketplace refers to the activity of buying and selling products that can
take place both locally and internationally. A good knowledge of marketplace
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Project Cost Management
conditions can help project manager gain a better understanding of the
competitors, degree f competition, and available resources. Various costs
estimates are based on the trends in market conditions and the implications
on the costs of the resources for the project. By considering this knowledge,
a project manager can develop a better and effective cost management plan.
Currency Exchange Rates
It is a significant factor especially for those projects where project costs are
sourced from multiple countries.
Published Commercial Information
This information may include resource rates. For example, there are
commercial databases available that track human resource costs. There are
also databases that provide standard costs for material and equipment. There
also available published seller price lists.
Project Management Information System (PMIS)
A PMIS can be used to discover alternatives ways for managing cost.
Productivity Differences
If a project involves resources located in different parts of the world, there
can be huge differences of productivity. This can have a large influence on
the cost of projects.
Organizational Process Assets (OPA)
The OPAs refer to processes, policies, procedures, and knowledge bases
belonging to organizations involved in a project. OPAs are archived at the
Project Management Organization (PMO) of an organization, if one exists.
OPAs have the potential to influence success of the project. Some of
important
The OPAs that can influence this process are:
Financial Controls Procedures
Project cost management requires that the policies, procedures, and
documentation should be established. These policies, procedures, and
documentation are used to plan, manage, expand, and control project costs.
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Engr. Dr, Amir Manzoor
A project manager should be aware of these policies, procedures, and
documentation when managing project costs.
Historical Information and Lessons Learned Repository
This may include project records, project documents, record of previous
project selection decisions, and record of previous project performance.
Financial Databases
The use of financial databases facilitates access to cost information.
Existing Policies, Procedures, and Guidelines
This includes both formal and informal policies, procedures, and guidelines
related to cost estimating and budgeting.
Planning Cost Management: Tools and Techniques
Expert Judgement
Expert judgement refers to judgment provided by individuals or groups. This
judgement is based on their expertise in a particular application area. This
expertise should be appropriate for the project activity being performed.
Such expertise may be provided by any group or person with specialized
education, knowledge, skill, experience, or training. Project manager needs,
besides his/her project team, experts who may be outside of project team.
These experts can assist the project work because of their specialized
knowledge or training. These experts are also referred as SMEs or subject
matter experts. This is because their expertise extends to a specific subject
matter, which affects the project.
Expert judgment is often used to assess the inputs used to develop the project
charter and to any technical and management details. Expert judgement is
often used to adapt the processes in a way that meets the needs of the project.
Project team uses expert judgement to interpret project performance
information. Project manager and team work in collaboration to determine
actions needed for matching project performance with expectations. Experts
consulted for expert judgement can also be part of change control board
(CCB). In performing administrative closure, use of expert judgement
14
Project Cost Management
ensures that the closure of project or phase is according to the appropriate
standards. One of the most commonly used technique of expert judgement
is Delphi technique. Some other techniques of expert judgement include
brainstorming and interviews.
The project manager should know how to obtain the necessary expert advice
and how to use this advice to take appropriate decisions for the project.
However, getting experts to provide expert judgement is not the prime
responsibility of project manager alone. Project manager, however, is
responsible for consequences of any judgement made on the basis of that
expert judgement. In many cases, the experts also get involved in developing
the best possible solution for the project.
Finding the right people with right expertise and determining the best course
of action is very challenging. This is because different experts may have
different opinions on the same issue. There are four options to use expert
judgement.
1) The project manager his/her knowledge to make the decision: This option is
used in cases where a quick decision is needed, project manager has
the subject knowledge, and the consequences are relatively limited.
2) The project manager consults with an expert and asks him/her to make decision:
This option is used in cases where a quick decision is needed, project
manager has no subject knowledge, and the consequences are
relatively limited.
3) The project manager seeks expert advice to augment his/her knowledge and
makes decision himself/herself: In this case, the project manager would
use a combination of expert advice and his/her knowledge to make
a decision. This is used in cases where the decision is important and
the project manager has subject-matter expertise.
4) The project manager seeks expert advice and facilitates decision-making: In this
case, the project manager facilitates getting expert advice and making
decision. This is used in cases where the decision involves major
consequences and project manager has no subject-matter expertise.
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Engr. Dr, Amir Manzoor
Experienced experts also understand that a key aspect of their role is to
determine the scope of accountability for their work. To facilitate the
judgement process, good experts separate their finding of facts from the
opinions they derive from the facts based on their intuition and experience,
and do not provide opinions on aspects of the problem which lay outside of
their area of expertise.
PMI outlines a framework to conduct expert judgment. This framework can
help reaching a wise decision in most situations. This framework includes
the following steps:
1. Frame the problem
2. Develop plan of getting expert
3. Select the appropriate experts,
4. Arrange briefing of experts to facilitate their effective and
meaningful contribution
5. Obtain experts’ opinions
6. Combine and analyze this information to develop your own expert
judgment
7. Document and disseminate the results
For the process of planning cost management, trained and knowledgeable
individual and groups should be consulted who have expertise in topics such
as:
Managing similar projects
Information of the industry and application area in which the project
is to be undertaken
Cost estimating
Budgeting
Earned value analysis (EVA)
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Project Cost Management
Data Analysis
Data analysis evaluates data and helps identify useful information that can be
used to facilitate decision-making. Some typical activities involved in data
analysis include data inspection, data cleaning, data transformation, and data
modeling. One important data analysis technique that can be used for the
process of planning cost management is alternatives analysis.
The objective of alternatives analysis technique is for analytical comparison
of some options to select the best option to execute and perform some of
the project work. In other words, alternative analysis is an examination of
other ways the project activities may be accomplished. Alternative analysis
can take into account factors such as operational cost, risks, effectiveness etc.
Alternatives analysis may require different tools (e.g. life-cycle costing,
sensitivity analysis, and cost-benefit analysis). For instance, different
resources may be substituted. These substitutions may have an impact on
other project constraints. Staff with lower skill levels could be used rather
than experts. This is likely to affect the time to complete the task. It could
also affect the cost in either way -- the lower skilled staff will probably have
lower salary rates, but may take enough longer that the cost ends up being
higher. Another example would be renting a larger truck -- costing more, but
potentially requiring less time and fewer trips. Analysis of alternatives can be
applied on both large and small projects. Analysis of alternatives uses good
project management processes and techniques to identify and select the best
alternative.
Following are the typical steps of conducting an analysis of alternatives.
Step 1: Identify the organizational objectives/project requirements
Step 2: Select the most viable alternatives for analysis.
Step 3: Identify assumptions that frame the analysis.
Step 4: Analyze the costs and benefits of most viable alternatives.
Step 5: Conduct a weighted score analysis.
Step 6: Recommend the alternative to be perused.
For this process, alternatives analysis is used to reviewing strategic funding
options. Some examples of such options are equity and debt financing.
Alternative analysis can also be used to review methods to acquire project
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Engr. Dr, Amir Manzoor
resources. These methods may include developing, purchasing, renting, or
leasing.
Meetings
Project manager and team use meetings to discuss and address issues
pertaining to the project. Meetings are a very useful and effective way to
develop communication and collaboration on a project team. This could
include both face-to-face and virtual meetings. Meeting can be held within
project team or between project team and stakeholders. There are different
types of meetings. A kickoff meeting is used to set the course and tone for
the entire project. A kick-off meeting is held either at the beginning of the
project planning or right before project execution. The kick-off meeting may
be held at different points in time. In projects that involve more than one
phase, a kick-off meeting is generally held before starting each phase. An agile
process meeting is also called sprint or iteration planning. A steering group
meeting is held to discuss the project’s expenditure and the overall work of
the project.
Meetings can be held to develop the cost management plan. These meetings
may be attended by following persons:
Project manager
Project sponsor
Project team members
Stakeholders
Any other person tasked with managing some aspect of project costs
Planning Cost Management: Outputs
Cost Management Plan
The cost management plan is a component of the project management plan.
The cost management plan describes how the project costs will be planned,
structured, managed, and controlled. It also describes how the project costs
will be structured into the project budget. This plan also describes different
cost management processes and their associated tools and techniques to be
used in the project. This plan also describes estimating methods used and the
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Project Cost Management
level of precision/accuracy required for the cost estimate. Following are
some examples of what cost management plan can establish.
Units of Measure: Defines unit of measurement for each resource
used on the project.
Level of Precision: Defines the degree to which cost estimates will
be rounded (either up or down). The level of precision depends on
the scope of the activities and magnitude of the project.
Level of Accuracy: Defines acceptable range used in determining
realistic cost estimates.
Control Thresholds: Specifies variance thresholds for monitoring
cost performance. A variance threshold refers to an agreed-upon
allowed amount of variation in cost performance.
Rules of Performance Measurement: Describes Earned value
management (EVM) rules of performance measurement.
Reporting Formats: Defines formats and frequency for the various
cost reports.
Organizational Procedures Links: The project cost management
plan uses WBS as the framework to develop consistent
estimates/budgets and control project costs. The control account is
a WBS component that is used for project cost accounting. Each
control account may include one or more work packages, but each
of the work packages should be associated with only one control
account. Each control account is assigned a unique accounting code.
This code is linked directly with the accounting system of the
organization.
A sample Cost Management Plan is provided in Appendix 2.
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Project Cost Management
CHAPTER 3: ESTIMATING PROJECT
COSTS
Introduction
Project manager and team use the process of Estimating Costs to develop an
approximate project budget. The estimate costs process is significant because
it helps in creating the project budget. This process is performed periodically
throughout the project as needed. A cost estimate is quantitative measure of
probable costs of resources needed to complete a particular project activity.
A cost estimate can be expressed in units of some currency (such as PKR or
US$) or in labor hours. Cost estimates may be presented at the activity level
or in summary form. A cost estimate is calculated based on information
available at a given point in time. When developing cost estimates, various
cost trade-offs and risks are taken into account. These trade-off and risks may
include make versus buy and sharing of resources.
Cost estimates are developed for all resources that will be used in a project.
These resources can be general (e.g., labor, materials, equipment, services,
and facilities) and special (e.g. inflation allowance, cost of financing etc.).
Costs estimates are reviewed and refined throughout the project life cycle.
Tis review is necessary because the new information continues to come and
various assumptions are revised throughout the project life cycle. The
accuracy of project estimates generally increases as the project progresses.
Organizations may develop the schedule of refinement of estimates and
degree of expected accuracy of estimates.
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Engr. Dr, Amir Manzoor
Estimating Costs: Inputs
Project Management Plan
Various components of project management plan are used as input for this
process. Cost management plan provides estimating methods as well as the
required degree of precision and accuracy for cost estimates. The quality
management plan is used to understand which activities and resources are
needed to achieve the quality objectives set for the project. The scope
baseline provides funding constraints for the expenditure of project funds.
The scope statement also identifies various project deliverables and their
components, describes relationships among project deliverables and, work in
each WBS component. The accuracy of the cost estimation depends on the
accuracy and details of the project scope.
Project Documents
Various project documents are used as input in this process. In the early
phases of the project, there could be various lessons learnt with regard to
developing cost estimates. These lessons are recorded in lessons learned
register. It includes the documented explicit knowledge in which the skills,
experience, and expertise of the project team and other stakeholders are
codified for reusing existing knowledge and creating new knowledge to
improve the performance of the project. The register should capture lessons
learned consistently across an organization. Capturing key project-related
data in a consistent manner helps other project teams (in a different location,
function, department etc.) filter through and identify relevant lessons. The
lessons learned register is part of the feedback report that is generated at the
end of each project phase. It is also part of the closeout report generated at
the end of the project. The lessons learned register is generally in an
organizational Lessons Learned database through which it is made available
and disseminated to all stakeholders. These lessons can be used to improve
the accuracy and precision of the cost estimates. Project schedule provides
detail of active project resources (type, quantity, and availability) and the cost
of financing (including interest charges). The duration estimates can affect
cost estimates in situation where cost of resources are in units of time or
when costs vary due to seasonal fluctuations. Resource requirement
documentation describes what type and quantity of resources each work
package or project activity requires. The risk register includes information
22
Project Cost Management
about various individual project risks that have been identified and
prioritized. Risk responses are needed against these resources. This
information is taken into consideration when developing cost estimates.
Enterprise Environmental Factors (EEF)
The EEFs that can influence this process are:
Marketplace Conditions
The marketplace refers to the activity of buying and selling products that can
take place both locally and internationally. A good knowledge of marketplace
conditions can help project manager gain a better understanding of the
competitors, degree f competition, and available resources. Various costs
estimates are based on the trends in market conditions and the implications
on the costs of the resources for the project. By considering this knowledge,
a project manager can develop a better and effective cost management plan.
Published Commercial Information
This information may include resource rates. For example, there are
commercial databases available that track human resource costs. There are
also databases that provide standard costs for material and equipment. There
also available published seller price lists.
Exchange Rates and Inflation
This factor is especially important for projects that operate with multiple
currencies over a multi-year life cycle. For such projects, project team needs
to closely watch and understand the possible impacts of fluctuations in
currencies and inflation. These fluctuations should be taken into account
when developing cost estimates.
Organizational Process Assets (OPA)
The OPAs that can influence this process are:
Cost Estimating Policies
These are organization’s internal guidelines on how to estimate cost.
Cost Estimating Templates
These templates can be used to develop cost estimate.
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Engr. Dr, Amir Manzoor
Historical Information and Lessons Learned Repository
This may include project records, project documents, record of previous
project selection decisions, and record of previous project performance.
Estimating Costs: Tools and Techniques
Expert Judgement
For the process of planning cost management, trained and knowledgeable
individual and groups should be consulted who have expertise in topics such
as:
Managing similar projects
Information of the industry and application area in which the project
is to be undertaken
Methods of cost estimating
Analogous Estimating
Analogous estimation is a technique that relies on expert judgment and
historical information of similar activities to estimate duration of future
activities of a project. This technique works only when the activities and
resources are similar there is a limited amount of detailed information about
the project. This technique is less costly, less time-consuming, but less
accurate. Estimates can be calculated for complete project or segments of a
project. An adjustment is applied to the calculated estimates. This amount of
adjustment is decided by the person who calculates the estimates. This person
decides this amount of adjustment based on his/her experience of calculating
project estimates. Less experienced persons may refer to the project records
of the previous similar projects to look for historical estimates. The DarnallPreston Complexity Index (DPCI) is an index to develop a project profile
that indicates the project complexity level. This index uses different aspects
of the project that will influence the approach to leading and executing the
project. Using DPCI, a project manager can identify projects whose profiles
are similar to the current project. A project manager can then compare the
calculated estimates with the final values of several previous projects with the
same DPCI ratings. This comparison provides project manager a reference
point to justify the calculated estimates.
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Project Cost Management
Parametric Estimating
Parametric estimating is used to estimate duration of future activities of a
project by analyzing a statistical relationship between historical data and other
variables. The variables selected describe the scope or type of project work.
The estimate must be must be scalable in order to be accurate. The calculated
estimates measure activity parameters, such as cost, budget, and duration. To
calculate activity duration, we multiply unit cost or duration with the number
of units required for the activity. Parametric estimates are more accurate than
analogous estimates. However, the accuracy of parametric estimates depends
on the data used to calculate the estimates. Parametric estimates can be
calculated for complete project or segments of a project.
Bottom-up Estimating
In bottom-up estimating technique, the work required to complete an activity
is further decomposed into more detail. An estimate is made for all such
detailed pieces of work. All these estimates are then aggregated to come up
with a total estimate for the project. The accuracy of a bottom-up estimate
depends on size and complexity of the work identified at the lower levels. A
bottom-up estimate is a more refined and accurate estimate. This technique
is time consuming and used when project team is unable to calculate activity
duration with a reasonable degree of confidence.
Three-Point Estimating
Three-point estimation technique uses three numbers to calculate estimates.
These three numbers are a most likely estimate, an optimistic estimate, and a
pessimistic estimate. The final estimate is the weighted average of these three
estimates.
Optimistic Estimate: The optimistic estimate is based on the bestcase scenario for the activity.
Most likely Estimate: This is the most likely duration estimate of the
activity.
Pessimistic estimate: The pessimistic estimate is based on the worstcase scenario for the activity.
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Engr. Dr, Amir Manzoor
One advantage of this technique is that you can get an approximate range for
an activity’s duration. This way there is less ambiguity about the expected
activity duration. The accuracy of three-point estimates depends on
estimation uncertainty and risk.
There are two generally assumed distribution of values within the range of
the three estimates: Triangular Distribution and Beta Distribution.
Triangular distribution is the simplest three-point estimate is the simple
average of the three values (known as the triangular distribution):
E = (a + m + b) / 3
The beta distribution places the final estimate closer to the most likely value:
E = (a + 4m + b) / 6
Where E = estimated cost, a = optimistic value, m = most likely value, and
b = pessimistic value
The triangular distribution is the default distribution used. Triangular
distribution is used when sufficient historical data is not available or when
estimate is calculated using judgmental data. The beta distribution is used
when there is more confidence in the most likely value, that is, where the final
estimate should be tighter to the mean.
The Table 1 provides a comparison of the four estimation techniques.
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Project Cost Management
TABLE 1: COMPARISON OF ESTIMATION TECHNIQUES
Analogous
Uses
historical
project data
Can be used
for
both
cost
and
duration
estimates
Used
for
resource
estimation
Least
accurate
Least time
consuming
Can be used
in
conjunction
with other
techniques
Parametric
Three-point
Uses
historical
project data
and
parameters
Can be used
for
both
cost
and
duration
estimates
Used
for
resource
estimation
More
accurate
than
analogous
estimates
Can be used
in
conjunction
with other
techniques
27
Uses three
estimates
Can be used
for
both
cost
and
duration
estimates
Cannot
used
for
resource
estimation
Most
accurate
More time
consuming
than
analogous
and
parametric
Cannot
used
in
conjunction
with other
techniques
Can
take
into
account risk
and
uncertainty
Bottom-up
Uses
aggregated
estimates
Can be used
for
both
cost
and
duration
estimates
Can be used
for resource
estimation
More
accurate
than
analogous
estimates
Most time
consuming
estimating
technique
Cannot
used
in
conjunction
with other
techniques
Engr. Dr, Amir Manzoor
Data Analysis
Some important data analysis techniques that can be used in this process are
discussed below.
ALTERNATIVES ANALYSIS
The technique of alternatives analysis has been discussed earlier. Alternatives
analysis can be used in the process of estimating costs as well. Take example
of a system acquisition project. The initial cost estimate for any prospective
program occurs during the early phase of the project. During this phase,
Rough Order Magnitude (ROM) cost estimates are used to gauge the
potential cost of a proposed new system. These estimates inform decision
makers of what material solutions may be feasible and supports development
of a capital investment plan. The material solutions suggested by the ROM
and the capital investment plan are feed into the alternatives analysis.
Promising concepts are evaluated using an alternatives analysis, including
costs based on a ROM cost estimate.
RESERVE ANALYSIS
On each project, a reserve is created to accommodate any risks remaining
after performing the risk management activities. Project team uses technique
of reserve analysis to accommodate and minimize impact of such risks that
may arise due to changes in project cost and schedule. A reserve analysis can
help maintain and manage the projects better. A reserve analysis establishes
the amount of two reserves: contingency reserve and management reserve.
Cost estimates may include contingency reserves. Contingency reserves, also
called contingency allowances, are used to accommodate cost uncertainty. In
monetary terms, a contingency reserve is the amount of money allocated in
the project schedule or cost baseline to accommodate unplanned changes to
costs. Contingency reserve is an estimated reserve based on various risk
management techniques. The contingency reserve may be a percentage of the
estimated cost, a fixed number, or developed using quantitative analysis
techniques. Contingency reserves can be provided at any level from the
specific activity to the entire project. Contingency reserves may be aggregate,
revised, or eliminated as precise project-related information becomes
available. Cost management documentation must clearly identify any
contingency needed. Contingency reserve is controlled by the project
manager who can delegate his/her authority control contingency reserve to
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Project Cost Management
the risk owner. Some off the techniques used to estimate contingency reserve
include Percentage of the Project’s Cost, Expected Monetary Value, Decision
Tree Analysis, and Monte Carlo Simulation.
A management reserve may also be used for project schedule. Management
reserve is an un-estimated revere used to manage the unidentified risks in a
project or unforeseen work that is within scope of the project. This reserve
can be in the form of time or cost. Since management reserve is not part of
cost baseline, project manager needs permission of sponsor to use it. A
management reserve is defined according to organization’s policy and
nature/magnitude of uncertainties. In general, management reserve is set at
5-10% of the total project cost or duration of the project. Any amount of
used management reserves is added to the cost baseline. This addition to the
cost baseline requires an approved change to the cost baseline.
Following relationship exists between contingency reserve, management
reserve, and the project budget.
Cost Baseline = Cost Estimate + Contingency Reserve
The project budget is obtained by management reserve to the cost baseline.
Project Budget = Cost Baseline + Management Reserve
The Table 2 provides a comparison of contingency reserve and management
reserve.
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Engr. Dr, Amir Manzoor
TABLE 2: COMPARISON OF DIFFERENT RESERVES
Contingency Reserve
Management Reserve
It is used to manage identified risks. It is used to manage unidentified
risks.
It is an estimated figure.
It is a percentage of the cost or
duration of the project.
The project manager has authority Project
manager
needs
over the contingency reserve
management’s permission to use
management reserve.
It is part of the performance
measurement
baseline,
cost
baseline, and the overall funding
requirements for the project.
It is not a part of the performance
measurement baseline or cost
baseline. However, it is part of the
overall project budget and funding
requirements.
COST OF QUALITY
Cost of Quality (CoQ) measures the quality performance of the project. It is
the cost to be paid in case the quality of the product/service/result provided
by the project is not up to the agreed upon quality requirements. With an
understanding of CoQ, a performing organization can integrate quality
conformance into its project management plan. Project team takes into
account CoQ while estimating project costs. Project team can use various
assumptions about costs of quality to develop cost estimates.
Project Management Information System (PMIS)
A PMIS is typically one or more software applications and a methodical
process for collecting and using project information. The PMIS allows
authorized individuals to access project status-information. Well-informed
project managers use a PMIS to keep their projects organized. PMIS decides
where and how to archive project information where it will be stored, and
for how long. A PMIS can provide help in developing cost estimates by
simplifying cost-estimating techniques to enable quick consideration of cost
estimate alternatives.
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Project Cost Management
Decision Making
Decision-making is an essential part of project management. The decision
made can range from approval of business case to approval of a vendor.
These decisions can have long-term impact on projects. Various decisionmaking techniques are used to aid the process of decision-making. Selection
of right technique is important and dependent on many factors such as
unique needs of project and stakeholders.
An important decision-making technique that can be used in this process is
voting.
VOTING
Voting, a collective decision-making technique is used to make a collective
decision or express an opinion on an issue. Examples of voting techniques
include:
Unanimity: Unanimity is a type of voting in which a decision is
reached where every member of the group agrees on a single option
or course of action. Project team uses this technique to analyze
multiple options in order to develop future action plan. Delphi
technique is one of the most commonly used technique for reaching
unanimity. In Delphi technique, a decision can be reached in two
ways: explicitly after the vote or implicitly if there is no objection. In
terms of hassle, unanimity results in least hassle for project manager.
Unanimity also shows that project team is united.
Majority: A decision that is reached with support obtained from more
than 50% of the members of the group. When there are an uneven
number of participants, it can be ensured that a decision will be
reached.
Plurality: Group discussions are often common in project
management. Plurality is one of the group decision-making methods.
In this method, the decision is taken by the biggest block of people
that come to the same result within the activity group. Plurality is
generally preferred when there are many (more than two) nominated
options.
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Engr. Dr, Amir Manzoor
Multi-Voting: This technique involves narrowing down a long list of
options to a smaller list of options. This method is preferred over
straight voting because voters can select an item that is favored by
all. Following are the steps taken to perform multi-voting.
o
Step 1: Number each idea/suggestion
o
Step 2: Decide on number of choices for each individual
o
Step 3: Each member selects choices and ranks in priority;
the highest number is given to the highest priority item
o
Step 4: Tally results
Estimating Costs: Outputs
Cost Estimates
Cost estimate is the quantitative process used to assess the possible costs to
complete different activities. Cost estimates can also be used to determine
contingency reserve and management reserve. Cost estimates can be
presented in summary form or in detail. The process takes into account
different resource estimates and constraints. Indirect costs, if they are
included in the project estimate, can be included at the activity level or at
higher levels. In this process, we also create financial plans, estimates, and
budget. The cost estimates (or activity cost estimates) are also used to control
costs in order complete a particular project within approved budget. Activity
cost estimate uses activity list and documents of the necessary activities to
determine the cost estimate for each activity. During activity cost estimation,
any changes to the activities can affect the entire cost estimate. To handle this
problem, a cost management plan is used to develop estimates for changing
tasks and managing the changes in tasks.
Supporting detail for cost estimates may include following documentation:
Basis of the estimate
All assumptions made
All known constraints
Identified risks
Range of possible estimates
Confidence level of the final estimate
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Project Cost Management
A sample Cost Estimates Summary is provided in Appendix 3.
Basis of Estimates
The basis of estimates is a method of documenting important aspects of the
project schedule estimate to mitigate the schedule risk of the project. Basis
of estimates are important for two reasons. First, it indicates how the various
estimates were derived. Second, it can be used to make a decision on how to
respond to variances. It is a document that everyone involved in project uses
to understand and assess the estimate and determine the cost, funding
options, pricing basics, cost risk, allowances, opportunities etc. The basis of
estimates should be concise, factual and describe techniques used to develop
the cost estimate. Some important inputs for basis of estimates include
estimate deliverable checklist, reference documents, benchmarking reports,
risk analysis, reconciliation reports etc. A well-written basis of the estimate
helps determine both the risks and opportunities involved in the project.
When using three-point estimates, assumptions are made. These assumptions
may come from the assumption log given or they may be developed during
the process itself. In addition to the assumptions made to form the estimates,
additional supporting details for the duration estimates may include the
following:
Documentation of known constraints and all assumptions made that
could probably influence the estimates
Range of possible estimates. This range can be expressed in terms of
plus or minus a certain percentage or the confidence level of the
estimates.
Individual project risks that could influence the estimates
Project Documents Updates
As a result of carrying out this process, various project documents may be
updated.
The process of cost estimation may make new assumptions and identify new
constraints. This process may also revisit or change the existing assumptions
and constraints. A Project Assumption is a decision taken by project team.
This decision may be valid or invalid but project team has little control over
it. One example of a typical project assumption is the assumption that
33
Engr. Dr, Amir Manzoor
resources required to deliver the project would be available. Untrue
assumptions can generate a risk. An assumption log is used to understand
what assumptions have been made in the planning and management of the
project. Assumption log contains both high-level and low-level assumptions.
Lower level assumptions are based on the tasks and products. High-level
assumptions such as "cost of financing will remain below 5%" are more
difficult to mitigate. An assumption log is created during project initiation
when forming the business case. Assumption Log is useful because it helps
to foresee potential risks and issues that will affect the overall delivery.
Assumption log is a key document used to make project plans and decisions.
An assumption log is maintained and reviewed throughout the project.
Assumption log content is used in the project charter. Assumptions in the
assumption log are prioritized based on level of uncertainty and the potential
impact to the project if the assumption proves to be incorrect. Following is
the key information stored in assumption log against each assumption.
•
Date on which the assumption was first logged
•
Category of assumption (e.g. budget, schedule etc.)
•
Name and description for the assumption
•
Level of uncertainty of the assumption (e.g. high/medium/low)
•
Impact rating of assumption (e.g. high/medium/low)
•
Owner of assumption
•
Action plan to mitigate the impact of the assumption if it turns
out to be incorrect
•
Date of next review of assumption
•
Status of assumption (e.g. open or closed)
The assumptions log is updated with this new information.
The process of cost estimation may utilize new, efficient, and effective
techniques to develop cost estimates. During this process, there could be
various learnt with respect to cost estimation. The lessons learned register is
updated these very valuable lessons. These lessons can be applied in the later
phases of the project or other projects. The risk register is updated with any
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Project Cost Management
agreed-upon risk responses that were chosen during the process of cost
estimation.
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Project Cost Management
CHAPTER 4: DETERMINING BUDGET
Introduction
Project manager use Determining Budget process to aggregate the estimated
costs of individual activities or work packages. This aggregate of estimated
costs is used to establish an authorized cost baseline. This cost baseline is the
primary advantage of this process. The cost baseline includes contingency
reserves, but excludes management reserves. This cost baseline is used to
monitor and control project performance.
Determining Budget: Inputs
Project Management Plan
Various components of project management plan are used as input for this
process. The cost management plan describes structure of project costs to be
used in the project budget. The resource management plan provides
information on resource rates and other costs required to estimate project
budget. The scope baseline details any funding constraints that may be
mandated by the organization, contracts, or other groups such as government
agencies. These constraints are important for cost estimation and
management.
Project Documents
The process of determining budget receives input from various project
documents. Basis of estimates provides details of assumptions regarding
inclusion/exclusion of costs in the project budget. Cost estimates of
individual project activities are used to develop an aggregate cost estimate for
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Engr. Dr, Amir Manzoor
each work package. In the process of determining budget, we develop
aggregate costs to the time periods in which the costs would be incurred. To
develop these aggregate costs, we need planned start and finish dates for the
project’s activities, milestones, work packages, and control accounts. This
information is included in project schedule. The risk register provides
information about agreed upon risk responses, which is reviewed to
understand the probable aggregate costs of these risk responses.
Business Documents
It is important that the project management approach capture the intent of
business documents. The Project Management Business Documents include
two documents: Project Business Case and Project Benefits Management
Plan. These two documents are interdependent and iteratively developed and
maintained throughout the life cycle of the project.
BUSINESS CASE
A business case is a planning and decision-making tool that is used to justify
undertaking a project. A robust business case provides:
The product, service, or result of the project: It is sometimes called
the statement of work. The statement of work is the conceptual
blueprint of what the project will create once it is successfully
completed.
Need of the Project: The project would provide some benefits for
some recipients. The recipients could be customers or the
department (in case of an internal project). This need could be in the
form of market demand, organizational need, customer request,
technological advance, legal requirement, ecological impact, or social
need.
Reason for undertaking the project: It refers to why the organization
is undertaking the project. Generally, an organization aims to achieve
some strategic objective by undertaking a project.
Accountability for the use of project resources
The business case should contain all the information necessary for sponsors
to decide whether to proceed with the project or not. The first step in
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Project Cost Management
preparing a business case is the review of project proposal and option analysis
report. This review helps understand the need and required functional
outcomes. With a clear understanding of the requirements, ongoing scope
management becomes easier.
BENEFITS MANAGEMENT PLAN
Every project intends to deliver some type of benefits. In general, these
benefits can be tangible or intangible. A tangible benefit, such as reduction
in operating costs, is a measurable benefit. An intangible benefit, such as
increased customer satisfaction, cannot be measured accurately. A benefit
management plan is a document that explains the process through which
various project benefits will be created, delivered, maximized, and sustained.
This plan also describes when the benefits will be delivered. To measure
delivery of benefits (such as reduction in operating costs), a baseline study of
current operating costs may be carried out. This study can be used to perform
a comparison following the delivery of benefit. The benefits management
plan is reviewed regularly throughout the project life cycle. This regular
review helps ensure that benefits are delivered as per the schedule. Some
benefits may be delivered long after the successful completion of the project.
As such, tracking and measurement of benefits management plan may extend
well beyond the project completion date.
Agreements
An agreement is a legal document that binds two or more parties to specific
and implied obligations (e.g., a contract). A contract obligates the project
owner to pay for the rendered services. Each agreement is subject to an
extensive approval process. When preparing project budget, project team
reviews all applicable agreements to review costs relating to products,
services, or results that have been or will be purchased.
Enterprise Environmental Factors (EEF)
The most important EEF that can influence this process is exchange rates.
This factor is especially important for projects that operate with multiple
currencies over a multi-year life cycle. For such projects, project team needs
to closely watch and understand the possible impacts of fluctuations in
currencies. When preparing project team, project team takes into account
these fluctuations.
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Engr. Dr, Amir Manzoor
Organizational Process Assets (OPA)
The OPAs that can influence this process are:
Existing Policies, Procedures, and Guidelines
This includes both formal and informal policies, procedures, and guidelines
related to cost estimating and budgeting
Historical Information and Lessons Learned Repository
This may include project records, project documents, record of previous
project selection decisions, and record of previous project performance.
Cost Budgeting Tools
This includes tools such as cost aggregation, reserve analysis, parametric
estimating, and funding limit reconciliation.
Reporting Methods
Incorrect reporting of project costs (such as labor costs) can cause errors in
project costs. If undiscovered, these errors can be exacerbated until a project
is closed. That means project team will have no time to make adjustments
and stay on budget. Traditional reporting methods involving timesheets and
invoices prepared by contractors often contribute to this problem. Different
cost reporting methods can also have significant financial implications (such
as tax implications).
Determining Budget: Tools and Techniques
Expert Judgement
For the process of determining budget, trained and knowledgeable individual
and groups should be consulted who have expertise in topics such as:
Managing similar projects
Information of the industry and application area in which the project
is to be undertaken
Financial principles
Funding requirements
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Project Cost Management
Funding sources
Cost Aggregation
Project team uses cost aggregation to aggregate costs from an activity level
to a work package level. Work package costs are then rolled up to control
account costs and finally into project costs. Figure 1 illustrates the concept
of cost aggregation.
F IGURE 1: C OST A GGREGATION
Data Analysis
An important data analysis technique that can be used in this process is
reserve analysis. This technique has been discussed in detail earlier. For
project budget determination, reserve analysis can be used determine the
degree of protection from cost overruns. This protection is proportional to
the risk foreseen in the project and the norms within the organization.
Historical Information Review
Project team can review historical information to develop parametric or
analogous cost estimates. The historical project information may be used to
develop mathematical analogous and parametric models to predict total
project costs. Historical information may include project characteristics. The
cost and accuracy of these models depends on factors such as accuracy of
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Engr. Dr, Amir Manzoor
historical information, quantification of characteristics, and scalability of
models.
Funding Limit Reconciliation
Various project expenses should be reconciled with the funding limits. These
funding limits are set by the customer or performing organization. These
limits are established when the funds for the project are committed. Funding
limit reconciliation helps project manager avoid large variations in project
funds expenditures. As a result of funding limit reconciliation, project
schedule may be revised to regulate project expenditure.
Financing
Financing refers to acquisition of funding for projects. Large projects (e.g.
public services projects) generally require external sources of funds. If a
project is funded by an external source, there may be certain requirements
that the project must meet.
Determining Budget: Outputs
Cost Baseline
Cost baseline is the approved version of the time-phased project budget that
can only be changed through formal change control procedures. Cost
baseline represents sum of approved budgets for the different schedule
activities. Cost baseline is the reference against which the actual project costs
are compared. The Earned value management (EVM) technique refers cost
baseline as the performance measurement baseline. Following are the steps
to develop cost baseline.
a) Cost estimates for the various project activities are aggregated into
their associated work package costs. These estimates take into
account contingency reserves for these activities.
b)
The work package cost estimates are aggregated into control
accounts.
c)
Cost baseline is the summation of the control accounts.
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Project Cost Management
It is important to note that cost estimates for project activities and work
packages take into account any contingency reserves assigned to the activities
and work packages. Project team uses cost baseline to compare actual results
on the project and assess the impact of the changes in project (i.e. approved
changes in scope, resources, or cost estimates) to the project cost. Sometimes,
the cost variances are so high that project team needs to develop a revised
cost baseline. Since various cost estimates used in developing cost baseline
are linked with schedule activities, project team can see a time-phased view
of cost baseline using an S-curve. Projects using earned value management,
refers cost baseline as performance measurement baseline. When
management reserves are added to the cost baseline, we get project budget.
Project Funding Requirements
Project funding requirements means forecasted sum of projected
expenditures and anticipated liabilities. These requirements are derived from
the cost baseline. Funding is often incremental and may not be evenly
distributed. Total funding requirement is the sum of funding requirement
included in cost baseline and management reserves (if any). Funding
requirements may include the source(s) of the funding. Funding is often
incremental and may not be evenly distributed. The funding requirements are
used as an input to control costs.
Project Documents Updates
As a result of carrying out this process, various project documents may be
updated. Cost estimates are updated to record any additional information.
Project schedule is updated to record estimated costs for each activity. This
process may identify new risks. The risk register is updated with this new
information.
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Project Cost Management
CHAPTER 5: CONTROLLING COSTS
Introduction
Controlling Costs process is used to monitor the status of the project with
respect to project costs. This process updates project costs and manages any
changes to the project cost baseline. This process is significant for project
management because project team can any variance from project plan. With
this knowledge, project team can take corrective actions to minimize risks. A
significant portion of the effort of cost control involves analyzing the
relationship between the consumption of project funds and the work
accomplished against this consumption. For effective cost control, it is very
important to manage the approve cost baseline.
Controlling Costs: Inputs
Project Management Plan
Various components of project management plan are used as input for this
process.
The cost management plan describes how the project costs will be managed
and controlled. The cost baseline is used to perform a comparison with actual
results. This comparison informs project team whether a change or
corrective/preventive action is required. For earned value analysis (EVA),
project team needs a comparison of performance baseline and actual results.
This comparison informs project team whether a change or
corrective/preventive action is required.
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Engr. Dr, Amir Manzoor
Project Documents
During project execution, there could be various lessons learnt with respect
to control. These lessons are very valuable and can be applied in the later
phases of the project or other projects.
Project Funding Requirements
The project funding requirements include projected expenditures plus
anticipated liabilities. This information is very important for cost control.
Work Performance Data
Work Performance Data is the raw data of the observations of your project.
Some examples of work performance data include actual cost, actual
duration, and the percent of work physically completed. Work performance
data shows status of various project parameters such as: how much work is
completed, how much time has elapsed, the cost incurred so far, etc. Work
performance data is used to create work performance information. Work
Performance Data is the lowest level of detail about project work.
Organizational Process Assets (OPA)
The OPAs that can influence this process are:
Existing Policies, Procedures, and Guidelines
This includes both formal and informal policies, procedures, and guidelines
related to cost estimating and budgeting
Cost Control Tools
Cost Control tools include computer-based programs like Microsoft (MS),
Excel spreadsheets and MS Project, and techniques such as Earned Value
Analysis.
Monitoring and Reporting Methods
This includes various cost monitoring and reporting methods used in the
organization.
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Project Cost Management
Controlling Costs: Tools and Techniques
Expert Judgement
Examples of some expert judgment techniques that may be used during this
process are:
Variance analysis
Earned value analysis
VARIANCE ANALYSIS
Variance analysis in project management is an analytical technique. In
projects, variance analysis applies to schedule variance and cost variance.
Variance analysis is used to determine the cause and degree of difference
between the baseline and actual performance. Project manager uses results
of variance analyses to maintain control over a project. Variance analysis may
also help identify emerging trends that may signal concern. Variance analysis
also helps project team to ensure appropriate corrective actions are identified
and completed. Variance analysis can provide effective control against
further cost and schedule problems that may seriously impact the successful
completion of a project.
EARNED VALUE ANALYSIS
The earned value (EV) refers to the value of completed work expressed in
terms of the approved budget assigned to that work for a schedule activity or
work breakdown structure component.
Earned Value Management is a management methodology that integrates
scope, schedule, and resources. EVM is used for objective measurement of
project performance and progress. To measure performance, we determine
the budgeted cost of work performed (BCP) and compare it to the actual cost
of work performed (ACWP). BCWP is earned value and ACWP is the actual
cost. To measure the progress, we compare the earned value to the planned
value. EVM can help prevent scope creep, improve communication with
stakeholders, reduce risk, help in profitability analysis/project forecasting,
achieve better accountability, and improve performance tracking.
To understand the concept of EVM, consider an example. Let us say a
project named A has been approved. The approved duration is one year and
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Engr. Dr, Amir Manzoor
the budget is X. The project would spend 50% of its approved budget in the
first six months. Let us assume that after six months it has been reported that
50% of the project budget has been spent. However, this information is not
enough to conclude that project is proceeding as planned. It is possible that
the project spent 50% of its budget but was only able to complete 25% of
the project work. That would mean project is not doing well. EVM addresses
such issues and attempts to provide a more transparent and objective method
of measuring project performance.
Figure 2 represents relationships between different components of EVA.
This diagram is also called a S-curve. Note that MR = Management Reserve,
PMB = Performance Management Baseline=BAC and PBB = Project
Budget Baseline, and CBB = Project Budget Base = PMB + MR.
F IGURE 2: EVA C OMPONENTS : T HE S-C URVE
Data Analysis
Some important data analysis techniques that can be used in this process are
discussed below.
EARNED VALUE ANALYSIS (EVA)
EVA involves a comparison of performance measurement baseline to the
actual schedule and cost performance. EVA develops and monitors three key
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Project Cost Management
dimensions for each work package and control account: Planned value,
Actual Cost, and Earned Value.
1. Planned Value (PV)
Projects often have assigned budgets. Planned value is the sum of the
approved cost estimates including any overhead allocation) for activities (or
portions of activities) scheduled to be performed during a given period
(usually project-to-date). Planned value ties the overall project budget to the
original project schedule. At a given point in time, PV defines the physical
work that should have been accomplished. Calculation of PV is based on the
planned schedule of activities. As such, PV essentially represents the value of
a project that would be considered complete, or earned, if the project were
running on schedule. The total PV of a project is also known as budget at
completion (BAC).
Planned value is calculated in relation to the value of the project budget at
completion, which is commonly referred to as the BAC. The BAC represents
100% of the planned budget. The formula to calculate Planned Value is
simple.
Planned Value = (Planned Percent Complete) X BAC
Percent Complete refers to an estimate expressed as a percent, of the amount
of work that has been completed on an activity or a component of work
breakdown structure. There are two types of the Percent Complete: the
relative and absolute one. The relative percent complete is subjective
assessment of the work package about the performed services in this work
package. The absolute percent complete describes the work package that has
been completed.
Example
Assume that a project is to be completed in 12 months. The budget of the
project is $100,000. Six months have passed and the schedule says that 50%
of the work should be completed. Here:
Project duration = 12 months, Project cost (BAC) = $100,000, Time elapsed
= 6 months, Percent complete= 50% (as per the schedule)
Therefore,
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Engr. Dr, Amir Manzoor
Planned Value = 50% of the value of the total work = 50% of BAC = 50%
of $100,000 = (50/100) X 100,000 = $50,000
Therefore, the project’s PV is $50,000.
2.
Actual Cost
The term actual cost is a significant concept in project cost management.
Actual cost refers to total costs (both direct and indirect) actually incurred
and recorded in accomplishing work performed during a given time period
for a schedule activity or work breakdown structure component. It is the total
cost incurred in accomplishing the work measured by EV. Actual cost is also
called the actual cost of work performed (ACWP). Actual costs include direct
and indirect costs. These costs are itemized in detail. The AC will have no
upper limit; whatever is spent to achieve the EV will be measured.
Example
Assume that a project is to be completed in 12 months. The budget of the
project is $100,000. Six months have passed, and $60,000 has been spent
already. On a closer review, project manager finds that only 40% of the work
has been completed so far. Since the AC is the amount of money that has
been spent so far, the project’s AC is $60,000.
3.
Earned Value (EV)
The EV is the value of completed work expressed in terms of the approved
budget assigned to that work for a WBS component. A measured EV must
not be more than the authorized PV budget for the particular WBS
component. Earned Value is also known as Budgeted Cost of Work
Performed (BCWP). Project managers monitor EV to determine project
status and to determine the long-term performance trends. The formula to
calculate the Earned Value is:
Earned Value = [% of completed work] X [BAC (Budget at Completion)]
Example
Assume that a project has to be completed in 12 months. The budget for the
project is $100,000. Six months have passed, and $60,000 has been spent. On
a close review, project manager finds that only 40% of the work has been
completed to date. The EV for the project will be calculated as follows:
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Project Cost Management
Earned Value = 40% of the value of total work = 40% of BAC = 40% of
100,000 = $40,000
Therefore, the EV of the project is $40,000.
4.
Estimate at Completion (EAC)
EAC refers to the expected total cost of a schedule activity, a work
breakdown structure component, or project when the defined scope of work
will be completed. EAC is equal to the actual cost (AC) plus the estimate to
complete (ETC) for all of the remaining work.
EAC = AC + ETC.
The EAC may be calculated based on performance to date or estimated by
the project team based on other factors, in which case it is often referred to
as the latest revised estimate. If the project has encountered a one-time
(atypical) variance, the following formula may be used:
EAC = actual costs (AC) + budget at completion (BAC) – earned value (EV)
If the project has encountered a variance that is expected to recur and
continue to affect the project (typical), the following formula may be used:
EAC = budget at completion (BAC) ÷ cost performance index (CPI)
5.
Estimate to Complete (ETC)
Estimate to Complete (ETC) refers to the expected additional cost needed
to complete an activity, a group of activities, or the project. Most techniques
for forecasting ETC include some adjustment to the original estimate based
on project performance to date. In other words, Estimate to complete (ETC)
is a forecast of how much more money will need to be spent to complete the
project.
Variance Analysis
In EVM, variance analysis explains variances in cost, schedule, and variance
at completion (VAC). The variance at completion (VAC) is the difference
between the total budget of the project, termed the budget at completion
(BAC), and the estimated total cost of the project, termed the estimate at
completion (EAC). The VAC gives a projection of the amount over or under
the budget at completion of the project. This project management concept is
the difference between the expected or baseline cost of the project and the
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Engr. Dr, Amir Manzoor
current estimated cost. If the VAC value is positive, the project will be under
budget. If the VAC value is negative, the project will be over budget. In ideal
situation, VAC value should be close to zero, which means that the estimate
is accurate. It also indicates that the project manager need not plan for any
contingencies.
Projects that do not use EVM perform variance analysis by comparing
planned cost against actual cost. The variance identified shows the difference
between the cost baseline and actual project performance. An important
aspect of project cost control is determination of the cause and degree of
variance relative to the cost baseline. Based on this information, project
manager decides if a corrective/preventive action is needed. Below we
discuss some example of variance analysis.
1. Schedule Variance
Schedule Variance (SV) is a measure of schedule performance. Schedule
variance tells us how late our project is, but does so in terms of dollars.
Schedule variance (SV) is calculated as the difference between earned value
(EV) and planned value (PV).
SV = EV – PV
A negative value of SV means that we are behind schedule. A positive value
of SV indicates that we are trending ahead of schedule. A variance of zero
indicates the project is exactly on schedule. However, if a project is $100K
late, how late is it in terms of days, months, or years? SV cannot give us this
answer.
2.
Cost Variance (CV)
Cost variance is the differential between the initial and the final cost incurred
on the project. Cost variance is considered as an indicator of the cost
estimating accuracy and a measure of project performance because it
indicates how much the project is over or under budget. Cost Variance is
calculated as:
Cost Variance (CV) = [Budgeted cost of work performed (BCWP)] – [Actual
cost of work performed (ACWP)]
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Project Cost Management
If CV=0, the project is considered on budget. If CV>0, the project is
considered under budget. If CV<0, the project is considered over budget. A
negative CV is difficult to overcome.
3. Schedule Performance Index (SPI) and Cost Performance Index
(CPI)
Schedule Performance Index (SPI) and Cost Performance Index (CPI), like
variances, help project team to analyze the efficiency of schedule
performance and cost performance of any project.
Schedule Performance Index (SPI)
SPI indicates how much project work has been accomplished against the
planned work
SPI is calculated as:
SPI = EV/ PV
If SPI>1, it means the project is running ahead of schedule. If SPI=1, it
means project is on schedule. By subtracting SPI value from 1 we can find
out by what percentage our project is ahead or behind schedule.
Example
Assume that a team is managing a hotel-room renovation project. The project
budget is $1500 and project is 40% completed. The project duration is 3months and planned expenditure per month is $500. To evaluate the project
status at the end of first month, the SPI will be calculated as follows.
BAC = $1,500, EV = $600, PV = $500
SV = EV – PV = $600 – $500 = $100
The value of SV indicates that the project is ahead of schedule)
SPI = EV ÷ PV = 1.2
The SPI value indicates that the project is ahead of schedule by 20%.
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Engr. Dr, Amir Manzoor
Cost Performance Index
CPI is a measure of the cost efficiency of budgeted resources. CPI is
expressed as the ratio of earned value to actual cost. The CPI helps you
analyze the efficiency of the cost utilized by the project. The CPIS can be
calculated as follows:
Cost Performance Index = (Earned Value) / (Actual Cost)
AC
CPI = EV /
If CPI<1, it means the project is over budget. If the CPI>1, it means the
project is under budget. If CPI=0, it means the project is on budget. A
consistently high or low value of CPI may indicate problems in project
planning and/or cost estimates. In such cases, project team should check
accuracy of all assumptions and estimates. Corrective actions should be
taken, if needed.
Example
Assume you have a building construction project that has to be completed in
12 months. The budget of the project is $500,000. Six months have passed
and $80,000 has been spent. A close review of project reveals that only 30%
of the work has been completed so far. The CPI for the project will be
calculated as follows:
Actual Cost (AC) = $80,000
Planned Value (PV) = 50% X $500,000 USD = $250,000
Earned Value (EV) = 30% X $500,000 USD = $150,000
Cost Performance Index (CPI) = EV / AC = 150,000 / 80,000 = 1.875
The value of CPI is greater than one. It means, the project is under budget.
Variances and indexes both are important. Indexes provide us the ratio
between the two values. Cost or schedule variances give us the variance in
dollar form. Negative cost or schedule variance means project performance
is not good. One limitation of variance is that it cannot compare the health
of the project with another project if your organization has many projects. In
such cases, you will need Performance Indexes to compare the health of the
project among many projects. The Performance Index is the ratio between
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Project Cost Management
the parameters. Use of performance indexes makes it easy for project
manager to compare the relative health of all projects.
Table 3 summarizes the key terms of EVM.
TABLE 3: KEY TERMS OF EVM, THEIR INTERPRETATION, AND
FORMULAS
Acronym
Term
Interpretation
Formula
BAC
Budget
At According to the According to
Completion
original spending plan, the
original
what was the total spending plan.
budget for the project?
PV
Planned Value
According to the PV = BAC *
original spending plan, (Planned
%
what value of work Complete)
should have been
completed
as
of
today?
EV
Earned Value
What value of work EV = BAC* (%
has actually been Actual
completed
as
of Complete)
today?
AC
Actual Cost
What is the actual cost What is actually
incurred
on
the spent
project as of today?
EAC
Estimate
Completion
at Based on today’s EAC = AC +
situation, how much New ETC
would the total project
EAC = AC +
cost?
BAC – EV
EAC
BAC/CPI
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Engr. Dr, Amir Manzoor
ETC
Estimate
Complete
to Based on today’s ETC = EAC situation, how much AC
more the project
would
cost
till
completion?
VAC
Variance
Completion
at As of today, how VAC = EAC –
much over or under BAC
budget do we expect
the project to finally
be, compared to the
original estimate?
CV
Cost Variance
Difference between CV = EV – AC
the actual value earned
and the actual cost
incurred –ve means
over budget +ve
means under budget.
SV
Schedule
Variance
Difference between SV = EV – PV
the actual value earned
and value that was
planned to be earned
as of today –ve means
behind schedule +ve
means
ahead
of
schedule.
CPI
Cost
Performance
Index
For every 1$ spent, CPI = EV/AC
what is the value
earned on the project.
Less than 1 means
spending more than
earning, more than 1
means earning more
than spending.
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Project Cost Management
SPI
Schedule
Performance
Index
For every 1 unit of SPI = EV/PV
work that was planned
to be completed, how
much
is
actually
completed? Less than
1 means less work has
been completed than
planned and more
than 1 means more
work
has
been
completed
than
planned.
TCPI
To-Complete
Performance
Index
Estimate of future
cost performance that
is
required
to
complete the project
within the approved
budget. This budget
may be BAC or EAC.
More than 1 is bad,
less than 1 is good.
TEAC
Time Estimate The forecasted total (No.
At Complete
number of days at schedule
project completion
days)/SPI
TVAC
Time Variance The
difference No. of schedule
At Complete
between the TEAC days - TEAC
and
the
original
project
duration
expressed in days
TCPI
=
(Remaining
Work)
/
(Remaining
Funds) = (BAC
– EV) / (BAC –
AC)
of
Table 4 summarizes how to interpret the values of cost and schedule
variance/indices to understand project performance.
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Engr. Dr, Amir Manzoor
TABLE 4: INTERPRETING COST AND SCHEDULE VARIANCE/INDEX
Performance
Measures
Cost
Schedule
SV > 0 & SPI
>1
SV = 0 & SPI
=1
SV < 0 and
SPI < 1
CV > 0 Ahead
of On schedule; Behind
and
schedule;
Under budget
schedule;
CPI >0 Under budget
Under budget
CV = 0 Ahead
and
schedule;
CPI =1 budget
of On schedule; Behind
On On budget
schedule;
budget
On
CV < 0 Ahead
of Ahead
of Behind
and
schedule; Over schedule; Over schedule; Over
CPI < 1 budget
budget
budget
Let us discuss few examples that covers all concepts related with EVM.
Example 1
Take example of a construction project that has an allocated budget of $ 5
million and 20 activities that are equally important. The project duration is 10
months. We also assume that the spend rate will remain same till project
completion. Assume that five months have passed and project is 40%
complete and $3 million has been spent. We would like to calculate the EV
of the project at the end of 5 months.
Here
BAC = $5 MILLION
PV = $2.5 MILLION
AC = $3MILLION
EV = BAC *(AC) = $5 MILLION * 0.4 = $2MILLION
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Project Cost Management
CV = EV – AC = $ 2 – $ 3 = -$1 MILLION (This shows that project is over
budget since CV is less than 1)
CV% = (CV) / (EV) * 100% = ($ 1) / ($ 2) * 100% = 50% (This shows
project is over budget)
SV = EV – PV = $2 – $ 2.5 = -$ 0.5 MILLION (This shows that project is
behind schedule since schedule variance is negative)
SV% = (SV) / (PV) = ($ 0.5) / ($ 2.5) * 100% = 20% behind schedule
VAC = BAC – EAC = $ 5 – $ 7.5 = -$ 2.5 (This shows that project is over
budget since VAC is negative)
CPI = (EV) / (AC) = $2 / $3 = 0.667 (This is not a good sign because CPI
is less than 1 and that means our actual cost is greater than planned)
SPI = (EV) / (PV) = $2 / $ 2.5 = 0.8 (This is not a good sign because SPI is
less than 1 and that means we are behind the planned schedule)
EAC = AC + ((BAC – EV) / CPI)) = ($ 3) + (($ 5 – $ 2) / 0.667)) = $ 7.5
MILLION
ETC = EAC – AC = $ 7.5 – $ 3 = $ 4.5 MILLION (expected cost to finish)
Example 2
Consider a project data as shown below.
Project Start Date:
1-Apr-18
Project End Date:
18-Sep-18
Number of Calendar Days:
167
Project Budget (BAC) Hours:
3456
Project Budget (BAC) Dollars:
$278,400
EV Data
Week
PV
EV
AC
1
7600
3800
7600
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Engr. Dr, Amir Manzoor
2
15200
7600
15200
3
22800
11400
30000
4
30400
12000
31000
5
46720
15200
33000
6
50000
50000
54000
7
75000
65000
75000
8
85000
65000
95000
9
95000
65000
105000
Table 5 shows the EVM calculations for this project.
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Project Cost Management
TABLE 5: EVM CALCULATION
SPI
Index
CPI
0.50
0.50
0.50
0.39
0.33
1.00
0.87
0.76
0.68
Variance
CV
EAC
ETC
VAC
T
-3800
-3800 556800 549200 -278400 1
-7600
-7600 556800 541600 -278400 1
-11400
-18600 732632 702632 -454232 1
-18400
-19000 719200 688200 -440800 1
-31520
-17800 604421 571421 -326021 1
0
-4000 300672 246672
-22272 1
-10000
-10000 321231 246231
-42831 1
-20000
-30000 406892 311892 -128492 1
-30000
-40000 449723 344723 -171323 1
SV
0.50
0.50
0.38
0.39
0.46
0.93
0.87
0.68
0.62
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Engr. Dr, Amir Manzoor
62
TREND ANALYSIS
Project Cost Management
It is sometimes necessary to identify trends. Trend analysis uses a
mathematical model of past performance to determine whether the current
performance is better or worst. Trend analysis show how well each project is
doing and, with the passage of time, their performance trends can be used to
predict the eventual project outcome. Trend analysis can work as an early
warning system by warning project manager in advance of the potential
future problems of the project if the identified trends persist. The project
team can use the results of trend analysis for timely analysis and take any
recommend preventive actions.
RESERVE ANALYSIS
In the process of controlling costs, project team uses reserve analysis to
monitor the status of contingency and management reserves. This
monitoring helps establish whether these reserves are still needed or if
additional reserves are needed. The unused contingency reserves may be
removed from the project budget. Upon request, additional reserves may be
added to the project budget.
To-Complete Performance Index (TCPI)
The TCPI is a comparative metric of EVM techniques that is used to
determine if an independent estimate at completion is reasonable. The TCPI
tells us the cost performance efficiency required for the remainder of the
project to achieve the desired final cost. TCPI indicates the budget for work
remaining versus the estimate for work remaining. By measuring TCPI,
project team tries to determine whether project has adequate resources
capable to complete at the efficiency required to achieve project estimate to
complete. TCPI is a ratio of the work remaining to be accomplished divided
by the amount of unspent funding. TCPI is calculated as follows:
TCPI = [work remaining to be accomplished] / [amount of unspent funding]
= [Total project budget (Budget at Completion or BAC)] / [Earned
Value (EV) accrued]
= (BAC – EV) / (EAC – AC)
The unspent funding can be calculated as the difference between the Actual
Cost (AC) incurred to date and the target total cost (TC) the project is
required to achieve, either the original BAC, or a different target cost agreed
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Engr. Dr, Amir Manzoor
by management. As such, the unspent funds can be determined in many ways
including:
As the difference between the AC and the BAC
As the difference between the AC and an Estimate At Completion
(EAC) approved by management
In these cases, TCPI will be calculated as follows:
When the desired final cost is the original project budget, the TCPI can be
calculated as:
TCPI = (BAC – EV) / (BAC – AC).
When the desired final cost is an estimate at completion, the TCPI can be
calculated as:
TCPI = (BAC – EV) / (EAC – AC).
The value of TCPI should always be close to 1.0. If TCPI < 1, the target cost
should be relatively easy to achieve or better. If TCPI = 1, the target will be
achieved by maintaining the current level of performance. If TCPI >1, an
improvement in performance is required and meeting cost goals is likely
unachievable.
Project Management Information System (PMIS)
A PMIS is used to monitor different parameters of EVM i.e. PV, EV, and
AC. A graphical analysis is done to see any trends and predict range of
possible results.
Controlling Costs: Outputs
Work Performance Information
Work Performance Information is the comparison between the actual data
and the planned data. Work performance information helps monitor project
progress and compares it with the planned progress. WPI also helps in
forecasting and taking corrective/preventive action if needed.
With respect to cost control, WPI provides a comparison of project current
progress with the cost baseline. Any variances are evaluated at the work
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Project Cost Management
package level and control account level. Projects using EVM include CV,
CPI, EAC, VAC, and TCPI in their work performance reports. Work
performance reports are physical or electronic reports on work performance
information. The purpose of using work performance reports is to make
decisions or raise issues, actions, or awareness about the project performance.
Status reports, memos, information notes, recommendations, and updates
are some examples of these reports. Work performance reports are very
useful tool to communicate project status and progress with project
stakeholders. Utilizing these reports, project stakeholders can decide future
course of action for the project. The format of the performance reports may
be any combination of different formats such as Burndown Chart, S-Curve,
Bar Charts, Histograms, Tables, and Run Charts. Using work performance
reports, stakeholders gain a better understanding of project health, and can
make a decision based on these objective data and analysis.
Cost Forecasts
Forecasts refer to predictions made by the project team on the particular
aspects of projects. These forecasts are derived through a careful and explicit
evaluation of all information and knowledge available. Forecasts can be
updated and reissued based on changes to that information. Forecasts can
also be updated as the project is executed and additional work performance
information is available. There are two important forecasts in a project
environment: cost forecast and schedule forecast. Cost forecasts include
forecasts such as the project’s estimate to complete (ETC), estimate at
completion (EAC), budget at completion (BAC), and to-complete
performance index (TCPI). Project team either calculates EAC or develop a
bottom-up EAC. This EAC value is documented and communicated to
stakeholders.
Change Requests
After the project is baselined, the deliverables are progressively elaborated
into activities. This process of progressive elaboration may discover work
that initially was not included in the original project baseline. This additional
work may generate requests to change the project baseline. A change request
is a document that includes a call for an adjustment of a system, states what
needs to be accomplished, but leaves out how the change should be carried
out. Change requests are formal proposals to modify any document,
deliverable, or baseline. An integrated change control process is used to
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Engr. Dr, Amir Manzoor
review and dispose all such change requests. Important elements of a change
request are:
•
Change request identification number
•
Customer identification number
•
Any applicable deadline
•
Whether the change is required or optional
•
Type of change
•
Brief description of change (i.e. a change abstract)
Change requests can originate from a variety of sources including problem
reports, enhancement requests from users, events in the development of
other projects, changes in underlying structure and or standards, demands
from senior management and stakeholders, and unclear understanding of the
goals and the objectives of the project. There are several types of change
requests.
Corrective action: Corrective action refers to changes made to bring
expected future performance of the project into line with the plan.
Preventive action: Preventive action refers to documented direction to
perform an activity that can reduce the probability of negative
consequences associated with project risks.
Defect repair: Defect repair refers to a willful act to modify a
deliverable or a component or the whole system to remove Defects
and make such a deliverable/component or the whole system
conformant to the stated needs and specifications.
Updates: Updates refer to changes to formal project documents to
reflect modified or additional ideas or content.
The project performance review may generate a change request to the cost
and schedule baselines. All change requests are processed through an
integrated change control process.
Project Management Plan Updates
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Project Cost Management
As a result of carrying out the process of controlling costs, many subsidiary
plans of project management may be updated. Cost management plan may
be updated to incorporate the revised control thresholds or accuracy level of
estimates. Any approved changes in scope, resources, or cost estimates may
result in updating of cost baseline and/or performance measurement
baseline.
Project Documents Updates
As a result of carrying out this process, various project documents may be
updated.
The process of cost control may make new assumptions and identify new
constraints on resource productivity and other factors influencing cost
performance. This process may also revisit or change the existing
assumptions and constraints. The assumptions log is updated with this new
information.
Review of cost performance and efficiency may require revisiting the original
basis of estimates and updating cost estimates. During process of cost
control, new, efficient, and effective techniques can be used to manage
various aspects of project cost management (including budgeting, variance
analysis, forecasting etc.). New and valuable lessons can be learned with
respect to corrective actions used to respond to cost variances. These lessons
are recorded in lessons learned register so that they could be used in later
phases of the project or future projects. The cost variances may go beyond
the cost threshold. In that case, risk register may will be updated.
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APPENDICES
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Project Cost Management
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Engr. Dr, Amir Manzoor
Appendix 1: Case Study: Project Cost Management
Tom Wyner was employed by Turner Corporation, the largest construction
company in the country. Tom graduated from one of the top engineering
schools in the country. Being intelligent, competent, and a strong leader he
quickly worked his way up the corporate ladder. Turner Corporation recently
got a US$5 billion 5-year contract from Federal Aviation Authority (FAA) to
build the largest international airport in the country. The New Capital
International Airport would be the main international airport serving the
capital city of the country. It would be country’s first Greenfield airport and
it would be built built 20 km outside the capital city. The construction of the
new airport was planned in response to increasing air traffic and passenger
load at the existing international airport in the capital city. It was estimated
that the number of passengers at the current airport is growing by 14 percent
annually compared to national air passenger growth rate of less than four
percent, making it the second busiest airport in the country. The whole
project was financed by FAA on its own. It was to be built on more than
3200 acres of land and consisted of a passenger terminal building, 2 runways,
taxiways, apron and parking bays for wide-body aircraft. There is also a cargo
terminal, air traffic control complex, fuel farm, as well as a fire, crash, and
rescue facility. It was to be equipped to handle all types of aircraft including
the new generation aircraft such as the Airbus A380, Boeing 747-8 and
Airbus A350 XWB aircraft. The new airport would have an 180,000m²
modular terminal building which would be initially capable of handling 9
million passengers and 80,000 metric tons cargo per annum. The numbers
were expected to reach 25 million passengers by 2024. Being a new airport, a
significant portion of the land was earmarked for commercial purposes such
as duty-free shops, hotel and convention center, air malls, business center,
food courts, leisure and recreational facilities. It was a unique project of the
Federal Aviation Authority (FAA) and designed by top global airport
engineering companies in the world.
This project was the company’s largest endeavor, and it had tremendous
potential for future growth and revenues. Unfortunately, there were
problems managing this large project. After three years of start of the project
Turner Corporation had already replaced five project managers on this
project. Now, Tom was appointed as the new project manager for this
project. The stakes for Turner Corporation were high. The FAA officials
were reviewing this project to evaluate its performance to date and the
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Project Cost Management
potential impact on their budgets before discussing funding for any new
projects. There was high probability that FAA could transfer this project to
another firm if they found Turner’s performance unsatisfactory. Tom called
upon a meeting of his team and was very upset when he found that most of
the issues keeping project off-track were cost-related issues. His team
informed him that detailed financial studies were not done before starting the
technical work on project. Although Tom had a degree in engineering, he had
no formal education and little experience in finance. Tom knew that he could
not focus on just the technical aspects of projects if he wanted to move ahead
in his career. He had to find a solution to the cost manage issues fast as the
time was running out.
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Engr. Dr, Amir Manzoor
Appendix 2: Cost Management Plan
Cost Management Plan
Internal Revenue and Information System (IRIS) Project
Zulu Consultants
13 M.A. Jinnah Road
Karachi, Sindh, Pakistan 75240
22-10-2019
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Project Cost Management
Date Submitted for Review: 10/30/2018
Formal Review
My signature below indicates I have reviewed this document:
Role
Reviewer Name
Signature
Date Reviewed
Project
Director
John Kerry
Version
Number
Version Date
Revision
Author
Summary
of
Major
Changes Made
0.01
09/09/2018
John Brown
Final Draft
11/01/2018
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Engr. Dr, Amir Manzoor
1. OVERVIEW
IRIS Project Brief
The current systems used by Sindh Board of Revenue (SBR) are standalone.
The long-term business and strategic plans of SBR emphasize use of
technology. The IRIS project is aimed to increase the number of taxpayers
and increase tax collection. The IRIS project aims to achieve these objectives
by increasing voluntary compliance, improving customer online services, and
improving audit, collection, and return processing activities. By completing
IRIS project, SBR aims to develop an expanded and responsive tax
infrastructure. IRIS will be a customer‐centric automation system based on a
functional organizational structure. IRIS will help SBR reengineer current tax
regime and adopt tax administration best practices. IRIS will be an intuitive
and easy to use system that will enhance efficiency of SBR employees by
streamlining and automating current processes, reducing paper, and
providing remote work opportunities. IRIS is a modular system based on
flexible, agile, expandable, and sustainable technology that will be able to
accommodate any changes in the system for timely implementation of
legislative changes. The IRIS project will allow the SBR to meet the
expectation of all of its customers into years to come.
Some of the key objectives of IRIS project are:
Increases tax revenue by 45%
Improve customer service by expanding online services
Reengineer and improve current processes
Provide the ability to work securely anytime and from anywhere
Provide an intuitive and easy to use system
Improve access to data and data sharing
1.1 Purpose
The purpose of the cost management plan is to ensure project costs are
planned based on project need, tracked, changed according to procedure, and
reported on a regular basis. This plan will be reviewed and updated annually.
The Sindh Board of Revenue (SBR) is the sponsor of IRIS project and
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Project Cost Management
Department of Information Technology (DIT) of Sindh Board of Revenue
is the performing organization.
1.2 Assumptions
Following are the assumptions of IRIS project.
The project will manage cost on a modified cash basis. Under
modified cash basis system, IRIS project will recognize payment at
the time the goods/services are incurred.
There exists an already approved baseline for IRIS project
provided in the Feasibility Study Report (FSR) and Special Project
Report (SPR). As such, this cost management plan will not describe
how the baseline will be established. Both FSR and SPR are
approved by the DIT.
1.3 Scope
The Cost Management Plan will include the processes, roles, and tools used
to plan and manage project costs throughout the life of the project. The
following cost management activities will be covered in this plan.
1.3.1
Project Cost Management
COST PLANNING
Cost planning includes activities performed to identify and categorize costs
based on project need by fiscal year. The IRIS cost management is guided by
the Feasibility Study Report (FSR) and the latest Special Project Report (SPR)
approved by Department of Information Technology of Sindh Board of
Revenue (SBR). These two documents outline the financial plan for the life
of the project by fiscal year. At the beginning of each fiscal year, the IRIS
Project will use the latest approved financial plan of approved special project
report as budget for the year, reconfirming projections and adjusting
implementation of the projections accordingly. There are three main
activities to IRIS Cost Planning:
Establish baseline
Adjust baseline
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Engr. Dr, Amir Manzoor
Compare and assess baseline with stakeholders
COST MANAGEMENT
This activity will cover management of changes in project costs, record
expenditures, and track planned to actual cost and expenditures.
Expense Tracking – This process will be used to all project-related
expenses. The process will track each expense from the request for expense
until payment of the expense.
Cost Control – This process will be used to control and communicate any
changes in the budget. This process will also document unplanned expenses
and change in costs.
Cost Reconciliation ‐ This process will reconcile budget to actual expenses
on a monthly basis. This process will also monitor project costs.
Cost Reporting ‐ This process will be used to produce various cost reports
and metrics for IRIS Executive Management, Project Management and other
stakeholders.
1.4 Roles and Responsibilities
Role
Responsibilities
Project Director
He/she will be responsible for managing overall
project within the budgetary constraints. He/she
will also approve funding documents.
Business/Technical
Project Manager
He/she will be responsible to review projectfunding documents.
Project Manager
He/she will be responsible to approve cost
management plan, develop project costs based on
project need, and reviews/approve or deny
project expenses.
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Project Cost Management
Cost Manager
He/she will be responsible to track/reconcile
project costs and assist in cost research.
Project
Administrator
He/she will be responsible to lead the cost
management effort and sponsor cost budgeting
and tracking activities.
IRIS Team Lead
He/she will be responsible to identify funding
needs and ensures all transactions have
appropriate supporting documentation.
SBR
Office
Accounting This department will be responsible to
coordinates the accounting, customer billing, and
invoice approval processes.
SBR Budget Office
This office will be responsible to coordinate the
review and submission of budgetary documents to
SBR.
Change
Control CCB will be responsible to make decisions on
Board (CCB)
issues that impact cost, schedule or resources.
2. COST PLANNING
2.1 Cost Baseline
There exists an already approved baseline for IRIS project provided in the
Feasibility Study Report (FSR) and Special Project Report (SPR). The FSR
contains the project’s baseline cost projections for each cost category, by
fiscal year for the entire life of the project.
2.2 Adjusting Cost Baseline
In case there is a major deviation from the project’s scope or schedule or
costs, the project office will submit a SPR to SBR. This SPR will be used as
the basis to adjust the cost baseline. CCB will validate and approve any
request for change in project resources greater than $0.25 million. A change
request less than this amount can be reviewed and approved by the project77
Engr. Dr, Amir Manzoor
management review meeting. In order to adjust baseline, multiple steps will
be followed.
Step 1- Analysis of Changes: The CCB will send the approved project
time/budget change requests to project management office and the project
cost manager. In case the approved changes will cause a variance of over 10%
of the total budget/time, the cost manager will review and detail the changes.
Cost manager can use many documents to detail the changes. These
documents may include previously approved FSR and PSR, economic
analysis, budget change proposal, project schedule, and current budget
report. In addition, the Cost Manager will contact and receive input from the
IRIS Team Leads regarding the impact of changes to their budget and
resources.
Step 2- Quantification of Costs: The project management office, team
leads, and technical/business project managers will help cost manager to
research and quantify various costs associated with IRIS project.
Step 3- The SPR: The project management office and the cost manager will
work together to develop a SPR based on the current needs of the project.
The team leads will review the SPR to verify information and projections and
provide feedback.
Step 4- Approval of SPR: The IRIS Management Team will review and
approve the SPR. The approved SPR will then be moved to the DIT. The
DIT will provided final approval of the SPR for the IRIS Project.
Step 6- Adjustment of Baseline and Projections: The cost manager will
review the approved Economic Analysis and integrate it with the approved
SPR to create the Adjusted Baseline.
Step 7- Dissemination of Adjusted Baseline: The project management
office will communicate to the IRIS Team the changes that have been
approved for the project.
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Project Cost Management
2.3 Confirmation/Adjustment of Current Year Spending
Plan
At the beginning of each fiscal year, the project will reconfirm the spending
plan for the costs defined in the Economic Analysis Worksheets and in
alignment with the project approach and timeline. The process will include
multiple steps. First, the cost manager will review the approved SBR budget
and compare the previous year’s budget to current year. Second, the IRIS
project team leads will review expected costs for the current fiscal year. The
project manager and the cost manager will meet with team lead to review
current and requested resource needs as well as financial and resource
requests. The cost manager will work with team leads to analyze the impact
of SPR on the estimated project costs. The analysis will also provide
alternatives for project costs given SPR restrictions and consequences for
exceeding budgeted costs. Third, the project manager and the cost manager
will develop a consolidated spending plan after taking on board the Project
Director, Business and Technical Managers, and Team Leads. At the end, the
proposed spending plan will be approved. The project director with the
business and technical manager will approve the spending plan.
3. COST MANAGEMENT
Each year, SBR will approve a SPR for IRIS that will form the basis for
providing allocations to IRIS project. The IRIS project will continuously
analyze the SPR to establish if changes in allocations are needed to meet SBR
budget goals. At the end of each year, project will reconcile its expenditures
against both its budget (based on SPR) and economic analysis.
3.1 Expenditure Tracking
At the beginning of the fiscal year, project manager will develop projected
costs. Expenditures can be initiated by a team lead or manager. The process
of expenditure tracking will include multiple steps. First, all requests for
expenditures will be reviewed and approved by the project management
team. Each request must be accompanied by supporting documentation.
Second, the cost manager will review the request and determine if the
supporting documentation is sufficient. The cost manager would reconcile
the request to the FSR, latest SPR, and SBR Standard budget for IRIS. The
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Engr. Dr, Amir Manzoor
cost manager would determines if the expenditure is a planned or unplanned
expenditure. Purchase requests that are not in the spending plan are
considered unplanned expenditures. Unplanned expenditures will also be
analyzed before moving forward with the request. Third, the cost manager
will review the analyzed request establish that the request meets the
thresholds for the purchase policy. If yes, then request will be forwarded to
the project-management team for authorization. Once authorization is
received, the cost manager will request a purchase order. Fourth, the
purchase will be executed through the SBR Acquisitions Branch. Fifth, the
assigned staff member will follow the purchase until its receipt at SBR. Upon
receipt, the item will be checked for accuracy before acceptance. The cost
manager will track the purchases to anticipate future purchases. The cost
manager will also verify that the actual cost equals the invoiced amount on
purchase order. Any variance will be documented.
3.1.2
Ongoing Expenditure Tracking
Expenditures that result from previous decisions made by the Project will
also be tracked. Multiple steps will be involved in this process. First, the cost
manager will document ongoing expenses. Second, the cost manager will
review the ongoing expenses and determine if the supporting documentation
is sufficient. The cost manager will reconcile the request to the FSR and SPR
and SBR Standard budget for IRIS. The cost manager would also determine
if the expenditure is a planned or unplanned expenditure. Third, the cost
manager will discuss with the Project Director, Business/Technical Manager,
and Project manager to confirm the need for the ongoing expenditure. The
purchase is only made if the need is verified. Fourth, the Cost Manager will
initiate the purchase of the item and follow the order until the purchase is
received and completed. Fifth, the SBR Acquisitions Branch will arrange for
the purchase of purchase orders. Sixth, the assigned staff member will follow
the purchase until its receipt at SBR. Upon receipt, the item will be checked
for accuracy before acceptance. The cost manager will track the purchases to
anticipate future purchases. The cost manager will also verify that the actual
cost equals the invoiced amount on purchase order. Any variance will be
documented.
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Project Cost Management
3.2 Cost Control and Changes
This process will track actual expenditures, compare planned expenditures
and actual expenditures, and determine any variances. This process will also
be used to define, communicate, and reconcile changes and unplanned
expenditures in the budget. It will be responsibility of project management
team to escalate any variance close to 10%.
3.2.1
Reconciliation
3.2.1.1
MONTHLY RECONCILIATION
The cost manager will obtain reports from SBR Accounting and reconcile
these reports to tracks all expenditures. The cost manager will also reconcile
the accounting reports to the Economic Analysis from the latest SPR.
3.2.1.2
YEARLY RECONCILIATION
The administrative manager will coordinate and perform the reconciliation
of the actual expenditures to the approved budget as well as actual to planned
expenditures. He/she will work with the SBR Accounting Office to address
any issues.
3.2.2
Cost Variances
The cost manager will analyze cost variances by cost item by month and by
year-end. For any variance greater than 10%, cost manager will document the
rational and escalate it to the project management team. If the variance does
not affect the overall project cost baseline, no other actions are required. The
process of analyzing cost variances involves multiple steps. First, the cost
manager will gather the variances for the project’s monthly, yearly and project
lifetime costs. Second, the cost manager will calculate and analyze the costs
and variances associated with the Monthly expenditure reports. Third, the
cost manager will document the variances and the reasons why the variances
exist. Fourth, the cost manager will report to project team any variance that
is between 5% and 10%. Any variance greater than 10% will be escalated to
CCB.
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Engr. Dr, Amir Manzoor
3.3 Expenditure Reports and Metrics
There will be several reports and metrics relate to IRIS project costs.
3.3.1
Monthly Expenditure Report
The Monthly Expenditure Report will be provided by IRIS project to DIT.
This report will contain the total amounts for each category of expense for
the project to date. The administrative manager will coordinate and perform
the reconciliation of the actual expenditures to the approved budget as well
as actual to planned expenditures. The cost manager will develop a monthly
report showing the actual vs budgeted costs for the month. This report will
be provided to the management team for discussion. To generate monthly
expenditure report, the cost manager will gather data for monthly
expenditures. After that, this data will be checked for accuracy and reconciled
against the original source reports.
3.3.2
Monthly status report
The status report is completed each month by the Project Management
Office staff. It is reviewed and approved by the Project Director and sent to
DIT along with a copy of the project schedule. The monthly status report is
divided into three sections: Cost-Tracking, Milestone Tracking, and Project
Status. Each of the sections is updated each month. The Project Manager and
Business/Technical Project Managers review and approve the Monthly
Status Report for presentation to the Project Director. The Project Director
reviews and approves the Monthly Status Report for submittal to DIT. The
IRIS Project will report expenditures to project stakeholders. To develop
monthly status report, multiple steps will be taken. The IRIS project will
collect and compute costs incurred by the project. After that, the monthly
expenditure report will be used to provide a comparison of the actual costs
vs the SPR totals and calculate the one‐time and continuing cost variances.
The monthly status report also includes milestone tracking. If the milestone
is delayed, the cause and impact to implementation date must be completed.
The project status report also includes the following items:
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Project Cost Management
Percent complete
Current
status
accomplishments
The percentage complete is updated from
the project schedule.
and
This section is updated
procurement status meetings.
from
Current status report
This is series of questions regarding
changes to project schedule, scope, and
resources.
Variances
Variances in schedule, milestones,
deliverables, resources, one‐time costs and
continuing costs are computed for each
element.
Monitoring vital signs scorecard
The project rates itself based on three
variables and point totals are assigned
based the answer. (e.g. High‐Probability,
High impact risks 0 to 3 is 0 points; 4 to 6
is 1 point; >6 is 3 points.)
Look‐ahead view
The report has a series of questions
forecasting statuses for the project in the
upcoming month.
3.3.3
Special Project Report
This monthly report will be developed by the cost manager and provide (in
narrative form) the significant project expenditures that occurred in the prior
month. This report will provide a comparison between the actual and
proposed cost in the SPR being submitted for approval and the last SPR.
This will be a reconciliation of prior and current plans for the project.
3.3.4.
Cost Closeout Report
The project sponsor will accept all project deliverables and products. After
this approval is obtained, the project manager will review, reconcile, and
verify the project costs and budget information as complete. The project
manager will develop a project cost closeout report that would include
83
Engr. Dr, Amir Manzoor
finalized project cost closeout information. Project manager will review
lessons learnt related to project costs. Any identified areas of improvement
would be documented for future projects.
4. RECOMMENDED COST MANAGEMENT PRACTICES
Following are some recommended practices for cost management of IRIS
project.
Realistic Estimates
Project team can have better understanding of project risks and opportunities
provided various estimates used in the project are as realistic as possible. In
order to do so, project team would need to follow a structured approach to
determine amount of work and estimating the associated costs. Cost overruns
and costs over budget can still make a project failure even if the project
delivered the desired product/service on time.
Cover All Costs
There can always be hidden or unexpected costs on any project. All cost
estimates must take into account all the required project work and resources.
Costs Tracking
A consistent collection methodology should be adopted so that all actual
costs of the project could be tracked on time.
Cost Analysis and Forecasting
These two activities should be ongoing throughout the life cycle of the
project. Doing so, project team would ensure that all relevant stakeholders ae
informed about various project costs and managing risks related to project
costs.
Communication
Project team must regularly communicate with all relevant stakeholders to
answer their questions regarding project costs and budget. This regular
communication would also help avoid risks related to project costs.
84
Project Cost Management
Red Flags
Project team would proactively monitor project costs to look for any red flags
e.g. inaccurate reporting of costs.
85
Engr. Dr, Amir Manzoor
Appendix 3: Cost Estimates Summary
Cost Estimates Summary
Department of Alternative Energy
Sindh Wind Farm Project
86
Project Cost Management
Project Name:
Cost Estimate Summary
Project Manager
Date Prepared
Category
Labor – Employee
Labor – Contract
Outsourced Work
Travel
Training
Other Labor
Related
Equipment
Supplies
Hardware
Software
Other
Other
Subtotal
Project
Management
(15%)
Risk Contingency
Estimating
Contingency
Misc.
Total Estimated
Cost
Description
Cost
If not included above
87
Engr. Dr, Amir Manzoor
Appendix 4: Project Budget
Project Budget
Department of Alternative Energy
Sindh Wind Farm Project
88
Phase
or
Categ
ory
Title
Task
Task
Task
Sub
Task
89
Under(Over)
Under(Over)
Project Manager
Actual
Start Date
Actual
Fixed
Costs
Materials
Labor
Budget
Tasks
Budget
Other
Travel
Material
$/Unit
Units
Rate
Hours
Project Cost Management
Engr. Dr, Amir Manzoor
Sub
Task
Sub
Task
Task
Phase
or
Category Title
Task
Task
Task
Task
Task
Phase
or
Category Title
Task
90
Project Cost Management
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91
Engr. Dr, Amir Manzoor
Appendix 5: Budget Log
Budget Log
Department of Alternative Energy
Sindh Wind Farm Project
92
Project Cost Management
The Table 1 shows a sample budget log with a sample entry for a hypothetical
project. In an investigation of the project finances, it has been revealed that
actual hourly pay rate has increased. Further examination revealed that this
increase is due to high sums of overtime being paid. One possible solution
to this issue is change in procedures. This change would require project
manager to seek mandatory approval of project sponsor before making
overtime payments.
Table 1: Sample Budget Log
Starting Descript Date of Estimat Actual Varianc Remaini
Budget ion of
Expendit ed Cost Cost
e (+/-) ng
Expense ure
Budget
$60000 Hourly 11/01/20 $25,000 $30,000 $5000
$30000
Payments 18
93
Comments /
Action Required
Take prior approval
of project sponsor.
Engr. Dr, Amir Manzoor
Appendix 6: Activity Cost Estimates
Activity Cost Estimates
Department of Alternative Energy
Sindh Wind Farm Project
94
Project Cost Management
Project Name: _______________________________________________
Date
of
Preparation:_________________________________________________
95
Additional information
Confidence Interval
Range
Assumptions/Constraints
Method
Estimate
Reserve
Indirect
Direct
Resource
WBS ID
Costs
Parametric Estimate
Engr. Dr, Amir Manzoor
Appendix 7: Variance Analysis Report
Variance Analysis Report
Department of Alternative Energy
Sindh Wind Farm Project
96
Project Cost Management
Project Name: _________________________________
Project Manager: _______________________________
Project Sponsor: _______________________________
Date of Report Preparation: ______________________
Reporting Period: ______________________________
SCHEDULE VARIANCE
Planned Result
Actual Result
ROOT CAUSES
1.
2.
3.
4.
PLANNED RESPONSES
1.
2.
3.
4.
COST VARIANCE
97
Variance
Engr. Dr, Amir Manzoor
Planned Result
Actual Result
Variance
ROOT CAUSES
1.
2.
3.
4.
PLANNED RESPONSES
1.
2.
3.
4.
QUALITY VARIANCE
Planned Result
Actual Result
ROOT CAUSES
1.
98
Variance
Project Cost Management
2.
3.
4.
PLANNED RESPONSES
1.
2.
3.
4.
99
Engr. Dr, Amir Manzoor
Appendix 8: Earned Value Status Report
Earned Value Status Report
Department of Alternative Energy
Sindh Wind Farm Project
100
Project Cost Management
Project Name: _________________________________
Project Manager: _______________________________
Project Sponsor: _______________________________
Date of Report Preparation: ______________________
Budget at Completion: ______________________________
Current
Cumulative Value
Reporting Period
Current
Reporting
Period
Planned
(PV)
Value
Earned
(EV)
Value
Actual Cost (AC)
Schedule
Variance (SV)
Cost Variance
Schedule
Performance
Index (SPI)
Cost
Performance
Index (CPI)
Percent planned
101
Previous
Reporting
Period
Engr. Dr, Amir Manzoor
Percent earned
Percent spent
Estimate
at
Completion
(EAC)
justification and
explanation
To
Complete
Performance
Index (TPCI)
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Project Cost Management
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Engr. Dr, Amir Manzoor
Appendix 9: Cost Estimation Worksheet
Cost Estimation Worksheet
Department of Alternative Energy
Sindh Wind Farm Project
104
Project Cost Management
Project Name: _______________________________________________
Date
of
Preparation:_________________________________________________
Parametric Estimate
WBS
ID
Cost
Variable
Cost
Unit
Per No. of Units
Cost
Analogous Estimate
WBS
ID
Previous
Similar
Activity
Previous
Similar
Activity
Cost
Current
Activity
Multiplier
Cost
Estimate
Weighted
Value
Cost
Estimate
Three-point Estimate
WBS
ID
Cost
Optimistic
Pessimistic
Most
Likely
105
Engr. Dr, Amir Manzoor
Appendix 10: Bottom-Up Cost Estimation Worksheet
Bottom-Up Cost Estimation Worksheet
Department of Alternative Energy
Sindh Wind Farm Project
106
Project Cost Management
Project Name: _______________________________________________
107
Estimate
Reserve
Indirect Costs
Other Direct Costs
Travel
Equipment
Supplies
Material
Total Labor
Labor Rate
Labor Hours
WBS ID
Date
of
Preparation:_________________________________________________
Engr. Dr, Amir Manzoor
Appendix 11: Project Cost Baseline
Cost Baseline
13000
13300
6
7
11500
7200
4700
1500
1700
1
2
3
4
108
5
Project Cost Management
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Engr. Dr, Amir Manzoor
Appendix 12: Project Budget Request
Project Budget Request
Department of Alternative Energy
Sindh Wind Farm Project
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Project Cost Management
Revision History
Versio Date
Author(s)
n
Revision Notes
Project Name
Department
Contact
Phone
Email
Fax
Project Manager
Phone
Email
Fax
Item
Statement
Response
1
The business needs used to justify the project are
still consistent.
Yes/No
2
The project is aligned with business requirements.
Yes/No
3
The project meets the defined technical
requirements
Yes/No
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Engr. Dr, Amir Manzoor
Budget Overview
Category
Requirement
1
Requirement
2
Total
Quantity FY2019
FY2020
FY2021
FY2022
Open Issues and Planned Resolutions in the Context of Formal
Approval of Budget
Issue
Planned Resolution
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